News

ING Groep NV (ING) Q4 2023 Earnings Call Transcript

ING Groep NV (ING)

Q4 2023 Earnings Conference Call

Company Participants

Steven van Rijswijk - CEO

Tanate Phutrakul - CFO

Conference Call Participants

Giulia Miotto - Morgan Stanley

Tarik El Mejjad - Bank of America Merrill Lynch

Raul Sinha - JPMorgan Chase & Co.

Samuel Moran-Smyth - Barclays Bank

Kirishanthan Vijayarajah - HSBC

Michael Harrison - Redburn

Benoit Petrarque - Kepler Cheuvreux

Johan Ekblom - UBS

Hugh Moorhead - Berenberg

Marta Sánchez Romero - Citigroup

Presentation

Operator

Good morning. This is Saskia, welcoming you to ING's Fourth Quarter 2023 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 a historical fact. Actual results may differ materially from those projected in any forward-looking statements as 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. Noting in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities.

Good morning, Steven, over to you.

Steven van Rijswijk

Thank you very much, Saskia. Good morning, and welcome to our results call for the fourth quarter. I hope you're all well and had a good start of the year. And as usual, I'm joined by our CRO, Ljiljana Cortan; and our CFO, Tanate Phutrakul. In today's presentation, I would like to highlight our exceptional results in 2023, discussed that the developments that we saw in the fourth quarter and share our outlook for 2024. And as always, there will be room for questions at the end of the call. First, I will start with explaining how we were impacted by the developments in the world around us on Slide 2.

Notably, we live in a world with increasing geopolitical tensions and conflicts in many countries, resulting in the loss of many lives. And we're saddened and concerned by the devastating impacts that these conflicts are having and the threat that they pose to international stability and security and these tensions also have an ongoing effect on the global economy and have led to heightened economic uncertainty and increased pressure on supply chains.

At the same time, inflation remained elevated for most of 2023 and only came down towards the end of the year. To take this inflation, central bankers around the world have increased policy rates at an unprecedented speed. And now with inflation at a much lower level, the market expects rates to come down during 2024. The economies have proven to be resilient and the IMF is forecasting '24.

We've also witnessed political and regulatory uncertainty in 2023. Several government elections have already had a surprising outcome and other important elections are coming up in '24. On the regulatory side, we've seen increased volatility following the collapses of Silicon Valley Bank and Credit Suisse. And in the aftermath, the European banking sector has proven its strength. Lastly, we see a continued and accelerating transition to a more sustainable economy, also reinforced by a promising outcome of and giving our strong ESG focus, the transition of significant opportunities for ING, and we look forward to continuing this front-runner role.

Then we go to Slide 3. We have shown exceptional results in this challenging environment. And more importantly, we are well positioned to deliver value through the cycle. Through our continued investments in our digital capabilities and our focus on offering a superior customer experience, we are able to grow our Retail Bank across our countries. Our well-diversified Wholesale Bank is highly regarded by our clients who appreciate our global reach, local knowledge and strong sector expertise. Our pioneering role in sustainability and our ESG focus positions us well to capture growth opportunities. The bank is built on healthy fundamentals with a highly insured retail funding base, a senior well-diversified and mostly collateralized loan portfolio, resulting in the lowest risk cost in -- Eurozone peer group.

Finally, our capital position is strong, with ample and all this has resulted in an excellent track record of delivering value to all our stakeholders and market-leading returns, and we are confident that we will continue to do so.

And on Slide 4, which is where we highlight R&D's outstanding results for '23. We have achieved significant growth in primary customers. At the end of '23, 40% of our total customer base had an active payment accounts with recurring income and at least [indiscernible] million customers have chosen as their primary bank. This growth in primary customers is reflecting the appreciation of our products by market-leading Net Promoter Scores in both Retail and Wholesale Banking.

On sustainability, we are increasingly integrating climate into our decision-making and business processes. And we're progressing well with introducing sustainable alternatives for key products in most of our Retail Banking markets. In Wholesale Business models, grew to in '23 or 14% higher compared to '22.

Our balance sheet remains strong with over 64% funded by customer deposits. The strong asset quality is reflected in lower risk costs, which came in at only 8 basis points over customer lending this year, well below our through-the-cycle average of around 25 basis points [indiscernible] , our capital ratio strengthened again, while we distributed almost €6.5 billion to shareholders in 2023.

In the next section, starting on Slide 6, I will highlight the main developments driving our results in '23 also in the context of a longer period. Looking closer at our total income in the past 6 years, I would like to emphasize a few developments on Slide 6. What clearly stands out is that ING benefits from a positive rate environment. And that is particularly visible in a strong impact on total income, which is now roughly 25% higher 2021 period, which was still impacted by negative rates. This increase was somewhat offset by subdued loan demand, which has impacted our lending NII, and we do see first signs of loan demand recovering, which bodes well for future income growth.

Another important development in '23 was the lack of fee growth. And although we grew by 750,000 primary customers and implement the strategic pricing actions, fee income was stable, growing and lower trading levels in investment products. The market is expecting demand for mortgages to pick up in 2024, and we are seeing the first signs of that rebound.

On the next slide, we provide some more details on the drivers of net interest income. The impact of the sharp increase of interest rates is evident on Slide 7, especially when looking at the margin we make on liabilities. The average liability margin in '23 was to a historical level of around 100 basis points in a positive rate environment. And this was driven by the positive impact from reinvesting part of our replicating portfolio at higher rates, which more than offset the increase of the core rates throughout the year [indiscernible]. In the fourth quarter, we paid a core rate of around 120 basis points corresponding to a pass-through of roughly 30%.

We also recorded significant growth in our core deposits, which was driven by particularly strong contributions from Germany, Spain and Poland. In lending, we saw a further decrease of the margin compared to '22, although the margin stabilized over the course of the year at around 130 basis points. Lending NII was noticeably impacted by subdued loan demands, yet loan demands -- yet we were able to increase our market share growth opportunities. The market does expect loan demand to return in '24, and we do see first signs of this in our books as well.

On Slide 8, we show the evolution of our fee and commission income. And although growth has been muted in the last two years, fee income has grown at an average rate of over 5% since 2018 level in the past. Looking at the different product categories in detail, there are some difference to notice in the development. Freeze on daily banking and retail have nearly doubled since 2018, driven by continued customer growth and pricing actions strategically that we've done in several markets. Going forward, this will have our continued focus. declined a bit driven by a lower demand for new loans, mostly visible in Retail Banking.

In Germany, for example, the fee income from , the largest residential mortgage broker in the country, was down 40% year-on-year and decreased by more than 50% compared to 2021 and the last year, not impacted by rapidly increasing rates. And now we do soon see some signs of recovery, which should support lending fees going forward. Lastly, lower trading activity in the last two years has impacted fees from investment products. As an example, in Germany, the number of investment product accounts increased by more than 20% compared to '21 while the total number of standard trades decreased by around 35%. So again, there, you can see that we're well positioned to benefit from the turnaround.

Operating expenses, excluding regulatory costs and incidental items, increased by 6.8%. That increase was mostly driven by the effect of high inflation on staff expenses, reflecting indexation and CLA increases across most of our markets. We also continued investing in our business, which benefits all of our stakeholders, and we will continue to do so. And as we indicated during our Investor Day in '22, regulatory costs have come down from their peak in '21 and were roughly €200 million lower than in 2022, partly driven by lower contributions in the deposit guarantee scheme and the single resolution fund.

In '24, regulatory costs will decrease by another €100 million despite additional bank taxes in various countries. Despite the growth in expenses, we've seen resulting in a 51% cost-to-income ratio in 2023. And going forward, we will continue to be impacted by inflationary pressure, which will partly be offset by efficiencies on the back of our continued focus on operational excellence. More on this in the section with the outlook for 2024.

Then we move on to risk cost on the next slide. In '23, our strong asset quality and robust approach to risk management resulted in low provisions for new defaults combined with effective recoveries. In addition, we saw a significant reduction of our Russia exposure, resulting in a release of provisions taken in 2022. Total risk cost in Wholesale Banking amounted to minus €92 million for the full year and the total risk cost for the bank amounted to only €520 million or 8 basis points of average customer lending. All in all, a very benign year in terms of risk costs. And we are vigilant as the cost of living and doing business increases for our customers, but we remain confident in the quality of our loan book.

Slide 11 shows the development of our CET1 capital ratio, which strengthened from 14.5% to 14.7%, while we returned €6.4 billion to shareholders. Increase in CET1 ratio was primarily driven by our ability to generate capital. And in addition, RWAs decreased, driven by disciplined capital management and a better overall profile of the loan book. Our fully loaded CET1 SREP requirements decreased year-on-year, driven by an announced 50 basis points reduction of the a lower Pillar 2 requirements. And these increases were only partly offset by higher countercyclical buffers, which increased by 34 basis points. And as a result, the buffer to both our target ratio and the regulatory requirements increased, positioning us well to continue providing attractive shareholder return. And more on that on the next slide.

As already mentioned, we returned [indiscernible]. We returned €6.4 billion to shareholders in 2023, consisting of almost €3 billion in cash dividends and slightly less than €3.5 billion of completed share buybacks. At the end of '23, €0.5 billion of the latest share buyback still needed to be completed. And the share buybacks have a structural impact on the earnings and dividends per share, and we have already repurchased more than 14% of shares outstanding since our first buyback in 2021. Given our strong capital position and market-leading profitability, we are well positioned to continue providing attractive returns.

Then starting from Slide 14, we show some key developments in the fourth quarter. And as these are mostly in line with the developments for the full year, which I just presented, I will focus on the highlights only.

Total income was again strong and increased compared to last year, driven by higher liability NII and other income. Compared to the third quarter, our total income decreased. However, most -- mostly due to a negative swing in reserves in financial markets and lower investment income as the previous quarter had included the annual dividend from the Bank of Beijing. The ECB decision to adjust the remuneration on the minimum reserve requirement to 0 basis points had an impact of €69 million on NII. The decrease of liability NII was only limited. The higher cost for retail deposits was almost fully compensated by the positive impact from reinvesting of our replicating portfolio at higher rates. And more details on the development of our margins are shown on Slide 15.

Net interest income, and I'm now at Page 15. Excluding the impact of TLTRO increased slightly year-on-year, liability margins and liability NII were still at much higher levels than last year. And this was partly offset by lower NII from treasury and financial markets, reflecting the impact of accounting asymmetry -- between the impact of accounting asymmetry between NII and other income. In lending, the margins stabilized after having increased by 1 basis points for three consecutive quarters. This stable margin, combined with higher volumes, resulted in a small increase of our lending NII. Our overall net interest margin for the quarter decreased by 3 basis points to 154 basis points, mostly driven by the lower ECB remuneration.

Slide 16 shows the development of our -- growth was mainly visible in Australia and the Netherlands from commercial performance of Business Banking in Belgium. In Wholesale Banking, we saw a small increase in net core lending, although demand was still subdued, and we continue to optimize our capital usage. Going forward, we expect loan demand to pick up. Although uncertainties remain, given the heightened geopolitical and macroeconomic uncertainty that are outlined at the beginning of this presentation.

We're confident that our business model and geographic diversification positions us well to capture growth opportunities when they arise. And on to liabilities, we saw core deposits decline by €900 million in the fourth quarter, which was fully driven by Wholesale Banking, reflecting seasonal outflows mainly related to [indiscernible] . Core deposits in our Retail Bank increased, although we continue to see some shifts from deposits to assets under management, most notably in Germany.

Then Slide 17. In the fourth quarter, operating expenses, excluding regulatory costs and incidental items were up on both comparable quarters, and this increase was mostly due to high inflation, but it was also driven by higher marketing expenses and continued investments in our business. Regulatory costs were slightly up year-on-year, mostly including a higher annual Dutch bank tax, which is always fully recorded in the fourth quarter. ...

Read the full article on Seeking Alpha

]]>

© www.conferencecalltranscripts.org 2020 | Terms of Service