Good morning. This is Patricia Klosov Norton, welcoming you to ING Second Quarter 2020 Conference Call. Before handing this conference call over to Steven van Rijswijk, Chief Executive Officer of ING Group, let me first say that today's comments may include forward-looking statements, such as statements regarding future developments in our business, expectations for our future financial performance and any statement not involving an 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 solicitation of an offer to buy any securities. Good morning, Steven, over to you.

Thank you very much. Good morning, everyone, and welcome to our second quarter 2020 results call. I hope you are healthy and well. I'm happy to take you through today's presentation in my new role as CEO. I am joined by our CFO and our interim COO, Tanate Phutrakul, as well as Karst Jan Wolters, currently responsible for the day-to-day risk activities. At the end of the presentation, we will as always have time to take your questions. With COVID-19 affecting many also the second quarter was far from standard. We continue to support our customers, employees and society during this time. At the same time, as countering financial economic crime remains our priority, we continue our efforts to increase effectiveness of our KYC activities. However, the current operating environment reinforces our belief that we are on the right strategic path, with our digital model being a clear strength in continuing operations and uninterrupted service. Pre-provision results proved resilient, as we keep focus on pricing discipline. We also saw some of the negative valuation adjustments from last quarter reversing as financial markets somewhat normalized again. Combined with cost control, this largely countered the margin pressure on customer deposits and goodwill impairments. Over to our risk costs, in the IFRS 9, we took substantial collective provisioning in Stage 1 and Stage 2 to reflect worsened macroeconomic indicators. When these remained unchanged, we believe that we have already taken the majority of provisioning for this year, and for the second half of 2020, we expect risk costs to be below the level recorded in the first half year. The CET ratio improved from 14% to 15%. This ratio was supported by lower RWA due to several management actions and CRR amendments. Regulatory capital also increased. I'll come back to this later in…

Thank you, sir. [Operator Instructions] Our first question is from Mr. Stefan Nedialkov of Citi. Go ahead, please sir.

Hi, good morning, guys. It's Stefan from Citi. Steven, welcome to your new role at ING. I have a couple of questions. The first one is on the outlook for pre-provision profit and post-provision profits. You seem to be getting to stable NIIs for the rest of the year. There was a small miss in the quarter. How should we think about the evolution for the rest of the year in terms of help from TLTRO and others? Then fees obviously very strong and costs relatively under control. Does this mean we should be looking at an improving pre-provision profit into the second half of the year? On the post provision profit basis, cost of risk, you guys seem to be guiding to second half being less than the first half. Back of the envelope calculations basically point to around €3.4 billion which is in line with consensus. Would you agree or disagree with that? Thank you.

Thank you very much, Stefan. I will take the cost on the risk guidance, and then I will give the outlook for the pre-provision profits to Tanate, also in light of your question on TLTRO. If you look at the risk cost, there is a significant part of our risk cost that came from macroeconomic indicators. And as we said in the first quarter of the year, we then took very much a process approach and said okay, well there's no consensus that we have in the first quarter of what we use with or for the economics of the then outlook, we then have for the economies for the first year and also for the next three years. And that consensus still was quite benign because some reports already were negative, some reports were still flat, and hands on average, the impact, GDP impact or impact on house prices or unemployment was relatively limited. And we took then a €200 million plus an additional €40 million for one of the portfolios. Now, what we now do is again, go back to the process, and we look then at what are the macroeconomic indicators for the end of June and there you see a big deterioration. You see a forecast for the eurozone minus 8% for some countries, even minus 10% or minus 12% with then recovery, a gradual recovery in 2021, 2022. And we need to bridge that delta in our risk costs. So both in Stage 1 and in Stage 2, you see then a significant uptick in our risk costs with over €400 million. And we included in that an additional management overlay for potential risk cost that we get from our payment holidays. Also what you see is actually migration of clients, who because of these macroeconomic indicators get higher probability of default allocated and therefore get higher ratings, and again, therefore, you see higher risk cost as well. So it's an additional effect. So, the lion share, the large lion share of what you see in Stage 1 and in Stage 2, are these macroeconomic impacts. And therefore you look almost already at about €550 million. Now if these macroeconomic indicators stay as they are, then the next quarters we will not see that anymore. And therefore, we are quite confident that our risk costs will go down for the second half of the year. Now, I will give some pointers, but obviously, I cannot give forward looking statements as to the provisions to make. So I cannot comment on the consensus, but I trust that with these pointers, I give you a good view of how we look at it. Now, Tanate, can you go to the pre-provision profits?

Sure. Stefan as you know, we don't give forward guidance, but let me talk you through some of the components about our NII. If you look at our quarterly results this quarter, you see that we maintain pricing discipline in terms of our repricing of our loan book. We try to also continue with the geographical diversification of our loans to more the non-eurozone, and I think to maintain stable NII, we do count on improving macroeconomic situation where that should come through with increased loan growth in Q3 and Q4. Having said that, we are also taking steps with respect to our liability costs, for example, there in a number of our non-eurozone markets, we are looking to take steps or having taken steps on reducing the deposit rates offered to our customer. And as you know, we have already gone negative for large private banking customers in either the Netherlands or in Belgium in charging negative rates. And of course, as you mentioned, we have taken this TLTRO funding outstanding as of the end of Q2, we have taken approximately €60 billion TLTRO funding, which we benefit if we can keep our loan growth stable or rising, we’ll benefit from funding of approximately minus 1%.

Okay, thank you guys.

The next question is from Mr. Benoit Petrarque of Kepler Cheuvreux. Go ahead please. See

Yes, good morning and welcome Steven, good to have you onboard. Now Steven, just as a first question, I know you are here just for a couple of weeks now. But do you expect us-- do you expect to update us on the strategy? I will not expect major turnaround but any thoughts on the -- on the direction you might want to give to the company? And linked to that, obviously, a big thing is, you know, the cost focus. We've seen some banks actually lowering costs significantly in the second quarter, and the direction is quite clear there. You know, could you update us on the -- on the pipeline of the cost cuttings and also on the kind of direction for the full year 2020? It was, I think, down 0.4% on the clean basis in Q2. It’s good but, maybe more is needed in front of the pressure on the on the topline is facing? And then the second question is on the asset quality and risk. Obviously, you have quite a small amount of loan under moratoria, I think it's 2.5% of your book, its €18 billion. Do you have a bit more granularity on that figure? How much is Retail and how much is Wholesale? And when do you expect those loans to be back to normal? And also, do you have any initial idea of, how much could turn, maybe, problematic on the $18 billion? Is that a small figure? Or do you have a view on that? Thank you very much.

Yes, thanks very much Benoit and I’ll try to dissect your two questions. So I will answer on strategy and the cost of risk and then Tanate will look at the cost side of things. But let me start with saying on cost, that it will be also an important focus of myself, especially in these times. So yeah and indeed it has been a couple of weeks in a job and but I mean, but in this particular job, but let’s say that I have already been in the Board for three years as a Chief Risk Officer but part of a Board management team. So I'm part of -- I was part of the strategy and I will continue the strategy. And of course, we will make some, we could make some amendments when we further develop but I'm behind the strategy. And I also do think and we've seen it in the crisis, that digital banking and mobile-banking first and 24/7 banking is the way to go. And the digital use of our customers went up again dramatically, with 87% of interactions being pure mobile, and with 41% of our clients, being only on the mobile and then we slowly transform our clients from assisted channel such as chat or call center, or even branches to -- to digital banking or to mobile banking. We have been closing branches in the Netherlands and we continue to look at our branch footprints. I mean some of these branches, there's only two or three customers coming per hour, so yeah, what can you do and we cannot leave them open. So the digital banking focus and the online banking focus really, really helped. And we've also seen it, for example, in the way in Germany, they are increasing fees…

And then now just addressing a bit on your cost question, I think clearly if you look at our quarterly results in Q2, we have achieved absolute cost reduction. And this is also absorbing inflation increases as well as heightened increase in spending on compliance and KYC. Now, if you look at what we have guided before with respect to costs, in market leaders, we have guided towards negative costs, negative costs evolution, and if you look in our Q2 that has been achieved. If you take out the goodwill impairment that has happened in Belgium, for example, in the wholesale bank, we have talked to you about the fact that we are flattening the cost growth in the wholesale bank. And that has been our guidance in Q4. And now you can see in Q2 with some positive evolution from that perspective that cost in the wholesale bank has started to decline. And within the CNG countries, again, we have said that selectively we would like to see cost growth. As long as we see positive jaw. Now in light of the macro-economic situation and slowing revenue prospects, we will also be taking actions with respect to cause in the CNG world in the coming quarters. And I think overall, we just wanted to say that we will take a balanced view between looking for efficiencies at this current time and investing in our digital future that Steven is talking about. And a number of our programs are under review in terms of looking for that cost efficiency.

And to come back to the cost of risk and a payment where it is, if you look at the €18 billion, approximately 40% is to households and so are Retail, 60% is to business clients. The lion share of the payment holidays is to the northwestern European countries. A bit over €1 billion already expired and there was no meaningful higher risk cost in these loans. We took some additional provisioning for payment holidays still outstanding and other than that, so we remained to watch it but currently we have no deteriorating signals at this point.

Great. Thank you very much.

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

Yes. Hi, good morning. Can you hear me?

Yes, very well.

Okay, fantastic. A couple of questions from my side as well. So fees, a strong result there. Can you please run through the main initiatives that make you confident that ING can deliver on the 5% to 10% fee growth? And, and then secondly, less related to results per se, but DCB had an M&A consultation last week or yeah, recently, and any thoughts on that could ING be perhaps involved in cross border M&A do you think if and, you know, there are some opportunities available? Thank you

Thank you very much, Giulia. I think on fees, I mean, we have clearly strong results. We've seen that for the first half year compared to the past half year, and we had an over 8% increase. But you let me give your also more granularity here. I mean, we increased our brokerage fee business in various countries with most notably Germany. There you see that our brokerage fee activity went up year-on-year with 28%. We increased our payment packages in various countries, amongst others, the Netherlands and Belgium but we only did that at the end of the first quarter, so the impact is only gradually coming. Despite the fact that we had virtually no travel and a significant decrease in payments in this quarter, obviously, we could keep our fees up. And the activity is now coming back again. We have subdued syndicated market loan activities. And when it comes back, those fees will go up as well. We have various initiatives in the insurance space, for example, which are currently growing, our collaboration with AXA. And there the fees are growing as well. And so -- and as you can see, historically, we consistently have delivered on our fee ambition of 5% to 10%. So in that sense I'm confident. And we see that delivering quarter-by-quarter. And if you look at the consultation --

Sorry, can I just follow up on the fee bit. The increase in payment packages how, what impact do you expect from that?

I'll give that to you Tanate.

Yeah. Giulia, the fee packages that we announced in the Netherlands and in Belgium, we announced a fee increase of approximately 10% to 15% in these two markets, but these packages normally increased on an annual basis. So we take decisions, if we would increase fees somewhere around October and it has an impact in the beginning of the subsequent year.

Thanks.

Okay. And then on the M&A consultation, I mean, our strategy has been clear, which is we first and foremost focus on organic growth. If we look at acquisitions, we focus on certain skill sets or certain products that we do not have that can broaden and deepen the service delivery to our clients. And then we would look at, yeah, in market consolidation because basically that is cost synergies, clearly, the current landscape as we currently see it in Europe limits the ability for cross-border synergies on both capital and liquidity, given the compartmentalization of that in various countries. And therefore we find it difficult to see benefits for cross border M&A at this point in time.

Thank you.

Next question is from Benjamin Goy Deutsche Bank. Go ahead please.

Yes, hi, good morning and two questions please from my side. I want to follow up on the fees and your work has been repriced, in Germany, for example, your payment packages, just wondered how the experience was and whether we can expect them to say more pricing power in your Challenger market as well where you have historically been price leader? And then secondly, I think there was a headline that you reviewed you your dividend policy, which probably is no big surprise. But I was just wondering whether this is part of a broader review and it might also include share buybacks, considering your trading well below the book value? Thank you.

Yeah, let me do the question on dividends and then Tanate will answer the question on fees. I mean, based on the announcements by the ECB earlier this year, we basically delayed our dividend policy. So and therefore, we said we need to resume a dividend policy later in the year. And that's what we will do in the third quarter. We also said that already in the first quarter that we would resume our dividend policy in the third quarter or announce what our dividend policy will be going forward. So that is and how we will then do it. And also depending on what we are allowed to pay, we will come back with the -- with our dividend policy and the structure in which we would pay dividends. But one thing is clear, and it is that we want to pay dividends to our shareholders. And hence we also made a reservation for the second half of the year 2019, dividend we could not pay. And we will do that -- have a new dividend policy as part of the total capital planning review, including the management buffer that we could only have 4.5% over our MDA level. Tanate?

Then, Benjamin just to reiterate the point on fee income, as Steven has mentioned, we do annual reviews on daily banking packages, we make sure that we try to take steps to sustain our investment product fees, and third-party fees as mentioned on our joint venture with AXA. Now to address your question specifically on the category of fees that we call behavior fees, whereby for example, in Germany, we say that we would start charging payment package fees of approximately €5 per month, unless you actually bring your salary accounts to ING. In those instances, and this is just an example for Germany, probably about a third of our customers actually who are not primary customer decided to become primary customer. So start bringing regular income into their account, so they go from non-primary to become primary. A certain proportion of our client, about a third, as well decided not to be primary customer but agreed to pay the €5 per month in fees, and the remainder have decided to leave ING as a client. So it's --it's I think, overall we are quite happy with this evolution.

Thank you.

Following question is from Mr. Johan Ekblom of UBS. Go ahead, please.

Thank you. Just coming back to some comments you made in terms of growth ambitions. And I guess, should we expect any change in terms of where you would like to focus on growth? You talked about the challenges in growth market but if we look back over the last two years, you clearly put the brakes on a bit in Wholesale etc. Is it a continuing of that strategy or is it an acceleration of that strategy? Or how should you think about?

Yeah, thanks Johan. I presume that’s the question that you have. So I mean we will have a continuation of the strategy. So we’re already, a couple of years ago said that we saw some risks creeping into the wholesale banking books. I mean, structures were deteriorating, we're becoming a looser, the amounts were getting bigger. We saw in some sectors that we were not really, the risk was not really priced in. And hence we started to put caps on books. We started to put caps on leverage books, we started to put caps on a real estate finance book, we started to run off some of the books to the extent we could in the oil and gas and the drilling sectors. And, yeah, that will -- that we will continue and obviously, we've also seen it in the previous crisis at some point in time there was a reversal, then this structure become tighter again, then the pricing goes up again. And then we can, again grow that. But for now, we will keep quite strict in the Wholesale Banking, especially when there's a lot of volatility, we need to be prudent there. And that's what we will continue to do. And at the same point in time, we said that we want to diversify our loan book, we want to diversify our business and hence we are doing that in different geographies amongst our CNG, amongst our consumer lending. And that's what we have been doing over the past couple of years, and that's what we will continue. Now I see while I'm talking that Johan’s question was lost. That's why he didn't hear it, but I hope all of you heard it. So I suggest we move to the next analyst. And when he returns, he may have a second question.

Thank you, sir. The next person is Tarik El Mejjad of Bank of America. Go ahead please.

Hi, good morning money. A couple of quick questions, please. First on the NII, could you give us some indication of how’ve been the behavior of Retail and Corporate customers in terms of deposits and how the €21 billion significant increase in deposits in Q2 could reverse in the next month? And the second questions is on capital? Think if you could give us a breakdown or if you think in terms of capital and other new evolution, but my question is on the CRR 2.5. What did you take in there in terms of semi-supporting structure and the rest of the small components? And on Basel IV, so is it fair to think that once you take the division before the €10 billion you booked into Q1 and then the now the whole €13 billion TRIM, that's like a majority, I guess for RWA related to Basel IV, I think there's still only like a 20 or 30 basis points to go. And you'll be fully loaded deflation related to Basel IV? Is that correct? Thank you

Let me take the questions on capital and RWA. And then we will also discuss the fees, sorry, the deposits. If you look at the capital benefit, we have from the CRR 2.5. Regulation, it was approximately 25 basis points benefits. So the lion share came from management actions, but 25 basis points came from the new regulation. And if you look at RWA, I think you make a valid point. I think that DoD was significant impacts. We had the -- with the large corporate model and the €13 billion you mentioned you remember that well, because we reversed €6.6 billion of that, we now we put it in again. Then most of the TRIM missions we've had four letters if you will, there are – two are yet to come, but these are on relatively small books. So the impact there from an overall point of view will be benign. And then the last step would be the Basel IV outcome, where it then comes 2022, 2023 or even later isn't clear. But we expect the impacts of eventual Basel IV to be limited. And hence, we are very confident with our current capital level with the most and the large majority of the impacts already having taken that. Tanate on the customer deposits?

If I may, just on the capital --

Clearly on the visibility on --

Sorry, Tarik, did you say something?

Yes, sorry, just on the CRR 2.5 form of the bids, so the 25 bits that takes into account the software and the SME, so nothing and IFRS 9 you took it, I saw that in the capital bit?

Yeah, it takes into account the SME, it does not take -- the SME support factor, if you will. It does not take into account software.

Yeah, Tarik, the software, the RTS is still being debated. We expect that to be issued during the course of Q3 and will be applicable in Q4. And we’re given some estimate that we think will benefit anywhere from 10 to 12 to 15 basis points from the software.

Okay, thank you.

So, our next question is from Johan Ekblom, UBS. Go ahead please, sir.

Thank you, sorry, I was cut off -- my line cut off before but you don't need to repeat that, I think I got most of it. Just a second question in terms of the TLTRO impact, how should we expect that to be accounted for, given the growth dynamics we're seeing? Will you be book it on a recurring basis and then adjust it at the end or will you wait until the end to book the benefits etc.?

Yeah, thanks, Johan. By the way, say hi to Ralph for me when you speak to him. So --

I will.

Yeah, so the first question we already answered. But on the second question on the TLTRO, I will give it to Tanate.

I think in the TLTRO, there's really three component parts that you need to think about. Clearly first, the magnitude of the TLTRO, we mentioned that we'd have taken approximately €60 billion of that funding. The second is the confidence level that we have with respect to maintaining at least zero growth in the portfolio. And currently, we do expect that we can actually encourage loan growth to basically be more than zero. And then the third point is, of course, as long as we can deploy into the relevant amount, the margin will be attractive and if we can deploy, we can still place the money, for example, with the ECB and have a margin on this funding of approximately 50 basis points. That's how it would be done from an accounting treatment. I guess it really depends on the level of confidence that we would have with respect to loan growth. And we'll inform you in subsequent quarters on that.

Thank you.

Our next question is from Mr. Kiri Vijayarajah of HSBC Bank. Go ahead, please.

Yes, good morning, everyone. So you alluded a couple of times to pricing discipline and you talked about fee packages deposit repricing. But I'm curious to what extent you've been repricing on the loan side and is it more than just saying no to loans from just a risk perspective in the wholesale bank? So just some color on where you've sort of demonstrate pricing discipline, if you like, on the lending side? And then just a quick follow up on the -- on the capital management actions you've done this quarter on the RWA? Just, 20% of that flow through onto into the Basel IV ratio or were those leavers more skewed towards really improving the Basel III ratio? You know, the €11.5 billion of RWA mitigation done this quarter. Thank you.

Yeah, thank you very much, Kiri. First on the repricing on the loan side, I mean, on the one hand, it's just a matter of discipline to not price loans whereby there's too much pricing pressure to make an adequate return. And for example, you see that in, -- in countries like Belgium, whereby if there are sometimes pricing pressure on the mortgage book, yeah, and then we will not go along and the mortgage book decrease a little bit, but we will stick to pricing discipline to go for return not for size. If you now look overall on the book, you see that on mortgages our lending margins on the overall book went up. On business lending, so mid-COVID and SME, it went down a little bit, and Wholesale Banking, it stayed approximately flat. But well it doesn't stay flat, because on the one hand, we increased our discipline in pricing for these project loans. But what you do see is that there are less projects and less project loans and less trade finance. There is a heightened demand in our recurrent credit facilities and our corporate facilities. And these typically go at lower rates. So on average, therefore, the Wholesale Banking margin stays flat. So it's a move from one book to the other. Now, then to the capital -- the management actions on RWA, to our extent that it’s front-loaded Basel IV implications. Yeah, it doesn't get sense since we are, if you look at the Basel IV regulation, largely hit, if you will, by the input factors and less by output factors. And that's why we have said that the lion share of what Basel IV will do and it's TRIM missions are actually a prelude to in the essence, Basel IV, that because of our dependency on the input factors rather than the output factors, the lion share, over 80% and I think now it's more than 90% at this point in time of Basel IV will impact will come as a result of TRIM missions and remodeling and DoD. So that in essence, the answer is yes.

Great, thanks.

Our next question is from Anke Reingen of RBC. Go ahead, please.

Yeah, thank you for taking my question. And the first one is on loan goal. A number of banks have talked about under recovery in demand in June and some also mentioned July, so I just wonder what you have seen in terms of demand coming back? And then secondly, on your update on capital with Q3 results. I'm a bit confused as to what you can actually say given the ECB is unlikely to have commented by that point. Is it about potentially reallocating capital within the group, capital return control and should we also expect this to be part of a broader overview of your targets and having taken over your role now? Thank you very much.

Thank you very much. I mean, on loan demand coming back, yes, its early days, but we see it going back a little bit. I mean the same goes for payments. Payments were quite down in April or May. Points of sales were down in April or May. And ATM withdrawals were down in April May. ATM withdrawals are still a bit down as we increasingly see we go to a less cash society and not necessarily a cashless society but less cash society. But that the payments we see coming back and if you see payments coming back, you can also expect loan growth to come back. By the way, there is good demand in the mortgage market, that has continued. It's a matter of pricing whether we will take it or not. But as -- when the economic activity recover, you can also -- we expect that working capital levels will increase and, in that extent, and the loan amount is expected to come back a little bit. But it's early days and also depends of course on how the lockdown will progress. In terms of capital plan, the ECB has given advice not to pay dividends in 2020, but it does not preclude us to have a dividend policy. So, basically here, we adjourned our dividend policy until the third quarter of this year. And so, we are going to come back to you with our new capital plan and in that new capital plan, we also will say to you our dividend policy going forward whether changing or not. And of course in that, we will also say something about buybacks because we do not exclude buybacks to some extent. But again, that's just in general -- a general statement. It's not logical to look at buybacks at below book valuation.

Thank you. And what would you also review your ROE targets at that point or is that for a later point?

At this point, I have no intention to change ROE targets.

Okay, thank you very much.

Our next question is from Daphne Tsang, Redburn (Europe) Limited. Go ahead, please. Ms. Tsung, please unmute your line. Ms. Daphne Tsang, can you hear us? We'll go further to the next question. Ms. Daphne Tsang, can you hear us?

Hi, welcome to the role. And I've got two questions. Hi, can you hear me?

Yes, we can hear you.

Hello?

Yes, hi, Daphne.

Hi, welcome to the role. I’ve got a couple. First on NII, do you stick to your flat NII guidance which you [inaudible] in the current department, does that sort of imply that you need high NII in H2 versus H1, if I am correct? You mentioned that you expect no --

Sorry Daphne. Daphne, sorry you seem to be very far from the microphone. So we have trouble hearing you. Can you get a bit closer to the mic please?

Yes. Yeah, sure. Hi, is now better?

Yes, it’s much better. Thank you.

Okay. Okay, thank you. I'll repeat my question. First one on NII, to meet your flat NII targets year-on-year, it kind of implies that you will need a higher NII in H2 versus H1? You mentioned earlier that you expect loan to improve in the second half. But I'm just wondering how about -- how about your margin? I appreciate you've have already given some comments earlier. But you mentioned pricing discipline and TLTRO which offset your liability drag? So is it fair to say that the H2 NIM should improve from the current low level of 144 bits? You previously guided 140 bps for each H1 and high 140 bps to H1 and you're kind of just below, so what's the outlook on H2, please? On NIM and on TLTRO III, how much more room you could increase from the current €60 billion levels taken in June? And my second question on cost, where do you see costs going in H2 and beyond? Your previous remark about a serious taking a serious look into the cost is very encouraging. Are you looking to achieving that cost reduction in 2020 or from 2021 onwards, given that the growth of opportunity in near term is quite limited? Thank you.

Thank you very much Daphne. And these are all good questions from on the P&L side. So I will give the floor to Tanate. So it’s the NIM, its TLTRO, its cost. Go ahead Tanate.

Daphne, I think if you look at our NIM evolution during the course of Q2, you can see that it is declining from 151 to 144. But that's really driven by the balance sheet extension that you have seen in Q2, right? Partly because of the revolving credit facilities that were taken by a wholesale bank, which comes with a margin, which is approximately 50% less than a normal blended portfolio of loans we extend in the wholesale bank, and also the extension of our balance sheet by increased funding to the Central Bank because of the taking up of the TLTRO III, but if you adjust for that on a pro forma basis, our net interest margin is approximately 148, right? So we do see a drop but not as dramatic as perhaps the number would indicate. And I think looking forward about how we would expect things to evolve. Again, I reiterate, it's really depending on to a degree maintaining and we will be maintaining price discipline. We will take actions also with respect to lowering deposit rates in our non-eurozone market, already announced plans to charge negative rates to, for example, private banking type customers in the Netherlands and mid-cops in Belgium. And I think with those actions together with the TLTRO, we hope that we can maintain that stable NII going over the next few quarters. Having said that, you asked about the TLTRO plans of €60 billion, currently, we are happy with our liquidity position and we don't have any current plans to increase that for the time being. Now, respect to cost. Again, we are taking steps with respect to costs, we are taking -- you can see that our costs evolution is good in the second quarter of the year with absolute cost declines in all of our major divisions. And we will continue to look at that whether it's in our channels, branches, other types of channels given the digitization that we have seen. But again, we will balance that with investment in our digital future. So it will be a balance between the two.

Thank you.

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

Hi, good morning. Thanks. Thanks for taking my questions. So just two based on costs, and so on the €44 million decline in underlying cost, ex the restructuring charge, can you just give us a sense of the scale of the three elements, you mentioned the cost savings versus bonuses versus CLA increases. I just don't really understand why you haven't seen the very sizeable COVID related savings that your peers are all seeing in areas like travel or marketing, etc. Many of your peers are down almost double digits year-on-year in their retail businesses, which is very, very far from you. And then similarly, if you could just update us on Unite plan and you know where all that stands is effectively on hold for the foreseeable future as we go through the crisis. I see Belgium seems to be down just 3% in terms of costs on an underlying basis. You know, I know that it affects both Belgium and Netherlands but an update on that would be, be helpful. Thank you.

Thanks very much, Omar. I'll take the bit on Unite and then Tanate will give you an answer on the cost. I think going to Unite. So there, we have already done the majority of what we needed to do under that program. We integrated Record Bank in our bank in Belgium; we decreased the number of branches in Belgium by half. We have put all of our active retail customers on the OneWeb environments from Belgium to the same OneWeb environment as the Netherlands. We're currently in the process of putting all the retail clients on the on the OneApp environment in Belgium. And today, that's approximately 170,000 and that will continue and by the end of the year or early next year, we will have migrated all those clients. We will then continue also to put our business clients on the OneWeb environment and we started with that as well. And then what we can do is that we then do is, that we will then put a new offerings, so for example, what we're currently doing is an insurance offering that we then can put on that same OneApp and OneWeb environments for both countries in one go. So therefore, we do not only have a larger number of clients on one IT system and one customer integration layer and one customer experience layer, but we give them a better digital experience by offering solutions on that one platform. And that we will continue going forward and that will continue beyond the Unite program. So the lion share of the Unite program we will taper off in 2020 and 2021. But the benefit from it both from a digital experience, a revenue and cost point of view, will then continue to come.

So then Omar to address your questions on cost evolution, I think the collective label agreement or wage inflation varies from market-to-market, but on a blended basis ING is anywhere between 2.5% and 3%. I think that's addressing part of your question. The second one, we do recognize that some of our peers have been reducing variable compensation, which has resulted in maybe a sharp reduction in their expense line, but I think ING as you know, is not really big on variable compensation. So that hasn't been a major factor in terms of our cost decline in the second half of the year. And then the third thing which I want to remind you is that we are still in the path of taking steps to improve our KYC environment within ING. And that if you look year-on-year, the KYC expenses actually went from €98 million to one €134 million. And to remind you, we had given guidance that during the course of 2020, we expect the total expenses that we would take on KYC to be approximately €600 million. And again, within that €600 million approximately half we currently pay either to external consultants or management consultants, and we would expect that going forward we will make efficiencies there as well.

Thank you. And sorry, Steven on the Unite, and also you predecessor use to tell us that there would be kind of hockey stick effect with the sizeable savings to come, you know, kind of 2021, 2022 as the systems were decommissioned, following all the elements of implementation that you've just highlighted. Are you basically saying that, that process is still ongoing? And that decommissioning process in 2021, 2022 will lead to those sizeable savings or you're basically saying that, you know, everything's kind of in the base of costs from here and any potential savings from the plan are going to be marginal?

Thanks, Omar. I think that, what my predecessor said that in the beginning of the process, when we started in 2016, we would look at centralization of our core banking systems. And then after some time in 2018, 2019, we said well, basically on one hand, it is very difficult to centralize those systems, on the other hand, we also can now make use of API's to actually draw data and products from our core banking systems into our customer integration experience layer to in an easier way, realize a one platform environment in the Benelux. So, we will continue to decommission systems. Not all systems can be decommissioned, but for some products it’s easier to decommission than not. But it is increasingly focused on harmonization, standardization, delivering a better digital experience on the full layer and that will deliver savings, not necessarily by a big bang in decommissioning the core banking systems.

Got it. Thanks a lot.

Our next question is from Mr. Raul Sinha of J.P. Morgan. Go ahead, please.

Good morning, gentlemen. Thank you for taking my questions. If I could just follow up on a couple of points, please. First one's slightly detailed, the oil and gas book, Stage 3 ratio seems to have picked up materially in the second quarter, not 7.8%. Even if I adjust for the trade finance book in Q1. Steven, I was wondering if we could discuss what you're seeing here, given the recovering oil prices and how you might be looking to proactively manage the risks in this book. And then related point on frauds. I think we had a discussion that last quarter as well, when there was a big fraud in Asia, now there is a big fraud in Europe? I was just wondering what lessons the group is taking away from what we're seeing in terms of fraud? And then just very quickly, just to follow up on the dividend discussion. I'm not sure if I missed this. I'm gathering that the progressive dividend payout policy of the old obviously, is behind us now. And this review that you're flagging at Q3 is that a sort of new policy? In that context, do you think that there are merits in a sort of U.S. model where, bank dividend payout ratios are low but then they have the flexibility to use buybacks. Is that a sort of direction we should think the sector should be heading towards, given what you've seen in the pandemic? Just some thoughts would be really useful. Thank you.

Yeah, thanks Raul. If you look at oil and gas, indeed, taking out, if you look at the Stage 3 ratio that 7.8% that is for the bigger oil and gas portfolio. And if we then take out let's say the trading part of it or the non-directly oil price related part of it, largely the 7.8% relates to that €4.5 billion. I'd say if you then do the math, you basically do see and I refer to what I said in the first quarter, then I said that we moved the entire U.S. oil and gas book to Stage 2. And that book is around €1.5 billion. Now, if you look at the 7.8% and you do the math. It's pretty well resembles that book. So what do you take from that? Yes, that book is a difficult part of the book. But again, and that comes in line with what we said in a previous quarter. It is therefore, so that book and not something else. So if you look at the broader oil and gas portfolio that we highlight on that page, there we don't see that many issues. It is really focused on this €4.5 billion, and that's where we see the provision taken. Now if you look at one of the later pages in the deck, you see in one of the bar charts that we took provisions in the natural resources space, that is largely that oil and gas part, including offshore and drilling that relates to the 7.8% amounts. So with a number of the names in Stage 2 and some of the names in Stage 3, continuing to move and taking higher provisions, we do expect that the provisions on oil and gas in the next half year will go down. Then…

Great. Thank you very much.

Next question is from Farquhar Murray, Autonomous. Go ahead please, sir.

Good morning gentlemen and just two questions, if I may. And I shall apologize, the first one is a little bit of an echo of Raul’s question there on the dividends. So my question there is, can you just outline what the key considerations are going to be that will feed into that kind of dividend policy revisit [inaudible] your perspective or the pros and cons of the previous approach and charges, so we get a bit of a sense of, of what you might regard as things were changing? And then secondly, apologies if I missed it, but what is the current full-loaded Basel position? And are you suggesting that as of today, basically Basel III and Basel IV are now essentially the same? Thanks.

Sorry, Farquhar, can you repeat the second question, please?

Yeah, sorry. So basically, the second question is on Basel IV. I'm just kind of wanting an update on the current fully-loaded Basel IV position. And essentially whether you're saying that Basel III reported and Basel IV are now essentially the same?

So on Basel IV, let me put it this way, if the TRIM missions are behind us, and of course we've now taken additional step. One of the main TRIM missions by taking additional €.6 billion. But once we are done with the TRIM missions, so we’ve got two more letters on smaller portfolios, but the impact on that is will be limited. But then 90% of the total Basel IV impact we will have had. Then on the -- and the Basel IV impact, I just lumped them together, it's a bit apples and oranges, but if you look at DoD, TRIM, remaining Basel IV, all of that, then 90% is already behind us. Then on the key considerations, yeah sorry, maybe I should add, that's why I'm hesitating, that Basel IV end part of it, that remaining 10% is not certain yet. So we've taken all the input factors, but Basel IV is still under discussion. It was first in 2022, then it would be 2023 and currently still under discussion where it will be implemented. So we do not know, but we know the rules that if they were implemented, what the impact would be, in that sense the 90% stands. Yeah, key considerations that will feed into our new policy are not different than what I asked to Raul. Maybe one thing to add there, we are looking into to what extent the new MDA level has structural elements in them, given the new regulations and the relief that has been given by the ECB. And to that extent that could have an impact on our dividend policy as well and to our capital levels.

All right. Thanks so much.

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

Yes, good morning, everybody. Thank you for taking my questions. And first one is on, I noticed some threats that you are putting some pressure on your external FTE providers to take lower wages. I was wondering you have a pretty sizable external FTE base, whether that could have impact in Q3 already? And then maybe a bit more specifically on TLTRO take up. I think you implied benefits could be €150 million per quarter. Is that what we should expect in Q3 to come through and then that benefits dissipate a little bit longer term on the back of continued margin pressure. I was just thinking about the shorter-term dynamics there. And on project Unite, I think in the past, you always have the longer-term view to integrate even more countries on the same platforms. Now, though it’s being a little bit different than you anticipated it firsthand, for Belgium and the Netherlands, I this still going ahead? Are you expecting to still add more countries on that same platform longer term? Or is the country differences are they too big basically to make that happen? Thank you.

Yeah, it's -- thanks, Robin. I think on the -- on Unite or on Maggie, I’d so let's say that's the Challengers & Growth countries, we have increasingly have focused on building a customer integration layer, so a front-end integration. And we've always called it an intermediate step. So we will continue with harmonization and digitization to offer a better days to experience, so new propositions can be put on that OneApp or OneWeb environment immediately across a number of countries. That does not necessarily mean centralization. So you do not need to centralize all your systems to create the same experience for your clients and put new propositions in one go on an integrated app or web environment. Then on TLTRO and lower wages, I give it to Tanate.

Yeah. Just maybe to address your question on external staff, first of all, our external staff community is significant. And we always treat them with a lot of respect and very similar to our employees. Having said that, we are asking them indeed for temporary cut in tariffs, right, given the COVID situation and it's slowing down over a number of projects. So it's a combination of tariff cuts and a reduction in absolute number of external staff that we deal with. And in addition, we're looking of course at changing mix, right? So how many of these external staff do we deploy in our home markets in the Netherlands, Belgium and Germany, and where we deploy them in other lower cost markets, for example, in Poland, or in Manila. So it's a combination of factors, but indeed it is part of the plans to actually get better efficiencies there. In terms of your question on TLTRO benefits, as I mentioned before, we have taken roughly €60 billion and if we can maintain zero loan growth or better, we benefit at least 50 basis points. But of course, if we can deploy those funds lending to our customer, then the benefit would be larger.

And I think in the past on TLTRO, you were able to book the full rate basically, immediately on the back of your growth history. Is that the plan now as well or is it more conservative approaches there?

I think those conversations are ongoing, the threshold given that the TLTRO III is coming with a deeper discount from a funding perspective, I think we would like to give you an update in Q3 based on what we see other institutions doing in discussion with our accountants.

Okay and I guess on the external FTE base, there's no quantification behind what we could expect there?

No, we don't disclose external FTEs externally, but rest assured we were asking in many of our home markets for these types of arrangement with our external suppliers.

Okay. Just asked, thanks

We have another question from Stefan Nedialkov of Citi. Go ahead, sir.

Yeah, hi guys. It's me again. Just wanted to follow up on the digital proposition here, obviously over the years you have been mentioning and emphasizing some partnerships, like the Scalable Capital one in Germany which I believe is now being extended. You have AXA, you guided to around €1 billion fees over 10 years. Now you're announcing the Amazon partnership in Germany for small businesses. Are you ready to give us more color in terms of the percentage of fees that are derived from the digital partnerships and the outlook for next year and beyond?

Yeah, I think that had -- what we can disclose about is that that one thing is clear is that the digital partnerships and the broadening of our services to our clients becomes more important. So, we are diversifying away from net interest income. And in that sense, we either do that by developing new services ourselves, such as a brokerage channel, by setting up fintech ventures ourselves such as Yolt or by collaborating with external partners. Now we have close to 200 of these fintech partners. We're very pleased in this case, as with Amazon, we have an exclusive partnership to afford our seller portal to provide loans to the sellers that come onto their platform. It’s again a sign of strength and the way ING has perceived also by the strong fintechs in the world as a strong digital player. And in the past people asked us, oh, don't you see the fintechs as a threat? But on the one hand, they can be a threat but on the other hand, they're also good in terms of collaborating to further develop businesses. And in that sense, it also helps us in our ambition of the 5% to 10% fee growth per annum, and is already a testament to that ambition going forward.

And Steven, are you able to put a number and like, are we talking about 5% of total fees right now coming from these partnerships, 10%, more than that?

It will be a ramp up. And so with AXA we started last year, with Scalable, we started two years ago, with Amazon we started the 1 of July, the first loans are in and this will be a ramp up and will become a more important part going forward.

Okay. Thank you.

There are no further questions sir, please continue.

Okay, thank you very much. With that, I would do a wrap up. One second, please. So thanks very much for the questions. And to summarize, we continue our efforts to help our customers, employees and society to deal with the effects of COVID-19. At the same time, we continue to work on countering financial and economic crime as it remains a priority not only in my previous role, but also in this role. The current environment reinforces our beliefs that were on the rise to strategic path. We've seen that now also in the COVID-19 crisis with our digital model enabling us to continue to grow primary summers and keep NII stable. Our loan demand was affected by COVID-19, stronger mortgages still, however, reduced demand and mainly coming from business customers. Pre-provision result was very resilient, supported by our focus on pricing discipline, good fee and common cost control and risk costs were impacted by substantial corrective provisioning in Stage 1 and Stage 2 to reflect worsened macro-economic indicators. But as I said, the lion share of that had to do with these indicators. And as a result, risk cost came in well above through-the-cycle average. And when these current macroeconomic indicators remain unchanged, we believe that we have taken the majority and the bulk of provisioning for the year. And for the second half of 2020, we expect risk costs to go down compared to the level in the first half. The Common Equity 1 ratio was strong at 15% and if we compare that to banks that have not included -- that have included the dividend for a second half of 2019 in our capital, our pro forma capital would stand at 15.5%. But we do not intend to include it in capital, but we intend to pay it out as a dividend. And we will come up with an updated capital plan and dividend policy in the third quarter results. We remain very confident that we are well positioned to face headwinds. We have a very stable income base with growing fee income, strong capital position, solid funding base as well as a low Stage 3 ratio. And with that, I thank you very much for your attention, for your good questions, for the interaction. And I wish you a very good day. Thank you.

Ladies and gentlemen, this concludes the Second Quarter 2020 ING Analyst Call. Thank you for attending. You may now disconnect your line.