R. A. J. G. Hamers - Chairman of Executive Board, Chief Executive Officer, Chief Executive Officer of Management Board Banking, Chief Executive Officer of Management Board Insurance EurAsia, Member of the Management Board Banking and Member of Management Board Insurance EurAsia Willem F. Nagel - Chief Risk Officer, Member of the Executive Board, Chief Risk Officer of ING Bank, Chief Risk Officer of ING Insurance, Member of the Management Board - Banking and Member of the Management Board - Insurance Patrick G. Flynn - Chief Financial Officer, Member of the Executive Board, Chief Financial Officer of ING Bank, Chief Financial Officer of ING Insurance, Member of Management Board - Insurance and Member of Management Board - Banking Delfin Rueda - Chief Financial Officer and Member of The Management Board

Farquhar Murray - Autonomous Research LLP David Lock - Deutsche Bank AG, Research Division Omar Fall - Jefferies LLC, Research Division Kiri Vijayarajah - Barclays Capital, Research Division Matthias De Wit - KBC Securities NV, Research Division Anke Reingen - RBC Capital Markets, LLC, Research Division

Ladies and gentlemen, thank you for holding. This is Yvonne welcoming you to ING's Q1 2014 conference call. Before handling this conference over to Ralph Hamers, Chief Executive Officer of ING Group, let me first say that today's comments may include forward-looking statements, such as statements regarding future developments in our businesses, 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 morning, Ralph. Over to you.

Thanks very much. Good morning, all. Welcome to ING's First Quarter 2014 Conference Call. As you are used to, I'll walk you through today's presentation. Patrick Flynn and Wilfred Nagel are here from the Executive Board, and Delfin Rueda and Doug Caldwell, CFO and CRO of NN Group, are here with us as well to answer specific questions on NN Group as well. Let's go through the presentation. And I think it's about a month ago, March 31, that we hosted our Investor Day on the Bank side, where we basically laid out our Bank strategy, as well as the financial ambitions 2015. The foundation for improving the client experience and achieving our target is clearly there. We have to deliver. I've traveled around both talking to you and investors, as well as internally, and specifically, talking to many of the people in the organization in the past few weeks, I'm confident that we will be delivering. In the meantime, we've made a lot of progress on the group restructuring to become a pure bank. And furthermore, the underlying businesses, both on the Insurance and the Bank side, have a good set of quarter results. So the summary is, ING Group posted another -- posted an underlying net profit of EUR 988 million, driven by good results, both on the Bank side, as well as the Insurance side. Turning to Slide 3, the update on the group restructuring, many things that you have known already, but we've made a lot of progress in the first quarter. And that's important in getting into the end phase of restructuring. We made penult with payment to the Dutch State. Voya has been de-consolidated and NN Group is now fully on track in its preparations on the intended -- for the intended IPO 2014.…

[Operator Instructions] The first question is from Farquhar Murray from Autonomous.

Two questions, if I may. Firstly, on the surprisingly strong Basel III ratio. The EUR 8 billion reduction in RWA coming from the change in calculation method seems to be driving around by 30 bps of that. And I wondered whether you might give some more detail around what changed that specifically, which lending books were involved. And was there a particular change in the risk weight there? Secondly, on NN Group, should we regard the 277% IGD ratio for the group as the kind of capital target for the future? What specifically drove the change there versus what we were talking about at 4Q? And can we regard this is a level from which dividends can be paid in the future?

Farquhar, the first question will be answered by Wilfred Nagel and the second one will be answered by Patrick.

Yes, so on the reduction in risk-weighted assets, the 30 basis points you're referring to, that is mainly comprised of 2 things: one is the next step in developing our master scale, which links BDs ultimately to risk weights, where we have extensively disclosed, actually, on Page 3 of the 95 of the annual report what we were planning to do there, and that is what we have executed on. So this is replacing essentially external data with our own internal data as per the Basel ambition. That is about 12 basis points of the 30 that you're talking about. And then there's another 10 basis points linked to part of the law that puts CRD IV into implementation in Europe, which provides specific risk weight reductions for SME exposures. And then there are some smaller things.

On the capital EUR 450 billion that we've injected, that -- does boost the IGD ratio as well, but it also is primarily improving the NN Life solvency ratio up to 251%, which you see in Slide 6. And also increasing the cash buffer and reducing debt. With this capital injection, we do obtain regulatory approval. The regulatory green light to go forward with the IPO. We have approval for the capital structure, which is very significant, that means now that we're in to the end phase of preparation for the IPO and the remaining pieces are within our control. Obviously, we need to have a -- maintain and continue to have a receptive IPO market. So dividends, I can't really talk about in too much detail about dividends or the lawyers will put me in jail. We are in the process of, as I say, preparing for the IPO and I think it's fair to say that dividends will be featured prominently in the IPO, on an equity story, but you'll hear more about that soon. But in conclusion, yes, we have regulatory approval of the capital structure to go forward with the IPO.

The next question is from David Lock from Deutsche Bank.

Two quick questions for me. First one is on your EM exposures. I know in the back of the presentation book, you've given some helpful disclosure on Ukraine and Russia. I just wondered if you can give any color on what you're seeing there at the moment. Obviously, it is a difficult time when we look at the news, but what are you really seeing in the exposures that you have there? Is there anything that really concerns you from your exposures? And if could you also just update us on the goodwill balance in the Turkish business. And then my second question is on net lending reduction in the Netherlands. Clearly, when you have the slide in the fourth quarter, the net lending reduction in slowing. I'm just wondering when you expect that kind of -- that change to really trough? Is it going to be the next couple of quarters? Or could it be longer?

David, let's first answer the last question, because I will take that one, the net lending reduction in the Netherlands. So basically on the mortgage side, we see a net production coming in on the mortgage side of EUR 1 billion, where we see a decrease on the portfolio of EUR 1.3 billion. So you see that basically the engine is working, new mortgages are coming in and we see a transfer of mortgages from the Dutch Banking book on the Bank side to the NN Bank side. So you see a transfer from the bank to the insurance company there. So net-net, you see the decrease, but you see that basically, the engine is running, the mortgage business is doing okay. And if you look at the business lending side in the Dutch market, you basically see that on the smaller SME businesses that you see that the repayments are still a little bit higher than in new production. Although we see in new production, we see higher demands, but that's off by EUR 300 million for the first quarter, so a bit of a decrease. If you then look at the larger companies in the analysis, we actually see a growth in that lending. So I think that most of these are now positive signals that demand is coming in. And in the end, that should increase the loan books, although on the mortgage side, we will continue with a transfer of some of the businesses at reset moment from the bank to the insurance company.

How much remains of that to be transferred? Sorry to interrupt. How much remains to be transferred to NN Group?

That's EUR 7 billion? EUR 7 billion. Then we go to emerging markets exposure. I'll refer -- I'll transfer to Wilfred for that.

Yes, obviously, Russia and Ukraine is a bit of a developing story. Maybe to dwell briefly on what our business is there, it is a pure Commercial Banking business. We don't do retail or SME. And the focus is really on the top local names, mainly exporters of energy and essential metals for the world economy. And we've been in both of these countries for over 20 years. We've got a long history with a number of our clients there. And if you look at what at the moment is going on in terms of exposure, then the lending exposure, the breakdown indeed is at the back of the presentation, that is hovering between EUR 7 billion and EUR 7.5 billion. And we're obviously in daily contact with our clients there to keep track of what's happening and discuss their next steps and our next steps with them. We try to continue to support our clients, to the extent, reasonably possible. Obviously, this is a balancing act between managing risk on one side and supporting the franchise in these longstanding relationships on the other side. We have pruned our exposures where we can, both in coordination with our clients, as well as by reducing the number of counter parties on the financial institution side that we deal with. And we do feel that our clients are taking generally a very prudent approach. They're hoarding cash, not our cash, but the cash that comes back because of a reduced business volume. And they're using that opportunities to strengthen their balance sheets. So at this point, if you look at the qualities of the book in Russia, it is very good. We've got a 0.1% NPL ratio and virtually no provisioning there. And Ukraine is a little bit weaker. There's a bit of detail on that in the presentation as well. But there also, we've got a long history, it's mainly exporters that we're dealing with. And it is reasonable to expect some more provisioning, at some point there, I believe, but, at this point, there's not a lot of details to give you.

Yes, the goodwill number of which we are very comfortable in Turkey is EUR 600 million, unchanged.

The next question is from Omar Fall from Jefferies.

Two questions, please. Firstly, on the NIM. Just on your comments around high-yielding assets maturing and that impacting the reinvestment income. I saw that most of that process was largely behind us in terms of the mix shift and the reinvestment portfolio, particularly on peripheral debt. And given that financial market has boosted the NIM materially, I guess this mix shift had a pretty substantial effect, so could you give us an indication of how well -- how much more of this yield shift there is to come, please? Secondly, and I know it's just one quarter but the capital position seems to be ahead of most people's expectations. And yes, you've been fitted for model updates, but are you tied to the guidance you gave at the Investor Day, around the pace of dividends on ordinary shares? Or if the capital position is ahead, as it seems to be frac-ing, you can revisit that pace of dividends?

Hey, Patrick will answer the NIM, and I will take the one on dividends.

So yes, in respect to the NIM, I think there's a couple of questions there, and I'll try to answer them. Yes, the NIM is up 250 basis points in the quarter, which is primarily due to financial markets, which is -- can be somewhat volatile. Also with Vysya coming out which is 2 basis points. I think it's more likely to ease back towards the year end position of 145 basis points. Interest margin on funding was increased marginally on the back of the modest base rate cuts we had in Q1, but was offset a bit by the lower rate environment, which you referred to. Yes, the lower rate environment, it's influenced by the duration of our reinvestment of deposits, which is around the 3-year piece, but it's a little bit more complex than that. And I'll try not to get into too much complexity, but there's other factors at play. We also have our capital investments which are longer dated, 7 to 10 years, which is a drag effect. And actually, the mechanics of how this works, which is a piece I don't want to dwell on too much, is that we actually use internal transfer rates to reflect the yield on deposits and they don't exactly link with the timing of the lower yield and reinvestments. So a bit of a complex answer, but it comes to the point we think that maybe 10 bps could be a drag in the Netherlands and maybe 20 bps in Belgium over the course of this year from a lower rate environment. However, there is still scope on deposit rate reductions. So our guidance on this is, yes, it could drop back from the 150 to the 145 level about because of the volatility in FM, but longer term, we are still maintaining our ambition to get to the 150, 155, which we announced only a month ago. And that's going to be on executing on what Ralph referred to, higher-yielding assets, deployment, SME, consumer finance, industry lending. This is an ambitious target, it's going to take time, so it will be gradual.

So just a very quick follow-up to that. Have you cut any savings rates this quarter to date?

No.

Okay. Yes, so we did cut in Belgium for Record Bank. But it's only in April, I think, we did only in April. So it's not in the first quarter results. Now on the acceleration of the dividend payments. Clearly, that hinges first foremost on the repayment of the Dutch State, that's we've indicated at the Investor Day. So if this year, we have a successful IPO of NN and we see the results of AQR stress test as I've indicated in the past, clearly, we will consider acceleration of the repayment of the state. But that one has to be -- if we can accelerate that one, then we can accelerate also dividend payments. But -- so we'll see -- we will see it when we get there. So let's first focus us on the IPO of NN and then we'll take another look at that.

The next question is from Kiri Vijayarajah from Barclays.

I'm just trying to reconcile flat '14 and '15 in terms of the balance sheet and loan books. Your loan book looks largely static, but you've added and EUR 17 billion to the balance sheet, so is it fair to say that it's financial markets that's driving the growth this quarter? And related to that, is it fair to say that your risk-weighted ratio is potentially more of a constraint for you, shorter term than your leverage ratio, looking at where both those ratios are at the moment?

Kiri, I'll give the answer -- the question to Wilfred. But could you repeat the second part of your question?

Yes. In terms of, I guess a link to earlier questions about earlier accelerating repayment. Is it fair to say that your -- the 10% stroke 11% risk-weighted requirements more of a constraint for you than your leverage ratio, which, when I compare it to a lot of your peers, when I look at other French banks, you're in the high 3s. Is it fair to say the leverage ratio is kind of pretty secondary in terms of your -- how you think about your capital and your constraints?

Okay, well, I'll come back to that after Wilfred has given the question -- has given the answer on the first one.

Yes, I think the question on the loan book and the fact that the 2 don't immediately seem to reconcile although they do in the end. It's mainly related to 2 things. One is the deconsolidation of Vysya Bank and the other one is the loan transfers that Ralph already mentioned that we're doing from the mortgage book in the Netherlands to -- and ING Bank to NN Bank.

Then on the leverage ratio, first the core Tier 1, both are important, clearly. On the core Tier 1, you basically see that the capital generating capability of the bank, actually, can kind of support further growing core Tier 1 ratio to 11% and have growth and have dividend payment as we have shown to you on the -- and told you on the Investor Day. Now on the leverage ratio itself, yes, on one side, you can come to the conclusion that since we are far ahead on the 3% itself as [indiscernible] you currently a European requirement that we are managing on, but which also debates in the Netherlands as to wanting to increase that to 2% -- 4% [ph] over time. So which one is more restrictive than the other? We don't know yet. The core Tier 1 for the moment that we are able to make, we're able to grow it as well in line with our own ambition. Leverage ratio for the moment is not a point. But we have indicated already, also in the Investor Day, that we want to manage that around 4%, anyway.

The next question is from Matthias De Wit from KBC Securities.

Two questions, please. Just to come back on the leverage ratio of the Bank, just wondered whether you see a possibility to reach the 4% target by issuing EUR 81 million capital, now that the tax deductibility of coupon sales for these instruments has been confirmed in the Netherlands. And then second question, on Insurance and NN Life investment margins are increasing despite the low-yield backdrop. It seems that you're re-risking the portfolio, but just wondered whether there is an -- whether you've seen ability to continue that re-risking process and whether or not we could expect any further increase in investment margins going forward in the quarters ahead?

On the leverage ratio, Patrick. The second one, I'll take.

Okay, the -- on the leverage ratio, yes, it's EUR 81 million, it does play a role in the leverage ratio and it's positive that the government has announced its intention to address the tax deductibility fees, but they haven't done it yet. So we want to see that actually commented first. But yes, we do see a Tier 1 as a key piece in the leverage ratio computation and we'll be looking to use -- avail once of the tax deductibility once it is confirmed in legislation.

Yes. On the second one, the investment margin. Yes, so basically you see the increase now because of re-risking, specifically in this one. You see the income from the mortgage transfers now on the Insurance side. And so therefore, you see that book building up so you can expect that to grow further. And the further re-risking beyond that depends on the capital buildup and clearly, when capital is being released and produced, we can further re-risk on the Insurance side.

And what's currently the buying capital constraint for NN Life? Is it Solvency I, or is it a 1.5 or Solvency II or any other economic capital metric you're using?

Yes, indeed that's -- as Ralph has mentioned, the explanation for the aggressive investment mortgages is related to a particularly increased mortgages that were performed during the last quarter or during the last quarter of last year. It is also due to increased volumes, also related to the capital increase in NN Group that was performed at the end of the year, approximate -- after EUR 1 billion. In terms of the capital constraints, as Patrick has mentioned before, with the today's announcement of the additional EUR 850 million of capital injection, and also with the use of part of those proceeds in order to further capitalize NN Life, we don't believe that there is any significant constraint in terms of capital in order to proceed with our planned reinsurance. As a matter of fact, all the 3 metrics at the moment, they're for the capital position of the group, based on leverage, based on the cash buffer but also on the capitalization of our regulated entities. All of them give us a comfortable position to look forward to our IPO.

[Operator Instructions] The next question is from Anke Reingen from Royal Bank of Canada.

I'm calling you from RBC. I just have one follow-up question on the net interest margin. I mean, if you say that the reinvestment portfolio drag could be about 30 basis points for this year, I just wondered if you -- not probably in terms of numbers, but just directionally, how much of the benefits do you expect from an improvement of the savings rate, as well as on the lending rate?

It's not 30, it's the average of the 2. So it's 10 in the Netherlands, 20 in Belgium. This is not additive. Yes, I mean, it is a bit of a drag. And as I said, we have potential savings rate, there's headroom there, as I said before. And as we have reduced rates, this is something we look at very carefully, any further steps that we might take. And if you were of competition, obviously, customers, so this is a potential that we have. But we will be careful on how we execute it and certainly, the pace of reduction that you've seen in the past will be slower in the future.

And on the lending rate?

And again, core to the -- to our strategy is to deploy customer deposits in higher-yielding assets, as I mentioned earlier. And our margins on lending have remained stable-ish, although there is plenty of competition out there for the growth. But as Ralph said, we're pleased that we're able to achieve some growth. So it's yes, we'd like to see margin improvement but I think it's more about deploying customer deposits, which we have an excellent capability of generating another EUR 8.5 billion this quarter and higher-yielding assets is where the boost will come from.

Just to clarify, so the drag from the reinvestment portfolio, the 10 and the 20 basis points, that's not at the group reinvestment portfolio, that's on the local level, so i.e., the impact on the group's net interest margin would not be the 10 and the 20 basis points? It would be much lower if I compare this with the group investment portfolio.

I think that's right.

We have a follow-up question from Omar Fall from Jefferies.

Just quick. You mentioned the AQR and the stress test. Given where we are in that process, could you highlight any areas of concern that -- what remains? And then at this stage these particulars with regards to the Dutch mortgage portfolio?

Wilfred will answer the question.

There's not a lot to say at this point, for 2 reasons. One is, if the stage of the process that we're in is that we're still delivering data. We're working with DNB and ECB on putting together what we need to do in terms of executing the stress test. And it's a lot of work. The progress is good. We've been able to deliver on time and completely what we needed to do, so we're pleased with that. And it's much too early to speculate on any outcomes, also because, yes, we have seen of course, what the inputs for the stress test are going to look like. But one very important input, nobody knows yet, and that is the output of the AQR, which determines the starting position for each individual banks. So and there's not a lot to say. We also have, clearly, an agreement with both the other banks, as well as ECB to not communicate about anything until we are there, which means until we have concrete results. And what we can say is that, you ask specifically about Dutch mortgages, I think if you look at our quarterly numbers and this quarter is not an exception, they behave as predicted. We said before, it is a large book. and -- but it's behaving fairly well. We're not overly concerned about it. I think we've been able to also get that across to DNB. And DNB, by the way, has shown confidence in general about the ability of the Dutch banks to come through this whole process with a positive outcome. And I'd like to leave it at that.

Thank you, gentlemen. There are no further questions.

Okay. If there's no further questions, then I'd like to close this call. Thanks for attending this morning, and thanks for sharing with us your questions and your queries. It's always appreciated to show the keen interest. We have a good quarter. Good quarter on the strategic front, on the restructuring front, on the financial performance and the commercial performance. So thanks for your attention, and have a good day. Bye.

Thank you, sir. Thank you, ladies and gentlemen. This does conclude today's presentation. Thank you for participating.