ING Groep N.V. (INGA) Earnings Call Transcript & Summary

Good afternoon. This is Laura welcoming you to ING's 4Q 2024 Credit Update Call. Before handing this conference call over to Jaap Kes, Group Treasurer 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 statement. A discussion of factors that may cause actual results to differ from those in any forward-looking statement is contained in our public filings, including our most recent annual report on Form 20-F filed with the United States Securities and Exchange Commission and our earnings press release as posted on our website today. Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities. Good afternoon, Jaap. Over to you.

Thank you, operator. Welcome all, and thank you for joining us today for the ING credit update call around our fourth quarter 2024 results. My name is Jaap Kes, and I'm the Group Treasurer for ING Group. Today, I'm here together with Sjoerd Miltenburg, the Head of Investor Relations. In this call, we will take you through the 4Q '24 results as well as ING's capital positions and issuance plans for the coming year. At the end of the call, we will have some time for Q&A. Before we get started, I would like to point out that the credit update slides to accompany this call are available for download from our website. After the presentation, we'll be happy to take your questions. With that, let me hand over to you, Sjoerd.

Thank you, Jaap. Let me start with Slide 2, demonstrating the outstanding commercial growth that we have achieved in 2024. We exceeded our annual growth target for mobile primary customers, adding almost 1.1 million mobile primary customers during 2024. We've also shown significant growth in our loan book of 4%, primarily driven by mortgages. As a result of this growth in Retail, 52% of our risk-weighted assets is now allocated to Retail Banking. This is in line with our strategy to increase the capital allocation to Retail Banking to 55% by 2027 as communicated during the Capital Markets Day. Net core deposit growth was at a record level of 7% in 2024. Retail Banking benefited from continued customer growth and successful promotional campaigns, while the effects of our focus to increase deposits in Wholesale Banking also became visible. Total customer balances growth, so lending and deposits combined, amounted to 6% in 2024, exceeding the expectation of 4% we set during Capital Markets Day. Now let me take you to Slide 5. On Slide 5, we show that our business growth is also leading to strong revenue generation. Volume growth in both lending and liabilities has supported the increase in net interest income over the last couple of years and has helped us to offset the margin pressure from decreasing rates in 2024. What is clearly visible on the slide is that the total net interest income is at a structurally higher level in a positive rate environment. Fee income grew by over 11% year-on-year, driven by the strong increase in the number of clients and our initiatives to further diversify the income base. This led to a record total income in 2025 to be at roughly the same level. Now let's zoom in a bit further on the fourth quarter. And for that, I would like to take you to Slide 17. 17 talks about our net interest income. The liability margin decreased to 100 basis points in the fourth quarter, mainly driven by lower replicating income following the decrease in interest rates since mid-2024. The additional lower margin volumes that we attracted in Wholesale Banking had an impact on the average liability margin as well. The average liability margin for the full year was 110 basis points, which is in line with our guidance at the start of the year. The same goes for the average lending margin, which was 130 basis points for the full year and stable quarter-on-quarter. The overall net interest margin, which takes the developments in the balance sheet into account, decreased by 1 basis point as the lower liability NII was compensated by higher treasury NII and the shorter balance sheet at the end of the year. Now moving to Slide 18. Here, we demonstrate our ability to maintain a strong liability NII also in a lower rate environment. The graph on the left shows the forward curve as per the end of December 2024 compared to the end of September 2024, with rates marginally higher at the end of the year. You can see the impact of this development on our gross replicating income in the graph in the middle of the slide. Based on the current interest rate curve, we remain confident that we will be able to manage our liability margin at a level of between 100 and 110 basis points over the longer term. For 2025, we expect the margin to end up at around 100 basis points. Turning to Slide 19. Our fee growth year-on-year was again double digit at 14%, primarily driven by structural revenue drivers. Growth in Retail was partly driven by investment products, reflecting growth in active investment product accounts and an increase in both assets under management and customer trading activity. Daily banking fees rose on the back of strong customer growth and an updated pricing for payment packages. In addition, Retail Banking grew its fee income from lending and insurance products. The increase in fee income in Wholesale Banking was mainly attributable to higher fees from lending. Next to Slide 20. Total expenses in 2024 increased by 4.8% compared to 2023, and we ended up at just over EUR 12 billion in costs for the full year. Expenses excluding regulatory costs and incidental items were 7.6% higher. This increase was mainly driven by the impact of inflation on staff expenses, reflecting salary indexation and CLA increases across most of our markets. Certain FX developments, in particular the weakening of the euro, also contributed. We also continued investing in our business, and we had to pay higher VAT following the implementation of the Danske Bank ruling in the Netherlands. Operational efficiencies compensated for a large part of these increases as we continue to digitize the services to further increase operational leverage. Now on to risk cost on the next slide, so Slide 21. Total risk costs were EUR 299 million this quarter or 18 basis points of average customer lending, which is in line with our full year risk costs as well and which is below our through-the-cycle average. Stage 2 credit outstanding rose, mainly reflecting the reclassification of low default portfolios in Wholesale Banking for which provisioning overlays have been taken, as well as the implementation of an enhanced early warning system for mortgages in Retail Banking. The Stage 3 ratio remained low at 1.7%, with a slight increase quarter-on-quarter due to the shorter balance sheet at year-end. So to summarize, 2024 was another good year with outstanding commercial growth and strong financial results. For 2025, let's go to Slide 26. In 2025, we expect total income to remain strong as we continue to benefit from volume growth in both lending and liabilities and from a further 5% to 10% growth in fee income. We maintain our focus on cost control and operational efficiencies, whereby we will make selective investments to facilitate further business growth. This brings the total expenses to around EUR 12.5 billion to EUR 12.7 billion in 2025. Our CET1 ratio will continue to converge towards our target of around 12.5% by the end of 2025. We will update the market on our capital distribution plans with our next quarterly results. Taking all of this into account, we aim for a return on equity of more than 12% in 2025, while also reconfirming our targets for 2027 as communicated at our Capital Markets Day last summer. With that, I would like to hand it over to you, Jaap.

Thank you, Sjoerd. Let's start by looking at the quarterly risk-weighted asset development and turning to Slide 28 of the deck. Overall, our risk-weighted assets increased by EUR 5.2 billion in the fourth quarter, including EUR 3 billion of FX impact, which is CET1 ratio neutral due to our hedging program. Excluding this FX impact, the credit risk-weighted assets increased by EUR 2.4 billion, which can be broken down into an increase of EUR 3.4 billion due to business growth, and in particular, our mortgage book, a EUR 1.2 billion decrease driven by an improved overall profile of the loan book; minus EUR 1.3 billion from model updates, and this includes a further EUR 2.5 billion reversal of the EUR 6.5 billion temporary increase in RWA that we took in 2Q '24. Operational end market risk-weighted assets were relatively stable this quarter. Bringing these developments together with the quarterly profitability and equity distributions, we will look at the capital developments on Slide 29. This bar chart shows the quarterly development of our capital ratios. First, the CET1 decreased to 13.6% as the additional distribution of EUR 2.5 billion as announced last quarter has been fully deducted this quarter. The cash component of the additional distribution was paid in January and the ongoing share buyback is progressing well with more than 50% of the program completed by now. In addition, a final cash dividend over 2024 of EUR 0.71 per ordinary share is proposed, subject to AGM approval in April 2025. This is already reserved outside of CET1. With a CET1 ratio of 13.6%, ING holds EUR 3 billion of capital in excess of around 12.5% CET1 target. Second, our AT1 and Tier 2 ratios remained stable at 2.4% and 3%, despite the switch we made in our reporting of the prudential value of these instruments from nominal to carrying value, which is in line with the EBA recommendation in the MREL monitoring report last year. As a result, our total capital at almost 19% is very comfortable. Moving from total capital to total loss absorbing capacity. Let's move to Slide 32 on TLAC and MREL. We show both the TLAC and MREL requirement measures against RWA on the left side as well as against leverage on the right-hand side. We plotted the year-end 2024 actuals against final TLAC requirements and MREL requirements for 2025. As you can see, we are amply meeting these metrics, RWA and leverage with sizable buffers. Although all metrics are relevant, it is clear RWA-based MREL is the binding constraint. So this is the measure for us to manage. The roughly 4.2% delta between actuals and requirements provides us a comfortable buffer of almost EUR 14 billion against the requirements. Clearly, to maintain this buffer, we will need to come to the market in '25. Turning to Slide 33. In '25, we plan to issue around EUR 6 billion and EUR 8 billion of HoldCo Senior, which is a little bit lower than the EUR 9.5 billion equivalent issued in '24. The planned issuance is driven by refinancing needs, accommodate risk-weighted asset growth and the continued aim to optimize our capital structure by replacing CET1 by Senior HoldCo over time. For AT1 and Tier 2, we are comfortable with the current AT1 and Tier 2 ratios at 2.4% and 3%. So any issuance is driven by replacement needs and/or to accommodate RWA growth. For AT1, the first upcoming call date for an AT1 instrument is April '25 for USD 1.25 billion. For Tier 2, we have 2 bonds totaling EUR 1.75 billion with the first call date in '25, in March and November, respectively. This very much details our plan on the capital side. If we move to the secured issuance side, we expect to issue between EUR 5 billion and EUR 7 billion, also a little bit lower than the EUR 8.3 billion issued in '24. Clearly, this will be coming from different issuance entities that we have and also includes RMBS. On OpCo Senior, we currently don't expect much other than potentially some local issuance in Australia in line with what we have done last year. As we mainly use these instruments for internal ratio management and general funding purposes, this can obviously change in case of any unforeseen balance sheet developments. Finally, and perhaps zooming out a bit further to liability side of our balance sheet on Slide 40. Here, it shows that ING has a very stable liquidity profile as 3/4 of the balance sheet is funded by customer deposits, of which retail deposit is the main component. Roughly 80% of the retail deposits are covered by the public guarantee scheme, so considered very stable. With an LCR of 143%, we feel that we have a very robust liquidity position. So while we're happy with the stable funding source, we have seen the dynamics in the deposit public market change over the last 12 months, driven by the rate environment, the effects of quantitative tightening and increased competition. Consequently, over the last years, we put even more attention to managing our funding sources. We had several disciplined savings campaign in various countries, but we also increased our liquidity buffers. Next to our LCR, which is supported by a conservative bond portfolio and sizable cash position, we maintain large pools of ECB-eligible assets consisting of retained corporate bonds, retained securitizations and credit claims. We continue to focus on the increase of these pools of assets that can be transformed to liquidity rapidly if needed. With that, I provided my key points and suggest we open the floor for some questions. Operator, please.

[Operator Instructions] We will now take our first question from Ryan B of Lord, Abbett.

Just a question as it relates to Slide 21. You mentioned some changes pertaining to Stage 2. And I was wondering maybe if you could perhaps expand upon what those changes were within Wholesale and also Retail Banking, and if this was ING specific or more industry related.

Yes. Thank you, Ryan. Well, as I mentioned, so in particular, for Wholesale Banking, this related to a reclassification of part of the -- some of the portfolios for which we have taken an overlay. So there is no fundamental difference in how we look at these portfolios, but it's merely a change in methodology that we take here. On the Retail side, there were some -- or there are some countries where we have also updated methodology with respect to the early warning systems that we have in place there. Again, no fundamental change into how we look at the quality of these assets, but merely an update to the methodology that we use.

Okay. And maybe my second question relates to CRT or SRT-related transactions. And I was curious to get your updated view of ING's use of these in the near future.

Yes. So we are not in a real rush and take a prudent approach to carefully assess the product and how it fits also ING. However, we do have a clear focus to optimize our capital efficiency, especially within the Wholesale Bank. And yes, we do see value in adding SRTs to our capital management toolbox. We have the capabilities in-house. And as we move towards our target CET1 of 12.5%, the usage of SRTs becomes more relevant. So we have very little to 0, where peers really have 3.5% of the book in SRTs. So yes, clearly some ground to win. Thanks.

And we will now move on to our next question from Lee Street of Citigroup.

One for me, please. There were some press reports yesterday talking about potential to look at M&A for ING across different geographies. So just any -- if you could talk any thoughts there. You obviously have excess capital you're looking to return, but your thoughts with regards to deploying that with -- be it bolt-on acquisitions. Or just any thoughts just to help us understand what your intentions might be there would be much appreciated.

Yes. Thank you, Lee. I think our CEO, Steven Rijswijk, this morning also mentioned that we see very strong organic growth of our business, as also alluded to on the first page. So growth in customers, growth in liabilities, growth in loans. But in addition to that, we also have a clear strategy to grow and that can be organic but also inorganic. So if we come across targets that fit our profile, that bring us capabilities that we currently don't have or bring us in-market scale, we will look at that. But obviously, also under very strict guidelines. So in terms of ROE, in terms of cultural fit and then M&A can for sure be part of strategy execution and acceleration.

Okay. That makes sense. And just on that, I mean, is there a preference to buying new books of business? Or are you open to doing small bolt-on banks or take the whole entity as well if -- [ anything that ] factors in the execution risk, IT costs, et cetera, et cetera? Or is it really just ROE dependent?

Well, I would say that we would look at assets that would generate or accelerate our strategy and thereby diversify our income. So on the fee side, would diversify our income in terms of segments in which we're active. So that would be the most logical step in terms of acceleration of strategy.

[Operator Instructions] I don't see any questions coming. [Operator Instructions] There are no questions coming through. I will now hand it back to Jaap for closing remarks.

Thank you, operator, and thank you all for joining this call today. The Investor Relations team is available for potential follow-up questions or else we are looking forward to see you during our investor calls and roadshows in 2025. Have a great day.