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Q2 2019 Earnings Call
August 1, 2019, 3:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning. This is Patricia Crosoff welcoming you to ING's second quarter 2019 conference call. Before handing this conference call over to Ralph Hamers, Chief Executive Officer of ING Groep, 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 statement.

A discussion of factors that may cause actual results to differ from those in any forward-looking statement is contained in our public filings, including our most recent annual report on Form 20-F filed with the United States Securities and Exchange Commission and our earnings press release as posted on our website today. Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation to buy any securities.

Good morning, Ralph. Over to you.

Ralph Hamers -- Chief Executive Officer

Good morning, everyone. Welcome to our second quarter 2019 results call. With me are our CFO Tanate Phutrakul and our CRO Steven 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 net profit of 1.4 billion euros. We see pressure from continuing low, maybe even negative rate environments, 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 margins, especially in mortgages, where we continue to be successful at improving our margins and repricing. This helps us to counter the high 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 0.24 euros 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 more than 3,000.

Turning to our commercial momentum on slide three, as I mentioned, the primary customers grew by more than 300,000, well-diversified and you can see it on the right-hand side across the different geographies, the Benelux adding 75,000, challengers adding 167,000 across all the different countries, but specifically Germany, Australia, and Spain really adding to this, growth markets adding 67,000 across all the different markets -- so, really doing very well on the commercial momentum if it comes to the customers that pick us as their primary bank. As you know, we firmly believe that primary clients create future value.

The core lending growth was strong at 7.4 billion euros with the majority realized in the retail markets. Net core lending growth in wholesale markets slowed down slightly, but we have signaled that already a few quarters, that we would be more cautious in our growth on the wholesale banking side.

Deposit growth was seasonally higher. That's driven by holiday allowances in some of the markets, specifically also in the Netherlands and Belgium. In terms of the most recent Net Promoter Score, this quarter we ranked No. 1 in 7 out of our 13 retail countries. As you know, we find the Net Promoter Score a very important metric if you look at how we're doing in a digital and mobile environment. It's certainly also a leading indicator of continued growth in clients and primary clients. So, that all looks good.

Turning to the strengthened commitment to sustainability -- again, real steps and real proof points this quarter. We launched this quarter what we call the Poseidon Principles. We launched those together with ten other major banks. Just to explain a little bit, under the principles, the banks involved will assess the climate alignment of their shipping portfolios on an annual basis.

This is part of what we call our Terra approach. Remember last time, I took you through the Terra approach, that basically, we want to develop our total loan portfolio in line with the Paris Accord. However, if you want to do that, you need to have specific approaches to different sectors. This is the one for the shipping sector.

Now, the fact that we do this one together with ten other major banks, overall having one-fifth of the global ship finance portfolio in place, this one will really lead to an impact. Clearly, we are very happy for other banks to join as well if they want.

Commercially, the proof points -- we see really increased deal activity with 26 sustainability bond transactions and 12 sustainability loan transactions completed, including some firsts again because with our knowledge, we can also continue to be knowledgeable on structures and different programs. Just to give you an idea there, we supported a 200 million-euro-Schuldschein transaction for our automotive client Durr. That's the first ever Schuldschein financing linked to an ESG rating. So, that's in the German market. It's a first.

For Merlin Properties, we acted as a joint sustainability coordinator in the largest sustainability improvement loan in the European real estate sector. As you know, real estate represents the majority of the carbon footprint, both commercial as well as residential. So, having these programs there really helps in order to achieve our target as well.

And for Philips, we acted as a joint book runner in the first issuance under the Philips Green & Sustainability Innovation Bond Framework. Those processes will be used to finance Philips' sustainability activities.

We wanted to take the opportunity as well to highlight one of our successful platform businesses. That's Interhyp. That's on slide five. We've highlighted Interhyp before. That is because it is a real example of how a digital platform evolves over time. Interhyp is by now the largest mortgage broker in Germany. It's fully owned by ING. It originated as a fintech, has revolutionized the market, which was dominated by traditional players. We're developing this approach now also and expanding it into Austria.

This quarter, specifically, was a record quarter for Interhyp as the mortgage volumes process exceeded more than 6 billion euros. By continuing this strong growth trend, they're well on track to reach 12% market share in Germany.

Now, to explain, it's a digitally enabled platform. It offers mortgages of more than 450 lenders. A lot of this is digitally done. The connection of the platform into the banks is all IT-driven as well. But yes, there is also independent advice given as part of all of this in order to make this good advice and a good experience at the same time and they do that through more than 100 offices.

But here you see how quickly you can develop a platform that is driven by good experience on one side and advice because it is mortgages on the other side. They have absolutely leading Net Promoter Scores. So, this commercial momentum will continue. For us, it is a very important fee income generator and it is a very profitable franchise in itself.

Turning to KYC and our management of non-financial risks -- as you know, as we have indicated to you, we have this global enhancement program. I'd like to give you an update on that one. The number of FTEs now working on KYC-related activities has increased to over 3,000. This is a combination of newly hired FTEs as well as a shift toward KYC-related activities of existing FTEs.

As you know, we started this program and rolled out this program already in 2017. We keep implementing this across all of the countries where we are present and where we have our clients. As part of this program, we are increasingly closing accounts of inactive clients, which is not always an easy process, but we're committed to fulfill our role as a gatekeeper here. Moreover, you will like the cleanup of inactive accounts. Inactive accounts clearly help to become even more efficient.

As an update, in Italy, I'm sure that's on your mind. We are in the process of implementing these improvements as required by the Banca D'Italia. We're also in discussion with Italian judicial authorities concerning the conclusions of the Banca D'Italia and related investigation. In the meantime, we will refrain from onboarding new customers, but we're fully servicing our existing customer base.

To increase the effectiveness of safeguarding the financial system, we keep working together with other banks because basically, as a bank alone, there's not a lot you can do, but also incorporating more and more with enforcement authorities and regulators. We think that the action plan that has been presented by the Dutch Ministers of Justice and Finance is really a good step forward. They do see the role of banks in this one is of crucial importance on one side.

But on the other side, in order to really increase the effectiveness of fighting or detecting financial and economic crime, there should be possibilities of data sharing in several areas. But for that, you either need laws to be changed or be able to work on specific waivers. So, they have taken up this plan to look at these possibilities in six areas specifically and see whether to a certain extent client data and monitoring of transaction information can be shared better.

At the same time, we will continue to raise awareness and support for similar activities on a European level because these activities don't stop at the border either. We think that with everything that we're doing and everybody is doing, that's a very good first step, but in the end, you need an all-encompassing approach to this one.

As we see the KYC-related activities increasing, we also keep developing our own tools if it comes to the improvement of the accuracy and efficiency of our KYC operations, specifically and especially on the transaction monitoring, we can benefit from artificial intelligence, machine learning, and this activity plays to our strengths and it plays to our strategies and is embedded in our strategy and that's an important part of it as well. A few of the examples of the tools that we're working on are highlighted on this slide as well.

Now, let's take you through some of the results, the highlights from a financial perspective in this second quarter. Turning to slide eight now, the underlying pre-tax result was just over 2 billion euros in the second quarter, just below the same quarter of last year. That's due to a higher risk cost, which we were still relatively low, but we're up versus last year.

An increase in income year on year more than offset the higher operating expenses. If you look on a year on year basis, the underlying income was a strong 181 million euros higher. That reflects a combination of strong loan growth, as indicated already, resilient margins, higher revenues and treasury, and a 79 million euro-receivable, which is related to the insolvency of a financial institution in the Netherlands.

These positive impacts outweighed the weaker performance in financial markets. That was driven by negative value adjustments, which we'll get back to that later in the presentation. Also, the positive impacts outweighed the margin pressure that we see on customer deposits because of the low, if not negative, rate environment. That's on a year on year comparison.

On a Q on Q comparison, sequentially, the underlying income was up by 89 million euros. This was mainly driven by the same factors as on a year on year basis, while the previous quarter included a 190 million euro-gain on the sale of our Kotak stake. So, if you correct for that, you see a real increase in the factors explaining that are the same that I mentioned in a year on year. So, a good performance on the income side for the quarter in both Q on Q as well as year on year.

Turning over to NII, just to illustrate, if you look at the NII, excluding financial markets, it increased 1% year on year. We saw our mortgage margins further improving. That's a sign of the pricing discipline in the market and that's one of the levers that we have to counter the increasing pressure from our replicating portfolio. As you know, we replicated a sizable part of our savings every year. To give you an impression on the pressure there, the five-year swap curve at this moment is now at a negative 25 basis points. That's where the pressure is coming from.

Now, that's the pressure. On the positive side, what we can do in order to counter this pressure, we see repricing of the book. We see growing of our loan book, which we are doing again this year and the repricing is also happening as we speak, not everywhere, but certainly in the mortgage area. The positive rate environment in our non-euro countries is also helping us. So, that's what we have there as well. Furthermore, we charge negative rates on deposits for our professional customers and we see a gradual shift to higher NIM products that basically has been part of our strategy for the last couple of years.

With all of this, our NIM, net interest margin, for the quarter came out slightly lower at 152 basis points, still at the top range of our guidance. So, it's continuing at healthy levels there. If you ask about our guidance until the end of the year, we would think that the NIM would stay at least close to the high 40s. So, that's where we think we can go.

Looking into lending now, turning to the core lending, slide 10 by now -- in the second quarter, we grew core lending by a strong 7.4 billion euros, as you can see here. As we said, we have strict risk appetite. We don't compromise on structures in wholesale nor anywhere else. We are looking into repricing. The good thing is we are not dependent on one geography or one sector or one business line.

Here, you see the strength of ING and our business. If one area doesn't pick up on repricing or one area is outside of our risk appetite, we will just leave it and we can grow somewhere else. Again, this quarter, we are showing the diversification of our business really helps to continue our core lending to grow and that is what you see in this picture, although this quarter, you see higher growth in the retail banking sector, but that is also in line with our earlier guidance on the bank side, where we've said that we will reprice and that will have an effect on growth in wholesale banking and we will not compromise on structure in the wholesale bank.

We have put caps on leveraged finance and real estate finance, as we have indicated to you in the past. So, that limits the growth on the wholesale bank side, albeit still growing at 2% to 3% for the year. Overall, if you take the 7.4 billion euros, it is still annualized more than 5%. So, well within the range that we have guided you, which is the 3% to 4%. Actually, it's above the range that we have guided to you in the past.

If you go deeper a little bit, retail saw a modest growth in both mortgages and business lending. That's also because the book is so big. So, in order to grow the total book, you also have to produce the run off of the book and the new production is at good margins. It's a job well done for the team. Also, in Retail Belgium, we see a continued strong commercial momentum. Retail Challengers growth continued on its growth trajectory as well, very well challenged both into mortgages as well as non-mortgaged lending.

As I earlier said, net core lending growth in wholesale bank is slightly lower than previous quarters, but again, it's because of the caution that we take as well as the fact that the syndicated loan market this quarter was a little bit less attractive.

Turning to fee income, net fee and commission income came in at 711 million euros. That's up 36 million euros or 5.3% quarter on quarter. Diving into that, this was driven by the increase in most retail countries and with higher fees from daily banking and mortgages, but also improved investment products, fees on investment products. In the wholesale bank, we saw that quarter on quarter that the deal activity was up, but if you compare the wholesale bank with last year, year on year, then you see that the deal activity is lower than a year ago.

If you look at the year on year perspective, overall, the fee income was stable. Overall, that is because the growth that we see in Germany and that's coming from, among others, Interhyp, was offset by increased fees that we are paying to our independent agents in Belgium. That's as a result of switching to more independent branches. As you know, we have gone through this transformation in Belgium, where basically we have closed a lot of branches, but of the branches that stay, we have more independent agents, which in itself is a good thing because that makes our costs more variable.

However, these agents we pay on a commission basis and whatever we pay is a negative on the fee income line. So, that is why you don't see that effect too much, but it makes variable cost and you only pay if there are activities for it and new commercial business for it. That is what you can't see specifically in the slide, but that is an underlying effect you have to take into account. We also see a bit lower fees on mid-corporates and Retail Netherlands there as well.

So, with these developments, specifically also the negative fee income line that comes from an increased independent agent group in Belgium and a different deal there, it might be challenging to reach a 5% to 10% fee growth ambition for 2019, but we do remain committed to this ambition. We believe in it and we have the intention to grow our fee income to approximately 20% of total income.

The reason why we feel confident there is that we see five main sources for increasing fee and commission income. The first one is around payment packages. The second one is around investment products. The third one is around behavioral fees. You kind of -- these are fees through which basically we try to influence the behavior of clients to do more digital banking rather than physical banking or to go to the ATM less often, etc.

Then we see as a fourth source of further fee income, we see third party products, which will increase on the back of more primary customers and will increase on the back of further improvement to cross-buy and we expect to increase the fee income still on the wholesale bank.

Talking about growing third-party fees as an important driver, you see that the joint venture that we announced ten months ago with AXA is now already producing products, digital products through the internet. We launched travel insurance as well as income protection in Italy and in Australia, we launched car and travel insurance through a local partner. So, that joint venture that we agreed to less than ten months ago is now already introducing digital products through the internet and more to come on that one.

Turning to financial markets, overall, if you look at this picture, you can see that financial markets saw the income decreasing, but that was fully driven by negative valuation adjustments and that's mainly explained by two factors. I'll take you through those. The first one is that we had negative model valuation adjustments. Those were the result of asymmetry between the derivative positions with our clients, which are often not collateralized, while we hatch ourselves in a market on a collateralized basis. So, that's an asymmetry right there. For that, we had a negative adjustment. But that will come back over time.

The second factor was the market to market movements on hedges mostly related to micro hedges and because of the spread tightening, it moved against us in the quarter. If you correct for these two, you actually see that financial markets income has improved 7% year on year and that's on the back of stronger client rating results. If you compare it to last quarter, it was stable-ish, around 255 level.

So, together with the cost decreases that we also see this quarter, you see the costs really going down in financial markets this quarter and you see more client activity coming up and growing, we see a sign of improvement, although we have to continue to really focus on this business as the markets are less predictable and the low for long doesn't help and you see that with many other banks as well, so, continuing to look at how this evolves for the quarter, it is not as bad as it looks if you correct for the value adjustments. You see client activity up and the costs are actually going down.

Now, to expenses -- excluding regulatory costs, which are seasonally lower, they were up by 82 million euros versus the first quarter and by 105 million euros year on year. Now, for both comparisons, there is one major factor that drives this increase that I'd like to take you through, which is a provision that we've taken in Germany of 36 million euros and that is the second kind of wave of restructuring in view of the agile transformation that we're doing in Germany.

That will help Germany to accelerate its responsiveness to rapidly changing customer needs. While it has increased our costs in the second quarter with 36 million euros, as mentioned, it will lead to structural annual cost savings of around 12 million euros. So, the business case on the line is one that is really strong. We see overall upward pressure from increasing KYC-related expenses as we continue the global rollout of our KYC announcement program. So, that's certainly a factor to reckon with.

Also, we see a bit of pressure given salary increases, but honestly, if you really look at the total of pressure of costs going up and specifically if you correct for Germany, you see the savings are also coming through because of further efficiency and the transformation programs paying and decreasing costs like you see decreasing costs in Belgium for the quarter, you see decreasing costs in financial markets for the quarter that we're really vigilant on the cost side and making sure that we stay on our trajectory to become more and more efficient.

That said, we will, if we feel there is good business in C&G, will support business growth in C&G and we wouldn't mind cost to grow if we feel that produces good business. But the cost discipline is there, we're really on top of this where we look through this and we're on our trajectory to become more and more efficient.

You can also see that in the fourth quarter, rolling average of the cost income ratio, that was stable at 55% for the quarters, but if you look at it in comparison to last year, it has actually come down from 56.1%. So, we'll continue on that trajectory. But also, as indicated during our IR day in March, we specifically looked at the underlying operating leverage because that is really showing the impact of our digitalization and transformation efforts.

Turning to risk costs -- that's slide 14. Here, you see the different areas of asset quality developments. Risk costs in the second quarter came in at 209 million euros. That's 14 basis points of average customer lending. On a quarter on quarter basis, risk costs were stable. The last quarter of last year was low 150 million euros. That was primarily driven by a release in Retail Netherlands at that moment, 52 million euros, just to remind you of that.

This quarter, we saw an impact from model updates, most notably in Retail Netherlands, where we recorded slightly higher risk costs of 22 million euros against Germany where we saw a 25 million euro-net release. So, that's on the retail side. On the wholesale banking side, risk costs were again low in this quarter at 91 million. We had a few individual Stage 3 files in France, the Netherlands, and the Americas, but there were no specific trends to be detected either from a geography perspective or a sector perspective, so, really specific cases.

Non-performing [inaudible] for ING as measured by the Stage 3 ratio you could see here as well, stable at 1.5%. For the remainder of 2019, we continue to expect risk costs to stay well below or average cycle of around 25 basis points of average customer lending.

Now, turning to capital, CET1 remained robust and ended the quarter at 14.5%. That's 20 basis points lower than last quarter, but still well above our requirement of 11.81%, as you can see here. During the quarter -- as a reminder for all of you, we reserve last year's full dividend per quarter. So, in the first three quarters of the year, we reserve the full dividend of that last year and that makes that we had limited profit to CET1 per quarter. So, that's also in here. So, it's very conservative.

During the last quarter, the CET1 ratio benefited from the inclusion of these profits that were beyond what we keep separate, but it was impacted by a risk-related asset growth, specifically in the operational risk assets, the operational risk domain. That was caused by an update of the weights of our own risk scenarios as well as external loss data. That's where you see the risk-related assets affect on CET1, the minus 0.3%.

Now, in line with the last couple of years, we will pay an interim cash dividend of 0.24 euros per share. I think if you really look at this picture and the profit generation that we have, the capital generation that we have the underlying business with most of the Basel IV impact coming, we remain well-placed to comply with future capital requirements.

Turning to the financial ambitions, we're pleased to see here in Slide 16 that we performed well against most of our financial ambitions, if not all. CET1 leveraged ratio is well ahead of minimum regulatory requirements producing a very attractive return on equity. If you look at the four-quarter rolling average of 10.8% within the 10% to 12% range, cost to income as we have indicated in the IR day, is not necessarily how we run our business.

But it is an important input factor to get a sense for where we are and what we should look upon. I already commented on that. It's actually improving on a four-quarter rolling average. When we have the financial ambition of 50% to 52%, but it's set -- at the IR day, we didn't put a date there, but we do think that over time, that's where you can run a bank. I said just to kind of repeat, in '19, our policy is to pay a progressive dividend.

Just to wrap it up, the second quarter confirms that we keep executing well on our think forward strategy. It's the right direction for our clients. It's also the right direction in order to counter some of the effects of the low rate environment. We see continued customer growth, continued lending growth. We see improving mortgage margins and resilient margins overall, apart from savings.

Even if you look through the fees, we see positive developments in Belgium and Germany and we have AXA starting. So, if you look ahead, we will continue to focus on retaining our commercial momentum, keep the costs disciplined while we continue to enhance our non-financial risk management, and I'm confident that further strengthening the company and what we're doing is there to enable sustainable success for the long-term benefit of all of our stakeholders.

So, let me open the call for questions now.

Questions and Answers:


Thank you, sir. Ladies and gentlemen, we're starting the question and answer session now. If you have a question or remark, please press *1 now on your telephone. *1 for questions or remarks. In the interest of time, we kindly ask each analyst to limit yourself to two questions only.

Our first question is from Mr. Pawel Dziedzic of Goldman Sachs. Go ahead, please. Your line is open.

Pawel Dziedzic -- Goldman Sachs -- Analyst

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 increasing staff numbers and costs when you go to the 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 this was a 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, could you give us a sense what 20 bps cut could have on NII and NIM over the next one or two years? And are there any incremental things that you can put in place if that happens?

I know you mentioned good commercial momentum for pricing and so on, but would you still consider expanding, for instance, parameter of the client that could be charged negative rates? Are you in a position to, perhaps, adjust fee structure for retail clients and so on? Thank you.

Ralph Hamers -- Chief Executive Officer

Thank you, Pawel. On the first one on cost -- so, on one side, beefing up KYC, the enhancement is leading to increased costs 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 are working in the client domain, their daily activities are more geared toward KYC to get these files in order than otherwise.

That's not necessarily leading to an increase in costs, but then clearly, there is also additional operational activities for which we are building centers of excellence and that is an increase in cost. Then over time, we will have to continue to improve our systems and some of our algorithms, which is leading to an increase in cost as well.

Now, there are two ways to manage this. The first one is that yes, some of these are what we would call project-related costs. These are externals that help us to make sure that from a final enhancement perspective, we get everything done. That you should see coming down in 2020, as those external issues you should see go down in 2020. If it comes to some of the IT or the program-related costs, we are also shifting priorities, as you 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 that we would otherwise run toward this domain. So, they will lead to a bit of an increase of cost, but you will not detect it in full. So, to conclude, yes, over 2020, you would have to expect some of these costs to come down to the extent that they're project-related in the file enhancement area.

On the ECB rate could impact mitigating actions -- so, there are many different things that we're looking at here and we're testing different things in different markets. We are charging rates already if it comes to the more professional part of the business. If it comes to the larger private banking clients -- now I'm talking euros and other currencies -- we started to charge a long time ago. So, that will have its effect on countering the negative rate environment, certainly, but there is only so much you can do from that perspective.

Then the question is do you go negative on savings or are there other ways you can compensate that for that in general, so, for consumers, that remains to be seen. That is in charge of territory to be quite honest and you have to kind of be mindful of the role that you play in a market, mindful of the stability of your deposit base as well, and mindful of the promise that you have made to your clients.

So, clearly, we are looking at different levers to kind of compensate, as I indicated. Fees is one of the ways, looking at administration fees around what people do with us as a bank, specifically in those areas where we are a low, if not low fee environment or non-fee environment because you know that the digital banks have been built on the back of almost no fees. So, there is quite some upside there, looking at fees.

We're testing different markets in different ways. To the extent we feel that we can pursue that further, we will certainly do so. So, yeah, there's a whole menu of things you can consider. You don't want to go full-blown into one of those specifically. You have to test the waters here and there and see how customers react and what your role is in those markets. Clearly, what works will then be rolled out to other markets.

Pawel Dziedzic -- Goldman Sachs -- Analyst

That's very helpful. Thank you. Maybe just a follow-up -- can you quantify the impact of 20 bps cut on NII, just to give a sense of sensitivity, what scale it could have? The second, just on KYC, would you be willing to disclose the size of the project-related cost that could fall out into 2020?

Tanate Phutrakul -- Chief Financial Officer

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 that we would say is that out of the 570 billion euros of deposits that we have, about 80% is in the euro zone and as we indicated in the past, roughly the duration is somewhere around the five-year mark. This is all about the ability to reprice, the ability go deeper negative in certain segments of our deposits. So, it's very much a future action and market response that we would see that.

Pawel Dziedzic -- Goldman Sachs -- Analyst

Thank you very much.


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

Robin van den Broek -- Mediobanca -- Analyst

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. Basically, on the current macro environment where the euro five-year point is at minus 33 bps, are you still confident 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 it feels like it's a bit more cautious than in the past. I was wondering if there were certain books where you see more TRIM impacts coming through, particularly on the structured finance books where you might see more headwinds than anticipated before. Any update there would be helpful. Thank you.

Ralph Hamers -- Chief Executive Officer

Robin, on the first one, it remains to be seen, honestly. Clearly, you have the pressure on the savings side in terms of an impact on NII there where we can see the lending growth. Now, the lending growth in itself, as you see this quarter -- and now 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 the Netherlands, the mortgage book in Belgium, and the mortgage book in Germany.

In some cases, this comes at a lower market share, but it's OK. It's OK to have a lower market share from that perspective, but we are really looking into where we can reprice and in the mortgage books generally, 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. 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. 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 been picked up by all new production. Honestly, that's already here. We see that if you continue to be able to produce a loan book growth of 2% to 3% or 3% to 4% and you can actually reprice, which is what we're showing, that we're really counting 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.

Steven Rijswijk -- Chief Risk Officer

Yes. Thank you, Robin. On TRIM, I don't think that we're more cautious or careful. In the end, we've always said that's the impact of TRIM. The more adjustments that come from the new regulatory technological standards and Basel IV, we have an impact of between 15% to 18%. What we do see now is a matter of timing. You see actually the impact of the TRIM is 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 we're all over the redevelopment of our morals you see coming in as well. A bit earlier, it still means that the guidance that we give 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% of our risk-weighted assets under a Basel IV regime.


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

Benoit Petrarque -- Kepler Cheuvreux -- Analyst

Yes. Good morning. Thanks for taking my questions. The first one is to come back on these mortgage margins which are going up nicely. This is a very good way to offset the pressure from low rates. We tend to see that more negative, like low rate is obviously very negative. But could you give us a sense of the extent you can offset the margin pressure from low rates with repricing across the books. Will that be really meaningful?

I have the impression that can be pretty significant, especially what is going on on the mortgage side. Can you give us a sense of whether that will be a very good lever for you to offset the pressure which is to come from the negative rates? Also, could you give us an update on the front book margins across the different geographies versus the back-book margins on the mortgages?

Then the second question was on the cost side, it's 3% clean. I think it's quite substantial, again. I think we were at 1% 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 like it is still a bit slow. We do not see that coming really in Q2, but do you expect more cost cutting coming in the coming quarters?

Ralph Hamers -- Chief Executive Officer

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

Tanate Phutrakul -- Chief Financial Officer

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 the costs are increasing, as you mentioned, between 2% to 3%, but depending on where we are and depending on which segments, the costs are different. If you look at the wholesale bank, excluding foreign exchange impact, the cost in the wholesale bank is up roughly 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 36 million euros cost increase, German costs are flat. The cost in Belgium is down 4.2%. The cost in financial market is down as well.

Where you do see cost increases is in some of the higher inflation markets like in the Challenger and 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 investments to do that.

Ralph Hamers -- Chief Executive Officer

Okay. Then on the lending margins, to which extent can we offset on the pressure on liability income -- honestly, you see this quarter it's rather flattish. It's a combination of grown and repricing. The repricing, you should realize, is only on the new production. The effect there is one and the growth is the other. 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 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, it is an increased price versus last quarter, it is repricing in terms of that the 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. Before that trickles down into the portfolio margin, it takes a couple of quarters. Thank you.


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

Adrian Cighi -- RBC Capital Markets -- Analyst

Good morning. Two questions from my side, please, one on fee income and one on KYC. On fee income, very helpful discussion around the four drivers of growth for the introduction, however, the growth still 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 longer-term ambition translates into certain near-term, maybe next year or this year growth targets?

And then on KYC, you mentioned you're in discussion with the Italian judicial authorities, yet you don't take any provisions for potential fines this quarter. Is that because based on the judgement 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.

Ralph Hamers -- Chief Executive Officer

Okay. So, on fee growth, where are you falling short? I think we're falling short everywhere if you compare to our ambition because I do think that there was upside in each of these sources. So, in daily banking, clearly, a lot of the daily banking fee setting in the past has been done on the back of realizing also some income on your current accounts.

That income is actually under pressure because of the low rate environment. If you want to make that cost neutral, you'll have to move in pricing your payment packages in the different markets you offer it or introduce it as a principal because in some markets, we have not introduced fees on payment packages. That's the stream No. 1.

Stream No. 2 are around 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, 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 gain market share and we offer new investment products in different markets where we hadn't introduced investment products. That's interesting as well. Then on third-party products, the AXA joint venture is one that is only now taking off.

Although, it's only ten months ago that we agreed to it. I'm very happy with the team and the collaboration with AXA in Paris. That's basically where we have the JV. They're already producing products in order to be distributed digitally as we speak only ten months into this JV because as said, these are not products off the shelf. These are products that we really wanted to make fit for purpose to be distributed in a digital way, either through the internet or mobile. So, there, I have real ambitions and expectations. So, that's one.

On the other side, when I did my introduction, the fee and commission line that we show is a combination of fees that come in and fees that we pay away. A big chunk of those, as I had indicated, if you compare to where we were a year ago in Belgium and where we are right now, that has actually increased. Now, that effect will be neutralized going forward because this is the level to be expected. In Germany, we see real fee increases and that's a really promising indicator as well because that's a market where we have been really careful always about inducing fees.

Then last not least, which is the wholesale banking environment -- you know that our wholesale banking strategy is to be very customer-focused and looking at cross-buy as much as we do on the retail side. We are building up capabilities in what we call strategic products, which are more the fee-driven products. We had a good quarter in corporate finance and we do expect good quarters depending on how the markets develop also in, for example, sustainability as we have shown this quarter as well.

So, honestly, it is really across the board and it is really an area that has a lot of focus from our side. So, that's why I indicated that this quarter, you don't see the growth and maybe in 2019, given some of the negative fee income effect coming through, you will not see the 5% to 10%, but overall, we stand by that ambition. We do expect this to grow to the 20% part of our total income.

On KYC and Italy, I'm giving the floor to Steven.

Steven Rijswijk -- Chief Risk Officer

Thank you, Adrian. In line with our policy, we will not disclose our interactions that we have with the supervisors, regulators, or judiciary authorities. Now, in 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 comments on individual provisions unless they are material, then we need to disclose, which at this point in time is not the case.


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

Farquhar Murray -- Autonomous Research -- Analyst

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 full year '20, full year '21 or should we be thinking more toward the 20% revenue ambition in aggregate proportion with some slower growth.

Then secondly, operational risk weighted assets went up 6.2 billion euros Q on Q. I just wondered how much of that we might regard as incremental to the Basel IV RWA previous indication and how much you might regard as fronting. I ask that because I thought it might have moderated the Basel IV inflation, but you still seem to be indicating 15% to 18% instead. Thanks.

Ralph Hamers -- Chief Executive Officer

Thanks for the fee income question. So, as I said, I think on the positive side of generating fee income, I'm confident in 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. Therefore, it is positive to the fee income line.

So, some of those effects are not necessarily negative in terms of the total 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 to the fees that were introduced or can increase or the new services, I think for 2020, we believe the 5% to 10% ambition can stay.

Steven Rijswijk -- Chief Risk Officer

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


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

Nick Davey -- Redburn -- Analyst

Good morning, everyone. Two questions, please, the first one on credit demand -- if I could just ask you to talk about anything you're seeing changing, particularly in the Netherlands and Germany, the Netherlands just on the back of the high pace of house price growth. It seems now it's of negative equity. I'm just wondering whether there's any change in signs or outlook on credit demand there. Then in Germany, it seems that your pace of growth is slowing where the system is accelerating. So, if you could make any comments about that apparent slowing down of your share.

Then the second question on impairments. It's a bit unfashionable to find any value in low impairments these days, but it has been, I guess, two and a half years of these very low levels of impairment. You've now said the second half of the year 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 meaningful environment you'd have to see to see a meaningful step up in risk costs. Thank you.

Ralph Hamers -- Chief Executive Officer

Thank you, Nick. So, on credit demand, you 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 a euro zone overall, but it is, as most of the economies, also struggling versus last year. Now, if you really dive deep into it, you see the business lending continuing. There's 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 OK, I guess.

On the mortgage side, there are many different effects here. The underlying trend for the housing market should always be the supply and demand. 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 filter through into your mortgage production and how does that affect your income on mortgages?

Now, there is a different effect because on one side, you see that people are increasingly repaying their mortgages because the structures that we offer are not interest only for 100% anymore. So, people have to start repaying on the mortgages. So, that from a total book perspective has a different effect on your P&L. We do, as you can see, expect a continued growth there.

In Germany, I think the underlying has always been pretty conservative. I think Germans are pretty conservative in how the housing market develops. There is quite some competition from banks because of the low rate environment to produce whatever they can produce. We're not in that game. That's just where we are not. So, we would rather benefit from distributing mortgages that go in somebody else's balance sheet at a rate that we don't like and get a fee for it through Interhyp than having the production at a too low price in our books.

Where we can pick up, 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 in some parts of the market and we're happy to be a distributor of the banks there. On LLPs, I'll give the floor to Steven.

Steven Rijswijk -- Chief Risk Officer

Thanks, Nick. What we currently remain to see is that the NPL levels remain low and the forbearance levels are relatively low and remain low. The watchlist levels have been low and remain low. So, we continue to see stability at the different stages of the performing to the gradually less to nonperforming loans. In that sense, that is a good sign.

If you look at macroeconomic factors, still growth in the wider economic context in the markets in which we're operating, albeit that the pace is deteriorating in some markets but also still there, we 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, still, a good sign.

Now, at the same point, I've 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 low. In that sense, we have set caps on the leverage portfolio, on the real estate portfolio. We remain prudent in mortgage portfolios, especially not only in pricing that Ralph just talked about, but also, for example, in the Netherlands, what you do see there also with the regulation changing is that even longer tenors have shorter durations given the more amortizing nature of these loans.

So, that also helps in the risk base of this portfolio. When it comes to diversification of loans, for example, in the consumer loan portfolio, we're growing relatively quickly on the total portfolio of consumer loans as currently, which is about 25 million euros, is relatively limited. Whenever we grow, we do it in small steps so that we can learn how the vintages behave themselves over the years. That's what I can say about it for now. I heard you say can we be brave -- I really would like to brave, but I'm really paid to be prudent.


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

Stefan Nedialkov -- Citigroup -- Analyst

Hi, guys. Good morning. Two questions on my side -- Ralph, you were talking about mortgage spreads on the front book being higher than the back book. Trying to understand this a little bit better, obviously, rates are coming down faster than yields and 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? That's the first question.

The second question is on costs. You guys keep on talking about growth opportunities in retail and wholesale challenge in growth markets. It's always sounded a little bit abstract to me. Obviously, we are growing a long book, etc. What are the growth initiatives that you have in mind, really? What are the top three growth things that are driving cost growth over the next couple of years?

Ralph Hamers -- Chief Executive Officer

Thank you. So, on the first one, the mortgage spreads -- 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. 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. Then we'd rather generate the capital by freeing it up because we're not growing our loan book and see how we return in a different way than putting it at work at below the cost of capital rate. It's not what we want to do.

So, on mortgage spreads, we're clearly looking at how we comprise for return on capital. As you know, the Basel impact on mortgages is there and therefore, 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 maybe not there yet. But you know they will be on your books the moment the Basel will be applicable. That's why we are cautious there and working repricing.

The C&G opportunities -- the top growth is 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. That's where you will see some cost pressure in C&G continuing if you grow the business.

That's why we look at these plans from a positive perspective. So, that's why we make judgment on whether we approve plans or not if we feel that within the timeframe that we find 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. Clearly, you know that, for example, in Germany, where we're large and in Spain where we're large and Poland and Romania, we're really growing fast and doing a real good job.


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

Omar Fall -- Barclays -- Analyst

Good morning. Sorry to come back to Stefan's question on front book margins improving everywhere in mortgages, etc., excluding what you are doing specifically in terms of not participating in low returning assets, are you actually seeing contractual customer rates in general going higher in your core markets or is it just the funding costs, rates coming down and reflected in FTP? Why do you think this time it's different and contractual rates aren't simply delayed in catching up with low rates as we've seen several times in the last few years? Is it that you think there's been a general epiphany from the competition in your core markets that they should act more reasonably?

Then the second question would just be the CET1 ratios perhaps not progressing 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. Could you just remind us of what levers you'd have to pull in terms of inorganic capital generation beyond the 70 bps of management litigating actions that I think you'd find in the past. Would you be willing to [inaudible] or are there any other areas we could look at? Where does adjusting the dividends fit in those priorities? Thank you.

Tanate Phutrakul -- Chief Financial Officer

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? The fact that the compression and 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 compensate for that from a pricing perspective.

That's why we believe in some of our big whole markets where we have big market share where the market is consolidated, that pricing impact is there. I think we lead the way as ING in some of these markets to make sure 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.

To give you an example in two countries where we're in different cycles -- if you look at the margin improvement in Belgium, you would expect margin in Belgium. That's not happening, partly because of the pricing discipline that we see from ING in that particular market. 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 reprice on saving gets less and less over time.

Ralph Hamers -- Chief Executive Officer

Your question on CET1, there will always be inorganic levers to pull, but we don't see the need for them. 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 reviews of models.

So, the guidance that we gave two years ago, this would lead to an increase of 15% to 18%, and with 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 timeframe, we can easily manage the capital situation. I'm not sure where your question is coming from, but there will always be inorganic steps you can do, but we don't think we need them.

Omar Fall -- Barclays -- Analyst

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

Ralph Hamers -- Chief Executive Officer

Yeah. Then I have to go into kind of the portfolio in all of that, which is something that we generally stay away from for now. Everything is strategic until it's not strategic. I think that is what people intend to say. That is for us as well. Whatever is in our portfolio is what we support until we feel we shouldn't support it anymore. That's where we stand. Thank you.


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

Johan Ekblom -- UBS -- Analyst

Thank you. Can we just come back to the net interest income? A couple of questions there -- first of all, in terms of the replication portfolio, should we think of maturities of swaps on your balance sheet as being pretty evenly distributed over time or are there any concentrated maturities over the next 18 months or so? That's the first question. The second question is just on pairings, if we get pairing 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? If not, if you can at least confirm how much money you have at the ECB deposit facility as of the end of June.

Then finally, coming back on the comments around mortgage margins. 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.

Ralph Hamers -- Chief Executive Officer

So, Johan, thanks. On the latter one, I'm going to ask you to have a call 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 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 50 billion euros at central banks. The vast majority is at the ECB. That's where we are. I don't know how their program 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 and 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 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 changes 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. 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. 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.

I think at this moment, we'll just have to look at how can you move back to a normal environment. 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 demand, but a decrease in confidence with consumers about their financial future and their saving more. It's not working. NII, Tanate?

Tanate Phutrakul -- Chief Financial Officer

So, just on that question, I think we don't really have any distribution from that perspective. We do 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. But overall, I think as these investments roll off and they are replaced, I think you just ese a more uniform steady compression or pressure on our NII, which as discussed before, we try to compensate on the asset side.


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

Giulia Miotto -- Morgan Stanley -- Analyst

Hi, good morning. A couple of questions from my side as well -- I just want to clarify something on fees. So, we heard there is 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 this is the case. The basis for my question is I would think in mature markets like Belgium, Netherlands, we could still see some fee pressure, given more transparency and recent regulation.

Then the second question on slide five, which is a very interesting disclosure on Interhyp -- I was wondering how much fees do you make out of this platform? Is that most of your fees in Germany? Just some indication. Thank you.

Ralph Hamers -- Chief Executive Officer

Thank you. So, on the negative fees in Belgium, why would 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 are commissions that you pay away to brokers for bringing in business to the bank. Therefore, if they may increase in the future, it means that there are good commercial activities happening through these branches. That's one thing.

On the other side, 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 that will be in the numbers and then you can continue to see further growth if we are able to charge more fees in Belgium. That's one.

Generally, I think that fee pressure in the Benelux, I would see where that would come from a pressure perspective, I would think that also in the Benelux, the introduction of additional products or looking at the cost of some of the activities that we offer to our clients that would normally be paid for through the rate environment, some of that will need to be covered. 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 move digital, some of that will activity also happen in the Benelux.

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 their part of the 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 fees to them and therefore it will neutralize that effect, but then we will have a good commercial activity on our balance sheet. That's where we are.


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

Kiri Vijayarajah -- HSBC -- Analyst

Yes. Good morning. Thanks for taking my questions. Firstly, could I just come back to that Belgium fee and commission question as more kind of a short-term question? When I looked last year, it was quite a seasonal drop-off from the first half to the second half. Should we assume there was something similar this year or was last year not really a good benchmark because of all the restructuring that was going on in Belgium?

And the second question is more kind of a high-level question on Germany and how you see that market evolving. On the one hand, you're seeing the slowing macro impact on exporters, but on the other hand, the listed banks are doing some deep restructuring at the moment. So, net-net, how do you see that playing out for ING Germany over the next two to three years, please? Thank you.

Ralph Hamers -- Chief Executive Officer

Thank you, Kiri. I will take the German question and I will give the Belgium question to Tanate because he was there. So, Tanate, Belgium?

Tanate Phutrakul -- Chief Financial Officer

So, just to give you a sense of the transformation in Belgium, prior to our restructuring in 2017 and 2018, we have predominately owned branches -- so, ING operated 70% of the branches ourselves and 30% with these agents where we pay these negative fees, right? So, 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, these are the dynamics that played over the course of 2018. 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, 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. 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. 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 call normalized run rate.

Ralph Hamers -- Chief Executive Officer

Then on Germany, I can do this in a minute or 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, is 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.

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. So, they keep coming in. They keep coming to us. 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. That is influencing the market dynamics. Therefore, you see fierce competition sometimes in certain markets if it comes to pricing. But nevertheless, we firmly believe in a focus on the Germany market that with most of the banks going through a transformation, they will be a little bit more inward looking, they will not be as quick in improving the experience to their customers.

They may make rational moves on pricing of some of the products just to get through the transformation period for them. Having said that, we have a strong brand. We keep focus on that experience and we're not competing on price, as the others are. Nevertheless, we get more than 800 primary customers a day.


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

Jean-Pierre Lambert -- KBW -- Managing Director

Good morning. Two questions, please -- the first one 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 you're waiting for or are you already taking actions? Any sense of timing of the mitigation efforts?

The second question is, again, on timing, but this time for the decommissioning of the Belgian IT, there is some interdependencies with various modules and basically, it has been postponed 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.

Steven Rijswijk -- Chief Risk Officer

Thank you, Jean-Pierre. 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 weight or a rebalancing of portfolios and the diversification and therefore an optimal mix into 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.

Ralph Hamers -- Chief Executive Officer

Jean-Pierre, on your questions around Belgium IT, yes and no is the answer. No, it's not postponed because you know 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, working as ING agents partially as well. So, that integration is done. The decommissioning of those systems of Record Bank are to happen in the next two quarters 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. There is an acceleration on one side and a delay on the other side. The acceleration is happening in terms of offering the one app and the one web environment to all Belgium clients.

A couple of months ago, we took the decision to ensure that our Belgium 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.

You know that the one app is actually developed between the Netherlands and Germany. The one app that has been developed there that already has some 17 million customers on it will actually be rolled out into Belgium. 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 will be decommissioned, which is that the way the agents and branches are supported from the IT perspective has also been rolled out into Belgium and there was about 50% of them working on it right now. We're looking at how that develops and how it helps them. That will continue then as well.

So, rather than -- this is what I tried to explain last time -- rather than kind of go to a big bang and everything is done and now we've done everything, we actually are looking at it from the front to back and looking at how can we wow the customer having a much better environment for them to transact with us digitally? How can we support the branches and the agents with having the right information in order to serve our clients better?

Once you have that, you can take out those systems. Then you roll it back and you will migrate products. So, there is a change there. It will affect the timing of a full decommissioning, absolutely. But it will also help us to continue our commercial momentum. That is basically the trade off that we made when we took the decision. I hope that helps.

Jean-Pierre Lambert -- KBW -- Managing Director

Yes, thank you. Just to come back on the mitigation -- just to clarify to make sure, the 15% to 18% are after mitigation?

Steven Rijswijk -- Chief Risk Officer

No, that's before mitigation.

Jean-Pierre Lambert -- KBW -- Managing Director

Very good. Thank you.


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

Jason Kalamboussis -- KBC Securities -- Analyst

Good morning. Sorry to come back quickly on Belgium on a couple of things. The one is the commissioning, the Record Bank the second half, that's very useful, thanks for that. Should we assume that the decommissioning, the large decommissioning would not be a 2020 but more a 2021 event, if not '22?

Also, on the fees, lots has been said about this, but when I'm looking at the quarter, 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 98 million euros, last year, it was 106 million euros and it doesn't look good to material. If you could help what I'm missing on this one.

The other question was more on the cost side -- if you look at your cost [inaudible], you say that you have dropped the target and it's something you'd like to look at but not how you run the business, but if we look at the one-offs in the revenue side and we take them out, your cost is around 54%, even consensus is above 55%. So, it looks like we are going in 2019 north of 2018. Looking at that and looking at the increase in cost, the cost inflation, which we continue in Q3, Q4 from KYC-CLA in the Netherlands, do you find that at a certain point, you would need to take some more actions on the cost efficiency side?

Tanate Phutrakul -- Chief Financial Officer

Maybe I'll address a bit the Belgian 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 or transformation that we expect is from the end of 2018 to 2021, a reduction of staff, some of which are IT staff or 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 timeframe. It's not going to be in 2020. Okay?

And then on the fee income, I suppose there's a mix there. 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. 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 Belgian market, not only for ING and that is sometimes quite volatile and seasonal, depending on when investors or retail investors make their investment.

I think if you look at numbers in Q1, the investment by retail investor is 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 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. Since Q4 2017, the full quarter increase in our client balances is somewhere around 6.3%, 6.4%, where our rolling average on cost increase is more like 2.9%. So, you see that operating leverage being there.

Jason Kalamboussis -- KBC Securities -- Analyst

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

Ralph Hamers -- Chief Executive Officer

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 officer you. 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 have to cut off at 11:00. So, let's continue.


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

Alicia Chung -- Exane BNP Paribas -- Analyst

Good morning, everyone. Two quick questions from me -- firstly, what impact do you expect on capital from regulatory guidelines? Specifically, I'm talking about calendar provisioning. Secondly, is it fair to assume that your go to equity tier one target will increase from 13.5% to 13.6% or 13.7% due to the activation of the counter-cyclical capital buffers in Belgium and Germany over the last quarter? If I look at your 13.5% go to ratio and I see a minimum of that 1% that only really gives you a management buffer today of 75 bps, I'd be surprised if you'd want to eat into that for your counter-cyclical capital buffer. Thank you.

Steven Rijswijk -- Chief Risk Officer

Thanks, Alicia. Regarding the NPE backstop, what you see is that we are a low NPE 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 guidelines has an element for unsecured loans that starts running after two years being nonperforming and for secured loans starts after seven years.

Now, also, the way that we are providing for and dealing with a write-off of our books, impact for ING is relatively benign and manageable and we'll have not a significant impact on our CET1.

With regard to the 13.5%, yes, we are seeing the counter-cyclical buffers coming in for Belgium and Germany. They have a number of basis points, the impact on 12-month rolling basis. We are looking at 13.5% as an ambition, not as an absolute strict target and then we compare that to the requirement that we didn't have, which is currently at 11.8% and then we do some stress testing around it to see whether that's before or it's efficiently strong through the cycle and we do not see a reason with these buffers coming in to change that ambition.

Alicia Chung -- Exane BNP Paribas -- Analyst

Thank you. If you don't mind, just one quick follow-up on the calendar provisioning -- thanks for your answer, it was very clear -- but just on your coverage ratio of your corporate loans, which is less than some of your peers, could you give some color on what the duration of your MPs are there? Thank you.

Steven Rijswijk -- Chief Risk Officer

We don't give color on the -- I understand the question. The reason why our coverage ratio on our [inaudible] could be lower is because all of our loans in our corporate book are investment grade or high investment grade loans and that's limits it. What I could say is that in terms of the duration, the duration in wholesale banking is relatively short.


Next question is from Mr. Jose Coll, Santander. Go ahead, please. Your line is open.

Jose Coll -- Santander -- Analyst

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, focusing on Challenger and Growth Markets. But we still see a high cost of income. When will you start seeing a significant progress there toward a more adequate cost of income for what a digital bank should be and also what level you think that should be?

My second question is regarding your market share in mortgage lending in Spain, which has been very strong year to date. I was wondering if you could comment on what the drivers of this strong growth have been. Are you offering higher [inaudible], longer terms, more agents, a combination, I don't know? If you could also comment on how this growth is being financed, is it deposits in Spain or is it intergroup lending? Thank you.

Ralph Hamers -- Chief Executive Officer

Thank you, Jose. On the first one, all business units are to drive the reduction in cost income ratio. I'll just go back to a recipe that you know very well, which is that in market leaders, given the pressure on income, we expect cost to really go down and with that to improve cost to income ratio. In C&G, we would allow cost to go up if the income is expected to go up as well and with that improve the cost to income ratio.

And in wholesale banking, we expect the income to be flattish or little improvement and therefore, costs should be flat or decrease. So, all of those units are to contribute to the reduction in cost income ratio. Having said that, again, we really look at operating leverage as the way to measure the effect of digitization on our business as cost income has an income component, which is largely influenced by the rate environment that we are active in. Having more volumes through the system leads generally to more cost and that is exactly where the efficiency needs to come and therefore the operating leverage is one that we look at that.

The other cost component that we have that seems to increase is what we call regulatory cost, which as you know for ING is close to a billion. We have absorbed all of that over the last couple of years. In terms of the market share of mortgages in Spain, there were two effects of that. One is that we really look 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 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. That's a real change in the process. Then the overall commercial process, as you may know, 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'll have one more question and then we'll end the call.


The final question is from Mr. Marcell Houben, Credit Suisse. Go ahead, please, sir.

Marcell Houben -- Credit Suisse -- Analyst

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

Ralph Hamers -- Chief Executive Officer

Yeah, Marcell, on the last one, clearly, we accept always that you can't charge fees for something that doesn't add value or is seen as something that is important to clients. In those areas where we have never charged fees, we have to make it very clear to our customers but also new customers what they pay for.

You have to make it very transparent. So, 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. Then I think we can still introduce them with our positioning as a bank that is clear and easy and delivers on a differentiating experience. I think we can do it. We're piloting in different places to see how that would work.

On the KYC costs, honestly, we do think costs will come off a bit 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 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 position is, that despite our focus on improving KYC and the enhancement program, 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 offer those in a reprice environment without working on the risk appetite. We will not compromise on that side. That's positive as well.

On the fee side, I know how you look at this. I think you have to dive a little bit deeper into this to get a sense of where this is. We see good fee growth in Germany, good fee growth in Belgium as well. We see ample opportunity for it in the future with the recipes that I laid out. In the wholesale banking side, fee growth is very much dependent on the activities in the markets. Let's see how the markets develop.

With that, thanks a lot for your interest and for your questions. Let's stay in touch and have a good day. Thanks.

Duration: 120 minutes

Call participants:

Ralph Hamers -- Chief Executive Officer

Tanate Phutrakul -- Chief Financial Officer

Steven Rijswijk -- Chief Risk Officer

Pawel Dziedzic -- Goldman Sachs -- Analyst

Robin van den Broek -- Mediobanca -- Analyst

Benoit Petrarque -- Kepler Cheuvreux -- Analyst

Adrian Cighi -- RBC Capital Markets -- Analyst

Farquhar Murray -- Autonomous Research -- Analyst

Nick Davey -- Redburn -- Analyst

Stefan Nedialkov -- Citigroup -- Analyst

Omar Fall -- Barclays -- Analyst

Johan Ekblom -- UBS -- Analyst

Giulia Miotto -- Morgan Stanley -- Analyst

Kiri Vijayarajah -- HSBC -- Analyst

Jean-Pierre Lambert -- KBW -- Managing Director

Jason Kalamboussis -- KBC Securities -- Analyst

Alicia Chung -- Exane BNP Paribas -- Analyst

Jose Coll -- Santander -- Analyst

Marcell Houben -- Credit Suisse -- Analyst

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