ING Groep N.V. — 2018 Form 20-F Summary
Business context and reporting period
ING Groep N.V. is a Netherlands-incorporated global banking group, with ING Bank N.V. as its principal banking subsidiary. It provides retail banking to 38.4 million customers and wholesale banking in more than 40 countries. The filing is an annual report for the fiscal year ended 31 December 2018, not a standalone 2018 fourth-quarter filing. Quarterly data are not separately presented in the supplied text.
The financial statements are prepared under IFRS as issued by the IASB for SEC reporting. ING adopted IFRS 9 on 1 January 2018 and did not restate comparative periods; therefore, some 2018 and 2017 figures are not directly comparable.
Key financial metrics
| Metric | 2018 | 2017 | Change/comment |
|---|---|---|---|
| Total income | EUR 18.324 billion | EUR 18.590 billion | Down 1.4%; presentation affected by IFRS 9 |
| Net interest income | EUR 13.960 billion | EUR 13.647 billion | Up 2.3% on reported figures |
| Net fee and commission income | EUR 2.798 billion | EUR 2.710 billion | Up 3.2% |
| Result before tax | EUR 6.986 billion | EUR 8.085 billion | Down 13.6%, primarily due to the regulatory settlement |
| Net result attributable to equityholders | EUR 4.761 billion | EUR 5.464 billion | Down 12.9% |
| Underlying net result | EUR 5.389 billion | EUR 4.957 billion | Up 8.7%; non-IFRS measure |
| Operating expenses | EUR 10.682 billion | EUR 9.829 billion | Up 8.7% on IFRS-IASB figures |
| Addition to loan loss provisions | EUR 656 million | EUR 676 million | Down 3.0%; risk costs were 21 basis points of average RWA |
| Net interest margin | 1.53% | 1.54% | Moderately lower |
| Underlying cost/income ratio | 54.8% | 55.5% | Improved |
| Underlying return on equity | 11.2% | 10.2% | Improved; based on IFRS-EU |
| Basic EPS | EUR 1.22 | EUR 1.41 | Down 13.5% |
| Proposed dividend per ordinary share | EUR 0.68 | EUR 0.67 | Includes EUR 0.24 interim and EUR 0.44 final dividend |
Balance sheet, capital, liquidity and debt
- Total assets increased 5.0% to EUR 884.6 billion at 31 December 2018, including EUR 589.7 billion of loans and advances to customers and EUR 555.7 billion of customer deposits.
- Net core lending grew EUR 36.6 billion, or 6.4%, while net customer deposits increased EUR 19.3 billion, or 3.6%. The loan-to-deposit ratio increased to 1.07 from 1.05.
- Shareholders’ equity was EUR 49.0 billion, compared with EUR 48.4 billion at year-end 2017. IFRS 9 reduced opening shareholders’ equity by approximately EUR 1.0 billion and fully loaded CET1 by approximately 0.2 percentage points.
- The fully loaded and phased-in CET1 ratio was approximately 14.5%, compared with 14.7% in 2017. The Group Tier 1 ratio was 16.2%, the total capital ratio was 18.4%, and the leverage ratio was 4.4%, versus 4.7% in 2017.
- ING’s 2018 consolidated SREP requirement was 11.8%. Management stated an ambition to maintain a CET1 ratio of approximately 13.5% and underlying ROE of 10% to 12%.
- Cash flow from operating activities was EUR 6.915 billion, compared with an outflow of EUR 5.253 billion in 2017. Cash and cash equivalents increased to EUR 47.529 billion from EUR 18.977 billion.
- Debt securities in issue were EUR 119.8 billion and subordinated loans were EUR 13.7 billion at year-end. ING Groep N.V.’s own debt and capital securities outstanding to third parties totaled EUR 27.9 billion, including EUR 10.5 billion of subordinated loans.
- ING issued EUR 11.5 billion of ING Groep N.V. instruments in 2018 to build MREL and TLAC capacity. The binding MREL requirement was 10.89% of total liabilities and own funds.
- Retail and corporate deposits represented approximately 50% and 21%, respectively, of total funding. Increased lending growth was partly funded through short-term certificates of deposit and commercial paper.
Material changes versus the prior comparable period
- Reported net income declined because 2018 included a EUR 775 million settlement with the Dutch Public Prosecution Service: EUR 675 million of fines and EUR 100 million of disgorgement. Excluding special items and other adjustments, underlying net income increased 8.7%.
- Underlying income increased 2.2% to EUR 18.088 billion. Net interest income increased 1.5%, while the underlying net interest margin narrowed to 1.53% from 1.54%.
- Underlying operating expenses increased 0.8% to EUR 9.907 billion. Regulatory expenses increased to EUR 947 million from EUR 901 million, including EUR 208 million contributed to the Single Resolution Fund.
- Wholesale Banking underlying net result increased to EUR 2.055 billion from EUR 1.950 billion, despite lower Financial Markets income and a EUR 123 million loss on the intended sale of an Italian lease run-off portfolio.
- Retail Belgium underlying net result fell 20.6% to EUR 390 million, while Retail Netherlands increased 5.1% to EUR 1.764 billion, Retail Germany increased 3.4% to EUR 646 million, and Retail Other increased 14.6% to EUR 652 million.
- Non-performing outstandings decreased to EUR 11.102 billion from EUR 12.481 billion. Total forborne loans declined to EUR 10.140 billion from EUR 11.819 billion.
- IFRS 9 increased the opening loan loss provision by EUR 795 million and changed the classification and presentation of financial assets. The 2018 loan loss provision closing balance was EUR 4.568 billion.
- ING acquired 75% of Payvision for total consideration of EUR 260 million and 90% of Makelaarsland for EUR 14 million. It agreed to sell part of the ING Lease Italy business, recognizing a EUR 123 million loss; completion was expected during 2019.
Guidance, outlook, management commentary and risks
Management emphasized continued commercial growth, digital transformation, platform development, customer acquisition and disciplined cost management. ING expects to continue profitable lending growth within its risk appetite, although it anticipates lower Wholesale Banking growth. Its strategy includes a global digital platform, increased data analytics, open banking, fintech partnerships and further standardization of systems and processes.
Management identified persistent low or negative Eurozone interest rates as a continuing pressure on savings margins and net interest income. Other key risks include Brexit and possible disruption to euro clearing, weaker emerging-market conditions, Turkish lira volatility, trade tensions, changing regulation, capital and MREL/TLAC requirements, counterparty and credit risk, and potential increases in IFRS 9 expected credit losses.
- The global KYC Enhancement Programme is expected to continue through the end of 2020 following the Dutch financial-economic-crime settlement.
- ING reported continuous DDoS attacks in 2018; two attacks breached defenses and caused approximately one-hour outages affecting customers in the Netherlands.
- Legal and regulatory exposures include interest-rate-derivatives claims, mortgage-expense litigation in Spain, tax matters, product and conduct claims, and other proceedings for which the ultimate outcome may be uncertain.
- Basel IV implementation is currently estimated by ING to increase risk-weighted assets by approximately 15% to 18% on a fully loaded basis without management actions. The ECB’s TRIM review and evolving CRR/CRD, BRRD, MREL and TLAC rules could increase capital requirements.
- The proposed EUR 2.646 billion dividend, or EUR 0.68 per share, was subject to shareholder approval in April 2019. Future distributions remain subject to capital, regulatory and liquidity conditions.
- ING announced a commitment to steer its approximately EUR 600 billion lending portfolio toward the Paris Agreement, reduce thermal coal exposure close to zero by 2025, and expand climate and social-impact financing.
Most important facts an investor should verify
- Reconcile the IFRS-IASB net result of EUR 4.761 billion with the IFRS-EU net result of EUR 4.703 billion and understand the EUR 58 million IAS 39 carve-out adjustment.
- Assess the sustainability of EUR 5.389 billion underlying net result after excluding the EUR 775 million settlement and other non-underlying items.
- Review the impact of IFRS 9 staging, macroeconomic scenarios and probability weights on expected credit losses and capital.
- Confirm the CET1 ratio relative to the 2019 MDA trigger, the 13.5% management ambition, and future Basel IV, MREL and TLAC requirements.
- Evaluate reliance on professional funding, including increased commercial paper and certificate-of-deposit issuance, as lending growth exceeded deposit growth.
- Review the status and cost of the KYC remediation programme, related regulatory oversight and any further financial-crime or conduct matters.
- Review outstanding litigation, including interest-rate-derivatives claims, Spanish mortgage-expense claims, tax matters and the Imtech and Mexican government bond proceedings.
- Confirm approval and payment of the proposed final dividend and assess restrictions on upstreaming capital from subsidiaries.