Nov 5, 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
Anton Kryachok - UBS Investment Bank, Research Division Farquhar Murray - Autonomous Research LLP Ashik Musaddi - JP Morgan Chase & Co, Research Division David Lock - Deutsche Bank AG, Research Division Andrew P. Coombs - Citigroup Inc, Research Division Omar Fall - Jefferies LLC, Research Division Jean-Pierre Lambert - Keefe, Bruyette & Woods Limited, Research Division Matthew Clark - Nomura Securities Co.
Ltd., Research Division Kiri Vijayarajah - Barclays Capital, Research Division Maxence Le Gouvello du Timat - Crédit Suisse AG, Research Division Benoit Petrarque - Kepler Cheuvreux, Research Division Jan Willem Knoll - ABN AMRO Bank N.V., Research Division
Operator
Good morning. This is Kirstin, welcoming you to ING's Q3 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 in our business, expectations for our future financial performance and any statement not involving a historical fact. Actual results may differ materially from those projected in any forward-looking statements.
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
Good morning, and welcome, everyone, to ING's Third Quarter 2014 Results Conference Call. As usual, I'll take you through today's presentation.
Patrick Flynn, our CFO; and Wilfred Nagel, our CRO, are here with me from the Executive Board. Please note, at 10:30 today, there will be a separate analyst call for you hosted by NN Group, and so any questions on NN specifically, we refer you to that call.
Then let's just go to the key points. ING posted an excellent set of quarterly results.
The underlying net result banking was EUR 1,123 million, and that was up 37% from the third quarter last year and 22% from the previous quarter. The results reflect a strong increase in interest result and lower risk costs.
And at the same time, we were able to support our customers with EUR 3.3 billion of net lending growth and funded by EUR 4.3 billion of net funds entrusted. After comfortably passing the AQR and the stress test, as you have seen over the last couple of weeks, we have been able to bring forward our final payment to the state to coming Friday, November 7, and that's what we have announced today.
And this is a major milestone. Repayment brings us an important step closer to fully meeting the EC restructuring requirements and they also complete our strategic repositioning as a leading European bank.
As a last point, NN Group has been reclassified as held-for-sale and discontinued operations, and that has led to a write-down for goodwill and other nonrecurring assets of EUR 403 million. Taking a look at the overall result at the Bank.
The strong underlying net result banking was on the back of continued volume growth, combined with better margins and the lower risk costs, as you can see in the picture. And this resulted in a return on equity of 12.7% in the third quarter and 11.4% for the year-to-date return on equity.
Turning to Slide 4. Excluding the negative CVA/DVA impacts and correcting for the de-consolidation of ING Vysya Bank, income rose by 8%, 8.1% to be exact, over the past year, supported by strong increase in net interest income.
And in net interest income, growth was especially in Retail Germany, Retail Netherlands, Structured Finance and Financial Markets. If we then take a closer look at the net interest margin.
Net interest margin rose to 153 basis points. That was due to higher margins on savings and a stronger contribution from Financial Markets this quarter.
The increase in savings margins reflect the reduction in client savings rates, and that was more than offsetting, at least for this quarter, the low interest rate environment in which we have to operate. As we expect pressure on the savings margins to continue given the low interest rate environment, we constantly monitor clearly our deposit rates in all countries.
For example, in October, we have also therefore already reduced our client savings rates further in the Netherlands and France. So it has our special attention there so the -- in order to ensure that we manage the savings rate so that we keep a healthy margin.
Then looking at the development of the loan book and the funds entrusted. The strong interest result was underpinned by our commitment to serve our clients' financial needs.
In the third quarter, we have been able to extend EUR 3.3 billion in net lending, primarily in Structured Finance, in General Lending and residential mortgages, and that was funded by EUR 4.3 billion of net inflows of funds entrusted. And that was generated across the whole franchise.
Now if we take a closer look at this, we see for the quarter Retail Banking up EUR 1.4 billion out of the EUR 3.3 billion and Commercial Banking up EUR 1.9 billion out of the EUR 3.3 billion. And that's for the quarter.
Now if we take a look at the 9 months picture, which is on Slide 7, and we take the -- we take a look at the lending development across the 9 months, we see that net lending increased by EUR 15.8 billion. And if we recalculate that on an annualized basis, we will -- we get to a 4.3% annualized growth, and that's driven by both Retail Banking and Commercial Banking; within the Commercial Banking, particularly in Structured Finance and transaction services.
And this includes -- so this net growth of EUR 15.8 billion includes the runoff of the WestlandUtrecht portfolio, the lease portfolio, part of the Real Estate Finance portfolio and also the reduction in our exposure on Russia. So basically, the annual growth rate -- or the annualized growth rate for the first 9 months, even with running-down some of the portfolios, is at the 4.3%, and that's consistent with the strategy that we set out at the IR day in March.
And then on the cost side, in the first 9 months, we have been able to keep the expenses at around last year's level. And we're confident that we can keep it roughly flat this year.
And then if you take a closer look at the quarterly cost-income, we actually see that decreasing: 55.5% in Q2 and decreasing to 54.1% for Q3. If we then look at basically how the costs will develop going forward, and that's where the restructuring programs come in and the remainder of what we need to do there, we actually see that all of these programs are on track to reach the cost savings of EUR 955 million by 2017.
Now talking about these restructuring programs and now on Page 9. You know that much of our existing cost programs are focused on the optionality environment.
And we know that even on completion of these programs, particularly in Retail Benelux, we will not yet be best in class. So if you take a look at this chart, and this is the chart that we also presented at our investment day, we basically see that, because of the CB TOM implementation, the commercial bank will actually move into best-in-class territory in the IT environments if it comes to the combination of cost effectiveness and cost efficiency.
But the -- and the challenger -- and growth countries, which is called challengers here, they are already in that quartile, but the Benelux programs will get us to the middle of the pack. And we have indicated before that we want to finish these programs but, at the same time, that we will continue to invest in IT to deliver much better services and harmonizing systems and processes in order to take further steps in the future.
Now then the other cost component, the risk cost components. Risk costs decreased both in comparison to the third quarter of last year as well as the second quarter of this year.
It decreased to EUR 322 million. And if you calculate that as a -- in terms of risk-weighted assets, we get to 44 basis points of risk-weighted assets.
These risk costs are a bit flatter this quarter, as Commercial Banking benefited from a release on a larger file. As I said before, the Commercial Banking risk costs will be volatile quarter-on-quarter.
The trend is downward. However, this is one of those elements which makes it volatile if we have releases on larger files, and that is what we'd seen in the third quarter.
Risk costs in the retail bank were slightly up from the previous quarter. And we expect them to be remain at this elevated level in the coming quarters, specifically in the Retail Netherlands environment.
If you turn to the NPL ratio. NPL ratio decreased marginally to 2.8% in the third quarter due to a lower amount of non-performing loans, and this was reflected across nearly all the reporting segments this quarter, so no one particularly stood out either negatively or positively in terms of developments.
Taking a closer look at Retail Banking Netherlands. As indicated already, risk costs in retail Netherlands were down from last year but stable in comparison to the second quarter.
And they remain above normalized levels. And we expect this to be for the foreseeable quarters, so risk costs are expected to remain elevated, although we do see a gradually improving macro picture in the Netherlands.
Then if we go back to the result and how it kind of divides between the performance of the retail bank and the commercial bank. I'm now on Slide 13, so back to the overall results.
Strong results for ING bank were driven by both sides. The pretax result of Retail Banking increased 27% from the third quarter last year, and that's on the back of better volumes and better margins.
And the commercial bank, the pretax result also increased substantially on both comparable quarters, but as -- if we exclude the negative CVA/DVA results. So this again -- I think, if you look at this picture, it again confirms the strength of our client-focused model both on the retail side as well as in the Commercial Banking side with the global reach, well diversified but also a good balance between the two because the Retail Banking franchise is important for the funding and the Commercial Banking franchise is also important for the lending, and both perform quite well.
Taking a closer look at Retail Banking then, Slide 14. You can see here that all retail divisions have reported strong results this quarter.
So all -- year-on-year, you see the results in all retail areas going up. Maybe particular attention requested for Retail Germany basically reporting another record-high quarterly result, and that's driven by both volume and thus income growth as well as lower risk costs in Germany.
And the same we see in the Rest of World. It's noteworthy that, behind this result, we see improved contributions from Turkey and France, and as well as better results from our stake in Thai Military Bank, TMB, this quarter in Thailand.
Then moving over to the commercial bank and Slide 15. The commercial bank delivered its improved results in the lending business, as you know, and you can see that in the -- also in the lending -- on the lending growth and the transaction services area and, specifically for this quarter, supported by lower risk costs.
And the cost-income of the commercial bank, if you compare to a year ago, so same quarter last year, the cost-income was like 45.2%. It's now down to 44.1%, so you see the effect of an increased efficiency both in terms of a larger lending book as well as a -- the good focus on the cost side through the CB TOM.
Then particular attention for the Structured Finance development. So Structured Finance posted another excellent quarter supported by strong volume growth.
You see that both in the interest income as well as the non-interest income, where we see the arrangement fees then increasing as well. And lending assets have grown by 22.3% from the third quarter last year and 8.2% from the second quarter this year.
And in this picture, that is also partly due to positive foreign exchange effects. Correcting for it, there was the growth -- there, we still saw growth there as well because the net lending assets growth, if we correct for the foreign exchange, grew EUR 1.3 billion in the third quarter 2014, and that was particularly in the energy trades -- at energy, transport and -- Energy, Transport and Infrastructure Group.
And those are longer-term assets, so they take longer to come on the book but they will also stay longer. These are more project finance assets.
The net lending assets in the trade and export finance, you see that going down. That's the light-blue bar, on the negative side, in the chart on net lending growth.
That's the more shorter-term assets, and they declined slightly in 2000 -- in the third quarter of 2014. And here you basically see some of the effects of the efforts to reduce exposure to Russia.
And the return on equity of the Structured Finance rose to 24.5% in the third quarter and 22.2% year-to-date, so good results there. Now moving to our capital position.
On the back of these results, ING Bank's pro forma core Tier 1 ratio on a fully loaded basis increased to 11.1%, and that's, as said, primarily and principally due to the retained earnings as well as higher revaluation reserves. The leverage ratio increased to 4%.
And on group level, the group core Tier 1 ratio, as we now report that as well, was at 13.2%. Then we turn to Slide 18.
If we'd look at the total position of the Bank with a core Tier 1 of 11.1% and then we look at the surplus position on group level, basically taking the market value of Voya and NN and correcting that for the remaining group debt, we saw a surplus of EUR 6.4 billion. And therefore, we felt comfortable to start the process to prepay the government, and so therefore, after we do the final payment to the Dutch State, the surplus on group level pro forma will be at EUR 5.4 billion.
So that's why we're very pleased today that we are able to announce today that we have received the regulatory approval from the DNB and the ECB to bring this final payment I've stated forward. And we will continue to look at the opportunities to further divest our remaining stakes in NN Group and Voya over time, but we will do that maintaining an orderly market as well.
Slide 19. It gives you a summary of the ambitions that we indicated in our -- on our strategy day in March, Ambition 2017.
So we're on track in terms of most of these elements. And therefore, we remain with the policy to pay a minimum dividend of 40% of profits over the financial year 2015, comprising both an interim and a final dividend in cash.
To wrap up. Well, we just went through everything.
It's a good summary slide. It was a really good quarter for the Bank, good quarter on the back of -- actually, also this quarter, we did the IPO.
And this quarter, we were -- we went through the AQR and the stress test, with quite a healthy picture. We have a very strong results both on the Bank and the insurance company, so -- and within the Bank, we see an actual contribution from all segments.
So a good picture. And with that, I would like to close the introduction and open the call for questions.
Operator
[Operator Instructions] Our first question comes from Anton Kryachok from UBS.
Anton Kryachok - UBS Investment Bank, Research Division
Just 2 questions from my side, please, 1 on dividends and 1 on net interest income, starting with dividends perhaps. You have successfully passed the AQR.
The capital build in this quarter has been stronger than expected. And now you have visibility on state aid payment, and you are not using bank capital to prepay the final tranche of state aid.
So I was wondering, what are any other moving factors which you would take into account when making a decision where the actual payout ratio will be in 2015? And then second question, please, on net interest income and specifically on margin trends.
I think, on an underlying basis, your ability to reprice savings continues to be a very important driving factor for defending net interest margin. And on Slide 27, you have provided a very helpful picture on where you are in terms of deposit pricing.
And in the Netherlands, you have reached a level of 120 basis points, which some people think is important due to the Dutch Wealth tax. I was just wondering whether you can give us your perspective on whether a 120 bps Dutch deposit pricing is an absolute floor, or over time, you can go lower.
Ralph A. J. G. Hamers
Thanks for those questions. I'll actually refer them to Patrick, and I'll fill in if there is the need.
Patrick, go ahead.
Patrick G. Flynn
Yes. In respect of the dividend payout ratio, as Ralph said, our intention is to pay 40%-plus or a minimum of 40% payout for next year.
As you probably will have noted, the fact that we have repaid the state -- or will, on Friday, repay the state from group means that, that dividend will be for both the first and second half, which is an acceleration of our commitment we gave at the Investor Day. We're going to stick to the 40%-plus for now.
Let's see how the results pan out in 2015 before we start making any broader commitments. I'd like to see the profits earned first before we decide how to distribute them, but the commitment remains 40%-plus in 2015, first and second half, in cash.
Now in terms of interest margin, you asked our ability to deflect. Again, this reference point in the Netherlands, I think it's more an issue that -- on your side of the table than ours.
No disrespect, but we don't see it. And when we're talking about it internally in our ability to manage interest margin, it's not something that features as a major barrier in our thinking.
We have been able to reduce deposit rates, as you note. We did that significantly in the beginning of this quarter and reflect that with the results last, which means that deposit margins improved about 2 basis points.
There's a drag maybe of low interest rates about 3 or 4 basis points a quarter. And we think that we are -- we will be able to offset that with rate cuts, but the speed, as I said before, the speed of those rate cuts can slow down.
And it may not necessarily be a perfect symmetry between the drag, which is a constant factor of low rates, and our ability to cut. They may not be in perfect symmetry, but over time, over the near term at least, we think we can offset the impact of low rates with further rate cuts on deposits.
Ralph A. J. G. Hamers
And maybe to add also on the Netherlands specifically. We're showing here the profijtrekening, which is one of the larger savings accounts that we have, and the price there.
Now we've moved it. But there's many other savings books that we have or savings accounts that we have where we pay already lower than the 120.
So it's not necessarily a psychological hurdle. That stands -- that basically limits us to stay at this level.
And we're following the market. We're managing this as to the inflow, the acquisition of clients and what is worth paying for it.
So -- but there is no specific hurdle there on that 120 basis points.
Operator
Our next question comes from Farquhar Murray from Autonomous.
Farquhar Murray - Autonomous Research LLP
I have 2 questions, if I may. Firstly, with the state capital repayment now done and the CET 1 ratio tripping over 11%, at what point do you think you'll be able to clarify the approach to making the final exit from NN Group?
And what are the key considerations there in particular? What do you mean -- or what are the restrictions related to exiting through an orderly market that you're discussing there?
And then just coming bank with regards to the dividend discussion. I mean there seems to be some slightly academic discussion about a dividend in 2014.
I just wouldn't mind just clarifying your preference. I mean, at certain levels, given the EUR 5.4 billion surplus in the holding, that discussion is slightly academic, and I'm just trying to sum -- would you prefer to do a distribution of the surplus, first, before coming around to the dividend?
Or would -- or is that scope reflects that?
Patrick G. Flynn
So yes, with respect to NN, as you know, we have a lockup to the second of -- third of next -- January of next year. In this phase, we're polling opinions about what people want us to do with that, shareholders want us to do, and other stakeholders as well.
What we're trying to make clear here is that we are not going to be doing any radical large steps, in part because we've got commitments in the IPO prospectus that we will exit NN in an orderly manner. The liquidity in NN is relatively limited.
Therefore, it does mean that we need to take things in a steady manner, and so what we won't be doing is one large mass of sell-down either in cash or spend. The steps we will take will be a progressive, steady, orderly progress so that we do not disturb the market and we do things in an orderly manner.
It's a bit like the way we've been dealing with Voya, transacting in an orderly manner. So that's the sort of thinking around how we exit.
We have not decided what we do with the surplus, whether we distribute it in cash or spin. That decision, we have not made yet and don't have to make till we conclude or go through the lockup period.
In terms of 2014, we've achieved a lot this quarter, as Ralph said, particularly with the state repayment, and that clears the path for dividends next year. There's a brand-new regulatory yesterday.
We need to get used to them a bit. So for 2014, we'll revisit 2014 when we get the full year and the fourth quarter results, and we'll talk about that in February.
Operator
Our next question comes from Ashik Musaddi from JPMorgan.
Ashik Musaddi - JP Morgan Chase & Co, Research Division
I have 2 questions. First of all, would you give us some color on how should we think about risk costs going forward given that you have already met the 44 basis points today, obviously, including the bigger releases from corporate and Commercial Banking?
But how should we expect the risk costs in Commercial Banking going forward, i.e. what is the one-off element here?
How much is the run rate? And what should be the level that we should forecast for 2015 and then 2016 as well?
So that's the first one. Secondly is, given that your capital position fully loaded is already at 11.1% and you have kind of targeting 11% by the end of 2017, how should we think about that?
Because it looks like, if you do a 40% payout, you will generate -- you will add 1 percentage point capital every year or 70 basis points, so you will end up at 13% or 14% capital in 3 years’ time, as compared to what you're forecasting or what you're targeting, 11%. So how should we think about the missing link here?
This would be my 2 questions.
Ralph A. J. G. Hamers
Risk costs?
Willem F. Nagel
Yes. On risk costs, as you indeed mentioned, we are now at 44 basis points, which is our through-the-cycle average.
And that would be something that you expect under normal circumstances. However, if you look at the outside world, the circumstances are far from normal.
And if you look into the numbers, as Ralph presented them on, I think, Slide 10, what you will see is that the 3 main contributors of provisions, Retail Benelux, Retail International and Commercial Banking, you see 2 of the 3 contributing pretty much the same number as, say, last quarter, and only Commercial Banking sharply lower, which is due to the fact that -- and this is something we flagged before, that Commercial Banking provisioning is definitely lumpy. In a quarter-on-quarter comparison, you can see quite meaningful swings without them necessarily indicating a trend.
And I would certainly say that this level is not reflective of a long-term trend that you should simply extrapolate. We've been saying that before.
And certainly, this quarter is a demonstration of that lumpiness. A while ago, we talked about when we expected to see the 44 basis points on a more structural basis, and we said that would be well into 2015, most likely.
If you look at the most recent projections of growth for the eurozone, which have come off quite a bit, there is a plus and a minus there. The minus is we are predominantly in Europe, so this will definitely affect the outlook also for provisions.
The plus is that, relatively speaking, the Dutch economy is doing a little bit better, and what was predominantly an export-led recovery is now beginning to look a bit more like a domestic spending recovery as well. So we think there are going to be potentially some positive movements in the longer run on that side, but I think, for the next few quarters, I would expect the domestic markets, the big ones for us, to be pretty much where they are and Commercial Banking to continue to be somewhat lumpy.
Ralph A. J. G. Hamers
And on your second question, I think, when we presented our story in March, we indicated that, the way we want to go about capital distribution. We have 3 stakeholders here.
The first one was the taxpayer that should never come into a situation to bail out the bank anymore. And therefore, we said why want to grow our core Tier 1.
The second one is that we have a commitment to support economies in which we're active, and therefore, we want to grow the business. And for that, we need more capital as well.
And then the third one, and this is not in a particular area -- not any particular priority, and the third one was the shareholder, who hadn't received a dividend for quite a long time. And so therefore, we should go back.
Well, basically, the way we worked it out is a 40% minimum dividend payout. And clearly, depending on how the growth develops and how the core Tier 1 develops.
That's why we called it a minimum dividend payout. Having said that, we don't know how the growth will develop.
We hope it's going to be good. But we also don't know how regulatory -- how the regulatory area will develop in terms of further requirements.
We know there is discussions going on, on TLAC and other concepts, and we just don't know where that's going to end either. But having said that, the logic through which we manage is it's a minimum of 40% dividend, leaving room for growth and capital buildup.
And it is not necessary for the other two. That's why we called it a minimum 40% dividend.
I hope that helps.
Operator
Our next question comes from David Lock from Deutsche Bank.
David Lock - Deutsche Bank AG, Research Division
My 2 questions. The first one is on costs.
I know, Ralph, in the past, that you've spoken about declining branch footfall, change in the way the people are approaching banking. I just wondered if you could update us on kind of what you're seeing in terms of trends in your retail business in particular.
I know you've appointed a new innovation officer and operating -- a Chief Operating Officer in the last 6 months. I just wondered if you could update in terms of the work they're doing and potentially if there's any upside to that kind of cost plan that you've already got in place.
My second question is on Ukraine. I note that, whereas in the second quarter we had a big jump in NPLs -- that it's actually been quite stable in the third quarter.
And coverage has also been quite stable. I just wondered if you could give us any updates on the outlook, particularly for Ukraine; if there's any kind of color you could give on how you see that area going forward for your business.
Ralph A. J. G. Hamers
I will give the second quarter -- the second question to Wilfred, first, and then I'll come back on the cost side.
Willem F. Nagel
Yes, sure. On Ukraine, obviously, the business climate remains grim.
And we -- you see it in many areas. The -- all the international airlines have reduced their capacity into Ukraine.
The local airline is struggling, rumored to be bankrupt. Car sales down by 80%, banking system very weak, lots of negative signals.
However, if you look at what's happening in our portfolio, first of all, let me note that about 1/4 of the book is subs or foreign companies fully guaranteed by their parents, and another 1/3 or so is agribusiness predominantly based in the western part of the country and actually doing quite well. And of course, a lot of the exports companies in the Ukraine have most of their costs in local currency and export in our currency, so effectively, they benefit from the current situation.
So there's quite a large part of the book that is not really that heavily affected by the situation. Now the other part is where you see the NPLs and the associated provisions.
We use our tried, trusted and relatively successful provisioning methodology on each of the situations that we get into. The Ukraine, in that sense, is no exception.
We obviously watch it very carefully. We make an assessment every quarter of what we believe the best estimate of the outlook is, and that translates into the numbers that you're seeing.
What we are seeing in the market over the past few weeks is that foreign currency supply is improving slightly and that the central bank is regularly and fairly predictably acting in terms of supplying liquidity where they can. Positive note also that the gas supply has now been agreed with the Russians, so that gives a bit of relief over potential also of the production shortfalls that would occur on the industrial side that at least will now not be triggered by a lack of energy supply.
So some marginally positive news, but as we mentioned, fairly grim picture.
Ralph A. J. G. Hamers
Then coming back to the cost side. Thanks for that question.
And I think the trends are -- remain the same. People want to do -- on the retail side specifically, to do their banking more and more themselves.
They're very well informed. There's self-directed.
What does it mean? It really means that the requirements that they have on -- in terms of banking is that they want to be able to do it everywhere and in any way.
And basically, that gives rise to new projects that we're thinking about in terms of making one channel for basically working through branches and call centers and mobile and Internet and all that. So the COO and the innovation officer are both looking at these kind of ideas how we can work on that.
While at the same time, because that's a real change, is that you can't work front to back in separate programs, so you need to work on one and the same programs to be able to improve the client experience on one side, whereas you do reduce the complexity of your IT and you reduce the number of applications. That's we're showing and we have shown in the Strategy Day.
So we're making a lot of progress on it given the current programs, but I do expect that more standardization across countries but also more standardization within the countries and reducing of complexity will lead to further cost savings in those areas.
Operator
Our next question comes from Andrew Coombs from Citigroup.
Andrew P. Coombs - Citigroup Inc, Research Division
My first question, which is to be a follow-up on NN. Perhaps you could just remind us of the pros and cons of a spinoff versus this sell-down as you see them.
I know you said you're polling opinions at the moment but would be interested to know your thoughts there. And secondly, in terms of loan growth, if I look at slide 7, you've provided the 9 months numbers there.
Just backing out third quarter, it does look like you've seen a slowdown in loan growth relative to both Q1 and Q2, in both the retail bank and in the commercial bank. I've seen the commercial bank is due to the real estate runoff and reduction in Russia that you alluded to, but it also looks like you're seeing a contraction in lending in both Netherlands and Belgium in the retail side as well.
So perhaps you could elaborate there on the key movements.
Ralph A. J. G. Hamers
Patrick, first?
Patrick G. Flynn
Yes. In terms of a sell-down versus spin, as I mentioned, one of the things we need to do is make sure we maintain an orderly market, which suggests, given the relatively limited amount of liquidity in NN, that a sell-down -- an exit process would benefit from building liquidity first.
We think, although we haven't finalized the work on this, that if we do a spin, it has to be the end piece of the puzzle. I don't think you can do a sell down in cash, spin and then sell down in cash or variants along that.
The spin would have to be the entire remainder. And given that we will want to build liquidity, that would suggest that if we were to do a spin, it would be more to the back end of an orderly process rather than the beginning.
You also want to avoid a significant flowback. So spin, to the extent we would use it, would be more towards the back end of an execution process, seeking to build liquidity and build flow in the stock beforehand.
I hope that helps you clarify some of the mechanical thinking around this. This is about how you do it.
It doesn't say what you do with the proceeds because we haven't decided about that yet.
Ralph A. J. G. Hamers
And then on your question as to loan growth. Clearly -- and loan growth also has to do with GDP development.
And -- but the good thing is that, in the Commercial Banking side, we have a global reach. And I would not read too much into the third quarter as a trend, if not for the fact that the longer-term Industry Lending activities and the project finance activities that are actually coming onstream.
We started hiring more people about a year ago, 1.5 years ago. And these bids for these projects went out 9 months ago, and now basically you see this book being built.
This takes time. I'd actually think that, if anything, because this is a business in which we play in a global scale, we're #8, #7 on a global level and we're #1 or #2 in Europe on this one, that we actually see that, that book is growing and it's the longer-term side of the book.
So if anything, I think that's a good development. Although maybe at lower amounts for the quarter, this will basically structurally build up the loan book.
That's on the Commercial Banking side. And then in the -- basically, the trade -- the transaction services, it's a matter of pricing yourself into more volume or not.
And clearly, we always make very clear decisions here as to keeping the pricing disciplined as well. Now on the more domestic side of things, we see the Netherlands.
We see actually the mortgage production coming up. However, net-net, as you know, we transfer mortgages out of our book to NN Bank to build up that bank, and we have the WestlandUtrecht book in runoff.
But we do see, actually, a good and healthy mortgage production in the Netherlands, but that book will decrease over time because of the transfers of business. On the SME side in the Netherlands, we actually see demand in the third quarter a little bit lower than the second quarter, but we do expect, given the fact, as indicated by Wilfred already, that we see the Dutch economy being also more driven now by domestic demand rather than just export-oriented growth, that more working capital will be needed if this continues and more investment loans will be requested.
So we do expect an upturn there, but it's not there yet. We don't see it.
If you go to Belgium, we actually see continuous growth. There is just one file, and it's a little bit more volatile.
There's one client that is in these numbers. And depending -- it's a big one.
And depending on where the -- how much they draw by the end of the quarter, you see these numbers going down or up, but the trend is still a growth trend in Belgium. And then in Germany, we're still growing in the consumer finance side and the mortgages.
And generally, internationally, whether it's Poland, Romania or Turkey, we see rapid growth in the portfolio. So I hope that kind of gives a picture as to how we expect the lending portfolio to grow.
But in the end, as said, it's all GDP driven, but within most of the countries, certainly the challenger countries as well as the growth countries, we are taking market share, so it's not only dependent on the GDP.
Operator
Our next question comes from Omar Fall from Jefferies.
Omar Fall - Jefferies LLC, Research Division
Just 2 questions, please. Firstly, your ROE target of 10% to 13% is now very old.
Given that you already had 13% this quarter and there are further P&L improvements to come and you're already above your capital targets, can you give us a sense of how internally you're thinking about where that number could really get to? Secondly, what do you view as the risk of some form of political backlash from the fact that you're so explicitly choosing not to grow the Dutch mortgage book for the foreseeable future?
Of course, demand is currently low, but it's surprising that, for a housing market that's only just recovering, politicians would have nothing to say about a bank that's been under state aid for so many years, reining back lending to such a crucial part of the economy.
Ralph A. J. G. Hamers
Okay, I'll give the answer to the second question, and then Patrick will follow with the answer to the first question. So on the second question, so basically, it's not so much that we're not in the market.
We -- in terms of mortgages and in terms of SME lending. We're open for business.
Even today, we announced that we want to extend the TLTRO support to our SME clients. If it concerns investment loans, we will actually give the discount to our clients.
So we're very much aware of our role also in the Dutch economy if it comes to supporting the SME as well as supporting the housing market. Now if we come to the picture of our mortgage book, we are open and we are producing mortgages.
Actually, we price always to ensure that we are one of the top 3 mortgage providers in the Netherlands, with a minimum market share of around 15%, in order to support our clients, our natural market share and also to get some new clients in. It just happens to be that, at the same time, we have decided to run-down the WestlandUtrecht book.
And we transfer mortgages to NN Bank, which is an EC requirement. So if you take the total development from an ING perspective as if we were still one full company, including the insurance company, you would probably see that the mortgage book would be stable because you also know that a lot of people do prepay their mortgages these days given the fact that the interests on the savings are as not as interesting anymore versus the tax -- the after-tax cost on the mortgages.
So you see some prepayments there as well. So both sides, we feel that we're committed to the economy.
If we come to, like, actual production amounts, the domestic bank in the Netherlands produces around 6 billion of new mortgages per annum. And with that, I'd like to give the floor to Patrick.
Patrick G. Flynn
Yes. Kind of interesting, you talking about the ROE target being so old.
On one hand, I'd agree with you. We only set it 6 months ago, but it does feel that 6 months has encompassed a hell of a lot given we've done an IPO and have repaid the state in that period.
I think it's a -- this isn't -- it's about consistent delivery here. Very, very pleased with the 12.5% in the quarter, but it's 11.4% year-to-date.
So we've got a 4-year plan. We have very ambitious targets in there about loan growth.
We want to be delivering consistently on these metrics, and we're not claiming victory on 1 quarter. Now I'll just have to remind you that the fourth quarter is typically a lower one in Financial Markets.
And we have that bank tax, 140-odd million bank tax, that has to be paid every year, it comes in Q4. So it's typically a little bit lower than the other 3.
So this is about consistent delivery of ROE targets year-on-year. And only when we're -- if we're consistently outperforming, we'll think about changing the ROE target, and we're not there yet.
Operator
Our next question comes from Jean-Pierre Lambert from KBW.
Jean-Pierre Lambert - Keefe, Bruyette & Woods Limited, Research Division
I would like to ask 2 questions related to dividends. Now that you have 11%, is there a thought that the supervisor authorities may push you to a higher core equity Tier 1?
And do you have initial conversations with your new supervisor on this topic? And the second point related to dividends.
Would you consider increasing the leverage to pay a dividend for 2014, or is that totally excluded?
Patrick G. Flynn
Yes, in the regulator on core Tier 1, well, these only -- they only really kicked in yesterday, so we haven't really had an opportunity to talk to them, but have -- mean are listening to what they said beforehand. They talk about level playing fields in Europe.
And they talk about common standards. The AQR and the stress tests were all about the leveling.
So we're assuming that, whatever they do, it will be a consistent application. But as of today, I don't have any insights or expectation that core Tier 1 targets are being put higher by the ECB.
As Ralph mentioned, what is on the -- potentially on the radar screen in terms of capital is the GLAC-TLAC debate, which we will get -- or the industry will get some clarity on. That's, I think, the major area in that space.
Obviously, the -- if the markets do rebound strongly, which we are not seeing yet, the countercyclical buffer is part of the overall Basel III framework. However, I think, at this point, it's remote to be thinking that, that will kick in.
And if it does, I think we've -- we will be in a much better place if the economy is growing strongly enough for that to happen. So a long-winded answer, but then at this moment, I do not see direct pressure on higher core Tier 1 from the ECB and partly because they started just yesterday.
On '14, dividends for 2014, Q4, we just completed Q3. Let's see how Q4 pans out.
Of course, we evaluate all our options and we will think about this. And I'm sure you will be asking questions about it, but we will reevaluate the position when we have the fourth quarter results.
Operator
Our next question comes from Matthew Clark from Nomura.
Matthew Clark - Nomura Securities Co. Ltd., Research Division
A question on the deposit rates. A bit curious on your comment that there's a 3 to 4 basis point headwind every quarter that you need to offset.
Just so that I understand: I thought that you invested your deposits at around the 3-year duration and looking at lagged rolldown of that kind of duration asset portfolio. I just thought that'd be a slightly lighter headwind stretched over time.
So maybe just could you clarify whether you see these cuts to the savings deposits as defensive or offensive and whether they're still invested at the 3-year duration. Because if you're cutting the rates in July and again in October, that would suggest maybe they're being invested at a shorter duration.
Patrick G. Flynn
Obviously, we're in multiple countries with different dynamics, and we're trying to give you an average. And so 3-odd years for replication of deposits is a good estimate of the overall position.
The low rate environment does have a drag. It is relatively constant.
Rates have come down lower, so we are giving you an estimate of that drag effect, which is in the 3 to 4 basis point range. The setting of deposit rates is also primarily, I would say, probably driven by commercial considerations, customer considerations, not exclusively based on offsetting a 3 to 4 basis points negative headwind.
So it's -- we look at the setting deposit rates in the context of the commercial proposition, what competition are doing in the various geographies. And when we consider those conditions justified, we then do reduce rates, so it's not about trying to seamlessly offset, perfectly offset, 3 to 4 basis points of negative headwind every quarter.
Matthew Clark - Nomura Securities Co. Ltd., Research Division
So that 3 to 4 basis points, that's the impact on your group interest margin. Or is that the headwind on the balance of deposits?
Patrick G. Flynn
Margin.
Operator
Our next question comes from Kiri Vijayarajah from Barclays.
Kiri Vijayarajah - Barclays Capital, Research Division
Just some -- a couple of questions on Structured Finance. Firstly, just to clarify what you said earlier about the slow in new lending numbers in Structured Finance.
Were you deliberately taking your foot off the pedal there given that you probably overshot your target in the first half? Or is it just there's just fewer opportunities out there given what we're seeing in terms of the macro?
And could you just comment on how your pipeline is looking, say, right now versus, say, a quarter ago? And then secondly, still on Structured Finance but looking further out, how vulnerable do you think that kind of 20%-plus kind of ROE is in that business?
Because it does look like quite a crowded space in terms of the number of banks globally that are targeting that area.
Ralph A. J. G. Hamers
Not so much -- I don't think that I indicated that it was slowing. What I indicated on Structured Finance is that what we see is that the longer-term side of Structured Finance actually is coming on stream now because it takes a little bit more time before you get these assets on the books, and they will also stay longer on the books.
At the same time, we have the TCF and transaction services element within the commercial bank, which is a little bit more volatile and depends on how you price yourself in the market. And we can -- basically, we can move that now.
It happens that, in the third quarter, we see a decrease on the -- on that because of the mitigation of the risk on Russia. But the longer-term side has actually taken off, and we're not taking off -- we're not taking the foot off the petal there.
In terms of the return on equity in that environment in Structured Finance, what we have seen in the past is that there's always been moments where banks have come into this business, either more regionally or more globally, and they often come then with a lower price for a while. But what we tend to see then is that, the sponsors of these projects, they really prefer the more professional banks who understand your underlying business because this is business.
It's certainly the longer-term side of this business is a business that you really need to understand. Because in these projects, you sometimes have to restructure the loan, restructuring all that, and then you have to understand what's happening underlying.
And if you're then engaging with a bank that is not as experienced as we are, and we have been building this business for the last 25 years, then basically the sponsors are surprised by their reaction. Now what we see, therefore, is that this is more -- it's next to an expertise business.
It's also a relationship business. So sponsors keep coming back to the top banks.
And we have been able to keep our position with the top 5 to top 10 for the last couple of years, even during the crisis. So that, basically, we think that this business will continue but it will also continue on these returns.
Now in some presentations over the last couple of months, we have shown actually that the returns in this area have been rather resilient even across -- even over the last 5 years. So it's a good-return business.
It's a long-term business. It's a combination of relationship and expertise business.
So we feel confident that these return on equity, whether it is 20 or whether it's 19, we have seen that range in-between 19 and 24 over the last couple of years.
Operator
[Operator Instructions] Our next question comes from Maxence Le Gouvello from Crédit Suisse.
Maxence Le Gouvello du Timat - Crédit Suisse AG, Research Division
I will have 2 question. Can you give a little bit more color regarding the good growth that we're able to see on the loan side in the rest of the world, which countries really are pulling this good performance?
And my second question is regarding the exposure to Russia. Listening to your conference call on the Q2, I was expecting a larger, significant decrease of the 7.8 billion that you released at that time.
Ralph A. J. G. Hamers
Okay, we'll start with the second question, for Wilfred. I'll take the first one.
Willem F. Nagel
Yes. On the exposure reduction in Russia, understandable question.
We have given some indications of our ambition there. And I can imagine, if you look at the numbers Q3, you may wonder whether we're going to get there.
There's a couple of things at play here. One is the repayments that we were expecting and the ones that we were simulating, we knew, were a bit backended into Q4.
In other words, we were expecting less of a drop in Q3 than in Q4, so in that sense, we're not entirely surprised. Secondly, what is at play quite substantially here is currency movements.
Most of the business we do with our Russian clients is in dollars. And I'm sure you've noticed the dollar has strengthened against in -- the euro, and that has had an impact of about 400 million on the reported exposures.
Also, the pre-settlement exposures have been influenced by the fact that ruble, of course, has continued to decline, and that has added about 300 million to 350 million to the pre-settlement exposure. So if you strip out those effects, the scheduled repayments and the ones that we thought we were going to be able to get, we have indeed obtained, so there is no issue with clients defaulting or not paying for other reasons.
But it's -- the effect of that is masked by the things I just described to you. We're still expecting a further reduction in Q4, which in notional terms will be bigger than the one in Q3.
Given the uncertainty around currency rates, we can't quite predict what the impact measured in euros will be.
Ralph A. J. G. Hamers
Okay. Then on your second question, the -- or on your first question, actually, the growth in the rest of the world.
The rest of the world basically means the countries in which we're active from a domestic perspective outside the Benelux and Germany. And basically, what we see there, in the third quarter, we see a growth in net lending of EUR 1.9 billion, so that's actually the areas that grow the fastest.
Now what is the underlying? The underlying is mortgages as well as SME and MidCorps, as we would call them.
And you should basically realize that in countries like Poland, Romania and Turkey, where we have large domestic banks, that these GDPs are growing, growing fast even in some of these, and we are taking market share. So we're growing generally twice as fast as the market in some of these countries.
So that's where some of this lending growth is coming from, and it looks good for the third quarter.
Operator
Our next question comes from Benoit Petrarque from Kepler.
Benoit Petrarque - Kepler Cheuvreux, Research Division
Two questions from my side. The first one will be on the Dutch mortgage margins.
There's clearly an ongoing repricing going on, on this book. Where do you think margin will trend in the coming quarters?
It seems that there have been a bit of margin expansion still in the third quarter. And linked to that, is that fair to assume that you're kind of -- are -- your margin on high loan-to-value are kind of sustainable because simply there's limited competition on that segment?
Second question will be on Germany. Actually, for the first time for some quarters, we have seen some small net outflows of savings.
I mean, nothing huge, but we were used of kind of nice positives there. Is that the effect of lower rates, savings rates, and what you've seen in the fourth quarter?
I mean are you comfortable you can lower savings rates further down in the coming quarters there? And then just a remark on the 3 to 4 bps impact on NIM: It puts it at 12 to 16 bps on an annualized basis.
Is that a kind of headwind you are expecting in the coming years?
Ralph A. J. G. Hamers
On the second question, about savings rates. So basically, the 3.4 -- 3 to 4 basis points, we already discussed.
I think Patrick already kind of elaborated on that. In the fourth quarter, whether we can reduce savings rates even further, yes, all this is a combination of what's happening in the market.
How can we grow our client business, and what is the funding that we need? And what we see actually is that, over the last couple of quarters, we have been able to reduce the savings rates.
And we see that, in order to develop in the market, is that savings rates are going down everywhere, so we can either lead that reduction or follow that reduction. And so as we already announced in October, which is the fourth quarter, we did reduce savings rates in the Netherlands and France.
And if we feel there is an opportunity or a need, we can reduce savings rates also in other countries, including Germany. So that's that one.
And then on the Dutch mortgages, maybe Patrick?
Patrick G. Flynn
Yes. The -- we have a -- we are producing, but we have a -- we're not -- we have a limited appetite for mortgages given the concentration risk.
New production margins are healthy, and that does contribute to the overall margin. We -- the nature of the market has changed, with LTV levels, by virtue of government regulation, coming down, so the production is as healthy or better loan-to-value levels than in the past.
And also, the tax incentive is now push people towards amortizing, so there's no -- you see very little of interest-only. So quality is better and margins are pretty good as well.
Yes, in terms of the headwinds, the 3 to 4 basis points, I think we're looking forward for maybe the next 12 months, reassess what we -- what the position is. It's difficult to predict 6 months ahead, never mind 12, so I'll reserve judgment on what will happen beyond 12 months.
Operator
Our final question today comes from Jan Willem Knoll from ABN AMRO.
Jan Willem Knoll - ABN AMRO Bank N.V., Research Division
I have a question on your exposure to the energy and commodity sector. We have seen fundamentals in this sector weakening rapidly of late.
How is your loan book holding up in this segment? And what are your expectations for the coming quarters in terms of loan loss provisions, risk migrations but also, let's say, appetite to grow the book?
And secondly, on lending margins also in Commercial Banking, you mentioned in the presentation that fund book lending margins are down in the quarter. Can you explain in which segments specifically you see the weakness?
And how should we be thinking about lending margins going forward, i.e. do you expect the pricing pressure to continue?
Willem F. Nagel
Yes, so on the exposure to the energy and commodity sector, I mean a couple of things are happening there. Obviously, the low oil prices and the shifting dynamics globally are having an impact.
And so far, we're not seeing any direct impact in terms of risk migration, quality deterioration of the book. We're obviously watching this closely.
What you do see is, here and there but more anecdotally than structurally, at this point, is some stickiness in terms of redeploying rigs and FPSOs. And that could be an early indicator of larger problems, but we're not seeing any strong indications.
So obviously, we stress test our books with some regularity for lower oil prices. And particularly, low prices for long is what you would want to worry about a bit more.
At the current levels, we're not extremely concerned, and indeed, even if they come a bit lower, it wouldn't have a massive, enormous impact. So at this point, no particular worries, but it is a space we're watching closely.
Patrick G. Flynn
And in terms of the commercial margin, Commercial Banking interest margin, in the quarter, there were lower margins in both Structured Finance and in General Lending. There is more overt margin pressure in General Lending.
However, I think the decline in Structured Finance is more mechanical. I think we're seeing that margins relatively stable in current quarters, so the quarterly decline is more of a mechanical effect reflecting how we accounted for things last quarter.
So the outlook for Structured Finance, broadly stable margins, so the -- which is our growth focus area, whereas the pressure is more in General Lending, which is not the focus of our growth ambitions.
Jan Willem Knoll - ABN AMRO Bank N.V., Research Division
And just to follow up. The weakness in the energy and commodity sector, any -- does it have any impact on your ability to grow or your risk appetite in terms of willingness to grow?
Willem F. Nagel
No. I think our long-term strategy in the energy sector is unchanged.
Obviously, the economics of a lot of projects will look different under the current oil price scenario than they would have a while ago, so that may lead to reduced demand. In that sense, I think you may see a bit of an impact on the growth going forward, but that is not directly related to our appetite.
Also, with lower oil prices, very simply, for example, in the TCF space, you will see a reduction in the monetary value of a regular shipment. And we're already seeing that in terms of the volumes.
So will it have an impact? Yes.
But is that due to reduced appetite on our side? No, not necessarily.
Operator
Thank you...
Ralph A. J. G. Hamers
All right, I think it is -- this was the last questions. This was the last question.
Well, gentlemen and ladies, thanks very much for joining us today on this call. And our teams on the investor relations side are, of course, available for further questions and more detailed questions as they may come when you start flowing through our numbers, so we're very happy to take you through some of the more details.
Thanks for being here. Just to sum up.
We had a very good quarter for the Bank at EUR 1,123 million net profits, underlying net profit for the Bank. And we had an announcement today that -- after a good outcome of the AQR and the stress test, that we have been able to bring forward the prepayment of the -- or the repayment of the state.
So good news from all different sides: in results, in commercial performance and as well as on the restructuring side. Thanks very much, and talk you next time.
Thanks.
Operator
Thank you. Ladies and gentlemen, that concludes today's ING's Q3 2014 Conference Call.
Thanks for your participation. You may now disconnect.