Good morning. This is Patricia Karasov welcoming you to ING Second Quarter 2019 Conference Call. Before handing this conference call over to Ralph Hamers, Chief Executive Officer of ING Group, let me first say that today's comments may include forward-looking statements such as statements regarding future developments in our business, expectations for our future financial performance and any statement not involving a historical fact. Actual results may differ materially from those projected in any forward-looking statements. A discussion of factors that may cause actual results to differ from those in any forward-looking 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 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.

Good morning, everyone. Welcome to our second quarter 2019 results call. With me are our CFO, Tanate Phutrakul; and our CRO, Steven van Rijswijk. I'm going to take you through the presentation. At the end of the presentation, there will be lots of opportunity to have a Q&A. Just to cover the key points for the quarter. We achieved good results in the second quarter with us posting a net profit of EUR1.4 billion. We see pressure from continuing low, maybe even negative rate environment. But in spite of that, we have shown strong commercial momentum that counterbalances that pressure. On the retail side, we recorded a net inflow of more than 300,000 primary customers to reach 12.9 million total primary customers with all countries contributing on this one. Just like in the first quarter, we saw good loan growth, well diversified by business, sectors and geographies. This loan growth was also achieved at resilient markets – margins, especially in mortgages where we continue to be successful at improving our margins and repricing. This helps us to counter the high margin – the margin pressure on the customer deposits because of the rate environment as well as the higher KYC-related expenses. On a four-quarter rolling average basis, we realized a return on equity of 10.8%., that's in line with our ambition. The CET1 ratio remained robust at 14.5%. Over the first half of 2019, we will pay an interim cash dividend of EUR0.24 per share. We further progressed on the rollout of our global KYC announcement program across all countries where ING is present with the FTEs allocated to KYC increasing to now more than 3,000. And turning to our commercial momentum, Slide 3. As I mentioned, the primary customers grew by more than 300,000, well diversified, and you can…

Thank you, sir. [Operator Instructions] Our first question is from Mr. Pawel Dziedzic of Goldman Sachs. Go ahead, please. Your line is open. Mr. Dziedzic, please unmute your line.

Hi. Good morning and thank you for the presentation. Two questions from my side, the first one is on cost, and more specifically, on inflation related to the KYC initiatives that you mentioned. Do you expect any further increase in staff numbers and costs when you go to second half of 2019 and perhaps to 2020? And perhaps related to that, are you on track to complete the bulk of the enhancement program in 2019? I think you mentioned that this is the target during Capital Markets Day. I'm just trying to understand if you still expect cost relief to materialize in 2020 on the back of initiatives that you're completing this year. The second question is on impact of a potential ECB rate cut and mitigating actions that you have still available. Firstly, can you give us a sense what 20 bps cut could have on NII and NIM over the next one, two years? And if there are any incremental things that you can put in place if that happens? I know you mentioned good commercial momentum, repricing and so on, but would you still consider expanding, for instance, parameter of the clients that can be charged negative rates? Are you in a position to perhaps adjust fee structure for retail clients and so on? Thank you.

Thank you, Pawel. So, on the first one on costs. So on one side, yes, beefing up KYC, the enhancement, is leading to increased cost because we're actually adding people as well. The 3,000 FTEs that we are indicating are not necessarily all an increase in cost because it also includes the fact that people who already work with us and who are, for example, client – working in the client domain that their daily activities are more geared towards KYC to get these files in order than otherwise. So that's not necessarily leading to an increase in cost. But then, clearly, there is also additional operational activities for which we are building centers of excellence, and that is an increase in costs. And then, over time, we will have to continue to improve our systems and some of our algorithms, which is leading to increase in costs as well. Now there is two ways to manage this. The first one is that, yes, some of this is what we would call project-related costs. So these are externals that help us to make sure that, from a final enhancement perspective, we get everything done. And that you should see coming down in 2020 as those externals you should see go down in 2020. Then if it comes to some of the IT or the program-related costs, we are also shifting priorities as we said. You can’t do everything at the same time. So also from an IT perspective, we are reprioritizing specific capabilities and capacity away from some of the programs we would otherwise run towards this domain. So they will lead to a bit of an increase of costs, but not that – you will not detect it in full. So to conclude, yes, over 2020, you would have…

That’s very helpful. Thank you. Maybe just a follow-up. Could you quantify the impact of 20 bps cut on NII just to give us a sense of sensitivity what scale it could have and – yes. And the second just on KYC, would you be willing to disclose size of these project-related costs that could fall out into 2020?

Pawel, this is Tanate. I think we really don’t want to quantify a 20 basis point cut on the ECB rate because it’s a much more complex roster of actions that we would take. The only thing we would say is that out of the EUR570 billion of deposits that we have, about 80% is in the Eurozone. And as we indicated in the past, roughly the duration is somewhere around the five-year mark. But this is all about the ability to reprice, the ability to go deeper negative in certain segments of our deposits. And so it’s very much a future action and market response that we would see there.

All right. Thank you very much.

Next question.

Our next question is from Mr. Robin van den Broek, Mediobanca. Go ahead please, sir.

Yes. Good morning, everybody. Thank you for taking my questions. The first one, I’ll try to phrase it simple because I know there are a lot of dynamics in the background. So basically, on the current macro environment where the euro swaps five-year point is at minus 33 basis points, are you still confident that you can grow NII in future years given your 2% to 3% loan growth ambition? That’s the first question. The second one relates to the remark you’ve made on your slides related to TRIM. I’m not sure that’s a general remark that you’ve had there before, but feels like it’s a bit more cautious than in the past. So I was wondering if there are certain books where you see more TRIM impacts coming through, maybe particularly on the structured finance books where you might see more headwinds than anticipated before. Any update there would be helpful. Thank you.

Robin, on the first one, well, it remains to be seen, honestly. So clearly, you have the pressure on savings side in terms of the – and the impact on NII there and then where we can see the lending growth. Now the lending growth in itself, as you see this quarter, and now we’re getting into kind of where we see actually repricing being picked up, we see actually in large books of ING, we see repricing being picked up, which is the mortgage book in Netherlands, the mortgage book in Belgium and the mortgage book in Germany. In some cases, this comes at a lower market share, but its okay, its okay to have a lower marker share from that perspective, but we’re really looking into where we can reprice. And in the mortgage books generally, we see across the whole franchise, we see that repricing is happening and it really helps us. In business lending, we see it picked up in the Netherlands. We see flattish margins in Belgium. And in the Wholesale Bank, we see on the lending side, we see flattish margins, but we see a bit of pressure on the real estate finance side if it comes to new production. I’m talking new production here, so how is the market reaction to repricing efforts. This is what we do as a commercial margin. Then internally, we have moved the FTP as well and that’s being picked up by all new production. And obviously, that’s already here. So you see that if we continue to be able to produce a loan book growth of 2% to 3% or 3% to 4% that – and you can actually reprice, which is what we’re showing, that will really counter the pressure that we see on the savings side. So that’s what I can give you on that one. On TRIM, I’m going to give the floor to Steven.

Yes. Thank you, Robin. I mean, on TRIM, I don’t think that we’re more cautious or careful. In the end, we’ve always said that the impact of – in the TRIM, the more adjustments that come from the new regulatory technological standards and Basel IV would have a ceteris paribus impact of between 15% to 18%. What we do see now is a matter of timing. So you see actually the impacts of the TRIM on the remaining TRIM exercises. We expect them to come in between now and the next 12 months. So Q3, Q4, you see more of them coming in. And moreover, the redevelopment of morals you see coming in as well a bit earlier. It still means that the guidance that we’ve given still stays, which means the 15% to 18% growth in RWA including Basel IV, which means that we still remain with our guidance of approximately 13.5% over risk-weighted assets under a Basel IV regime.

Okay, thank you.

Our next question is from Mr. Benoit Petrarque, Kepler Cheuvreux. Go ahead, please sir.

Yes. Good morning, thanks for taking my questions. The first one is to come back on these mortgage margins, which are going up nicely, basically. This is a very good way to offset for you the pressure from lower rates. Clearly, we tend to see that more negative, like lower rate is obviously very negative for you. But could you give us a sense of the extent you can offset the margin pressure from lower rates with repricing across the book? Will that be really meaningful? I have the impression that could be pretty significant, especially what is going on the mortgage side. But could you give us a sense of – on whether that will be a really very good lever for you to offset the pressure, which is to come from the negative rates? And also could you give us a bit of an update on the front book margins across the different geographies versus the back book margins on the mortgages? And then the second question was on the cost side. It’s clean – it’s up 3% clean. I think it’s quite substantial again. I think we were up 1.5% last quarter. So how do you see cost inflation for the rest of the year, especially H2? And could you give us a bit of an update on the timing of the cost cutting coming in? It seems that it is still a bit slow. We did not see that coming really in Q2, but do you expect more cost cutting coming – in the coming quarters? Thank you.

I’m going to give the cost one to Tanate. I’ll come back to the margins.

I think as – I think Ralph gave at the beginning of the overall presentation, we do have a sizable cost increase this quarter. And then if you discount the impact of the German provisions, you see that the cost side increasing, as you mentioned, between 2% to 3%, right? But depending on where we are and depending on which segments, the costs are different, right? If you look at the Wholesale Bank, excluding foreign exchange impact, the cost in the Wholesale Bank is roughly up 0.6%. So you see the transformation having a good impact there. Even in Germany, where that cost increase is there, and if you exclude the EUR36 million cost increase, German costs are flat, right? The cost in Belgium is down 4.2%. The cost in Financial Market is down as well, right? Where you do see some cost increases is in some of the high-inflation markets, like in the Challenger & Growth Markets, where I think, year-on-year, excluding that German number, our costs are up 2.9%. But that’s in light of a 7.5% growth in income. So as mentioned before, where we see opportunity for growth, opportunity for revenue strengthening, we don’t mind actually making those investment to do that.

Okay. Then on the lending margins, to which extent can we actually offset against the pressure on liability income? Honestly, you see it this quarter, it’s rather flattish. It’s a combination of growth and repricing. The repricing you should realize is only on the new production, right? So the effect there is one and the growth is the other. And that’s a little bit how you can kind of get a sense for it. Now if you then go into the difference between front book versus back book, I’m not going to give you kind of the specific margins per area, but in all geographies on the mortgage side, the new production margins are better than the back book. So it’s not only repricing that is an increased price versus last quarter. It is repricing in terms of that new production has a better margin than the back book. So overall, it has a real good impact. But again, it’s only on new production. So that is – it’s – before that trickles down into the portfolio margin, it takes a couple of quarters. Yes? Thank you.

Thank you very much.

Our next question is from Mr. Adrian Cighi, RBC Capital Markets. Go ahead, please sir.

Hi, good morning. Two questions from my side, please, one on fee income and one KYC. On fee income, very helpful discussion around the four drivers of growth for the introduction. However, it’s still the growth remains meaningful below your ambition. Can you maybe unpack where among those four you’re currently falling short of your expectations and maybe what the sort of a longer-term ambition translates into sort of near term, maybe next year or this year growth targets? And then on KYC, you mentioned you’re in discussions with the Italian judicial authorities, yet you don’t take any provision for potential fines this quarter. Is that because based on the judgment you have so far, you don’t see any potential for fines? Or is that because there’s too much uncertainty on the size of a potential fine or a combination of the above? Thank you.

Okay. So on fee growth, where are we falling short. I think we’re falling short everywhere if you compare to our ambition because I do think that there is upside in each of these sources. So in daily banking, clearly, a lot of the daily banking fees setting in the past has been done of the back of realizing also some income on your current accounts. That income is actually under pressure because of the low-rate environment. So if you want to make that cost-neutral, one way or the other, you’ll have to move in pricing your payment packages in the different markets in which you offer it or introduce it as a principal because in some markets we have not even introduced fees on payment packages. So that’s the stream number one. Stream number two, our behavioral fees. That is actually one that I think is interesting to see how that develops. It certainly has upside because we don’t have many of those, but it is also helping us to decrease costs. What do I mean with that? In many of the markets, we don’t have, for example, our own ATM network. So whenever our customers use the ATMs of our collegial banks, as we would say, we would have to pay a fee. So introducing behavioral fees in order to incentivize them not to go to the ATM as often is actually decreasing our fee outflow to our commission outflow to the other banks. So that is one that we are actively looking at as well. On investment products, actually we’ve seen a real good quarter on fees in investment products this quarter, and the underlying assets under management is increasing to grow. It’s not only because of the rate environment. It’s also because we gained market share…

Yes. Thank you, Adrian. In line with our policy, this we will not disclose, particularly our interaction that we have with supervisors, regulators or judicial authorities. Now Italy, of course, we had disclosure in the first quarter already after the press release of the Italian supervisor and ING came out together. What we do not do typically also is we do not tip comment on individual provisions, unless they are material and then we need to disclose, which at this point in time is not the case.

Thank you very much. Very clear.

Our next question is from Mr. Farquhar Murray, Autonomous. Go ahead, please your line is open.

Good morning, gentlemen. Just two questions, if I may. Firstly, on fee income. Obviously, the 5% to 10% is not realistic for this year. That’s perfectly understandable given market conditions. But does it remain for 5% to 10% in terms of the ambition for, say, full year 2020, full year 2021? Or should we be thinking more towards 20% revenue ambition that aggregate the proportion instead perhaps with some slower growth? And then secondly, operational risk-weighted assets went up EUR6.2 billion Q-on-Q. I just wondered how much of that we might regard as kind of incremental to the Basel IV RWA previous indication and how much we might regard as fronting. I ask because I kind of thought you might have moderated the Basel IV inflation, but you still seem to be indicating 15% to 20% – 18% instead.

Well, thanks for the fee income question. So as I said, I think on the positive side of generating fee income, I’m confident that – and actually, you will see that. However, just to give you an idea. For example, if the growth of Interhyp, for example, in Germany continues and we increase our share of their production, we will pay fees to Interhyp and their contribution to the fee line will actually decrease because of the net effect. So this quarter, we see actually a very positive contribution because we are not as aggressive in pricing in Germany, and therefore, they produce a lot of mortgages for other banks. And therefore, it is positive to the fee income line. So yes, some of those effects that are not necessarily negative in terms of the total – or the overall franchise. But given the fact that the fee income line is a net fee income line, you have these distorting kind of effects in it. If you would look at it from a growth perspective, as you know, the fees that we introduce can increase or the new services, I think also, for 2020, we believe the 5% to 10% ambition can stay.

On operational risk, what we have done is we have updated our internal scenarios and also the capital – our capital and operational risk based on the external database. But indeed, if you would look at a standardized model under Basel IV, you can perceive this as front-loading on Basel IV, and with that, the guidance does not change on the 15% to 18%.

Thanks very much.

Our next question is from Mr. Nick Davey, Redburn. Go ahead, please sir.

Good morning, everyone. Two questions, please. The first one on credit demand, if I could just ask you to talk about anything that you’re seeing changing particularly in the Netherlands and Germany. And the Netherlands, just on the back of all the high pace of house price growth, it seems now everyone out of negative equity, so just wondering whether there's any change in signs or outlook on credit demand there. And then in Germany, it seems that your pace of growth is slowing where the system is accelerating. So if you can make any comments about that sort of apparent slowing down of your share? And then the second question on impairments, and I know it's a bit unfashionable to find sort of any value in low impairments these days, but it has been, I guess, 2.5 years of these very low levels of impairments. So you've now said the second half of the year, I guess, stays at these very low levels. I just wonder whether I could tempt you to talk about the next two or three years if we're all here modeling out low rates for the next three years into our margins, whether you'd be brave enough to say these levels of impairments could be here to stay or what kind of economic environment you'd have to see to see a meaningful step-up in risk costs?

Thank you, Nick. So on credit demand, then we really have to go and make the fundamental analysis of the Dutch economy. So for starters, the expectation around the Dutch economy is that it grows faster than the Eurozone overall, but it is, as most of the economies, also slowing down versus last year. Now if you really dive deep into it, you see the business lending continuing. I mean there is no kind of abundance of growth on the business lending side, not from a demand perspective, also not from a production perspective. So that's okay, I guess. On the mortgage side, there is many different effects here – the underlying trend for the housing market should always be the supply and demand. And actually, we see that there is a shortage of houses in Holland. So from that perspective, that imbalance will ensure that new houses will come to the market as well as that there will be continued tension on that housing market. Then the question is, how does that kind of filter through into your mortgage production? And how does that affect your income on mortgage in the Netherlands? Now there is a different effect because on the other side – on one side, you see that the people are increasingly repaying their mortgages because the structures that we offer are not interest only for 100% anymore. So people have to actually start repaying on their mortgages. So that, from a total book perspective, has a different effect on your P&L. But we do, as you can see, also this quarter, expect continued growth there. In Germany, it's – I think the underlying has always been pretty conservative. I think Germans are pretty conservative in how the housing market develops. And there is quite some competition from banks. Because of the low rate environment, you produce whatever they can produce. We're not in that game. That's just where we are not. So we'd rather benefit then from distributing mortgages that go on somebody else's balance sheet at a rate that we don't like and get fee for it through Interhyp than having the production at a too low price in our books. Where we can pick up and where it fits our risk appetite and it fits our pricing, we will certainly do so. So I think the underlying market is not changing in Germany, but there is fierce competition on some parts of the market and we're happy to be a distributor for other banks there. On NPL, so I'll give the floor to Steven.

Yes. Thanks, Nick. So what we currently remain to see is that the NPL levels remain low, the forbearance levels are relatively low or remain low, the watch list levels have been low or remain low. So we see – we continue to see stability at the different stages of the performing to the gradually less to nonperforming loans, so in that sense, that is a good sign. If you look at macroeconomic factors, still growth on – in the wider – global macroeconomic context in the markets in which we're operating, albeit the pace is deteriorating in some markets. But also still there, you see limited impact and it has a positive impact now and again in markets when you look at our model updates or our LTV levels. So it's still a good sign. Now at the same point – three, and I also talked about that during the Investor Day, I'm being paid also to shave off the peaks in the loan loss provisioning when things are going from high to a low. And in that sense, we set caps on the leverage portfolio. On the real estate portfolio, we remain prudent in mortgage portfolios, especially not only on pricing that Ralph just talked about, but also on tenures, for example, in the Netherlands. And what you do see there also with the regulation changing is that even longer tenures have shorter durations given the more amortizing nature of all these loans, so that also helps in the risk basis of this portfolio. And when it comes to diversification of loans, for example, in the consumer loan portfolio, we're growing relatively quickly, albeit the total portfolio of consumer loans as currently with about EUR25 million is relatively limited. Whenever we grow, we do it in small steps so that we can learn of how the vintages behave themselves over the years. So that's what I can say about it for now. And I heard you say that, can we be brave? I mean I really would like to be brave, but I'm really paid to be prudent. Thank you.

Okay, thank you.

Our next question is from Mr. Stefan Nedialkov of Citi. Go ahead, please sir.

Hey, guys. Good morning. It's Stefan from the Citi team. Two questions on my side. Ralph, you were talking about mortgage spreads on the front book being higher than the back book, just trying to understand this dynamic a little bit better. Obviously, swap rates are coming down faster than yields on mortgages. Do we, at some point, find ourselves in a situation where the banks, no matter how much they prefer margins over volumes, they are effectively forced to start lowering spreads as well in a low-rate environment, which may be persisting for years to come. So is this a sort of accretion on the front book of mortgage spreads a somewhat temporary event, if you will, and therefore might limit your ability to counter low rates on the replicating side of things? So that’s the first question. The second question is on costs. You guys keep on talking about growth opportunities in Retail and Wholesale, Challenger & Growth Markets. It always sounded a little bit abstract to me. I mean, obviously, you’re growing your loan book, et cetera. But what are the sort of growth initiatives that you have in mind, really? Like what are the top three growth things that are driving cost growth over the next couple of years?

Okay. Thank you. So on the first one, the mortgage spreads. Well, honestly, I don’t think it’s a temporary effect. In the end, it’s also about whether you can make the return on capital and that’s what we’re looking at here as well. If we can’t make the return on capital, then we will not produce the asset and then we’d rather generate the capital by freeing it up because we’re not growing our loan book and see how we can return in a different way than putting it at work at a below cost of capital rates. So it’s not what we want to do. So on mortgage spreads, we’re clearly looking at how we can price for return on capital. And as you know, the Basel impact on mortgages is there. And therefore, you’ll have to – given the fact that these are longer-term assets, you’ll have to work on your repricing, as we speak, even with the Basel impact may be not there yet. But you know they will be on your books the moment the Basel will be applicable. So that’s why we are cautious there and working on repricing. The C&G opportunities, the top growth – three growth initiatives that will drive costs. It is just client growth and business growth across. So on one side, we are becoming more and more digital. And therefore, you can increase your operating leverage. On the other side, not everything is digital yet, so you can’t fully scale without additional cost. And that’s where you will see some cost pressure in C&G continuing if you grow the business. Now that’s why we look at these plans from a positive season perspective. So that’s why we make judgment on whether we approve plans or not if we feel that within the time frame that we find it important, that we actually see positive scissors. If the plans don’t have those, we will not support them. If they’re not material, we will not support them either. And clearly, you know that, for example, in Germany where we’re large and in Spain where we’re large, in Poland and Romania, we’re really growing fast and doing a real good job.

Thank you.

Our next question is from Mr. Omar Fall of Barclays. Go ahead please sir.

Good morning. Sorry to come back to Stefan’s question on front book margins improving everywhere in mortgages, et cetera. So just excluding what you are doing specifically in terms of not participating in lower-returning assets, are you actually seeing contractual customer rates, in general, going higher in your core markets? Or is it just the funding cost swap rates coming down and reflected in FTP? So why do you think that this time is different and contractual rates aren’t simply delayed and catching up with lower rates as we’ve seen several times in the last few years? Is it you think there has been a general epiphany from the competition in your core markets that they should act more reasonably? And then the second question, which is the CET1 ratios perhaps not progressing upwards as fast as one would hope and capital generation from earnings should be more rather than less challenging in the low rate environment, I’m guessing. So could you just remind us of what levers you have to pull in terms of inorganic capital generation beyond the 70 bps of management mitigating actions that I think you’d flagged in the past. So would you be willing to revisit the Asian stakes? Or are there any other areas we could look at? And where does adjusting the dividends sit in those priorities? Thank you.

Thanks, Omar. Let me put it another way why we believe our pricing discipline will come through. I think if you look at the negative interest rate environment, it’s not only affecting ING, but it’s broadly affecting all Eurozone banks, right? And the fact that the compression on savings margin is happening to not just us but to all of the major participants in this market means there is less leverage on how you can actually compensate for that from a pricing perspective. That’s why we believe that in some of our big core markets where we have big market share where the market is consolidated, that, that pricing impact is there, right? And I think we lead the way as ING in some of these markets to make sure that we maintain the pricing discipline and perhaps potentially in the short term see a drop in market share. But overall, I think the fundamental challenges for the industry remains, right? And to give you an example in point of two countries where we’re in different cycles. If you look at the margin improvement in Belgium, you would expect margin contraction in Belgium. That’s not happening partly because of the pricing discipline that we see from ING in that particular market. And in Germany, perhaps then you see slower growth in market share today. But overall, you can imagine what is facing other German banks and we believe over time the market will normalize itself, and the front book needs to improve because the ability to re-price on saving gets less and less over time.

Okay. On your question on CET1, well, there will always be inorganic levers to pull, but we don’t see the need for it. If we just look at the organic development and the capital generation that comes from the core business, the impact of Basel and maybe the timing impact of TRIM on Basel, it’s not changing the effect of the total review of models and Basel, and what you asked. So, the guidance that we gave two years ago, that is – would kind of lead to an increase of 15% to 18%. And with that, we think that a large part of that we can manage through management actions and that this, over time, will only come into effect with more effect on the input floors than on the output floors. We think that in that time frame we can easily manage the capital situation. So, I’m not sure where your question is coming from, but there will always be inorganic steps that you could do, but it’s not that – but we don’t think we need them.

Sure. I guess my point was just in the event that you were to need them, what would those steps be?

Yes. Well, then I have to go into kind of the portfolio and all of that, which is something that we generally stay away from. For now and as you know, everything is strategic until it’s not strategic. I think that is what people then tend to say, and that is for us as well. So whatever is in our portfolio is what we support until we feel we shouldn’t support it anymore. So that’s where we stand. Thank you.

Fair enough. Thank you.

Our next question is from Mr. Johan Ekblom of UBS. Go ahead please, sir.

Thank you. Can we just come back to the net interest income? I guess a couple of questions there. First of all, in terms of the replication portfolio, should we think of that – of maturities of swaps on your balance sheet as being pretty evenly distributed over time? Or are there any sort of concentrated maturities over the next 18 months or so? So that’s the first question. Second question is just on tiering. So if we get tiering from these, do you have any thoughts that you want to share as to how we can assess the impact or how it might be structured? And if not, if you can at least confirm how much money you have at the ECB deposit facility as of the end of June? And then, finally, just coming back on the comments around mortgage margins. I mean if we look at back book mortgage prices versus front book, the Netherlands still has probably the biggest gap in Europe or close to and you’re saying that the improved pricing is just seen on the front book. How big is the margin differential versus if we just look at the yield differential, if you will, just to kind of gauge how quickly those two can balance out?

So Johan, thanks. On the latter one, so I’m going to ask you to kind of have a call after – after the call with the Investor Relations department because we don’t have some of the information you’re asking at hand as we speak. I’ll take the one on tiering and Tanate will take the one on NII. On tiering, I can’t give you my thoughts on it. I don’t know how it’s going to look like. I can tell you what we have. We have EUR50 billion at central banks. The vast majority is at ECB. That’s where we are. I don’t know how their problem is going to look like, but I’ll give you my opinion on tiering. I think that it will help banks, but I think that we have to move away from the policy that is currently being anticipated. Banks need a positive yield curve. Banks need an interest environment that is healthy, that is resembling a healthy economy. The discussions and the ideas around how to stimulate inflation I think are not going to help. If you are going to change your policy as we speak, at this moment in time, whereas we all know that the subdued economic growth is due to geopolitical uncertainties, Brexit, trade negotiations, and whatever policy change you make, you have no idea whether this lands on fertile grounds. So I’m not a supporter of further change there. I also don’t see any credit demand in Europe unanswered. So there’s no need for further liquidity to be injected in the market that has no unanswered credit demand. And even further, I actually see that the low-rate environment, if not negative rate environment, is making consumers so uncertain about their financial future that they’re starting to save more rather than less. So I think the effect of QE, and whatever you want to call QE or decreasing rates, has dried up and continuing with it in an environment that you don’t know whether it’s going to land on fertile grounds with unknown outcomes of trade balance negotiations, unknown outcomes of Brexit, is not the time to do it anyway. So, I know it’s a firm opinion, but that’s where I stand. I think we have to look at how can we move away from this. The governments that we have bought time for to reform by having this easing policy have had their times. And I think, at this moment, we’ll just have to look at how can you move back to a normal environment. That works. That works also better for the psychology of producers and consumers. At this moment, I don’t see it working again. No lack of liquidity in the market to answer credit demands, but a decreasing confidence with consumers about their financial future and saving more. It’s not working.NII. Tanate?

So just on that question, I think we don’t really have any distribution from that perspective. We do a target five-year duration on our replication and then we have probably more of a barbell strategy, having short term, maybe one to two years, and then the 10-year replication, right? But overall, I think as these investments roll off and they are replaced, I think you just see a more uniform, steady compression or pressure on our NII, which as discussed before, we try to compensate on the asset side.

Perfect. Thank you very much.

Our next question is from Mr. Bart Jooris, Degroof Petercam. Go ahead please, sir.

Yes. Good morning. Thank you for taking my question. So on the CET1 ratio, I’m afraid, regarding the increase in operational risk-weighted assets, you told us that it’s front-loading on Basel IV. So could you confirm that the increase there is something that is already to be included in the 15% to 18% RWA migration you guided for towards Basel IV? But more importantly, on which owned risk did you increase the weighing and why? Has this something to do with KYC AML troubles we’ve seen in the market? And then secondly, on credit RWAs, these remained flat despite strong loan growth because of positive risk migration. Do you expect you can keep up to do that in the future because you stay ambitious on loan growth? Could that be continued with a very subdued credit RWA growth?

Steven?

On the first question on the CET, the answer is yes. So that is already included in the 15% to 18% guidance on RWA increase on the back of TRIM, model redevelopment and Basel IV. On the second question, yes, indeed, when you develop new scenarios and these are very much linked and guided by EBA guidelines, you are – you look at specific – or first of all, the specific own fines and regulatory impacts that you’ve had over the different geographies over the past number of years. We have internal database in that regard, internal scenarios, and of course, you have an external database, the ORX database, and that’s being filled by many banks, which you also then use. And those two elements are being used to update your models. And of course, with regards to KYC or AML, both those databases are also again then filled with new fines and regulatory measures that we ourselves, but also other banks and financial institutions have had and that impacts operational capital. What it does do, though, is that – also with Basel IV coming in, generically speaking, given these input floors that will reduce RWA volatility also going forward. And then on the third question, on the positive risk migration, whether that can be continued. Yes, again, this may be brave versus prudent. We are continuously focused on getting good, sustainable loan growth given through-the-cycle capital. And hence, what you especially see with more cyclical portfolios that we become, yes, more aware, if you will, from where we are in the cycle. At some point in time, what goes up must come down. And especially for portfolios, which are more cyclical, we are aware of that. And that’s where you see that we start to cap them to avoid having a very well-performing back book but then also good-performing front book, given the fact that we do it at low margins at a portion in the cycle where RWA may or may not increase. That’s how we look at it.

Okay. Thank you very much.

Our next question is from Ms. Giulia Miotto of Morgan Stanley. Go ahead please.

Hi, good morning. A couple of questions from my side as well. I just want to clarify something on fees. So we heard there are some pressure on commission expenses or fee expenses in Belgium. And if I understood you correctly, these are now in the numbers and you don’t expect further pressure there. I was wondering why is this the case? And the reason for my question is that I actually would think in mature markets like Belgium, Netherlands, we could still see some fee pressure and given more transparency and recent regulation. And then the second question, on Slide 5, which is a very interesting disclosure on Interhyp. I was just wondering how much fees do you make out of this platform. Is that most of your Germany – of your fees in Germany? Or – yes, just some indication.

Well, thank you. So on the negative fees in Belgium. Why will this not go up further? Well, it actually could go up further, but that would mean that we’re doing more business. So that would not necessarily be a negative. As I said, the commissions that we pay away to these independent agents or commissions that you pay away to brokers for bringing in business to the bank, and therefore, if they may increase in the future, it actually means that there’s good commercial activities happening through these branches. That’s one thing. On the other side, I mean the – what comes in as a higher negative also has to do with a new contract that has been closed in Belgium with these agents. And that’s an effect at a certain moment will be in the numbers and then you can continue to see further growth if we are able to charge more fees in Belgium. So that’s one. And generally, I think fee that pressure in the Benelux, I wouldn’t see where that would come from, from a pressure perspective. I do think that also in the Benelux, the introduction of additional products or looking at the costs of some of the activities that we offer to our clients that would normally be kind of paid for through the rate environment, that some of that will need to be covered. And therefore, I do think that, as in other markets, looking at daily banking packages behavioral fees, specifically with the transformation that we're going through in the Netherlands and Belgium, from branches to more digital, that some of that will actually also happen in the Benelux. Now on Interhyp. If you look at the total fee income in Germany, Interhyp is a material part of that. Having said that, we're not specifically disclosing they're a part of total fees there. But again, as I said, the more we produce for Interhyp, for third-parties, the more fee income we will see. If our share of that increases, then we will have to pay actually fees to them and therefore it will neutralize that effect, but then we will have good commercial activity on our balance sheet. So that's where we are. That's the dynamic.

Our next question is from Kiri Vijayarajah of HSBC. Go ahead, sir.

Yes, good morning. Thanks for taking my question. Firstly, can I just quickly come back to that Belgium fee and commission question, a more kind of a short-term question. Because when I look, last year, there was quite a seasonal drop-off from the first half to the second half. So should we assume maybe something similar this year? Or was last year not really a good benchmark because of all the restructuring that was going on in Belgium? So just maybe on the kind of fee and commission first half/second half drop-off? And then the second question is more kind of a high-level question on Germany and how you see that market evolving. Because on the one hand, you're seeing the slowing macro impact on exporters. But on the other hand, the listed banks are doing some quite deep restructuring at the moment. So kind of net-net, how do you see that playing out for ING Germany over the next, say, two to three years, please? Thank you.

Thank you, Kiri. I will take the German question and I will give the Belgium question since it is on last year to Tanate because he was there. So Tanate, Belgium.

So just to give you a sense of the transformation in Belgium, right? So prior to our restructuring in 2007 and 2018, we have predominantly owned branches. So ING operated 70% of the branches ourselves and 30% with these agents where we pay these negative fees, right? Since the reduction of the branches from 1,200 to 600, that ratio is virtually reversed. So now 70% of the branches are with agents and 30% is actually owned branches. So this is the dynamics that plays over the course of 2018. And I think, 2018, there's a lot of transition going from the old system to the new system. That's why sometimes you see a bit of volatility in terms of fees because of these negative fees. Now going forward, if you look at what we have done with our partners, agent partners, is that we have also renegotiated the contract that we have with them whereby they are not incentivized to only sell based on volume, but they are paid on the margin of both the originated as well as the current base, right? So our interest and the agent interest are aligned to make sure that not only is new business being generated at the right volume but also at the right margin as well. So that's what you should expect to see. Having said that, all these are feeding into our numbers now, so these negative fees are now at what we would call normalized run rate.

Then on Germany. Yes, well, that's – I mean, I can do this in a minute, I can do it in an hour. There are so many different things at the same time that are happening to the German market. Clearly, it's a market that, from a banking perspective, it's not the most efficient market. It's a market that's going through major transition and transformation from a customer expectation perspective. That's why we gain so quickly. That's why we grow so quickly. Just also this quarter, on primary customers, 74,000 of the new primary customers that we gained in the quarter are in Germany, which is just over 800 a day, yes? So they keep coming in, they keep coming to us. And that's not because we compete on price that is the interesting phenomenon. So it is really because we offer a much better experience to these customers and probably also a more stable environment. This makes, by the way, that some of our colleagues there are irrational in the way they try to work and make the market. And that is influencing the market dynamics. And therefore, you see fierce competition sometimes in certain markets if it comes to pricing. But nevertheless, we firmly believe in a focus on the German market, that with most of the banks going through a transformation, there will be a little bit more inward looking. And they will not be as quick in improving the experience to our – to their customers. They may do make irrational moves on pricing of some of the products just to kind of get through the transformation period for them. Having said that, we have a strong brand, we keep focused on that experience and we're not competing on price as the others are. And nevertheless, we get more than 800 primary customers a day.

Great, thank you.

Our next question is from Mr. Jean-Pierre Lambert, KBW. Go ahead, sir.

Yes, good morning. Two questions, please. First one is, is there any update on the risk-weighted assets Basel IV mitigation initiatives you currently are undergoing in terms of timing? Is it related to the TRIM results that you're waiting for? Or are you already taking actions? And any sense of timing of the mitigation efforts? And the second question is again on timing, but this time for the decommissioning of the Belgian IT. There are some interdependencies with various modules and basically it has been postponed maybe due to priority changes as well in IT. Is there a better visibility on the final timing for decommissioning of the IT platform? Thank you.

Thank you, Jean-Pierre. So with regards to the mitigating actions, these are continuously ongoing. So there’s not a particular moment in time that we do that, but we continue to do that, which includes the linking of collateral to certain specific facilities or looking at public ratings for corporates as a result of which you get a decrease in risk weights or a rebalancing of portfolios in the diversification and therefore an optimal mix under the Basel IV constraints from input to output floors. So we are continuously doing that and that’s all in the mix of the 15% to 18% we highlighted initially. We continue to do that, and if we see more opportunities, we will do so.

And Jean-Pierre, on your questions around Belgium IT, yes and no is the answer. No, it’s not postponed because that Belgium is going through two phases of transition. So the first one is actually the integration of Record Bank that operationally has been done, so with the clients having migrated, with the branch networks having been combined and decreased, with the agents being kind of taken on and are working as ING agents partially as well. So that integration is done, and the decommissioning of those systems of Record Bank are to happen in the next two quarters. So – and there is no delay on that. So in the first phase of transformation in Belgium, if it comes to the systems perspective, there is no delay. Now the second phase of transformation is the one where we basically combine the Netherlands and Belgium, and there is acceleration on one side and a delay on the other side. The acceleration is happening in terms of offering the OneApp, as we would call it, and the one web environment to all Belgium clients. A couple of months ago, we took the decision to ensure that our Belgian clients will, as soon as possible, be able to benefit from a good digital experience both in the web environment, which is called Home’Bank in Belgium, as well as the app environment, the mobile environment in Belgium, that the OneApp is actually developed between the Netherlands and Germany. So the OneApp that has been developed there, it already has some 17 million customers on it. Well, actually, then also be rolled out into Belgium. So we’re getting closer to the 20 million customers on the same channel environment, both app and web. Then there’s another part of the IT that at a certain moment…

Yes. Thank you. Just to come back on the mitigation. Just to clarify to make sure, the 15% to 18% from the comment, I understand, are after mitigation?

No.

No, no. That’s before mitigation.

Okay. Before. Very good. Thank you.

Our next question is from Mr. Jason Kalamboussis of KBC Securities. Go ahead, sir.

Yes, good morning. Sorry to come back quickly on Belgium on a couple of things. The one is just if you could – the decommissioning – so the Record Bank is second half, that's very useful. Should we assume that the decommissioning, the large decommissioning would not be 2020 but more 2021 event, if not 2022? And also on the fees, I mean a lot has been said about this, but when I'm looking at the quarter in Belgium, net fees and commissions, I mean presumably the agents bring a lot of fees that are investment products. So they are coming as revenue within the net fees and commissions, and a lot has been said about what they get paid. But when I look at EUR98 million, last year it was EUR106 million, and it doesn't look that material. So if you could help what I'm missing on this one? And the other question was more on the cost side. If you look at your cost/income ratio, and I accept that it's not – for the moment, it's not exactly – you say that it's not – you have dropped the target that it is something you like to look at but not how you run on the business. But if we look at the one-offs in the revenue side and we take them out, your cost/income ratio is around 54.5%. Even consensus is above 55%. So it looks like we are going in 2019 north of 2018. Is there – I mean looking at that and looking at the increase in costs, the cost inflation, which will continue in Q3, Q4 from KYC, CLA in the Netherlands, et cetera, do you find that at a certain point you will need to take some more actions from the cost efficiency side?

Maybe I address a bit the Belgium piece. I think the IT decommissioning, as Ralph mentioned already, the core bank for Record goes off this year. And then in terms of the IT expenses for Belgium, I think perhaps I refer back to the presentation we made in Investor Day where overall the programs, the transformation that we expect is from the end of 2018 to 2021, a reduction of staff, some of which are IT staff of a further 1,500 staff. And you see that in the Belgium internal staff continuing to decline over that period of time. But indeed, the decommissioning tipping point is more 2021/2022 kind of time frame. It's not going to be in 2020, okay? And then on the fee income, I suppose there's a mix there. There's, of course, in Belgium, we have a combination of various fees, whether it's daily banking fees where if there's increase or not increase, they tend to be very much a Q1 event, right? That's where daily banking fees seasonally are done. And the other one which varies from quarter-to-quarter is really investment management, which is an important business for the Belgium market, not only for ING, and that is sometime quite volatile and seasonal depending on when investors or retail investors make their investment. And I think if you look at our numbers in Q1, the investment by retail investor were more modest. And in Q2, based on a campaign, they became higher because people were more optimistic about equity and bond market prospects.

And then cost/income?

Yes. And then on the cost/income ratio, I think as we mentioned before, we look at the cost/income ratio less simply because from a cost control perspective, given the fact that the revenue number is more pressurized, and I think we look more at operating leverage as a measure of that. And if you look, for example how we look at operating leverage, we see that, on a rolling basis, the operating leverage is increasing for ING, that, since Q4 2017, the four-quarter rolling increase in our client balances is somewhere around 6.3%, 6.4%, while our rolling average on cost increase is more like 2.9%. So you see that operating leverage being there.

You don't find that at this stage, there is any need to consider anything additional on the cost front?

Well, clearly, Jason, wherever we find the opportunity to do so, we will always do so. But in the end, we are looking at return on equity as the real primary target for you. And cost/income is just an input there. But again, if we feel there is room on the cost side, we will certainly take it, absolutely. We have time for three more questions because we’ve to cut off at 11, so let’s continue.

The next question is from Ms. Alicia Chung, Exane BNP Paribas. Go ahead your line is open.

Good morning everyone. Two quick questions from me. Firstly, what impact do you expect on capital from regulatory guidelines on MPEs? Specifically I'm talking about calendar provisioning? And secondly, is it fair to assume that your go-to equity Tier 1 target will increase from 13.5% to 13.6% or 13.7% given the activation of the countercyclical capital buffers in Belgium and Germany over the last quarter? If I look at your 13.5% go-to ratio and I assume a minimum Pillar 2G of about 1%, that, that only really gives you a management buffer today of 75 bps. So I would have thought you'd be some – I'd be surprised if you'd want to eat into that for your countercyclical capital buffer? Thank you.

Thanks, Alicia. Regarding the MPE backstop, what you see is that we are a low-MPE or NPL bank, so 1.5% over the total RWA. Most of our loans are secured. If you look at the total loan book, so that basically means that the backstop in terms of the EBA guidelines has an element for unsecured loans that starts running after years being into non-performing and for secured loans starts after seven years. Now in that sense and also the way that we are providing for and dealing with write-offs of our books, the impacts for ING is relatively benign and manageable and will have not a significant impact on our CET1.

Then on – yes, go ahead.

With regards to the 13.5% ambition, yes, we are seeing the countercyclical buffers coming in for Belgium and Germany. In the end, they have a number of basis points impact on 12-months rolling basis. We are looking at 13.5% as an ambition, not as an absolute strict target. And then we compare that to the Pillar 2 requirement that we then have, which is currently at 11.8% and then we do some stress testing around it to see whether that buffer or that approximate buffer is sufficiently strong through the cycle. And we do not see a reason with these buffers coming in to take – change that ambition.

Okay. Thank you. And if you don't mind just one quick follow-up question on the calendar provisioning. And thank you for your answer, it was very clear. But just on the coverage ratio of your corporate loans, which is a little bit lower versus some of your peers, could you just give us some color around what the duration of your MPEs are there? Thank you.

We don't give color on the – so I understand the question. But typically, why – a reason why our coverage ratio on our corporates could be lower is because a lot of our loans in our corporate book are investment grade or high investment grade loans and that limits it. But what you – what I could say is that in terms of the duration that the duration in the Wholesale Banking is relatively short.

Okay. Thank you very much.

Next question is from Mr. José Coll, Santander. Go ahead please. Your line is open. José Coll: Good morning. Thank you for taking my questions. The first one is whether you could give us a sense of which business units you expect will drive the reduction in the cost-to-income ratio? And focusing on Other Challenger & Growth Markets where we still see a high cost-to-income, so when would you expect to start seeing a significant progress there towards a more adequate cost-to-income for what a digital bank should be and also what level you think that should be? And my second question is regarding your market share in mortgage lending in Spain, which has been very strong year-to-date. So I was wondering if you could comment on what the drivers of this strong growth have been? Are you offering higher DPs, longer terms, more attractive pricing, more sell-through agents, a combination, I don't know. And if you could also comment on how this growth is being financed, is it the deposits in Spain? Or is it intergroup lending? Thank you.

Thank you, José. Well, on the first one, the – all business units are to drive the reduction in cost/income ratio. Just go back to the recipe that you know very well, which is that in Market Leaders, given a pressure on income, we expect cost to really go down and with that to improve cost/income ratio. In C&G, we would allow cost to go up if the income is expected to go up us well, and with that, improve the cost/income ratio. And in Wholesale Banking, we expect the income to be flattish or a little improvement, and therefore, cost should be flat or decrease. So all of those units are to contribute to the reduction in cost/income ratio. Having said that, again, the – we really look at operating leverage as the way to measure the effect of digitalization on our business as cost/income has an income component, which is largely influenced by the rate environment that we're active in. And having more volume through the system, this generally through more cost and that is exactly where the efficiency – the efficiency needs to come. And therefore, the operating leverage is one that we look at that. The other cost component that we have, which seems to increase is what we call regulatory costs, which, as you know, for ING is close to EUR1 billion and we have absorbed all of that over the last couple of years. In terms of the market share of mortgages in Spain, there is just two effects to that. One is that we've really looked at how we accept clients from a risk perspective, how we go through that. That has, on one side, helped us to accept the right clients because we were a little bit too cautious on the knockout criteria that we had there. So actually – we actually now get to see the full risk profile of a client before we accept it rather than that we never got there because of knockout criteria. So that's a real change in the process. And then the overall commercial process, as you may know, I'm not sure you're our client, but I still kind of recommend you to become a client if you're not, is one that is so much better than whatever can be found in the Spanish market. That is really pushing our market share up. Thank you. We have one more question and that will end the call.

And the final question is from Mr. Marcell Houben, Crédit Suisse. Go ahead please, sir.

Good morning. Thank you for taking my question. Just one on the cost side, following up on Pawel's question on how much – can you give us a sense on how much of the KYC costs are project-related and expected to fall off by 2020? I suppose a quick one on the ambition for the fee increase, especially in the regions where your loan costs no fee charging for your customers. If you start charging these customers fees, how do you think that will impact your new client accumulation to that respect? Thank you.

Yes. So Marcell, on the last one, clearly, we have said that always that you can't charge fees for something that doesn't add value or doesn't kind of – is seen as something that is important to clients. So in those areas where we have never charged fees, we have to make it very clear to our customers, but also new customers that what they pay for. So you have to be – you make it very transparent so you don't – you shouldn't have like three pages of how you calculate those fees on their behavior, which some banks tend to give. So make it very transparent. And then I think we can still introduce them with our positioning as a bank that is clear and easy and delivers on a differentiated experience. So I think we can do it. We're trying – as I said, we're piloting in different places just to see how that would work. On the KYC cost, well, honestly, we do think costs will come off a bit towards – so in next year. But to give you exactly where these are project-related, we don't really have that information at hand, but we do expect some of that to come out next year. So sorry not to be able to give you a little bit more specific information on that. We'll work on that and see whether we can give you updates going forward on that one. Just to round it off, if you look at the quarter, we actually think it's a strong quarter from a result perspective. If you look at the underlying commercial momentum, it is there. It continues to be there. You see that a lot of the effort that we put in over the last couple of years in terms of how we deal with clients, what our proposition is, that despite our focus on improving KYC and the enhancement program, that you actually see customers continuing to come in. You see loan growth to continue as well, given the fact that we have so many different engines that we can run through. We can actually take those and offer those loans in a repriced environment without working on the risk appetite. We will not compromise on that side. So that's positive as well. On the fee side, I know how you look at this. I think you have to really dive a little bit deeper into this to get a sense for where this is. We see good fee growth in Germany. We see good fee growth in Belgium as well. We see ample opportunity for it in the future with the recipes that I laid out. And in the Wholesale Banking side, fee growth is very much dependent on the activities in the markets, and let's see how the markets develop.

With that, thanks a lot for your interest and for your questions. Stay in touch, and have a good day. Thanks.