May 10, 2016
Executives
Ralph Hamers - CEO Patrick Flynn - CFO Wilfred Nagel - CRO
Analysts
David Lock - Deutsche Bank Andrew Coombs - Citi Anton Kryachok - UBS Pawel Dziedzic - Goldman Sachs Bruce Hamilton - Morgan Stanley Kiri Vijayarajah - Barclays Ashik Musaddi - JP Morgan Farquhar Murray - Autonomous Research Jean-Pierre Lambert - KBW Paul Fenner - Societe Generale Alex Koagne - Natixis Anke Reingen - Royal Bank of Canada Robin van den Broek - Mediobanca Alicia Chung - Exane
Operator
Good morning. This is Maurine, welcoming you to ING's First Quarter 2016 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 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 statement.
A discussion of factors that may cause actual results to differ from those in any forward-looking statements 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 is posted on our website today. Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation of any offer to buy any securities.
Good morning, Ralph, over to you.
Ralph Hamers
Well, thank you. Welcome everyone to ING's first quarter 2016 results conference call.
I will talk you through today's presentation, and then Wilfred Nagel and Patrick Flynn from the Executive Board are here also to answer questions thereafter. Turn to Page 2.
If you look at the quarter, I think I can be pleased with the achievements in the first quarter as we continued to deliver consistently on our Think Forward strategy. ING posted a first quarter 2016 underlying net result of EUR 842 million, and the core business performed very well, but the net result was impacted by a dramatic increase in regulatory expenses this quarter.
Our net interest result increased on volume growth and margin improvements, while the commission income remained stable. The quality of the loan book continues to improve as well as risk costs and the NPLs fall.
Our capital position continued to strengthen. The Group fully loaded Core Equity Tier-1 was up to 12.9% or 13.2% pro forma for the full divestments of NN.
Not if we turn to the strategy. In March 2014, we launched our Think Forward strategy and we continue to make progress on many fronts.
So I wanted to start today's presentation with a quick review of some of the highlights of our strategic development before we talk about our commercial developments and before we talk about the final financial results. This quarter we are paying a little bit of attention to both the Netherlands as well as innovations in fintechs.
So if you turn to Page 4, you see technology digital banking, as you know, are changing the way that our customers want to do their banking and this requires us to be flexible, requires us to be agile. In the Netherlands, we have introduced the omni-channel approach, which means that the information is captured only ones, so the customer can seamlessly switch between channels without information being lost.
Importantly we put the customer at the heart of the process and organize our channels around him or her. Now the second key change we have made to our organization in Netherlands is the agile way of working, which we have now introduced.
This means that we work with multidisciplinary teams and they enable us to react faster and more effectively to the changing customer needs. And to our knowledge, we are the only bank to have tried this approach and we are now looking at launching this way of working in other countries as well.
On the innovation side, over the last couple of quarters, we have informed you about new introductions of innovations that we developed ourselves and the way we deal with our clients, new products, new apps. And what we do with those is that each of them we are testing in a specific market, and when successful, we copy them quickly and roll them out into new countries.
If we then move to Slide 6. To the extent, we don't have the innovation internally.
We clearly also have to look externally at the some of the developments that are happening there, and I think it is important that sometimes you get through the noise of the fintechs, everybody talks about fintechs. There is a lot of fintechs, but the question is, how do you deal with fintechs?
And I think that's where we are very clear. We have a strategy.
That strategy is aimed at differentiating the client experience. That strategy calls for a new approach on assets capabilities.
So we very much look at fintech initiatives in the areas that can improve our customer experience, and as well can deliver assets generating skills as you have learned over the last two quarters when we talk about Kabbage and WeLab. And what is so attractive in working with fintechs is that they have an entrepreneurial spirit.
They are agile. They have technology available - the newest technology available.
And what they find attractive to work with ING is in fact that we are agile that we are, what we call, a fintech of [indiscernible] and with our ING Direct approach and our approach in the challenger countries, we have a strong brand and marketing capabilities. We have capital and we have access to the customers that they can use in order to try their initiatives on.
So working together, we feel that we bring new and better services to our customers that are much fast to pace that we could do only looking at our own innovations, so it’s the combination of the two but very much aligned and consistent with our strategy. We don't go after the next best idea, if it doesn't fit the strategic direction nor our culture.
That has led to some commercial results as well. All of this, Page 7.
So if you really focus on the customer, you see that the net promoter score improves and we are now ranked number one in seven out of the 13 countries and this recognition underscores that ING is delivering on the customer promise and that’s at the heart of our strategy. We’re growing customer numbers also this quarter again, 250,000 new customers coming in.
100,000 new primary relationships coming in. And we're growing on the back of that, our savings and lending franchise.
And that is then also reflected in the way our balance sheet develops. For example also in this slide you see that we have made a steady progress on building more sustainable balance sheet in our challenger and growth markets, which has been part of our strategy, and you see that there is less dependence on mortgages and there is an increase of wholesale lending, as well as retail banking non-mortgages in the balance sheets of the challenger and growth markets.
So it’s a more diversified lending book and that supports the NIM as well. Now we move to the results.
Slide 9. So we posted a solid set of first quarter results despite significantly higher regulatory cost.
And our regulatory costs increased by over EUR 300 million from the first quarter last year, and we've also had much lower volatile items this quarter and that's what you see in the middle of this slide. But if you adjust just for those items, the regulatory costs and the volatile items, then - and you look at the underlying trends, you can see that on Slide 9, that the pre-tax result was roughly stable from the first quarter of 2015 and slightly up from the fourth quarter, and that reflects the positive momentum in the business, notwithstanding that difficult quarter for financial markets.
Our net interest result was strong again this quarter from both the first quarter last year and the fourth quarter, and this increase was driven by good volume growth and slightly higher margins, reflecting reductions in our client savings rates. In the first quarter of 2016, we reduced savings rate in several countries to align with the record low interest rates and these rate cuts together with a slightly higher margin on lending activities were the main driver behind the increase in NIM this quarter, though it was also supported by some one-offs in bank treasury and the corporate line.
If we then look at the core lending development slide that we use every quarter to show you the commercial progress as well, on Slide 11. You see that we've continued to lever on lending growth also this quarter.
Our core lending business increased by EUR 7.1 billion from the fourth quarter 2015, and that's driven by healthy growth in both wholesale banking and retail banking outside of the Netherlands. And therefore we remain comfortable with our lending growth target of 3% to 4% per annum.
Now on the commission income. Commission income has also remained relatively stable for us this quarter compared with the fourth quarter of 2015.
And as you may remember, that included a positive one-time impact on the consumer loan origination in Germany, so if you compare, the underlying commission income was up due to higher fee income in Belgium on investment products and better revenue in current accounts in the Netherlands. Investments and other income was impacted by volatile items, which actually were quite significant in the first two quarters of last year, and lower income from financial markets reflecting the challenging market conditions.
Turning now to expenses. Our expense base is more and more impacted by regulatory costs and you can see on Slide 13 the difference it makes to our own cost/income ratio this quarter.
And you see on the slide how the cost income has developed ex-regulatory costs and that is really to the range that we had indicated earlier, but the increase in regulatory cost is taking us off that path and it's important for you to see that influence of the regulatory cost from the cost/income. Our latest estimate for regulatory cost for 2016 is EUR 960 million, which is an increase of EUR 340 million from 2015.
There is another reason why it is so high in the first quarter. IFRIC 21 requires us to book a large portion of these costs in the first quarter of the year, so it is disproportionately high in the first quarter as well.
So all of the annual increase - nearly all of the annual increase will be incurred in the first quarter with the booking of EUR 496 million. So this makes the year-on-year comparison a little bit difficult.
What you can also see in the slide is that excluding regulatory and redundancy costs the expenses have remained relatively flat from previous quarters. So the actual underlying cost, the cost that we manage in our organization has been stable despite growing the franchise, so that's a real good result.
So it shows that some of the restructuring programs that we launched that they actually deliver the room to grow in other areas and keep costs stable at the same time. Now moving to the quality of our loan book and the risk cost.
The quality of the loan book continues to improve. As you can see, total risk costs were 33 basis points over average risk-weighted assets this quarter, and again below our through-the-cycle average.
The NPL ratio decreased to 2.3% and that's an improvement for the fourth consecutive quarter, and that's both in retail banking and wholesale banking. Dutch retail, you see also in the orange part of the stack bars has also continued to improve also this quarter.
But we have taken some risk cost in our oil and gas portfolio this quarter, and the NPLs for oil and gas have edged up to 2.1%. Overall the oil and gas portfolio continues to perform rather well and that reflects that on the higher risk segments of the lending, we are invariably senior secured lending.
So we rank ahead of the bondholders and the equity in the downturn or default situation. And we want to make that clear and we can have a discussion later on it, and that is the explanation of why risk costs are okay in the oil and gas portfolio.
On the retail banking results then, we turn to Slide 15. Here you see how the regulatory costs have impacted the pre-tax results of the retail businesses in the different regions.
As you can see, excluding the regulatory cost, the underlying performance has been very steady, and that's again on the back of better net interest income and commissions across. Turning to the wholesale bank then, you see that the impact of regulatory cost in the wholesale bank was less significant than in the retail bank, but still a drag on the results for the quarter.
While our financial businesses suffered from the challenging market conditions on one side, our lending business actually performed very well and they continue to perform very well, and you see that in both industry lending as well as general lending and transaction services. Moving to our capital position then on Slide 17.
Group Core Equity Tier-1 capital increased to 12.9%. That primarily reflects the positive impact from the reduction of our stake in NN Group.
The pro forma Group Core Equity Tier-1 ratio at full divestment of NN Group on April 13 is 13.2% in the first quarter of 2016. But I think it's also important to mention that similar to last year, ING has decided not to include the first quarter net results of EUR 1.3 billion in the Group Core Equity Tier-1 capital, so the net result of EUR 1.3 billion is not included in the Group Core Equity Tier-1 capital.
And that profit that we don't include includes two components. The first one is the net gain of EUR 0.4 billion on the sales of NN Group in generally in April and that's equivalent to 14 basis points.
That brings to pro forma level more or less in line with the 13.4% then that we disclosed earlier this year in the previous quarter. And second component is the first quarter 2016 Group net profit which then - and then excluding the gain on the sales of NN, which is EUR 0.8 billion and that's equivalent to another 24 basis points.
And that's what you see in slide 17. Slide 18.
If you look at the Ambition 2017 targets that basically we are delivering on almost all of the ambitions that we set out 2.5, three years ago when we launched our strategy. The cost/income ratio and the return on equity however are impacted by this dramatic increase in regulatory costs for this quarter, but if you would equally distribute the regulatory cost for the four quarters of 2016, the first quarter 2016 return on equity would actually have been 10%.
And then Slide 19 is just the slide - an overview slide to show you how we have gone through restructuring in the separation of bank and insurance, and that restructuring is now fully done with the final divestment of the stake in NN group. We’re obviously delighted that we have completed the final divestment with the sale of 40% in NN Group in April.
It's been a long journey since we started this process in 2009 and we've done over 50 transactions raising more than EUR 40 billion in proceeds, often in lot of difficult market circumstances. But it has now put through the crisis and it has made us even stronger bank going forward.
If you look at ING at this moment, we have a strong portfolio of leading banking businesses. Our strategy is clear and we are well placed to empower our customers and deliver sustainable results to our shareholders.
To wrap up and transfer to the Q&A, the quarter summarizes well on the volume growth on the NIM improvements on the stable commission income, so net interest income good, commission income good, financial markets weak-ish in the first two months of the year, and that's what you’ve seen on the results on the income side. On the cost side, the regulatory costs that are much higher in the first quarter specifically, but if you look through all of this, a solid development and a good result.
The underlying performance is strong, and that's important. So I would like to open the call to questions now.
Operator
Thank you. [Operator Instructions] We will now take our first question from David Lock, Deutsche Bank.
David Lock
Good morning, everyone. First one for me, please, on the credit quality.
I just wanted to ask if you could give any comments on or color around the shipping book. We've seen a couple of other banks sort of taken additional charges here.
Just wonder if you could update us on the signs of that business? And the second question is on regulatory costs.
I think we've seen over the last couple of years an ever increasing regulatory cost spill. I just wonder if you could comment on how confident you are that this really is the kind of total that we’ll have for regulatory costs now, or do you think there is potential for further rises in regulatory costs going forward?
And I guess, if you could update us on how you're trying or how the - how you're trying to offset some of that inflation elsewhere in the Group. I know you’ve got flat costs despite loan balances up, but if you could just update us on the initiatives and how those are going, that would be great.
Thank you.
Ralph Hamers
I'll give the first question to Wilfred, and Patrick and I will share in the second one.
Wilfred Nagel
Good morning, David. On shipping, we have booked up consists of both the pure shipping, i.e.
shipping companies major lines, as well as container leasing shipbuilding ports and other services. The total amount is around EUR 12 billion and I'll give you a bit of a breakdown of that.
And the large shipping companies, line is, of which you would recognize pretty much all the names I'm sure, that’s slightly over EUR 7 billion with NPLs of 1.5%. Then there is inland shipping and coastal shipping book of 1.3% that is more problematic.
I'll come back to that in a minute. And then there is a container lease business of about EUR 2 billion with 0% NPLs; shipbuilding and repair of about EUR 0.7 billion with 0.8% NPLs; Ports EUR 0.5 billion with 1.4% NPLs; and shipping-related services of EUR 0.5 billion with 1.6% NPLs.
So as you see, the vast majority of this book is relatively unproblematic with NPLs well below the global average for ING's book. So turning back to inland coastal shipping that has NPLs in the 20s, which I think shouldn't be a surprise because a large part of this sits actually in the business lending books in the Netherlands that we have been showing pretty poor performance on for a number of years.
It's now improving, so a lot of the pain that we have taken on inland and coastal shipping has been taken and has been taken through that business lending book in Netherlands. I think it's important to make sure everybody understands the overlap there.
The prohibitions that we took on this whole book in Q1 were not material. They were well below 10% of our total provisions.
And maybe a general comment, I mean, there is a lot of talk in the market about shipping at the moment. What we see in terms of problems in that market tends to be related to non-recourse financings to partnerships.
These have been heavily used in Germany and to a lesser extent also here in Netherlands as investment vehicles for private individuals, helped by accelerated depreciation schemes that were made quite an interesting tax shelter. The issue of working out these loans is obviously that you're dealing with a number of investors there that are not interested really in injecting more capital or taking an active management role, and therefore you simply end up typically liquidating the collateral.
As I said, in our case, that part of the book is relatively small and most of the issues have gone through to P&L over the past few years in the business lending in Netherlands.
Ralph Hamers
Okay. Patrick, on regulatory costs?
Patrick Flynn
Yes, on regulatory costs, I mean, there are three key buckets for regulatory costs, I think, all of which are now in situ, which should mean that we should not see a significant or this level like the EUR 300 million level of increase year-on-year in the three books of deposit guarantee schemes, and there the Dutch introduced one which come into effect in 2016 we didn't have before which is EUR 130 million-odd which is the reason for the bulk of the increase. We can get growth in that, but that would come from growing our franchise and that should be modest but in line with the growth of our client franchise and growth of deposits.
Then bank levies, bank taxes, there has been an increase there, primarily due to the Polish introducing significant bank tax. We have bank taxes from the Dutch, the Belgian and the Polish.
And to our knowledge, there are no other major countries where we are in that are introducing new bank taxes. And then the single resolution fund, zero resolution funds are in situ as well.
So the structural part is in place and ensure the growth at this stage should really come from growing the franchise or unless some other country we are not aware of introduces a new bank tax. But as I say, I don't expect this quantum of increase to recur again.
David Lock
May be on the accounting, why some of this is fully taken in the first quarter?
Patrick Flynn
Yes, I'm talking about full-year impact and there is a timing impact which requires you to upfront some of this into Q1, but the numbers I was talking about they are year-on-year increases. If you want, we could go through the - why it's Q1 versus - later on, I can do that as well.
Ralph Hamers
Then going forward how are we looking at offsetting those. Clearly this is such a big amount that you can't absorb those in the quarter, not even in a year.
Generally, we talk about different kinds of headwinds in a low growth, low interest rate, as well as high regulatory cost environment. But we do see also there to be tailwinds, at least for a franchise like ING, and I think the whole digitalization is a tailwind for ING.
If any bank understands how to use digitalization in order to improve customer experience and with that make the company even more efficient, it is ING. So clearly the offset in the end should from how can we use digitalization for improving the efficiency of our franchise, and that - customer behavior is only changing faster, so we can also improve and accelerate some of our strategy and that's what we are looking at right now.
David Lock
Thanks very much.
Operator
We will now take our next question from Andrew Coombs, Citi. Please go ahead.
Andrew Coombs
Good morning. First a question on NII, and the next one on financial markets income.
On NII, there is obviously a number of moving parts within the NIM calculations in particular. You talk about lower client savings rate, but higher margin lending, a bit on the treasury and corporate line which sounds like it’s more one-off in nature.
And then you just talked about the offset lower investment yields. Would it be possible just to break down between those factors, one, to basically what’s driving those 4 basis points increase Q-on-Q?
Second question on financial market. If we look at the income ex-CVA/DVA, down 33% on year-on-year.
You draw out lower income in late in particular, but I’m slightly surprised with your results is weaker than peers, if we get me your macro bias. So perhaps you could explain on what’s causing the sharp year-on-year decline and why you’ve underperformed broader industry?
Thank you.
Patrick Flynn
On interest margins, as you see the aggregate increase is 4 basis points, which comes from a combination of factors, some of them were interrelated, so it's not that always that easy to pull them apart will try and help. So there are three things we've been doing, and again these are the three levers that we've been talking about consistently over the last year try and driven by our strategy.
So improving the asset mix in our balance sheet; moving away from pure mortgage growth to higher margin assets, and we see success particularly in challenger and growth markets with increasing non-mortgage SME, and also commercial banking - also banking assets in those markets, which was a nice driver of NIM increase in that segment. Optimizing the balance sheet as well, which again means as we grow our client franchise bringing more deposits, we deploy those increasingly into loan originated assets and less so in bonds, that's another lever that's been working well.
And then we cut deposit rates, trim deposit rates, which gives a benefit as you do it, but it's against the backdrop of a persistent low rate environment, so that’s something you have to keep up to offset that negative headwind. And there were a couple of things in bank treasury, corporate line as you rightly point out aren’t - likely not structural like day count benefits that you get in the first quarter.
We’re EUR 151 million for now. What we are seeing to - what we are try to achieve, again we are trying to keep our commercial margin stable-ish as we've done previously and how would that translate probably in the high 140s where we would try to be throughout the course of this year, and maybe one or two of the increases is one-off related.
Ralph Hamers
And on your financial markets side, I can't compare to peers. I think it's for you to do.
I can only talk about ING. So if you look at our financial markets franchise.
Then in the area of the foreign exchange business, the global security finance business as well as the money markets business, those reasons have held up. And the global capital markets business results were even further up.
And some of the interest rates business as well as the equity products were down for us in this quarter.
Andrew Coombs
If I could just come back on the interest margin, if savings rates were to be unchanged in the quarter, how that would play - what would be the drag from lower investment yield in the current accounts?
Patrick Flynn
I know you want more granularity in numbers but forecast the future, which we are hesitant to do. The best I can give you is that what we have done so for, we can continue to do for the rest of this year, at least is that we can manage our deposit margins such that we can defer or defray the impact of low rates by managing deposit rates.
So we still have the ability to do that and hence with improving the balance sheet, optimizing the mix, the commercial margin in aggregate, we think we can hold stable for the rest of the year.
Andrew Coombs
Okay. Thank you.
Operator
We will now take our next question from Anton Kryachok from UBS.
Anton Kryachok
Good morning and thank you for taking my questions. Two questions please.
Firstly continuing on theme of margins. I noticed that you’ve been actively repricing your deposit base in the Netherlands and Belgium, but the savings rate in Germany has been stickier for the last couple of quarters?
It's around 50 basis points. Does it mean that you think we've reached trough in deposit pricing in Germany or do you think there is more bit out there?
And the second question, please, on capital and dividends. You’ve set aside 100% of this quarter’s profit for dividend, that is, I think, roughly equivalent to half of all the annual dividends you’ve made last year.
So if you continue at the current pace, you will create quickly provide more than the last years’ worth of dividends. So how shall we think about capital accretion going forward?
Are you planning to set aside 100% of next quarter’s profit as well until you reach to certain point and then 100% of profits will go into the capital build? And so some more color on dividend accretion would be very helpful.
Thank you.
Ralph Hamers
Okay. Well, thanks Anton, for the questions.
On margins, well, we did move the rates in Germany in December and clearly the way we move rates on savings side, it really depends on a little bit the market, the customer behavior, the funding that we need to fund also the lending side in general. So it's a combination of factors that makes us move rates on the savings side.
And the only thing I can say is that over the next couple of quarters, as Patrick was already saying, no matter we are talking Germany or the Netherlands or wherever, that generally is the management of your savings rates on one side with the lending margins on the other side, as well as the move of the lending book away from mortgages towards higher yielding assets that will kind of curate the mix of keeping an overall NIM that is high 140s. Yes, and so sometimes we can change and we can decrease our savings rates where we feel, together with keeping the interest of our clients into account as well, we will certainly do so and to resume them.
On the capital dividend front. Yes, so last year already we showed you that we wanted to have a practice in place if we don't have to reserve our profits and put it into capital.
We want to keep it separate in order to build a reserve, so that we have flexibility to determine our dividend going forward to the dividends both interim as well as final. But you can't read anything into this as to whether we are going to pay this out in full or not and what our payout ratio will be.
It's just that we look at two factors. One is how can we make sure that we have a reserve to pay out dividends on one side and how do we make sure that we will stay in to category one as determined by the ECB, i.e.
how do we make sure that we comply with the fully loaded Core Equity Tier-1 of 12.5% for us, so that we are at liberty to pay a dividend without approval. And those are the two factors that we take into account so that we have the flexibility to pay dividends.
Now honestly I think the whole thing is a good problem to have. So yes, it’s - and on the dividend side itself, as you said, we have indicated when we launched our dividend policy that that will be a dividend that will grow over time progressively, but also this year, given the fact that we do see some regulatory changes to come, we just don't know their impact yet.
We have to be cautious in coming to final conclusion on it.
Anton Kryachok
Thank you. That's very clear.
Operator
We will now take our next question from Pawel Dziedzic from Goldman Sachs.
Pawel Dziedzic
Good morning. Thank you for the presentation.
Two questions from my side. The first one is follow-up on the regulatory cost.
You mentioned that you would not expect similar volatility in regulatory costs going forward. But can you - when we look at your regulatory charge for this year, EUR 960 million, you booked right now around 50% or slightly over 50% of that.
Can you confirm that you have full clarity on the reminder of the charge? In other words, are there any assumptions that you still have to take over the scope of the regulatory charges in the remaining nine months of the year?
And then I have a follow-up on asset quality. You mentioned that NPLs and impairments slightly increased in your oil-related portfolio.
But could you comment if the deterioration is in line, above or below expectations, and how should we think about losses on related to reserve-based lending, given the oil prices are now above 30% level that you indicated in the past. Would you still expect those charges to increase in the second half of the year?
Thank you.
Patrick Flynn
Yes, on regulatory costs, yes, we do have a reasonably good view based on the correspondence we've seen from regulators and interpreting the rules that have, in some cases, just recently been published on how these regulatory costs are computed. And Ralph has referred to his whole mark on IFRS and understanding of IFRIC, which I’m very impressed about.
It puts me and embarrasses me about his technical knowledge. So we do have a reasonably good insight on that, and I think we try to put it in a slide on Page 13, an IFRIC-proof distribution of regulatory costs is laid out for you there.
Wilfred Nagel
Yes, on oil and gas, you have in the appendix to Ralph’s presentation on Pages 33 and 34, both our usual disclosures as well as a little bit more detail, so I'd recommend you have a look at that. And regarding your question on how do we see the deterioration given current oil prices.
Well, obviously a higher oil price helps. We should keep in mind though that we’re protected as partly in the times that oil prices were even lower was hedging, that of course we’ll see it away round now a little bit because we won't see the full benefit of the oil price increase on some of these spread is because of the hedging either.
Having said that, the book is behaving pretty much as expected talking about the reserve-based lending, in particular just anecdotally, we've seen over the past four, five months or so about 60-odd bankruptcies in the reserve-based lending business in the U.S., three of those where ING clients. One ended with no loss and has been finalized, one where we started with just interesting anecdotal I think - started with about EUR 110 million of exposure.
We are now down to EUR 10 million and we expect to come out of those also with no loss. And the third one had a small single-digit loss on several tens of millions of initial exposure, so this underlines - although it is anecdotal, but it underlines Ralph’s point about these loans being senior secured and not at all comparable to high yield bonds or second lien or mezzanine tranches.
It really depends on where you are in the capital structure, what the impact is. Having said that, yes, we will continue to see some pressure on the oil and gas related book.
Reserve-based lending is one area where we do expect to have some losses, but surely at this point we don't expect any dramatic deterioration compared to what we have been saying earlier. There is also the offshore drilling and services part of the business that depends on, one hand, on the continuation of number of big producing wells that's in the areas where we operate is a business which we've mentioned before is very high CapEx but relatively low OpEx or lower margin or lifting cost than the current prices, so most of these fields simply continue to produce and therefore continue to consume services.
However what we are seeing of course is slowly growing impact of the cutback on the investments in new projects and that over the next few years will obviously bring some more pressure on the offshore drilling and services book. On the whole, I don't think we need to make any changes to our guidance.
We gave you the results of our internal stress test last quarter and we said that at $30 for long periods we would see the risk cost between ‘14 and ‘15, and if it were to stay at $20 for a long time, we would expect to go back to the ‘14 level for 2016. I think at the levels where we are currently, we are still looking at risk cost guidance around last year for the total of 2016.
Pawel Dziedzic
That's very clear. Thank you very much.
Operator
We will now take our next question from Bruce Hamilton Morgan Stanley.
Bruce Hamilton
Thank you. Good morning guys.
If I could just come back on costs, I realize - obviously you’ve given us good color on the regulatory costs and a degree of confidence that hopefully the EUR 960 million is the right number. On the underlying cost, I mean, if I look versus Q1 last year, cost growth grew at about 3.5%, obviously a much more stable on the subsequent quarters.
How should we think about the underlying cost base for this year? I mean, is it better to look at, at least a small single-digit percentage growth, or does the move in towards digital and what you're doing with your business, you think you can get things much nearer to flat?
And then secondly, just on the RWA in the Group, obviously they drifted lower by a couple of percent in the quarter. So just trying to understand how you relatively manage that down, whether that was largely FX driven or are there other drivers in terms of your RWA modest decline?
Thank you.
Ralph Hamers
Yes, on the cost side, basically the underlying cost we expect going forward in the next quarter to be flattish. It's a mixed bag really.
We see that the restructuring programs that we announced last year in the Netherlands, basically an extension of that program, Belgium and the commercial bank and the wholesale banking, basically those are delivering and so we see costs going down in some areas of the bank. But then again, we don't mind cost increases if it leads to further income increases.
So over the last couple of quarters, you have seen cost in the industry leading business, the franchise, we have hired people there. In Germany, we have shown that last quarter as well, that we didn’t mind costs going up in Germany because the income was going up even more rapidly.
So what we do generally is that where we save money, we can actually invest in franchises where we do expect growth for the foreseeable quarters is exactly what we want to do, so flattish, cost hovering around this level is what you can expect. On the risk-weighted asset side, I can give it to Wilfred.
Wilfred Nagel
So the main components of the changes in risk-weighted assets are, on one hand, lending volume which created an increase of about EUR 4.5 billion, partly mitigated by FX changes which created a drop by about EUR 3 billion. Then there was a credit migration for about minus EUR 1 billion.
The biggest drop in risk-weighted assets came from the operational risk side, where we had a model update that both reflected industry data, which led to a slight uptick. Our own internal scenario analysis and projections would lead to a slight decrease and some incremental diversification benefit as well.
And then market risk was up slightly but that hovers around EUR 10 billion for a long period already. So those are the main changes.
Bruce Hamilton
Very helpful. Thank you.
Operator
We will now take our next question from Kiri Vijayarajah from Barclays.
Kiri Vijayarajah
Yes, good morning, guys. Going back to financial market.
It does seem to get allocated with a lot of the regulatory costs within the wholesale bank. And given - I know you’ve front-loaded some of the regulatory costs into 1Q.
But is your expectation that moves back above breakeven for the rest of the year? And then more generally, given regulatory costs aren’t going to disappear any time soon, do you think you might need to do more shrinkage or rationalization within financial markets because on the basis of what we are seeing at the moment, it is a drag on the ROEs in the commercial bank.
Thanks.
Patrick Flynn
Yes, I mean, the EUR 15 million of the regulatory cost goes to financial markets, the EUR 12 million the same quarter of last year. So those are the regulatory cost numbers and that's what the real driver.
The revenue fall is more to do with the pretty horrible markets in January and February and clients simply weren’t active. That is not likely to stay forever.
I think March was a little better and we’ll see how sentiment improves. So it is more about dealing with client flow, and as that picks up, we would hope to see improvements.
All of the revenue lines within financial markets are positive, so it's not about losing money and taking position, it’s more the volume of client activity was very low, which is a common phenomenon I think across the markets. Yes, of course we always look to optimize and improve our business and respond to whatever structural changes are we may foresee coming in all of our business lines.
Kiri Vijayarajah
Okay. Thank you.
Operator
We will now take our next question from Ashik Musaddi, JP Morgan.
Ashik Musaddi
Yes, hi. Good morning everyone.
So just one question on your loan book growth. I mean, you achieved a loan book core lending growth of around EUR 7.1 billion in this quarter.
First of all, the large part of that is still coming from the wholesale banking, so can we get a bit more color about what is it? Is it - what book is it, because it mentioned industry lending and general lending et cetera?
And just related to that is, what sort of margin uplift are you getting because of this shift away from retail into wholesale banking? Any color again on the margins you're getting on this new book?
Ralph Hamers
So in the wholesale bank, it's a mix between industry lending as well as general lending as you saw. So basically in the industry lending side, it’s a bit across the different franchises that we have.
There is no particular franchise that grows faster than the others. And you see here the growth in euro.
It’s a dollar business, so in dollars, it has been - no, in euros it has been stable, and dollars it has been growing. And on the general lending side, we see quite some growth coming through there as well, which is related to normal client franchises and as well as the transaction services business that we're growing in.
So it's truly across the board. It's not growing faster than the other.
It’s basically across the whole franchise and that's basically the healthy aspect of this.
Patrick Flynn
On the margins, obviously wholesale banking margins are higher than mortgage margins because they are priced that way because you have much lower loan losses expectation on mortgages retail then you have on wholesale banking, so they are higher. And that's the pay for the inherent risk that we run into.
Ashik Musaddi
Yes. I mean, one thing I would like to check in, is there any sign of margin compression in the retail banking as well, because one thing I was struggling is if I look at your our pre-tax results in Germany, it's more or less flat for five, six quarters, whereas I presume your book has grown - book has still grown in that business.
So what is driving that? Is it margin pressure you're seeing on that business on the asset side - sorry, liability side?
Patrick Flynn
I think that's a big success that we can grow, bring in new clients, bring in new deposits which we used to pay 60 bps on and keep the margins slowly increasing. It goes to the whole point around the strategy on optimizing the balance sheet, the mix is that we can grow that franchise bringing new clients and put that money to work.
And again if we can continue to do that and hold the large and stable, we're more than happy. Growing franchise and keeping the margins stable in this environment is, I think, is not a bad achievement in my humble opinion.
Ashik Musaddi
Okay. That's wonderful.
Thank you.
Operator
We will now take our next question from Farquhar Murray from Autonomous. Please go ahead.
Farquhar Murray
Good morning gentlemen. Just two questions, if I may.
Just starting with the financial markets business. This did come in weaker than expected.
I think you hinted towards this in the last question, but could you just give a sense of how activity in 2Q is panning out as compared to the experience in 1Q, namely particularly how April compared to earlier in the year, particularly on the rates mixed derivatives businesses? And then just on the retail Netherlands, expenses excluding regulatory costs came in at EUR 601 million for the quarter.
Can you just identify how much restructuring provisions are actually in that figure? You seem to reference some in the text but I just think I would like the percent of the magnitude, please?
Thanks.
Ralph Hamers
Okay, on the financial markets side. Well, what you’ve seen in the financial market side is that given the fact that our financial markets business is increasing so a real client business than in the first two months of this year that clients were really waiting for developments to stabilize - the markets stabilize before they would take out their hedges that they would normally do in the first two months.
And some of that business we've seen coming back in March and we also see it coming back in April. So March and April look much better than January and February on that side.
Now on the restructuring expenses and the numbers [ph].
Patrick Flynn
Yes, I mean, the big ones we tell you about and some of the more regular because we are constantly trying to optimize and improve - Ralph talked about - earlier about what we are trying to do to improve efficiency and effectiveness. So there are nearly every quarter some degree of restructuring decisions we take.
We don't give a number on them every quarter but sort of low mid-teens is in the order of magnitude.
Farquhar Murray
Okay. Thanks very much.
Operator
We will now take our next question from Jean-Pierre Lambert from KBW.
Jean-Pierre Lambert
Yes, good morning. Two areas of question if possible.
The first one is the latest proposals on the Basel III, Basel IV area, the switch to standardized approach for large corporate, institutions and project financing. I was wondering if you have some views on the likelihood of this being implemented and the process of developing that area.
The second point is the outlook for volume growth going forward. You benefited from wholesale banking growth this quarter and over the previous ones.
But going forward, you've always indicated that you expect growth coming from other areas such as SME lending and consumer finance. However you are still at the pilot base, and I was wondering if the quantum development required will be able to help you to sustain the growth rates you have in mind?
Thank you.
Patrick Flynn
So yes, on the regulatory costs, what we see. When you hear is that the eminent individuals within the ECB environment and I think also the UK for that matter are saying that the quantum of capital in the system is adequate and they believe in advanced model.
With what we see coming out of the Basel Committee is not consistent with that, hasn't been for some time. The positive thing is that there is the increasing regulatory recognition that these things are not - these statements are not aligned, and we as an industry are working together with our colleagues in the banks to keep updating the QIS ideas for the three different Basel, III, IV, whatever you would call, iterations and present the impacts back to the regulator.
So we're working very hard on the regulatory and lobbying front to make sure that there is a very clear awareness within the powers that [indiscernible] saying and that it is not consistent with the expressed wish of the leaders of the ECB.
Ralph Hamers
Now on loan growth, I think you're right in terms of when we see the quantum. We see high growth rates actually, but they start from a low base, if not a base that is not even near, right.
So in some of the countries in which we are piloting, we don't really have an SME base or consumer base, but in the more growth markets we do. What is important to us is that we see the growth and that we see the growth happening at high percentage levels.
But from a quantum perspective, it will never - it will not be as visible yet, so you see somewhat success that we have in the wholesale bank. And yet what is important is - and that is what you see in Slides 7 of the deck, is that you do see the asset mix changing over time, and at any - in the SME and consumer finance area, which is the grey part of this chart.
We've seen that that growing from EUR 27 billion to EUR 34 billion. So it has the higher growth rate higher than mortgages.
It's not as high as the commercial bank in those markets, but is growing with the 11.5% over to just over two year period, so it's not bad. I mean you see it there and it's happening.
These are important engines for us. It's also important that we show our commitment to the economies in which we get our savings there as well.
So the momentum is there, but before you see back in billions and billions and billions, you see it takes a little bit longer. But it’s happening and it’s happening at double-digit growth.
Jean-Pierre Lambert
Thank you very much.
Operator
Our next question comes from Paul Fenner from Societe Generale. Please go ahead.
Paul Fenner
Hi, good morning. Thanks for taking my call.
I've got a couple of questions. The first is in terms of your resolution strategy, given that you’ve now sold down NN, have you decided what strategy you’re going to use in terms of holding company, an operating bank?
Can you just give us bit of color as to what the issues are and what is it that you're waiting for? And the second question is in terms of bond issuance, you've done one tier-2 issue this year.
You hadn't done any AT-1 for over a year now. I just wanted to get a sense of what your near-term plans for subordinated debt issuance was?
Thank you.
Patrick Flynn
Okay. So we have to find out from the Dutch authorities what the resolution entity will be that was promised clarity - that was promised about this time, but it seems to be slipping back probably towards the end of the year.
I mean, we are in strong position. We have a holding company, we can use that.
We have the operating company as well. It's really up to them to decide which one they want us to use.
Until we know that, it's difficult to change our issuance strategy. What we were…
Paul Fenner
And do you know what it is that [indiscernible].
Patrick Flynn
We're waiting for the regulator to update to us what’s our - which entities should be a resolution entity. And once you understand that, that is the entity from which you would want to do your issuance.
Paul Fenner
Got it.
Patrick Flynn
That's either a holding company or op company. The point is we have both.
So we have optionality on that. And what we did - the first two quarters were horrible for the markets particularly for tier-1 issuance, pretty wide spreads out there.
Given our strong capital position, we didn't have to move there, so we didn't. Now what we did do is a bit of a near-term [ph] tier-2 issuance where we issued a debt at the bank with an option that within two years we can move it up to the Group, so we priced that optionality into the structure.
Paul Fenner
I'm sorry, near-term turns over the next couple of quarters?
Patrick Flynn
Yes, we don't comment in advance. We have a strong capital position.
We have a lot of flexibility given the grandfathering of our hybrids. So we take our time and pick up our moments.
Paul Fenner
Okay, many thanks.
Operator
Our next question comes from Alex Koagne from Natixis. Please go ahead.
Alex Koagne
Yes, hi there. Just one or two follow-up question from my side.
The first one is on the NIM guidance. I think that you are guiding for stable net interest income in 2016 compared to 2015.
Is that something that you can confirm today given the good Q1 and also the low margin and the low interest rate on Germany? I mean, just trying to understand what is your view on net interest income?
And then on commission. I was just wondering whether you expect your commission to grow in 2016 compared to 2015.
Thank you.
Ralph Hamers
So NIM guidance. Alex, yes, you're right.
I think also what you see this quarter that the NIM is actually up a little bit. We can actually confirm that we can manage the 2016 NIM stable versus 2015.
It's a mix of things we use. It's the funding side to savings.
It’s the lending side, and moving towards higher yielding assets as well. So it's a mix of three.
But for 2016 we are quite comfortable on managing at the higher 140s level, so that's stable versus 2015. On the commission side.
Yes, so clearly on the commission side, if you look at our interest - if you look at our income picture, you see that we’re, in comparison to others, a little bit lower commission but our commission income has been stable and we actually feel that there is opportunity on the commission side in our model and that’s - so we do expect commission income to grow a little and even more so going forward, and that's basically the core of our strategy, not so much the commissions but the core of our strategy is to primary relationship in a digital market through which you understand your clients much better and through which the client really looks at you as their main bank, then you do get to cross-buy and linked to the cross-buy will be higher commission income. So that's the whole strategy.
Alex Koagne
Thank you.
Ralph Hamers
Thank you.
Operator
And we will now take our next question from Anke Reingen from Royal Bank of Canada.
Anke Reingen
Yes, good morning. I just wanted to follow-up on net interest income.
Firstly on your guidance of - or your commentary about the net interest margin. I thought early on you said you can hold it at the Q1 level around stable for the rest of the year, and I guess that would refer to EUR 151 million minus, let's say, the two basis points that would be more likely EUR 149 million, while you were just saying you expect that to be stable versus 2015 which would be the EUR 146 million.
So if you can maybe just clarify what the net interest margin for the rest of the year? And then on the volume growth, which was obviously very strong in the wholesale bank in Q1.
Just wondered, do you see the level sustainable given the investments you made, or is it part of the nature of the business it's quite lumpy on the quarter as well? Thank you very much.
Wilfred Nagel
So on the NIM, yes, we can just reiterate what I said and what Patrick has said is that we think we can manage it at the higher 140s level. So it could be 146, it could be 149 in a given quarter depending on how financial markets turns out.
It could be a bit higher, it could be a bit lower, but the higher 140s, and therefore stable first 2015 is where we see it being able to manage it going forward. On the volume growth, yes, we do think that the growth is sustainable whether it's from larger than the year or not, I mean what we have indicated is that - and we always indicated that we expect a 3% to 4% lending growth per annum.
Now sometimes it's more in the first quarter in one part of the business and sometimes it's more in other quarter in the other part of the business, but it's the 3% to 4% lending growth that we feel comfortable with over the year. So if it is a little bit lumpy over the quarters, it is, it could be.
But the wholesale banking franchise is the franchise that is a global franchise. It's an industry lending franchise on the lending side and the general lending franchise will not necessarily dependent on how the developments are in the Eurozone.
It's truly global in different industries, so yes, we feel quite comfortable that we can continue to grow as indicated, 3% to 4% over the year. Thanks.
Anke Reingen
Thank you very much.
Operator
We will now take our next question from Robin van den Broek from Mediobanca. Please go ahead.
Robin van den Broek
Yes, good morning. Thank you for taking my questions.
Coming back to NIM, looking forward a bit further to 2017. If I understand you correctly, you're basically saying high 140s for ‘16.
Probably you will need to use some of your deposit rate cuts to keep it at that level. How should we look at 2017, given that's where the interest rates clearly lower for longer?
Do you still feel comfortable with the 150 to 155 targets you’ve put in place, or should we hope that we can keep it in high 140s? Second question relates to the D-SIFIs.
I think on previous Q4 earnings call, you indicated that if there is more regulatory clarity, you would see a chance that the regulator might reduce the D-SIFI. However in a recent financial stability report, the production through bank, they seem to make a connection of the D-SIFI with the relatively sizeable banking landscape in the Netherlands to GDP and the fact that DGS is not funded yet that will take up until 2024.
So it seems that that financial stability report could imply that the D-SIFI is going to stay at that level for at least lot longer than at the end of this decade. Happy to hear your thoughts on that.
Ralph Hamers
Thanks Robin. Yes, in 2017 to be quite honest, I think it’s too soon to say.
Things are developing so quickly these days. Things are changing around so quickly.
It's really difficult. In terms of the guidance, the ambition that we have indicated when we launched the strategy, the 150, 155.
That was the mix of improvement of margins moving to higher yielding assets as well, and that's exactly what you're seeing us doing. But clearly when we launched the strategy, we haven't foreseen lower interest rate environment, at least not to this level.
So depending on where we are, I think it's too soon to tell on that one. Then on the D-SIFI.
It's there and we'll have to manage with it. It's a one side.
And whatever the reason is, why we have it, I don't think it's that is important to - well, it's not so important to us. What we always basically use as arguments is that we do believe in the European Banking Union and therefore we do believe in a level playing field for European banks, and we happen to be one of the larger European banks, if not, the most Eurozone bank on the savings side and therefore we do plea for a level playing field, and in that case a D-SIFI is - yes, is not helping us, so that's certainly our plea, a level playing field.
Robin van den Broek
Yes, thank you.
Ralph Hamers
Okay.
Operator
We will now take our final question from Alicia Chung, Exane. Please go ahead.
Alicia Chung
Hi there. Just one final question for me really.
Provisions clearly came in below even your base case if you annualize that quarter for the full-year. Can you give a little bit more guidance from here, would you expect that this would improve your base case outlook now?
Patrick Flynn
Well, you need to keep in mind that quarter-on-quarter in particular, the wholesale provisions can be quite lumpy, and you see in one quarters sometimes a big release and another quarters a bigger fall coming within provisions. So it's not really helpful to look at it that way.
We have indicated that we believe the overall 2016 number is going to be around 2015 under the current macro circumstances and that guidance remains.
Alicia Chung
Okay. Thank you.
And sorry, just one last question. I know we talked a little bit about where the net interest margin might land over in ‘16 and then further out.
Could you give a bit of a view of where you expect deposit rates might floor, just because obviously that’s one of the key levers that you will pull from here and we are already relatively at low levels, so perhaps there is further to go?
Ralph Hamers
Yes, well, if I had a crystal ball, we wouldn't probably be doing this job actually because then I would know everything for certain. So where would deposit rates floor?
We are looking at a situation in Belgium where the floor is actually set by the legal environment, so we have 11 basis points floor there. It's legally - that's the floor legally.
It's different for country. I think what's important is that we feel that in the coming quarters, we have enough room to manage between lending margins, their composition of the asset base and also savings to make sure that overall we have a growing franchise and that we serve our clients very well.
And where deposit rates may actually floor, I can't really indicate. The direction is down, but it's as much as I can see because this is - you see the interest rates going down, and therefore there will be more pressure on deposit rates going forward.
Alicia Chung
Okay. Thank you.
Ralph Hamers
Thank you. Thank you all.
I'd like to wrap up this call. If you look at the quarter, the underlying developments, the business developments being really good, 250,000 new clients, 100,000 new primary relationships, EUR 9 billion of new savings, core lending up EUR 7.1 billion.
With that, the net interest result up and the commission result stable. The other income specifically in the financial market side, we've seen a weaker quarter and we have explained that as well.
On the cost side, stable costs, lower risk cost but the higher regulatory costs, but that is proportional for the quarter. Overall, we feel quite well with the performance, but we do see challenges ahead so - and for that we are convinced that our Think Forward strategy is exactly the right strategy going forward in a world where customer experience is what counts and how you can grow.
So thanks very much, and talk to you later. Bye.
Operator
This concludes the conference call. Thank you for participating.