Aug 6, 2014
Executives
Ralph A. J.
G. Hamers - Chairman of Executive Board, Chief Executive Officer, Chief Executive Officer of Management Board Banking, Chief Executive Officer of Management Board Insurance EurAsia, Member of the Management Board Banking and Member of Management Board Insurance EurAsia Patrick G.
Flynn - Chief Financial Officer and Member of Executive Board Willem F. Nagel - Chief Risk Officer and Member of Executive Board
Analysts
Francesca Tondi - Morgan Stanley, Research Division Martin Leitgeb - Goldman Sachs Group Inc., Research Division Ashik Musaddi - JP Morgan Chase & Co, Research Division David Lock - Deutsche Bank AG, Research Division Anton Kryachok - UBS Investment Bank, Research Division Matthew Clark - Nomura Securities Co. Ltd., Research Division Omar Fall - Jefferies LLC, Research Division Jacqueline M.
Ineke - Morgan Stanley, Research Division Lemer Salah - SNS Securities N.V., Research Division
Operator
Good morning. This is Emily welcoming you to ING's Quarter 2 2014 Conference Call.
Before handing this conference call over to Ralph Hamers, Chief Executive Officer of ING Group, let me first say that today's comments may include forward-looking statements such as statements regarding future developments of our business, expectations for our future financial performance and any statement not involving any historical fact. Actual results may differ materially from those projected in any forward-looking statement.
A discussion of factors that may cause actual results to differ from those in any forward-looking statement is contained in our public filings, including our most recent annual report on Form 20-F filed with the United States Securities and Exchange Commission and our earnings press release as posted on our website today. Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities.
Good morning, Ralph. Over to you.
Ralph A. J. G. Hamers
Thank you. Welcome, everyone, to ING's Second Quarter 2014 Results Conference Call.
You know the way we do this. We have Patrick Flynn here as CFO; and Wilfred Nagel as the CRO, from the Executive Board.
Just before I start, please note that there's also a separate analyst call today at noon hosted by NN Group, so we would like to refer you to that call for specific questions on NN because that team is not with us here and they will have their own call with you. Assuming you have the presentation in front of you, we'll go to Page 2.
So early July, we successfully listed NN Group at the Euronext stock exchange. For ING Group, it was a real pivotal moment representing the final major transaction in our restructuring and repositioning of ING as the leading European bank.
It has also unlocked significant financial flexibility for the group because the combined values of the remaining stakes in Voya and NN now comfortably exceeds the double leverage on group level, and that results in a pro forma surplus of around EUR 5.7 billion. And then ING Group's second quarter financial performance was strong with an underlying net result up 19% on last quarter at EUR 1,181,000,000, and that is supported by improved results in both the Bank and NN.
Now turning to Page 3. As said, the IPO of NN basically is the official beginning of the company's standalone future.
I would like to take this opportunity to once again congratulate Lard Friese and his management team on this success, and I wish him all the success in the future. But following the IPO now, our stake in NN Group has reduced to 68.1%.
And as you all know, that stake is subject to a 6-months lockup. We've also -- we also have our final payment to the Dutch State in May next year that was due [ph].
However, as we have indicated earlier, we have 2 conditions to be fulfilled before we would review the timing of this payment and consider an early repayment. One was the IPO, and the other one was the outcome of the AQR exercise.
And basically, one of those has now been fulfilled, so we will review the timing of the payment after the outcome of the AQR exercise. Turning to Page 4.
Just to go in a little bit more detail what the impact of the IPO is on the double leverage. The core debt was EUR 4.6 billion at the end of second quarter.
If we then include the net proceeds of the IPO at EUR 2.1 billion, the double leverage is reduced to EUR 2.4 billion. If we then look at the market value at August 1 of the remaining 68.1% in NN and the 43.2% in Voya, you see that the market value stands at EUR 8.1 billion.
And therefore, the surplus is the EUR 8.1 billion minus the EUR 2.4 billion. It is EUR 5.7 billion at group level.
And that -- basically, that is the cash value that has now become very apparent, offers us the financial flexibility to finalize our restructuring going forward. So much on restructuring and double leverage.
Let's turn to the second quarter results of the group, Page 6. The group posted an underlying net result, as said, of EUR 1,181,000,000, and that's significantly up from the second quarter last year as well as from the first quarter of this year.
And that's driven by improved results from both the Bank side, NN Group. Turning to the Bank, Slide 7.
We're actually pleased to report a strong underlying result before tax at the Bank at EUR 1,278,000,000, and that's up 11.4% year-on-year and 8.7% quarter-on-quarter. If you look at what has caused the improvement with both prior quarters, that mainly reflects a further decline in risk costs and good lending growth, ensuring good income generation.
And that is what we will show you later. As you also can see from the slide, both Retail Banking and Commercial Banking contributed positively to the improvement of this result.
If we then look at Slide 8, we turn to the return on equity. The strong performance has now resulted in an underlying return on IFRS-EU equity of 10.7% over the first half of 2014, and that's already in the range of our ambition.
Now clearly, this is on the back of a strong quarter and 2 strong quarters. It's good to be in the range already, so that's quite an achievement there.
And if we then look at what are the units that are delivering this improved performance, basically, we see that the -- that every units in -- all units in Retail Banking delivered on this improved performance, but specifically, Retail Banking International, their return improvement was particularly encouraging. If we then look at the income components of the results.
I'm now on Slide 8 (sic) [Slide 9]. We saw healthy development.
If we exclude the negative CVA/DVA impacts and we deconsolidate -- and we exclude the deconsolidation of ING Vysya, we seen income increase by 3.1% from the second quarter last year and a 0.9% from the first quarter of this year. And as said, that is supported by strong volume growth in both lending and funds entrusted.
As you know, you know the character of our bank. ING's Bank total income is dominated by net interest result, and that really reflects the relatively stable and predictable income stream.
The underlying interest result, excluding the impact of the deconsolidation of Vysya, increased slightly versus the first quarter of 2014, and that is despite lower interest result in Financial Markets and Corporate Line. If we then look more specifically and zooming in on the net interest margin development, we see that the net interest margin declined to 146 basis points.
And that's mainly due to the deconsolidation of ING Vysya and lower results in Financial Markets, which was already what we guided last quarter, that the NIM in Financial Markets was rather volatile. So we see 2 basis points decrease for the Financial Markets component.
The net interest margin on client balances actually remained stable at the lower savings margins that we see have been offset by higher lending margins and as we expect pressure from the savings margins to continue given the low interest rate environment that we're in, we have already reduced clients savings rates in July, so that's after the quarter ending in Germany, the Netherlands and Belgium. And in September, we will further reduce our savings rate in Spain in order to manage the savings margins.
Moving to Slide 11. And really, Slide 11 shows you the early proof points of our strategic direction in wanting to grow in Structured Finance and in the Challenger countries.
We have seen a loan growth of EUR 7.4 billion during the quarter, and that's funded by a similar amount of EUR 7.4 billion by customer deposits. And so clearly, we are very happy and pleased that we already see some confirmation of direction that we have communicated in March of this year.
And if we then look even further and we zoom and we make a further analysis, we see that deposits side of the Bank is particularly strong in its development in the Netherlands, Belgium, Germany and Spain. Turning to where lending then actually come from, where the lending growth comes from.
The net lending in Retail Banking has increased by EUR 3.5 billion, and that's predominantly in Belgium, Germany and the Rest of World. They all contributed to this growth.
And then the net lending in Commercial Banking has increased by EUR 3.9 billion, and that is driven by Structured Finance and General Lending & Transaction Services. The strong increase in Structured Finance was across all products and geographies.
And that basically reflects the increased focus and the resources that we have put in over the last 12 months in order to grow our activities in this core product. So as said, that is certainly a confirmation of the strategic direction, and we're happy to see that.
Then looking at expenses, Slide 13 now. On the cost side, we see in the first half that we have been able to keep the expenses at around last year's level, and we are confident that we can keep them flat overall through 2015.
Though, quarter-on-quarter, we will continue to see some volatility, so we will remain vigilant on cost. And cost growth is only allowed if there is even higher income growth.
And that's what we've seen in businesses such as Retail Germany and in Industry Lending. So where we see a double-digit income growth, and therefore, we do allow for cost growth.
So these are investment areas, but if the income growth is not there, we will not allow the cost growth. Looking at the risk costs component then.
We see that the risk costs are continuing their downwards trend. Risk costs decreased from both second quarter last year as well as from the first quarter this year and came out at EUR 405 million, and that is basically driven by lower risk costs across the different countries and segments.
In the commercial bank, as we already guided, we see a continuing downward trend. We expect risk costs to decline further from here.
However, we also know that this is a business with large files, so quarter-on-quarter comparisons may still be volatile, but the trend we expect to be downwards. On the Retail Banking Netherlands side, we see slightly lower risk costs in the first quarter, but we expect them to remain at this elevated level in the coming quarters.
Looking at the nonperforming loan ratios. The nonperforming loan ratio overall increased marginally to 2.9% just, however, due to a higher round in nonperforming loans.
The increase was caused by Commercial Banking and business lending Netherlands. And business lending Netherlands is part of the Retail Banking results, for your information.
Now taking a closer look at risk costs, we see that ING's bank -- ING Bank's loan book remains well collateralized and provisioned because the net additions to the loan loss provisions have structurally outweighed write-offs and resulting therefore in a higher stock of provisions. So I think that's a great signal of prudency still around this subject.
Turning to the Retail Banking results specifically, on Slide 17, you see an underlying pretax result of Retail Banking at EUR 870 million. And that's up 31% from the same quarter last year and about 13% versus the first quarter.
So both comparisons show a real strong development of Retail Banking as part of our franchise. Although all retail units have improved over the quarters vis-à-vis last year as well as vis-à-vis last quarter, I would like to emphasize the developments in Retail Germany, where we reported a record-high quarterly result, and that's driven by both higher volumes and income growth and lower risk costs.
And we see an increase of 26% year-on-year for the quarters, and we see a 23% increase sequentially on this one. So Germany Retail is still going strong.
Now turning to the commercial bank. The commercial bank also had a solid second quarter and, as indicated, on the back of particularly strong performance from Structured Finance.
They're an important part of our strategy. As we have discussed with some of you in more detail and also with some of our shareholders, we have recruited people in this area in order to grow this business, and you see that, that is already paying off.
Income was up 9.6% from the second quarter last year and 19.5% from the first quarter this year, and that's supported by both strong volume growth and improved margins. Now if you then look at the Financial Markets component of the structured -- of the Commercial Banking result, we see that Financial Markets has also performed very well this quarter, as we've seen that in this quarter, the client business has held up quite well in a generally difficult market.
So we're quite pleased to see the quarter at this level. Then how does this translate into our core Tier 1 ratio?
On the fully loaded basis, we see that the pro forma core Tier 1 ratio has increased to 10.5%. That's mainly due to retained earnings, strong retained earnings.
It doesn't have the same effect on the leverage ratio because that remains stable, and that's because the retained earnings were offset by the negative impact of calling the 8% perpetual hybrid in April. So that basically neutralized it, and therefore, we don't see a further improvement of the leverage ratio from this perspective.
So improvement on quarter 1 and stable leverage ratio, whereas we are growing the business by EUR 7.4 billion. Then just a small peak at NN Group's results, Page 21 now.
You see that NN delivered a much improved result before tax this quarter. But as mentioned at the outset, NN's management will have a separate call with the analyst community, and therefore, I propose not to comment on this.
And if you have questions, you probably have a different call. So to wrap up before we go to Q&A.
I think we're all relatively proud of the progress we have made since our last result. On the restructuring side, we have reached a very significant milestone with the last milestone to reach, which was the IPO of NN.
The IPO itself was successful. The company is now increasingly independent.
It has a good performance. So that's -- we're very happy with that.
And then on the ING Bank side, we see strong quarterly results, and we see already signals confirming the progress in our strategy both in customer growth, because we have been able to welcome 0.5 million, 0.5 million new customers over the last 6 months. We see the lending growth coming in and we see the savings growth coming in.
So basically, a solid commercial performance there, in line with strategy. Now clearly, we are looking forward now to getting through the comprehensive assessment, the combination of the AQR and stress tests, because that will enable us to move forward with our plans, including a decision on the state aids repayment.
And with this, I would like to open the call for questions.
Operator
[Operator Instructions] And our first question comes from Francesca Tondi of Morgan Stanley.
Francesca Tondi - Morgan Stanley, Research Division
[indiscernible] both very 2 simple questions from my side. On the margin side, you still feel very confident and though in a challenged environment about progression of your margins.
You clearly have upward targets. Other banks in the same regions that you are, KBC in Belgium, [indiscernible], others are pointing to more margin compression also because of the impact of the reinvestment yield.
Can you please again elaborate a little bit more where you see this margin improvement, how much scope you really think you have on the deposit side, why you have it compared to some of the other domestics, so that we get more comfortable? And then the second question is on you're clearly open to capital repayment and an eventual dividend.
Do you think this is something that we -- assuming that the class affairs [ph] go well and gives you a clean bill of health, is it something that we could even consider at the end of the year? Or do we have to wait for next year?
Is paying the state and dividend and announcing some dividend something that could even be at the same time? Is that conceivable?
Ralph A. J. G. Hamers
Okay, I will take the first question. I will give the second question to Patrick.
The margin development, as we have indicated when we launched our strategy, we expected margin stability and improvements to come from a couple of things. The first one was certainly that the mix of our asset base was go to -- is going to change.
Basically, we want to grow more toward Structured Finance and SME and consumer lending. Now clearly, we see the growth in the Structured Finance area already, but on consumer lending and SME, that is more backend-ed in our strategy because we basically have to still build some of these engines.
And that is why we are confident about the structural improvement of the margin from where we go. Now clearly, in the lower interest rate environment, there is pressure on savings margins, but as we have indicated, we see still scope to further reduce our savings rates and bring it more in balance vis-à-vis the reinvestment on the other side.
So it's a combination of being able to manage the savings margin vis-à-vis reinvestments and slowly but surely building up a different asset mix going forward. So that's on the margin.
On capital repayments, Patrick?
Patrick G. Flynn
Yes. Thank you.
In respect of capital repayments, we have a longstanding and oft-repeated commitment, a desire, to repay the state early that we don't count the dividends until that is done. And we reiterate that today.
We've set 2 conditions for that some time ago, the first being the IPO of NN, which has been very successful and gives us EUR 5 billion of excess value above double leverage. So the money is there as it were.
Second condition was the AQR, which we've said some time ago we're going to wait the outcome of that. So we -- when that is done, we will revisit the timing of the repayment for the state.
Now our commitment on dividends, which we outlined in the strategy, is that the Bank will pay 40%-plus dividend in 2015. That remains unaltered.
The positive news would be, to the extent that we were able to repay the state early out of the funds we generated from the IPO, then that 40% will be fully available to shareholders. The base case had been that half of that would have gone from the Bank to -- from the repayment of the state, and the remaining half would have been available for shareholders.
So there's the potential, if we're able to repay the state early, that 2015 could see the full 40% dividend payout to shareholders. I think you touched also on a dividend in terms of '14.
I think that's too early to talk about '14. Let's get the AQR out of the way and let's conclude on the state repayment piece first.
Francesca Tondi - Morgan Stanley, Research Division
If the Bank -- because obviously your ambition is to keep capital above 10% and pay state, but you have a lot of cash in the group, if that would make the Bank a little tight. Could you just still pay the cash for the state out of the group's cash pockets and, therefore, effectively being able to anticipate all of that, that way?
Patrick G. Flynn
The Bank has got a good capital ratio of 10.5% in fully loaded, up 40 basis points in 1 quarter. That's clearly positive.
We've talked about the capital generation of the Bank in the past, and here's a further example of that coming through. And we have resources of the group as well.
So both parties look healthy in that respect.
Operator
And our next [indiscernible] from Martin Leitgeb of Goldman Sachs.
Martin Leitgeb - Goldman Sachs Group Inc., Research Division
I have 2 questions, please, and the -- and both on deposits. So the first question is you mentioned that you have cut deposit rates in a number of countries towards -- starting with towards end of June and then July into September.
And I was just wondering if you could provide a bit of detail or color in terms of by how much you're cutting your main markets, so Germany and Netherlands. And what proportion of deposits would be affected there?
And I think, in particular in Germany, you historically paid, I think, around 1% there. By how much that would go down?
And in that regard, you had very strong inflows of EUR 2.2 billion in Germany in terms of deposits. Do you see this affecting your inflows, or do you see just the market in general coming down?
And the second question is probably a bit more about strategy and about the banking union going forward. And with the regulator -- or the ECB taking over as the regulator later this year, would you expect to be relatively shortly in a position to apply to transfer some of the excess deposits you might have in Germany and some other jurisdiction into countries such as Netherlands where you had a shortfall or to optimize your funding structure?
Or is this more a longer-term issue here?
Patrick G. Flynn
Okay. In terms of the rate evolution, there were a number of rate reductions, as Ralph indicated.
We brought down in July rates in the Netherlands by 10 bps; Germany 20 bps -- that brings it to 80 bps, answering your question; Spain 30. And Belgium as well will gradually come through in a 30 basis point reduction.
So that should give a boost in the second half to the margin on deposits.
Ralph A. J. G. Hamers
Yes. So that's the development in the main markets, that sort of reduction.
What are the consequences? Your -- one of the main parts of that question was, do we see outflows in Germany?
And no, we see a continuous strong inflow overall in Germany. It's still a good functioning machine.
And I think the whole market is moving with lower rates. Then your second question, basically on how regulators will react going forward as to whether they will be more lenient to transfer of liquidity or funds, it remains to be seen, to be quite honest.
Clearly, we are happy for European supervision to take over. I think it kind of will enforce a level playing field across the whole banking system in Europe and the eurozone.
And then hopefully, we will all build up quite quickly a credibility to cross the borders so that local regulators will be more open to transfer of liquidity. It's certainly something we hope for, as we have indicated in our strategy launch that we -- that our plan does not depend on that because our plan basically shows the direction where we use the excess liabilities as much as possible in the -- in these countries.
And however, clearly, the moment there would be an open transfer, we could actually accelerate some of the savings machines that we have, so -- but for the moment, our strategy is not taking that benefit into account, but if it comes around, it will provide for quite some upside, for sure.
Operator
And your next question comes from Ashik Musaddi from JPMorgan.
Ashik Musaddi - JP Morgan Chase & Co, Research Division
And so a couple of questions. First, on your loan loss provision, clearly, the commercial space has been improving significantly.
And can you give us some clarity on what's going on in the Dutch SME and residential mortgage market? And what would trigger an improve in the risk costs in these 2 places?
Secondly, also, like in terms of Germany, can you give us, like, what's going on in the background? I mean what is driving that?
Is it just the volume and the margins which is -- are both going up together, which is making a big increase in German profits year-on-year? And sorry if this was asked in the previous questions.
I joined up later on, yes.
Ralph A. J. G. Hamers
Wilfred, the first question?
Willem F. Nagel
Yes. So maybe -- I'm sure there are going to be more questions about loan book and NPLs, so let me give you a quick rundown of what's going on.
So as Ralph mentioned, total risk costs for the Bank as a whole, down from EUR 468 million to EUR 405 million; Retail Banking, down from EUR 296 million to EUR 263 million; and Commercial Banking, down from EUR 172 million to EUR 142 million. So overall, positive development.
And it won't be surprising that we still expect the risk cost in 2014 to be lower than '13. If you dig a little bit more and look under the hood, and we do see the watch list also down globally, though, and this goes to your question about the Netherlands, it's more or less flat in the Netherlands.
If you look at provisions on a geographic basis, then actually, the provisions, as well as the NPLs, in the Netherlands are up compared to last quarter. So our total view of where we are in the economic cycle is a very mixed bag between, on one hand, the Netherlands remaining very slow in terms of recovery.
And we expect business lending as well as mortgages in the Netherlands to stay elevated in terms of provisions. There is definitely, and we've said this before, a delay between all the macroeconomic signs becoming slightly more positive, and that's translating into lower NPLs and provisions for us in the Netherlands.
And we're seeing that delay factor at work here quite clearly. On the positive side, we do see internationally, generally in the Commercial Banking business, a reduction in provisions, and in quite a few of the retail books as well, most notably the commercial real estate book, where provisions this quarter are close to 0, based partly on some significant releases.
And it's, I think, also encouraging that some of the more problematic markets, like Spain in particular, on that front are now showing an improvement. And if you look at the real estate market in general, what we're seeing for the first time this quarter is vacancy rates across the portfolio either flat or down, which is a decent indicator of where the NPL levels might go.
I'm sure you've also noticed that the sales of commercial real estate in Europe are up sharply. Q2, there was about 51 billion in total transactions in the European markets, which is up more than 20% from the same quarter last year.
And overall, though, we're still looking at NPLs in the total portfolio slightly up. And that's why I think that you shouldn't read a very good estimate of the actual trends of the reduction of risk costs going forward in what you saw between Q1 and Q2.
As I said, we do expect '14 to be better than '13. I don't think you should extrapolate the drop that we saw between Q1 and Q2.
Patrick G. Flynn
Germany is just a success story. This is ING delivering on the model.
What we're seeing in the zone is that, if you go back, say, to 2012, with the deposits of under EUR 90 million, there are over EUR 110 million. And at the same time, we've had rate reductions from about 150 bps, I think, at the time, down to 80 bps in July.
We have a cost-income ratio that's come down from 50% to 47%, negligible risk costs. And yes, that's the essence of it.
And by the way, it's not up to mode yet [ph].
Ashik Musaddi - JP Morgan Chase & Co, Research Division
Yes. Just to follow up on that.
I mean is it -- you mentioned negligible risk costs, so is this a kind of a trend at the moment? Or is it -- is there some one-off in the risk cost, some releases?
Or is it just a trend that you're seeing, underlying trend of improvement in Germany?
Patrick G. Flynn
If we look at the last 5 quarters, I don't see risk costs over EUR 27 million. They were 10.
They're just structurally low. That's the quality of the book.
Operator
And our next question comes from David Lock from Deutsche Bank.
David Lock - Deutsche Bank AG, Research Division
Two from me. First one, on asset pricing.
I just wondered if you could give us a little bit of an update of what you're seeing in terms of asset pricing across your core markets because, clearly, you're flagging deposit rates coming down a little bit in September in Spain and in July. Just wondered if you could give us a bit of color on what you're seeing on your kind of new flow asset margin.
And then secondly, kind of connected with that, on the loan growth, EUR 7.4 billion in the quarter. It's running about 6% annualized.
It's ahead of where I was expecting. And it's particularly driven by your Structured Finance business, which you're also flagging as being a higher-margin business, of course.
I just wondered how sustainable you felt that, that was in the coming quarters. Is it a particularly strong quarter?
Or would you expect that to continue through the course of this year and beyond?
Ralph A. J. G. Hamers
Well, on asset pricing, what do we see in the core markets? Clearly, with rates going down, the way we're managing the Bank, we set kind of what we call the funds transfer price.
Sometimes, it works better for asset margins, and sometimes, it works better for lending -- for savings margins, but from the way we manage it in the core countries, we see a slight improvement on the lending side. And we see the savings margins going down a little in the core markets.
So basically, clearly, you would expect and we do expect some more pressure on the asset side in the market as a whole given the surplus of liquidity. And I guess that's also the purpose of the tactics of the ECB.
Within our core markets, the way we manage our balance sheet, we don't see the decrease in margin yet. Actually, we see it a little bit increased over the last quarter and not so much decreased.
Now that also overall comes from the fact that we are growing in higher-margin areas like Structured Finance, as you have indicated, and it is strategic. And if you look at the underlying business that we do in Structured Finance, some of this is short term.
Others is a little bit more long term. Will this be the level of production going forward?
I can't tell you, but that it is a strategic area where we want to grow, I can tell you, and we see the first signs here. Will it stay at this level?
It's really difficult to say now.
Operator
And our next question comes from Anton Kryachok of UBS.
Anton Kryachok - UBS Investment Bank, Research Division
Just a couple of questions, please, on the restructuring efforts of the group. Firstly, on state aid.
Previously, you have used the balance sheet of ING Bank to essentially repay the tranches of state aid. Is it reasonable for us to expect that you will do the same for the final tranche?
Or do you think you might actually use the proceeds from the insurance disposals to do this? And the second question, please, on timing of the remaining insurance divestments: How do you think about exiting your current stake in NN?
And I would be particularly interested in your thoughts around different options that you might have, including the -- a spinoff versus the direct sale into the market.
Patrick G. Flynn
Yes, in terms of repaying the state, yes, we've signaled perhaps that we would use the Bank and that's what we had done before. But that was before we've done the IPO and that's before the point where we have resolved the double leverage, which is now in a EUR 5 billion positive scenario.
And the fact of the matter is we simply haven't sat down and decided because it isn't really a constraining decision. We've got resources on both sides of the table to repay the state and can serve us at the group as well.
I mean a lot of the goods will come from the group, so it's a question do we want to push dividend now for the Bank, to do it or not, maybe not, but it's a luxurious position. In terms of NN, we are, of course, locked up, as is common practice following an IPO, for 6 months to the 2nd of January.
In terms of options to what to do with the surplus value, we have the option to spin. It's a real option in that we've got, as you'll recall, at the AGM, shareholder approval to do that.
So that's in the bag as it were. So what we're going to do now for the next 6 months in this locked-up period is evaluate our options, listen to shareholders and think about what those options might be and how best to proceed.
Operator
And your next question comes from Matthew Clark from Nomura.
Matthew Clark - Nomura Securities Co. Ltd., Research Division
I was just hoping to follow up on the margin and, in particular, the impact of lower interest rates on your investment portfolio. I think, last quarter or the quarter before, you mentioned that deposits were invested at 3 years and own equity was invested at 7-plus years.
So that implies pretty hefty headwinds to come through, in particular if you compare long-end rates currently with a lagged portfolio. So I was just wondering if I'm missing anything on how you've invested your liabilities in own equity that might limit that impact, because otherwise, it will take more than 10 basis points per annum deposit rate cuts to offset that headwind of lower rates if yields stay where they are.
Patrick G. Flynn
Yes, we have flagged before that there is a headwind from lower rates. If you look at the documents, you'll see that the margin on deposits came down somewhat in the second quarter because we had marginal [ph] or little by way of deposit rate cuts, and you see there the impact to reinvestment rates biting a bit.
It is an impact. It's been like before.
You're broadly right. And that's what we've given in terms of average duration of reinvestment of deposits and capital.
That said, it's -- that is not a threat to our target for 1 50, 1 55 [ph]. And as Ralph said, we aim to get there by deploying deposits and surplus deposits in higher-yielding assets, hence the growth in the lending is important, and expect that the ability to do that will compensate for the low rate environment.
Matthew Clark - Nomura Securities Co. Ltd., Research Division
So would I be right to think, for example, that in terms of the -- purely thinking of the deposits in isolation, you can offset lower rates that wrap -- that roll forward by cutting the deposit rates and then to think of the own equity that's going to have to come from the asset spread mix? Is that the right way to think about?
Patrick G. Flynn
I won't break it up like that. We have cut rates.
We -- there's relatively chunky rate cuts in July, as announced already. There is still some further capacity in terms of rate cuts going forward.
And I think that what I said before still stands in that, as we get down to 1-ish percent, 1%, where we are in some other books, others we're above that, the speed of rate cuts or the frequency rate will reduce, but there's still further capacity to cut rates on deposits to offset the low rate going to the investment rate piece. That avenue is not fully exploited yet, but as I said, repeating, the strategic intent is to drive the margin up from the asset side.
And we believe we can, and I think we're showing the first signs of delivering on that.
Operator
And our next question comes from Omar Fall of Jefferies.
Omar Fall - Jefferies LLC, Research Division
Three questions, please. Firstly, just a clarification on a one-off: The negative EUR 51 million of amortization of capitalized fees in the Corporate Line, is that going through net interest income, and therefore needs to be added back to NII to get to a clean number?
I only ask because, otherwise, it's hard to make sense of the very strong volume growth number against the final NII number compared to expectations. Secondly, I still don't understand, and I think I asked this last quarter, why we can't see any improvement in NPL trends in business lending NL when bankruptcies have been collapsing for over 6 months now.
Is there something about your particular exposure or footprint that means you're not seeing the improvement that's pretty clear at system level? Finally, coming back to Structured Finance.
Your volume margin and the revenue growth numbers are far in excess of what we're seeing anywhere else in the industry. I don't believe that you have much emerging markets exposure, so what do you think you're doing to differentiate yourself at the moment?
Patrick G. Flynn
In respect to your first question, you're right, the EUR 51 million fee amortization did go through NII, and it is nonrecurring. Yes, if you add that back, you would have seen a growth in top line income.
That's probably the right way to look at it.
Willem F. Nagel
Yes, so as we've mentioned before, the recovery in the Netherlands is slow. You're right that bankruptcies are coming down, but bankruptcies, of course, are at the tail end of a lot of misery, not necessarily reflecting the actual situation of our existing loan book.
What we see is we were slow in the Netherlands going into this recession. The initial impact came a lot later than in many other countries.
We're also traditionally somewhat slow coming out. And secondly, of course, if you look at NPL percentages, you also have to keep in mind that the outstandings of this book in total are going down, as you can see from our quarterly reporting, so with a stable level of NPLs in the absolute terms, you'll see an increase in percentages simply because the book is going down.
Ralph A. J. G. Hamers
Then on your question on Structured Finance. As we have indicated, this is a strategic area for us to invest in.
We've been in this business and building it up slowly but surely in the last 20, 25 years. We've recruited across.
First, Structured Finance is a global franchise. So basically, we're really active across all the different continents, and therefore, we're not necessarily dependent on the European market to develop or a specific region to develop.
So we can opportunistically grow, on one side. On the other side, we have the knowledge, we have the relationship and we can price competitively.
So it's a combination of the fact that we can source the business across the globe and we have the right people. We have a very long experience in this and long-term relationships, and we're gaining market share.
That's how it works.
Operator
And your next question comes from Jackie Ineke of Morgan Stanley.
Jacqueline M. Ineke - Morgan Stanley, Research Division
I just had a question from the credit side here. Could you comment on when you think the new additional Tier 1 instruments in Holland will get the final sign-off on tax deductibility?
And linked to that, what are your plans for issuance of these new instruments?
Ralph A. J. G. Hamers
Yes, we are getting good signals that the tax deductibility issue will be resolved in the second half. And clearly, hybrid -- October perhaps.
Hybrid instruments are a core feature of how you look at managing your Tier 1 and leverage ratio. And we haven't issued up to now because of this tax problem, but probably we'd be looking very carefully at doing so when the tax decision is clear.
Jacqueline M. Ineke - Morgan Stanley, Research Division
Okay. So most of your peers are kind of looking at 1.5% of risk-weighted assets to 2% in terms of issuance over the next few years.
Would you say that's in line with what you're thinking?
Ralph A. J. G. Hamers
It's our minimum requirements in each category which you need to have, so we will have to respect that, at a minimum.
Operator
And the next question comes from Lemer Salah of SNS Securities.
Lemer Salah - SNS Securities N.V., Research Division
3 questions from my side. Well, given your European footprint, I was just wondering what your desire is with respect to the targeted long-term refinancing operation and whether you want to share any possible benefits with the customers.
Second question, with respect to the cost level. I see that your cost-income ratio or target is lagging at the moment, which is one of the few targets.
When do you see these cost-cutting benefits coming through for the Bank? And the third question is with respect to the AQR.
I mean it seems, from my perspective, that it's going to be a non-issue for you. Do you expect any negative surprises there?
Ralph A. J. G. Hamers
Okay, thanks for this question. So I will take the first one; Patrick, the second one and Wilfred the third one.
So on TLTRO, it's not that we need it, but you know our strategy. So in our strategy, we have indicated that we want to grow in the European economies.
We'll be supporting the core economies in consumer finance and SMEs and business lending. And therefore, the LTRO, the TLTRO basically supports those plans.
But it's not that we specifically need it, but it is a very attractive way of funding. So in itself, I think that given the fact that banks will participate and we are considering so as well, we do think that, that will have an effect on interest rates across-the-board, anyway.
And yes, I think, whether you can specifically relate to it or not, that it will have an effect on margins going forward as well. So it is in line with our strategic plans.
So it could support us. It is not that we need it, but it's a very attractive instrument.
We're considering it. And I do think that, one way or the other, some of the benefit will certainly also be lower interest rates for the businesses themselves.
That's on TLTRO. And on costs, Patrick?
Patrick G. Flynn
Yes, on expenses, we have a target to get to 50, 53. And as we said in the Investor Day, it may be that, that could -- the achievement of that will be a year late than the original 2015.
That was the date by which we planned in our original strategy to achieve that. We've revised that on the Investor Day, saying probably more likely '16 before we hit that.
We also have a commitment to keep costs flat for the next 2 years, and we remain committed to that and we're in line to achieve that.
Willem F. Nagel
Yes, on the question whether we expect negative surprises. Surprises, by definition, are not expected, so the answer is no.
What we can say about the AQR is that it's been a very intense process in terms of delivering data. We're at the end of that.
We're now at the stage where DNB, the other local regulators and the ECB are going through what we have submitted, asking questions, getting clarifications. Frankly, our biggest worry going into this process was the operational handling of it.
And we're quite happy with the way that has gone. There is official clarity on communication on this, which is that it will take place in October.
So that is when we will learn what the outcomes are going to be, and that's when you will find out as well. And what's obviously may have some influence on the outcomes is some political elements, differences between the various parts of Europe in terms of how we handle risk measurement, and it's kind of hard to predict exactly where this is going to land.
Operator
And that was our last question. Thank you.
Ralph A. J. G. Hamers
Okay. Thanks very much for all your questions and the time that you've taken to analyze the results up to now.
Clearly, the -- you will have more time now to go through the financials, together with the input that we have given. Our team in Investor Relations is happy to answer further questions later today and during the next weeks.
Thanks again. It's a good quarter.
We're happy that we see confirmation on restructuring going forward, confirmation on strategy going forward. I wish you a good day.
Thanks a lot. Bye.
Operator
Ladies and gentlemen, this concludes the ING Analyst Quarter 2 Results 2014 Conference Call. Thank you for participating.
You may now disconnect.