ING Groep N.V. (NYSE:ING) Q2 2023 Earnings Call Transcript
ING Groep N.V. (NYSE:ING) Q2 2023 Earnings Call Transcript August 5, 2023
Operator: Good morning. This is Marion, welcoming you to ING's 2Q 2023 Conference Call. This conference is being recorded. Before handing this conference call over to Steven van Rijswijk, 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 is posted on our website today.
Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation on an offer to buy any securities. Good morning, Steven, over to you.
Steven van Rijswijk : Good morning, and welcome to our second quarter '23 results call. I hope you're all well. As usual, I'm joined by our CRO, Ljiljana Cortan; and our CFO, Tanate Phutrakul. And I'm pleased to take you through today's presentation. After that, we will take your questions. The second quarter was another strong quarter for ING, and we delivered good results, especially in an environment characterized by ongoing macroeconomic and geopolitical challenges. Our continued focus on our offering of superior customer experience resulted in good organic growth. We added customers with many customers in Germany, the Netherlands and Spain selecting ING as a primary bank. The share of mobile-only customers increased further and 60% of our retail customers only do business with us through their mobile, our main channel.
In Wholesale Banking, we're fully mobilized to help our clients' position to more sustainable business models, reached €47 billion in the first half '23, a growth of 17% compared with the first six months of 2022. We continue to benefit from the positive rate environment and our total income grew by 23% year-on-year, mainly driven by higher interest income on liabilities. Our four-quarter rolling average return on equity increased to 11.7%, and we have achieved this while operating on a very healthy CET1 ratio of 14.9%. On August 14, we will pay an interim cash dividend over the first on August 14, we will pay an interim cash dividend over the first half of '23, amounting to €0.35 per share, which brings our total year-to-date distribution to shareholders to around €4.5 billion.
And before moving to the financial results in more detail, I will spend some time on the progress that we're making in execution of our strategy and related targets. And on Slide 3, our purpose and strategic priorities are shown. The first priority is to deliver a superior experience, which remains one of the most important reasons for customers to choose and promote ING as a primary bank. And as a result, it is one of the key drivers for customer growth. And to enable this growth, we continue to invest in our scalable tech and operations foundations and focus on offering a seamless digital experience. And in the first half of this year, we have increased the straight-through processing of Retail customer journeys to 69%. And this means that 69% of our key customer journeys is handled without manual intervention, which is getting closer to our 2025 target of over 75%.
Another highlight this quarter is that in the Netherlands, 63% of our new clients were digitally onboarded, up from 52% at the end of last year. Our second strategic pillar is sustainability where an important aim is to support our clients in their transition to more sustainable business models. As our people are essential to putting sustainability into action, we organized our first Global Sustainability Week in June. And colleagues from around the world participated in more than 80 online and in-person sessions to share knowledge, inspire each other and exchange views on how to make a difference, both in and outside their work. We also expanded our product offering to help clients make energy-efficient renovations. In Belgium, we launched a new eco-renovation loan to support business banking clients in making their real estate more sustainable.
Now we are moving to Slide 4, which shows our strength in a positive rate environment. The graph shows our total income since 2018, and it's clear that our continued focus on income diversification and our ability to capture loan growth through the cycle has paid off as we were able to offset the pressure from the lower rates and keep our income stable. Now that the interest rates have turned positive, the strength of our business model are highlighted. We have an attractive funding structure with over 60% of our balance sheet funded by sticky customer deposits. We have a proven ability to grow the number of clients and attract additional deposits. And this was again clearly evidenced this quarter through our successful promotional campaigns, which resulted in significant inflow of deposits in Germany, our largest market in terms of number of clients, and thirdly, through our diversification, which can capture loan growth through the cycle.
And this was evidenced again this quarter with €2.7 billion growth in mortgages despite the fact that the number of transactions in the market was down significantly. And these positive impacts are already visible in the P&L with income being structurally higher than in previous years. And going forward, we expect continued tailwind from these higher rates, given the structure of our replicating portfolio. Around 55% of the €480 billion replicating portfolio is reinvested longer than one year and we will continue to reprice at higher rates in the coming years. Lastly, a return of loan demand and asset margins are a catalyst for future income growth, and we expect to be able to further grow fee income. Slide 5 shows our financial targets for 25% and our performance in the first half of this year.
On fee growth in Daily Banking, we see further room to increase or introduce fees. In investment products, the continued growth of accounts is a strong base for fee growth when market confidence improves and further support will come from growth of Lending fees when overall demand recovers. Higher fees and continued focus on income diversification will support total income growth, though, for 2023, the main driver will continue to be liability NII. And while there are some uncertainties such as further central bank rate increases, deposit tracking and customer behavior, the tailwinds from our replicating portfolio on liabilities will continue. This income growth will support an improvement of our cost-income ratio, which has already declined to just over 54% on a four-quarter rolling basis.
Our costs are well controlled despite the pressure from high inflation, and we also continue to invest in our strategy enablers and in marketing, which will support commercial growth and bring cost benefits in the longer term. On our CET1 ratio, we intend to move through our target of around 12.5% and roughly equal steps through our 50% payout of resilient net profit combined with additional distributions. The next step will reflect the strong capital generation and we will update the market with the disclosure of our third quarter '23 results. Good to highlight here is that the Dutch Central Bank reduced the systematic risk buffer requirement for ING from 2.5% to 2%, while at the same time, increasing the Dutch countercyclical buffer from 1% to 2%.
And as a result of these adjustments, our fully loaded SREP requirement decreased by roughly 32 basis points to 10.7%. And as a result, we will not adjust our CET1 target. Despite the risk cost below our through-the-cycle average and no identifiable trends in provisioning, we remain vigilant as cost of living and doing business arises for our customers. And driven by all these factors, we have confidence we will reach our target of 12% return on equity. Then on to the second quarter results, starting on Slide 7, which shows the continued strong development of NII. And liability NII was even higher than the showing headline number as accounting impacts shifted some NII from treasury and financial markets to other income. And the increase in liability NII reflected further rate increases and continued the positive flow, which was only partly offset by an increase of the core rates in some of our retail markets.
The positive impact was also clearly visible in Wholesale Banking, where our Payments and Cash Management business benefiting from higher interest rates. In Lending NII, we saw year-on-year pressure on mortgage margins due to the rising interest rates as client rates generally track higher funding costs with a delay while also income from prepayment penalties was negligible. Sequentially, this effect diminished and lending margins have stabilized. As mentioned year-on-year, we saw the impact of a temporary shift of NII to other income as Treasury benefited from favorable market opportunities through money market and FX transactions. And for financial markets, rising rates and increased business led to higher funding costs. And accounting-wise, this resulted in a reduction in net interest income, while other income rose significantly.
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Our net interest margin for the quarter decreased by 3 basis points to 156 basis points fully driven by the increase of the balance sheet total, which more than offset higher NII. Slide 8 shows net core lending growth. In Retail, mortgages continue to grow, mainly in Australia, the Netherlands and Germany, despite the fact that mortgage transactions in Germany and the Netherlands dropped significantly. In Wholesale Banking, loan growth was visible in Lending. This was more than offset by lower utilization in working capital solutions and lower volumes in Trading Commodity & Finance, reflecting a decrease in commodity prices and lower economic activity. Going forward, with still heightened macroeconomic uncertainty, we expect loan demand to remain subdued.
We benefited from our diversified business model as we grew net customer deposits with €17 billion, primarily reflecting the success of our promotional campaigns in Germany, where we had €16 billion of deposit inflows. Roughly two thirds of this inflow came from existing customers. Wholesale Banking recorded a small outflow. Then we turn to fees on Page 9, which showed growth year-on-year, driven by increased deal flow in Wholesale Banking Lending and Global Capital Markets. In Retail Banking, the growth of primary customers and the increase in payment package fees was offset by lower fees year-on-year for investment products, which continues to be affected by less trading activity. However, the opening of new investment accounts continued and assets under management increased, which will result in higher fees when market activity recovers as we will grow from a higher base.
Sequentially, fees were up, also reflecting an increase in fees in Wholesale Banking, driven by Lending, lower capital markets and Corporate Finance. Fee income from Retail Banking was stable. Now I move to Slide 10. Excluding regulatory costs and incidental items, operating expenses were up 6.9% year-on-year. This was mostly due to the effect of high inflation rates on staff expenses, reflecting indexation and CLA increases across most of our markets. We also continued to invest in growing our business, including higher marketing expenses, and these factors were partly offset by positive FX impacts and the exit from the retail markets in France and the Philippines. Quarter-on-quarter, expenses excluding regulatory costs and incidental items decreased with 0.5% despite higher staff expenses.
Last quarter had included €44 million of legal provisions and restructuring costs, while these amounted to €22 million in the second quarter. Regulatory costs were down year-on-year as the second quarter last year had included a €92 million contribution to the Institutional Protection Scheme in Poland. Our contribution to DGS funds has decreased as well. The quarter-on-quarter decrease in regulatory costs reflects the full payment of several annual contributions that we took in the first quarter of this year. Then risk costs in the next slide, Slide 11, where we -- which were €98 million this quarter or 6 basis points of average customer lending, below our through-the-cycle average of 25 basis points. This included a €39 million increase of management overlays, mainly reflecting the current inflation and interest environment as well as some regular model updates.
The total stock of management overlays amounts to €560 million at the end of the second quarter 2023. In Wholesale Banking, risk costs included a few individual files. And this was, however, more than offset by a further release of our Russia-related provisions as we continued reducing our Russia-related exposure. Total offshore exposure with regards to Russia amounted to €1.7 billion at the end of the second quarter. Total risk costs in Wholesale amounted to minus €15 million, minus 1-5. In Retail Banking, there were limited additions to risk costs in Poland, Spain and Belgium. In Stage 3, we saw more inflow with no clear trends identifiable and the Stage 3 outstandings declined slightly this quarter while the Stage 3 ratio remained low at 1.4%.
The lower Stage 2 ratio mainly reflected sales and repayments, including a further reduction of our offshore Russia-related exposure. And all in all, a very benign quarter in risk costs and although cost of living and doing business rises for our customers, we remain confident in the quality of our loan book. On Slide 12 that shows our CET1 ratio, which increased to a very strong 14.9%. CET1 capital was nearly €500 million lower as the distribution of €1.5 billion was largely offset by the addition of 50% of the resilient net profit for the quarter. Furthermore, risk-weighted assets were €4.5 billion lower, including €200 million of FX impacts. Credit risk-weighted assets decreased by €5.6 billion, mostly driven by model updates, an improved profile of the loan book as well as disciplined capital management in the Wholesale Banking.
On distribution plans, we will pay an interim cash dividend of €0.35 per ordinary share over the first half of 2023 on August 14, and we will update the market on our future distribution plans with our third quarter of 23 results. And as mentioned before, the next steps to converge to our CET1 ratio target of 12.5% by 2025 will reflect the strong capital generation. To wrap up with the highlights, a strong second quarter in which we delivered an excellent set of results. Execution of our strategic priorities delivered strong growth of primary customers. And we increased our volumes, mobilized to finance the transition to more sustainable business models. The financial results in the first half of the year clearly demonstrated our business model and strength position as well to benefit from the positive rate environment.
Total income increased with growth across all segments and expenses remained under control. Our capital position remains very strong, and we are well positioned to continue providing a very attractive return to our shareholders. Going forward, I'm confident that we will continue to deliver robust financial results while successfully executing our strategy. And with that, we move to Q&A.
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