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ING Group, N.V (NYSE:ING)
Q3 2019 Earnings Call
Oct 31, 2019, 4:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. This is Anita Keelan [Phonetic] welcoming you to ING's Third 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 a 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 solicitation of an offer to buy any securities.

Good morning, Ralph. Over to you.

Ralph Hamers -- Chief Executive Officer

Thank you very much. Good morning, everyone. Welcome to the third quarter 2019 results call. As always, I'll take you through the presentation. I'll give you some kind of highlights per slide and Tanate, our CFO and Steven, our CRO are here with me to answer some questions.

Going through the key points. We posted a net profit of more than EUR1.3 billion in the third quarter, leading to a four-quarter rolling underlying return on equity of 10.3%. The negative interest rate environment continues to be a challenge, but as in the previous quarter, we have been able to counter the resulting pressure on income. In retail, we retained real good commercial momentum with further growth of our primary customer base by 165,000 and now exceeding 13 million. This basically means that more than one-third of our clients see as their main bank, as their primary bank, which for digital bank is a real testimony to our strategy.

We also achieved loan growth in the retail businesses, specifically in mortgages, where we continue to improve margins in almost all of our countries. In the wholesale banking area, our lending business declined this quarter, due to some external factors, such as the oil price and some incidental large repayments, but I'll discuss that with you later. Overall, between wholesale and retail, the customer lending went down by EUR1 billion.

Now, the loan growth at retail, at the resilient margins, as indicated, combined with very good fee growth, countered the margin pressure on customer deposits, as well as the higher costs related to KYC. On the expenses, besides the increase in regulatory costs, which is the real cash out, we saw an increase in legal provisions. Also, the KYC enhancement program continues to weigh our cost. The CET1 ratio improved to 14.6%. However, we do expect to see effects on capital from banking regulation and reviews in the coming quarters.

As our key priority, we keep taking steps to counter financial and economic crime. We have further strengthened our organization. As you can expect from us, as well as our governance related to KYC. We do see again the cost of KYC going up for this quarter. And as you can expect from us, we are using innovation and technology to make the management of our non-financial risk more efficient and even more important, more effective.

Now, turning to the commercial momentum slide. You see continued commercial momentum in this slide. Customer -- primary customer base went up again to 13.1 million, specifically growth in Germany, Australia, Poland, Romania, that's where we saw the most growth in primary customers.

In terms of net promoter score, as you know, a very important component for us. We ranked number one in six out of the 13 retail markets.

Next to the core lending growth. We saw growth in retail, amounting to EUE3.6 billion, wholesale EUE4.6 billion negative and that negative -- so the decline in Wholesale Banking was mainly driven by oil price developments. As you remember, we also saw that in one of the quarters last year. Furthermore, syndicated loan activity remains subdued, given the favorable bond market, which also led to exceptionally high loan repayments in the third quarter in our book. We don't think this decline is setting a trend for the quarters' to come. So we maintain our ambition of 3.3% to 4% overall loan growth with a slightly lower loan growth on the Wholesale Banking 2% to 3%.

To remind you, last year we were the first to signal that due to market dynamics, loan growth in Wholesale Banking could slow out. It was exactly this quarter when I mentioned that first. We were putting caps already then at leveraged loans, as well as real estate finance. We also indicated to you that in view of some of the capital requirements and our own ambitions around that, we would focus on repricing on the wholesale lending side. So you see some of that coming through as well in this now.

Customer deposits grew by EUR4.4 billion, that's inline with general market trend in the Eurozone countries, where we do not see the effect of increased funding due to low interest rates. We see rather the opposite. And not to repeat myself, from last quarter, but balances on customer deposits are increasing as loan demand is and was already being met and market uncertainties and cost savings throughout net spending. This is -- what we also see is the underlying growth on cost of deposits for us is also related to clearly getting more and more customers and doing more with us on a current account basis as well.

Turning to Slide four. As indicated in the key points is, one of the key priorities, if not, the key priority, we continue to take steps to counter financial and economic crime by improving our management of non-financial risk. We started to roll-out of our global KYC enhancement program in 2017. We're implementing that across all the different countries in which we are present. As part of this program, we have both reinforced the way we governance this area, as well as the pure strengthening of the KYC organization in terms of the number, as well as the quality of the people.

As you can expect from us, we also keep apply technology and our innovation skills to develop tools, which increased the accuracy and the efficiency of the management of our non-financial risk. Just to mention a couple of examples, and you see them here on the slide. In the Netherlands, a tool was created to improve to file enhancement process for SME customers, and that would support our KYC centers by digitalizing the data need and the feed really into the transaction analysis. And that is basically moving away from a cumbersome manual process to an automated one, saving time, being more efficient, but also reducing the risk of error, so more effective as well.

Now, onto Italy. I'm sure you will want to have an update there. We continue to implement our program there. We are living up to the program that we presented on the improvements that were required by the Banca D'Italia. In the meantime, we will continue to refrain from on-boarding new customers, but we are fully servicing and successfully servicing, I must say, the existing customer base.

As I've said before as well, banks can't do this alone. So we need to work together with other banks, but we also need to work together with law enforcement, as well as regulators. Together with our -- with four other banks in Holland, we will investigate possibilities to cooperate on transaction monitoring, for example. We believe this represents an opportunity to bind the knowledge of resources on one side and the other side to really strengthen the collective role that we have as a gatekeeper to the financial system.

Turning to the next page. As you know, every quarter we like to spend a few minutes highlighting one of our businesses. We've discussed Spain successful model before. Having built a fully-fit -- fully -- full-fledged digital bank in Spain with close to 4 million customers now and growing, growing fast. This quarter I want to actually zoom into -- on Spain, and more specifically on how we have reviewed and redeveloped, and re-calibrated our approach to mortgages and the success that we see there.

As you know, mortgages generally in advisory product, it's a challenge to successfully sell this product in a fully digital way. But the new development -- the new relationship model that we developed by ING Spain provides customers with a dedicated mortgage advisor. I think that is the key here. And that advisor supports the customer throughout the process from start to finish. At the same time, we have reviewed the process itself, and we've also improved our risk acceptance process as part of that. Not changing our risk appetite but the way you accept the risk. And so, that newly developed model with this dedicated accounting -- account manager, with this review process, with this new risk acceptance process, we've been running that model next to the old model.

And here, you see a little bit, the comparison. So when we compare the commercial results of the two models, and you see it on the right-hand side of the slide, we see that the model -- the new model is delivering really promising results, literally all over the different categories. So the number of incoming calls is really lower than for the old model, which is a cost savings in itself, and it shows the improved efficiency of the model. Also, working on the customer satisfaction side, so you can actually get a higher customer satisfaction at a lower cost. You see that here as well going up from 3.9 to 4.5 on a 5 point scale. So really, really good.

Then the conversion in the whole process is almost twice as high. So the effectiveness of the whole process and clearly, supported by the personal approach and having this dedicated relationship manager throughout the process, leading to a much higher conversion. And all of that leading to a new production year-to-date that is 20% higher. And with that, leading to a 1.5% market share increase. So a digital market share of 1.5%, and maybe to render off us a success story, the new production is also being produced at higher margins.

So basically, what it is from a cost perspective and efficiency perspective, customer satisfaction perspective, conversion perspective, effectiveness -- sales effectiveness, as well as from a margin perspective and market share perspective, it's a real good example of how we'll continue to review even in a digital bank; you can have high markets as good pricing at decreasing costs. So a real success story.

Now turning to Slide 6, as you know, we have given you updates on this as well. Over the last couple of quarters, we are committed to do our part to combat climate change, and also this quarter, we've taken several actions, which reinforce this commitment. We're backing several initiatives on this one, both on a global level as well as in the Netherlands specifically, as well as our really fighting climate change. We can't do this alone; we realize that. One bank can only do so much impact you get, if you have a group of banks and therefore we're happy to see the many of the other banks are joining us in signing these initiatives.

These initiatives are the Principles for Responsible Banking that we signed in New York, but with that also putting all of that in action by starting the Collective Commitment to Climate Action, which is basically kind of a continuation of our commitment that we already kind of launched more than a year ago in the market that we would manage our lending portfolio in line with the Paris Accord on climate change. And a year ago, we did launch our own Terra approach that makes all of this measurable. You may remember, we launched that together with the two-degree investing initiative. And through that, we basically use the science base scenario per sector to see how you can actually decrease your indirect footprint per sector and how you can actually also get into a conversation with your customers in order to apply new technology in order for them to decrease their footprint and with that decreased our indirect footprint now with the commitment comes also taken the accountability and the accountability, you can only show by publishing the results of what you have set out and what you've committed to. And therefore, this quarter we released our first Terra progress report and we're proud to be the first bank to publish such a report showing climate alignment.

In addition, we've also signed an initiative together with the European Investment Bank to support large business clients in the Benelux with sustainable projects, basically financing the transition to more sustainability. But this also works on the commercial side. So clearly, our stance on this is combined with developing specific skills and capabilities. So we saw another strong quarter with 12 sustainable bonds -- sustainability bonds, 11 sustainability improvement loans, five green loans completed. Again, including some first because we're really still developing these products as highlighted in this slide.

To mention one of those transactions, Porsche is investing in its first battery electric vehicle. And have tapped the green bond market and we were a green advisor for EUR1 billion Green Schuldschein. So the first-ever Schuldschein for Porsche and also a green one. So good commercial positioning right there.

Now, turning to the results, Slide eight. The underlying pre-tax result, as you can see here, is just over EUR1.9 billion in the third quarter, that's EUR213 million below the same quarter of last year. That's, as you can see, only slightly lower on income year-on-year, which is I think the good news in all of this, but with higher expenses, specifically on the KYC side, and still relatively lower risk costs.

Now, year-on-year underlying income as a component was EUR20 million lower, reflecting the combination of higher margins or mortgages, higher fee income, and we'll certainly dive into that later. And that's offset by lower treasury-related income and the margin pressure we see on customer deposits is due to the low rate environment. So maybe a bit lower but certainly of higher quality and I think that's the good news in all of this. It's shown you a tick lower but good quality earnings here -- income here. Sequentially, underlying income was down by EUR40 million and that was fully driven by lower treasury-related income. And as you know that can always be volatile.

Turning to Slide nine. If you exclude financial markets NII, it was a bit lower just 1% year-on-year. While we clearly would rather see a growing NII and we continue to aim for that, I believe this is actually good achievement that we managed to keep an eye stable especially. Since the market rates have gone negative, you see that our model proved resilience and we're keeping the commercial momentum.

We have been able to achieve this as we continue to improve our mortgage margins increased mortgage volumes as well and that partially counts as the negative impact from margin pressure on customer deposits and the lower treasury related to NII as I mentioned earlier. Also going forward, we will continue to focus on margin improvements and loan growth we further benefits from our activities in the non-euro retail countries.

So that's also strong in our franchise and also negative rates that we can charge on our deposits for professional customers. Furthermore, the deposit tiering at the ECB, which was announced some time ago, will be or is enacted to these days. It will help as it were largely cancel out the negative rates on deposits at the ECB. On the NIM, the net interest margin, specifically; that was a slightly higher this quarter at 154 basis points; get my numbers right here, mainly driven by financial markets. Our NIM guidance and here we go again, end of the year, if on NIM is that we stay in the high the 140s, I'm aware that you and the market closely watches the NIM development. However, as we also see that some of the volatile items such as treasury and FM can impact the NIM as well as the size of the balance sheet impacts the NIM we believe it is better to look at the NII development and I know it is good.

I mean that shows real resilience and the NIM development over the last couple of quarters has shown resilience as well by the way.

Good. Then, we turn to net core lending just dive a bit deeper here. As I said, you know the net core lending decreased by EUR1 billion, driven by a EUR4.6 billion decline in core lending and wholesale banking, and increase of EUR3.6 billion in growth in retail. The decline in wholesale banking was predominantly driven by the Daily Banking & Trade Finance with the oil price development impacting the volumes in TCF. Core lending was also lower, as I mentioned, given the repayments of some of the larger loans. But we continue to grow in the lining as well. So I mean, it's not like the machine has stalled stops, on the contrary the machine is in full production, but you have these two specific effects that doesn't show a net growth, but a net decrease for the quarter.

Retail Netherlands, so turning to retail. Saw a modest growth both in mortgages, as well as other lending. In Belgium, we see continued growth of the mortgage book. However, the overall core lending was EUR0.2 billion lower, mainly related to a large institutional client that we have there. Then, retail challenges are growth markets, so the combination of Germany, but also all the other digital banks that we have and the growth -- and the ones that we have in the growth markets. We see that net core lending was up EUR2.7 billion, also largely mortgages, but also a modest increase in non-mortgage lending. So, as I earlier mentioned, the commercial momentum is still there, volume is there, new clients is there and margins is there, and that is a good combination.

Now, turning to fees, Slide 11. If you adjust for a reclassification of financial markets where the fees in both quarters, net fee and commission income increased by EUR40 million year-on-year and that's 5.8% and that's coming in at a strong EUR733 million of fee income. Now, that fee income was fully driven by Retail Banking. And so, if you would kind of make the analysis, the Retail Banking year-on-year increase is 9.4%. That's in mortgages, that's in daily banking, it's in insurance products, it's across all of the different countries. So this is really good quality commission income showing the strategy is working in launching new products and continue to grow. So it's a good sign.

If you zoom in even further you see that Germany saw particularly strong growth in fee income, recording 21% higher fee income, mainly in Interhyp, our mortgage broker. Wholesale Banking fee income adjusted for the aforementioned FM reclassification was stable. Now, sequentially, fees and retail also increased, while Wholesale Banking fees were lower, mainly due to lower lending-related fees as transaction volumes were impacted by, as earlier mentioned, oil price development.

Looking at financial markets, an okay quarter. Total income was EUR 19 million higher year-on-year. Income growth in several segments was more than offset by higher negative valuation adjustments. Sequentially though, you see that FM income improved by EUR49 million and that is because of a lower negative valuation adjustment. So the underlying business there is constant, if not growing. So that's a good news than the valuation adjustments, which have been negative for the last couple of quarters; you see them having an effect on it. But what we concentrate on is the real client-related business, and that is solid -- and that is a solid development.

Turn to the expenses, Slide 12. Excluding the regulatory cost, the expenses were down EUR20 million. So, moving down, if you compare to the second quarter of 2019, and I think that's a good result. At the same time, if you compare them to the same quarter last year, they were up EUR118 million. An important factor driving these higher cost specifically, if you look at the year-on-year KYC-related activities.

Quarterly cost increasing by some EUR50 million compared to last year and that's the enhancement program. It's the strengthening of our KYC activities across the board. Furthermore, specifically in this quarter, we took several legal provisions in the challenges and growth markets, amounting to EUR40 million, that's across several countries, various underlying reasons. We also had to absorb CLA related salary increases across the markets, where we also see the effect of generally tight labor markets and then we also had VAT refunds. So that helped us a little bit.

You can expect from us to have a continuous cost focus. We do realize that KYC costs are increasing. We call absorb those increases by the negative cost developments on the back of the earlier transformation programs. But you can expect from us that over time, we will continue to look for further efficiencies, further digitization of our operations, so that over time, these costs will be absorbed.

Now, on a quarter-over-quarter picture, results were lower driven by the combination of already we mentioned VAT, but also last quarter we had a provision in Germany, which you may remember, and then this quarter we had these higher KYC expenses and legal provisions. As you know, in the third quarter, the cash out regulatory costs, which is the right-hand side of the picture. The cash out regulatory costs in the third quarter are not the highest, but we do see an increase here, that increase is mainly due to an a digital DGS contribution and higher costs in Poland.

On a four-quarter rolling average basis to cost-to-income ratio was 55.8%, which is more or less the same as last year in the same quarter it was 55.5%. But you see that over time even with increasing cost that we are able, from an C/I perspective, to either work on the income side or continue to work on the cost side over time and we will continue to focus on that.

Turning to the risk costs, Slide 13. The third quarter, we saw the risk costs coming in at EUR276 million, that's 18 basis points of average customer lending, that's up from EUR209 million the -- in the last quarter and EUR215 million in the same quarter a year ago. It's driven by some things in the Retail Benelux and the Wholesale Banking as well. Compared to the second quarter in the Netherlands, the main driver was a change in the house price index for mortgages, which mechanically increases the LTVs and that then leads to an additional -- to an addition to the general loan loss provision. In Retail Belgium, risk costs were back to a more normalized level after a very low second quarter, and you can see that in the chart.

In Germany, we saw actually a EUR7 million net release versus EUR25 million release last quarter. That all has to do with model updates and mortgages, the EUR7 million. Other challenges and growth markets reported lower risk costs, mainly driven by Turkey and Poland if you compare quarter-on-quarter. Wholesale Banking risk costs were higher this quarter at EUR116 million, with a few non-correlated individual Stage 3 files in the Americas, Belgium, Poland. We don't see a trend here, but we can go into that in the Q&A as well with Steven there. Overall non-performing loans for ING, as measured by the Stage 3 ratio under IFRS 9 was slightly higher at 1.6%, still low. For the remainder of 2019, we continue to expect risk costs to stay well below the -- or through the cycle average of around 25 basis points of average customer lending.

Turning to capital, Slide 14, I'm almost at the end. So, hold your questions. CET1 increasing to 14.6%. Basically, we benefited from an inclusion of the EUR500 million of interim profits. Just to remind you that we reserve last year's full dividend already now in the first three quarters, limiting the profit added in this quarter, but therefore in the fourth quarter, a large part of the profit can be contributed to capital. Risk weighted assets increased by EUR1.4 billion mainly caused by model impacts as we absorb the impact related to the ECB's TRIM review Deutsche SMEs. Also the impact of a mortgage model updates in Australia, currency impacts, higher market risk weighted assets further contributed to an overall risk-weighted asset growth and that was partly get an offset by positive risk migration and the lower operational risk-weighted assets.

Now, with the 14.6%, we are still well positioned to achieve our CET1 ratio of around 13.5%. We may see risk-weighted asset inflation in the coming quarters coming from other regulatory developments, such as finalization [Phonetic] of the TRIM exercise on some of the corporate portfolios, as well as the implementation of the new definition of default that could impact CET1 levels in the coming quarters, as I said, though the magnitude and the exact timing of these risk weighted assets inflations remained uncertain.

As you can see in Slide 15. We continue to perform very well against nearly all of our financial ambitions both CET1; our leverage ratio remained well ahead of the minimum regulatory requirements. And despite the higher regulatory requirements, we continue to produce a very attractive return equity at 10.3% for the quarter. That's a four-quarter rolling average. And so, we reiterate, cost income is not how we run the business, but it's certainly remains a very important input factor for our own analysis as to where we have to improve and it's certainly also an important input factor to calculate your return on equity and we still have the ambition to over time to reach to 50% to 52%.

Our policy for 2019 on dividend is to pay a progressive dividends, like we did in the past years.

Good. So to summarize, honestly, I think in view of macro environment, the negative rate environments, we show good results. Very good results may be even on the NII in the third quarter and that leads to a net profit of EUR1,344 million. We continue to see that pressure on the interest rate environment, but we are able to offset it with continued strong commercial momentum on the retail side, both volumes and margins. We see continued commercial momentum on the increase of primary customers with 165,000 but we also see an increase in cost set besides the regulatory costs, the KYC costs and the CLA costs, that clearly, will have to absorb over time and make sure that we continue to run efficient franchise. All of that in order to delivery a handsome return of 10.3% for the quarter and that is fits in the ambition range of 10% to 12%.

CET1 ratio improved to 14.6%, well above regulatory minimums. And I said, and they were repeated, we do expect to see some effects on capital from banking regulation and reviews in the coming quarter.

And with that, let me open the line for questions.

Questions and Answers:

Operator

Ladies and gentlemen, we will start the question-and-answer session now. [Operator Instructions] In the interest of time, we kindly ask each analyst to limit yourself to two questions only.

[Operator Instructions] The first question is from Mr. Stefan Nedialkov, Citi. Go ahead, please.

Stefan Nedialkov -- Citigroup -- Analyst

Yeah. Hi, guys. Good morning. It's Stefan from Citi. Two questions on my end. Number one, are you ready to give guidance for the net interest margin for 2020?

And secondly, some press reports show that some of your shareholders are angling for M&A in Spain, specifically with much more of a traditional bank. Can you just comment what are the attractions and challenges of such an initiative and whether this is something that you could consider?

Ralph Hamers -- Chief Executive Officer

Hi, Stefan, it's Ralph. I'll give the NIM question to Tanate, I'll pick up the second question now. Yeah. As you know, we don't go into any of these comments of press and rumors around M&A. Don't expect us to do that in the future either to go into that. Our strategy, and as you see it, again this quarter, is a organic growth strategy, very much focused on delivering a differentiating client experience. And with the innovation and with the new products and even with KYC, knowing our customers even better, we can make that as much as an approval for our role as a gatekeeper, also a commercial tool, and that's what you can expect from us, focus on organic growth.

But we have said before that on M&A, we would be looking for -- if any, for teams that has specific skills, is some of the more lending products that we may not have our own skills in and then see how we can develop that or for specific technology players that's going to help us to deliver that differentiating customer experience. And I will repeat that, when in a market in which we're active as a large bank, if consolidation is happening, we will analyze whatever is happening. But this is it, nothing more, nothing less.

On NIM, Tanate?

Tanate Phutrakul -- Chief Financial Officer

Yes. Hi, Stefan. On NIM, I think we give our guidance pretty much looking forward for the next six months, where we guide now towards the 140s in terms of net interest margin. And I think the high-140s. And then I think in terms of looking at the rate, I think it can be quite volatile. I think if you look at the August curve, it was really quite bearish where we see strong recovery in September and October, that's why I think we are more comfortable guiding the net interest margin over the next six months.

Stefan Nedialkov -- Citigroup -- Analyst

Okay. So it's basically high-140s through the end of the first quarter of 2020?

Tanate Phutrakul -- Chief Financial Officer

Yes.

Stefan Nedialkov -- Citigroup -- Analyst

Okay. Thank you.

Operator

The next question is from Mr. Pawel Dziedzic, Goldman Sachs. Go ahead, please.

Pawel Dziedzic -- Goldman Sachs -- Analyst

Good morning. Two questions from me as well. The first one is on the risk-weighted inflation related to regulation of the macro prudential policies and so on that you highlighted. I completely understand that details and magnitude and timing. This is all uncertain at this point. But can you help us understand to what extent this inflation comes on top of the 15% to 18% risk-weighted asset inflation guidance that you gave in relation to Basel IV? So in other words, our goalpost for ING -- capital goalpost is moving up, or this is more a timing issue?

And the second question is somewhat related to that. It is on your dividend policy, I think you reiterated it. But we witnessed over the last two weeks the first buyback in the -- first major buyback in the Eurozone. And, of course, that captures our imagination. So, given all the uncertainty on, let's say, regulations at this point, would you be in position to review your capital policy over the next one, two years you think, and with buybacks could potentially feature into those given the flexibility they could give you over the, let's say, progressive dividend growth policy and obviously your current valuations? Thank you.

Ralph Hamers -- Chief Executive Officer

Yeah. Thank you, Pawel. The risk of the inflation will be taken about Steven. So on the dividend policy, we had a policy couple of years ago. It's a progressive policy. We feel comfortable with it as we speak. We keep generating capital every quarter and we continue to look at the -- how we could manage that capital; do we manage it to support growth, do we manage it in order to support our capital buffers or do we manage it in order to to pay dividends. That is how we can play this. Over time, we'll have to see and that's what Steven will certainly feel in as to what risk rate of inflation will bring. But if we would come into a situation where we feel as comfortable, we will always look at a distributing capital to the shareholders. But again, you know, is the three purposes that we want to fulfill with capital generation it is buffers or in tackling risk weighted asset inflation. It is growth and it is capital return and not ruling out any additional return above the policy. But give what we're looking at for the call of next couple of quarters. I'll give the floor to Steven.

Steven van Rijswijk -- Chief Risk Officer

Yes, thank you. So, indeed, how we may expect some impact on the finalization of the TRIM exercises and the year; the definition of default inclusion in the new standards of the models that we need to apply of the ECB to an extent that is a prelude to Basel IV, the extent to which we will only know in more detail once we have received a final letters, but at this point in time, we remain comfortable also given the current capital ratio that we are at with 14.3% common equity Tier 1 to maintain our ambition of 13.5%.

Pawel Dziedzic -- Goldman Sachs -- Analyst

Thank you very much. I think 13.5% is clear, but is 15% to 18% risk-weighted asset inflation still an accurate guidance over the next years? I think that was the --?

Steven van Rijswijk -- Chief Risk Officer

On Basel IV, it is and we will need to see what the impact is on the TRIM and the definition of default but on Basel IV, so comfortable with that number.

Pawel Dziedzic -- Goldman Sachs -- Analyst

And overall, do you believe that this could be higher, given the new initiatives? Apologies for drilling into this.

Steven van Rijswijk -- Chief Risk Officer

I repeat myself in saying that we need to wait for the final letters to see the total and final impact.

Pawel Dziedzic -- Goldman Sachs -- Analyst

Okay, very clear. Thank you.

Operator

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

Robin van den Broek -- Mediobanca -- Analyst

Yes. Good morning, everybody. Thank you for taking my questions. My first question is a bit digging into the margin dynamics. You mentioned during the pre-earnings call that you expect to see some pressure on generalize -- general lending on the back of [Indecipherable] having better conditions, more liquidity coming to the market, well demand according to ECB data, it seems to be dropping off a bit. I presume that that pressure has not really hit your book yet and it is more likely to come early stage next year. How is that factored into your guidance? Is that basically fully offset by the euro swaps bounce we've seen over the last quarter? That's the first question.

And the second question is a bit on costs. I appreciate that you've set your cost savings from the restructuring plan are more back-end loaded than initially foreseen. But could you give us an update on where we stand? I mean, according to the program, you would reach accumulated savings of EUR550 million by the end of 2019 going to EUR700 million by the end of 2020. Could you give an update on where we stand on that, please? Thank you.

Ralph Hamers -- Chief Executive Officer

Yeah. So, Robin, on the -- so on -- basically the dynamics in loan growth and whether that's more the market dynamic where at the ECB is kind of hinting at or our own dynamic. Whatever the ECB is hinting at, we don't see that necessarily. I can't really kind of come to that conclusion from how the lending developed in our own loan book because it's really a combination of our own strict repricing as we have and as in the beginning of the year, specifically in the wholesale area, we felt that given where our capital levels are going, we have to make our returns and therefore, we have our return on equity hurdles that we apply there, at least to some fewer deals on one side.

At the same time, that doesn't mean there is less demand. Same with the repayments that we've seen this specific quarter. The fact that some clients tap the bond markets rather than the banking markets. It doesn't mean there is no demand. So that's another dynamic there as well. So I wouldn't come to the conclusion, honestly, I would turn around more from our perspective. We don't see a trend yet, if there is one coming -- that there is going to be lower demand. You know that we have exposure across the whole globe and across the globe -- whole globe we are still growing, also in the wholesale banking side. Even with this quarter, we're just short of the 2% growth on an annualized basis. We continue to guide that, although the wholesale banking will not grow as much as retail banking, we do expect it to grow 2% to 3% continuing. It's not a target because I don't like targets on the lending side. It's certainly an ambition, but at the right price. So that's more or less on that side.

Now on the cost savings, actually the transformation programs are delivering the cost savings actually we had a review of those yesterday once again, but some of these cost the transformation programs deliver these cost savings as specifically the Netherlands and Belgium program, maybe a little bit later, but on the other side, we also see some of these transformation programs will deliver more savings, and so all in all, we're not that much behind on delivering on the savings as we speak, but we have specifically for the Netherlands and Belgium for the unique program.

We have announced a change in tactics as per our Investor Relations day in which we basically said that given where technology is going and given the opportunity that the technology is providing us we're at the front of the business; can be connected to the mid and if you want to call it like that where the product set that you were your accounting sits or your account management sits through APIs that we felt it was better to disconnect a decouple the migration of clients in one go.

The Belgium clients all due to the systems and one go with products and accounts and everything in order to benefit from these digital channels but connect the retail banking clients in Belgium directly all these channels and we're in the midst of that and with that, but we feel we can they have better commercial momentum. So we are currently running a pilot with about 1,000 retail clients in Belgium, as we speak were they experience the digital channels general where we introduce digital channels. We see the operating going up from just below 3% to more than 4.5%, so these are real good experiences that we're providing. We want the Belgium clients to benefit from that. We do expect that all clients will be migrating towards that front end by the end of 2020 and that will continue with that the commercial momentum that we currently see in Belgium, because if you look at the Belgium numbers, although there is a bit of an uptick on cost, the income component is pretty impressive, given where we are on the rate environment. And so, that's a little bit what I can say from you. Overall, as I've said before, even in markets where we are low in contingent [Phonetic] ratio like in Germany, but if we do see pockets where we can improve from an efficiency perspective, putting digitalization in, we will do so, and you can expect it from us as a digital payer. Thank you.

Robin van den Broek -- Mediobanca -- Analyst

And then maybe one follow-up. So your underlying cost base, is it fair to assume that your restructuring program basically can -- you basically said that KYC is not fully -- it's not going to be fully captured, but at least the other factors of CLA increases and stuff like that, is that basically captured by the program?

Ralph Hamers -- Chief Executive Officer

Absolutely. Absolutely. And over time even the KYC costs will be captured like we have been able to capture the EUR1 billion of cash out regulatory costs over the last five years. But you can't take EUR1 billion on the chin and compensate for it in one quarter. But we do this over time continuous reviewing, what can do -- what can we do better, look at new technology, as I said, which does make us change tactics in some of these transformation programs because new technology is available and we'll certainly apply that where we feel that it can improve both on customer experience, as well as an efficiency.

Robin van den Broek -- Mediobanca -- Analyst

Thank you very much. That's very helpful.

Operator

The next question is from Mr. Johan Ekblom, UBS. Go ahead, please.

Johan Ekblom -- UBS -- Analyst

Thank you very much. Just one question from me, please. Could you talk a little bit about the development of mortgage margins? I think you mentioned that mortgage margins were up in most markets. And, I guess, a big -- with the biggest driver of that has been the falling long bond yields, which as you also mentioned, have rebounded somewhat. If I look at pricing in the Dutch market, for example, we can see pricing coming down still with a biggest spread to long bond yields than what we saw six months ago, but the direction is clearly less positive than what we saw in Q3. So how should we think about the potential impact of improved retail margins I think Group level for the next couple of quarters?

Ralph Hamers -- Chief Executive Officer

Tanate?

Tanate Phutrakul -- Chief Financial Officer

Okay. Thank you very much, Johan. I think overall, you -- we look at basically product margin and we split that through basically use of the FTP, right? And with the negative interest rate that we have seen from the ECB, basically the funding costs for our lending business has dropped quite dramatically because of that. Having said that, I think if we look through pretty much all of our geographies, we do not pass on that benefit to our customers, right, which means our product margin, particularly on the front book you see improvements in margin. Specifically, what you talked about in the Netherlands, for example, indeed we see some pricing competition coming in September, where absolute pricing is under pressure but I think overall, the evolution over the months has been actually quite positive. We do see absolute price improvement in Belgium coming into July and August, moderating in September and in one of the more competitive market like Germany, we also see product margin improvement there as well.

Johan Ekblom -- UBS -- Analyst

And then maybe just a follow-up on that, I mean, could you comment on how big is the different kind of front versus back book now versus when we spoke after Q2, because I guess at that point, they would have been at kind of the peak differential given where rates?

Tanate Phutrakul -- Chief Financial Officer

I don't think we basically give that information, but I think typically mortgage pipeline from origination to actually being booked is depending on markets anywhere from three months to six months. So it's hard to say on such a quarter-by-quarter basis, but I think we do measure in monthly our new origination margins and so far, a little bit of pressure in September that has been accretive over time.

Johan Ekblom -- UBS -- Analyst

Okay Thank you.

Operator

The next question is from Mr. Tarik El Mejjad, Bank of America. Go ahead please.

Tarik El Mejjad -- Bank of America -- Analyst

Hi, good, morning everybody. Thank you for taking my questions. Two questions, first on the costs. Clearly, the compliance costs you mentioned a few times that are quite sticky and becoming a bit structural to your cost base, and you just mentioned in the question before that you'll be absorbed within the current plan that, did I understand that well, or do you need to put in place a new save expand with new investments and deliver the savings to absorb these over time? Second question is on capital and dividend. I mean, I understand that it's still not clear about the impact of TRIM and so on, but if all these things are actually front loaded, the TRIM, the definition of default and also the DNB decision to put forward the output -- I mean, the floor in terms of mortgages and so on, would you be comfortable to keep still this progressive dividend policy despite seeing your CET1 actually falling quite sharply? I know it's just a timing difference, but you still be in a position where CET1 and buffers would be lower than what you really had. Thank you.

Ralph Hamers -- Chief Executive Officer

Thank you, Tarik . Thanks for you -- so in terms of your first question, clearly, if we feel that current programs can be accelerated, or it will -- could have a bigger impact, we will do so even if in reviewing all of the programs that are going and all the initiatives on a quarterly basis are coming to our table because we run this on a quarterly basis. The investment programs that we have in order to deliver, for example, improvement of the KYC but also the investment program is to deliver on a better experience or further efficiency, we continuously rank them as to impact and therefore it is may be a mix of the current programs and more effective implementation of current programs, it could be also new programs as the one that I was alluding to that we did in Germany, just last quarter. And you can see the results already on the cost side this quarter.

So if there is better programs than the current programs, we will certainly switch over to the ones that are better, but in the end you have to make sure that you don't run into programs that you don't finish, because in the end it's also important to finish programs, but clearly on a quarterly basis, review all the programs that we have; we review all the investment, the discretionary investment money that we have and all of that as to the effectiveness of on compliance, customer experience as well as efficiency and that's how we kind of take our decisions. On the second one, I will give the word to Tanate.

Tanate Phutrakul -- Chief Financial Officer

I think it's really reiterating what Steven has done. We have in this quarter continue to accrete capital at a good rate at 14.6% and I think we are fairly confident about our guidance on Basel IV in the 15% to 18% but I think for these new regulations on capital and the results of DoD and TRIM, we simply need to wait for those things to come along in the next quarters. So, nothing more to add beyond that. I recognize his request for clarity, but I think we just need to wait for that to come.

Tarik El Mejjad -- Bank of America -- Analyst

I mean, I understand the remarks, and clearly that you are comfortable in terms of buffer in light of full picture, but it's just more the timing and how from management's perspective if you feel you can see true, bit of a blip in terms of lower capital because it's just a timing difference or or you can't actually take that's one more than you have to basically keep thus buffer reasonable levels. So it's more like a strategic view then the I agreed on the math we need to wait for clarity.

Tanate Phutrakul -- Chief Financial Officer

I think if you look, we have a comfortable buffer, right, because our current [Indecipherable] buffer requirement is 11.8% may be rising a little bit to 11.9% because of the counter-cyclical buffer requirement, but I think we still stand several basis points above that number and given time we believe we can adapt ourselves and our strategy to come back to that 13.5% or around 13.5% post Basel IV target.

Tarik El Mejjad -- Bank of America -- Analyst

Okay, thank you. Can I just follow-up very quickly on the cost line, the legal provisions, is that related to compliance issues you had in different jurisdictions or, because I think Ralph, you mentioned that's in many countries?

Ralph Hamers -- Chief Executive Officer

Yeah, so this is related to several cases in several countries and are not necessarily or AML issues altogether. So it's a mix. It's a mix. So maybe my coming back on the CET1 ratio and the capital effect there, just to reiterate, we have the 14.6% where we are; we have a minimum of 11.93%, whatever we need to have with the counter-cyclical, it's quite a buffer so. Tarik, on your question as to strategically, every quarter we generated capital; this machine is really working very well, 10% -- more than 10% return on equity. So we do feel comfortable to to absorb that but again, you know, timing-wise, it could be one quarter a little bit more than the other and we'll have to see how we manage that. But, yes, so no specific worries of that side.

Tarik El Mejjad -- Bank of America -- Analyst

That's very helpful. Thank you.

Operator

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

Adrian Cighi -- RBC Capital Markets -- Analyst

Hi, there. Two questions from my side; one question on cost of risk and one follow-up on cost side. On the cost of risk, I understand that large part of your cost of risk in Netherlands was due to a change in methodology in terms of the house price index. What would it have been under the old methodology, would you have seen a big increase as well or would it have been differently? And maybe a follow-up on that, have you seen any IFRS 9 impact in the cost of risk increase? And then on the cost side, the KYC investments, the EUR50 million this quarter, how much more do you expect to have to take in the coming quarters as part of this remediation program and is this sort of something you have visibility into. Many thanks.

Ralph Hamers -- Chief Executive Officer

Yes, I'll take the cost and then Steven will take the one on the mortgages and the IFRS. So the KYC costs, clearly, we're running up these cost and that's a combination of what we agreed which is do look backs then is almost done, it's about final enhancements, which really on track, it's about structured solutions. Now, lookbacks, as well as file enhancements, that in itself will, I would say, the moment stop, and therefore, you could see the next quarters to kind of see the growth, of course, stop there and maybe even decrease there.

And the other side, from a structural solution perspective, that is something that we have to look at on a quarter-by-quarter basis as to how we can improve the effectiveness, but also the efficiency of that. So I can't really give you anything there. But clearly, the enhancement and the lookback aspect of it is something that is temporary. But having said that, we will have to do continuous review of our clients. And so, some of that capacity will stay with us.

Steven van Rijswijk -- Chief Risk Officer

Okay. Adrian, then on your first question, regarding the price index from the charges. If we would have been using the old index, the NVM index, the risk -- cost of risk would have been lower in Netherlands. So this is a, I would say, a more -- a less volatile, a more stable, but also more a conservative index that we're currently using.

With regards to IFRS 9, the impact is limited. It depends on the market. We have some -- we are seeing some better macroeconomic circumstances in Turkey compared to, for example, number of quarters ago, but if you look at the overall scheme of things in risk costs that has had limited impact.

Adrian Cighi -- RBC Capital Markets -- Analyst

Thank you very much.

Operator

The next question is from Mr. Raul Sinha from JPM. Go ahead, please.

Raul Sinha -- JP Morgan -- Analyst

Good morning. Hi, thanks for taking my questions. Maybe on the replicating portfolio to start with. Could you give us some more color on what you're doing here? And how sensitive you are to the 30 basis points or so increase in the five-year swap rate that we have seen since the lows in August? Should we start to think about that drag maybe potentially alleviating a little bit?

Tanate Phutrakul -- Chief Financial Officer

Thank you very much for that. I think our critical point is really the three-year, the five-year and the 10-year, right, in terms of our replication. And I think if you look at perhaps the situation back in August, I think the picture looks a bit bleak, given where the curve was at that particular point in time. Since then, as you know, we've seen really quite an improvement coming into September and now into October. So I think the picture varies. But I think it's improving given where the curve is today. And, of course, we take various different hedging strategy in terms of hedging when we feel it's appropriate and that also has a positive impact on margin as you can see in Q3 as well.

Raul Sinha -- JP Morgan -- Analyst

Thank you. Could I request for more disclosure on this please going forward? It would be really helpful I think from a market perspective to get a little bit more information around how it could impact your NII, because I think, obviously, it's become quite key to the outlook into next year?

Ralph Hamers -- Chief Executive Officer

Okay. We have our Investor Relations be in touch, we do that.

Tanate Phutrakul -- Chief Financial Officer

Okay.

Raul Sinha -- JP Morgan -- Analyst

Thank you. If I can just follow-up on NII then excluding the financial markets line and I think Ralph, you talked about the performance in this quarter being down 1% is obviously quite good in the challenging environment, but your volume growth is, obviously, being offset by a lot of the pressure you are seeing. Do you think this down 1% sort of performance is the best you can hope to achieve going forward? Or is there something you could do from a management perspective that could improve this NII growth, excluding the financial markets line? Thank you.

Ralph Hamers -- Chief Executive Officer

Yeah. So, Raul, basically, the way we look at this is that, given the commercial momentum that we have and the continued growth of new customers that we got and with that, not just the factor that the market is growing, but also that we are continuing to grow market share and improve margins, we think that over the next couple of quarters that we can offset the pressure on NII coming from more the savings side of it with growing in our lending, improving our margins, growing in non-euro areas. So from an NII prospective, we expect to see a flattish picture. But clearly, if the yield curve improves, it may help us a little bit upward on that.

Raul Sinha -- JP Morgan -- Analyst

Thank you.

Operator

The next question is from Mr. Omar Fall, Barclays. Go ahead, please.

Omar Fall -- Barclays -- Analyst

Hi, good morning. Just a couple of things for me. Firstly, could you just quantify the amount of RWA relief from positive risk migration this quarter? Also, where is that coming from given all the metrics you've discussed on credit and the worsening macro and more broadly?

Then secondly, can you just give more color on the impressive performance on commissions, even if it's just the split in performance between account-related fees and more market-sensitive fees, please? And how much of that performance is related to the AXA partnership, for instance? Thank you.

Ralph Hamers -- Chief Executive Officer

Okay. On the fee side, I'll take that and then Steven will come back on the risk-weighted assets relief. On the fee side, I'll give you a bit more insight here. As I said, year-on-year 9.4% on the retail side, it's 5.8% wholesale -- 5.8% including wholesale. I think the -- what you should kind of realize now is that, the one-time effect of the change of the composition of own branches versus agent branches in Belgium and the kind of the fee mix of that is now neutralized because that all happened in the third quarter last year. And so, that is now here as well. So, this is a real good comparison now and therefore, the 9.4% on the retail side is a real 9.4% on the retail side.

If you go deeper into that, you see that this is high-quality improvements across the board, because in Holland, we see an increase of just short of 5%, in Belgium, we see an increase of short of 8%. Then in Germany, already mentioned specifically, given the super performance of Interhyp there as a mortgage broker over 21%. But then other C&G, so these are all the other growth but also the digital banks with new products or new fees being introduced or -- and including the AXA program, it's over a 11% fee growth. So it's kind of a -- it's proving that focusing on this primary business -- this primary relationship in a digital way looking at how you can kind of offer simple, transparent products to your customers digitally, that is really working.

Now, on your question specifically as to AXA, I think it's too early to give you insight there. We're in the first quarter now of this JV. Initiating new products, we launched seven products across four different markets. It's really too early to tell you and give you insight as to how much fees we are making in that. Actually, so basically it is really early days. So, the impressive performance of fees is not because of this, because this is -- I mean, this was just launched, and it's not like this is now immense. o, it's really because of other products as well. So AXA and the growth in the success of the joint venture with AXA will kind of help us going forward even more.

Omar Fall -- Barclays -- Analyst

Got it. And just as a quick follow-up on that, in terms of that split between account-related fees and then more market-sensitive fees that are booked within retail, could you give us sense of that?

Ralph Hamers -- Chief Executive Officer

I don't have that here with me. So if you want to go a bit more insight, we'll see whether the Investor Relations guys can give you. I just don't have it here with me as we speak. So, Omar, if you could call the lady and gentlemen of Investor Relations that would be helpful.

Omar Fall -- Barclays -- Analyst

Great. That would be great. It's just that the growth is so much higher than the pieces of loan growth. So I just wanted to get a sense of that. So thanks.

Ralph Hamers -- Chief Executive Officer

Yeah. But it's still like we didn't kind of indicate our comfort that we would be increasing our fees between 5% to 10%. So we have guiding that for the last couple of quarters. And so, we're realizing it. So, yeah.

Omar Fall -- Barclays -- Analyst

Absolutely.

Ralph Hamers -- Chief Executive Officer

Okay. Thank you, Omar. Then Steven?

Steven van Rijswijk -- Chief Risk Officer

Yes, thanks, Ralph. Omar, on your question on risk migration. So for the quarter that was a positive impacts on CET1 of 19 basis points. So that's over EUR4 billion in RWA. It's actually realized across the board. So in the Wholesale Banking here in Netherlands, mainly on the back of increasing prices in the retail franchises and Wholesale Banking driven by some LGD improvements in finance.

Omar Fall -- Barclays -- Analyst

Got it. 19. Thank you.

Operator

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

Bart Jooris -- Degroof Petercam -- Analyst

Yes, hi. Just a follow-up question from my side. Could you give us some more quantified idea about how TLTRO III and deposit tiering could help your NII?

Tanate Phutrakul -- Chief Financial Officer

I think about on the deposit tiering, which has now come into effect, roughly, we have EUR50 billion in deposits with central banks. So we will benefit from the tiering on that amount. Roughly, it will make it neutral, right? You can count on average that we get negative 50 basis points until the tiering scheme has come into place.

From a TLTRO III, I think we still look at it on an opportunistic basis. We are actually quite well funded for the year and going forward. So we may or may not participate on the TLTRO III, which is look at it on a pricing perspective going forward.

Bart Jooris -- Degroof Petercam -- Analyst

So -- and the deposit tiering factors, that already included in your NII outlook to stay flattish?

Tanate Phutrakul -- Chief Financial Officer

it's part of the outlook indeed. Yeah.

Bart Jooris -- Degroof Petercam -- Analyst

Okay. Thank you very much.

Operator

The next question is from Mr. Kiri Vijayarajah, HSBC. Go ahead, please.

Kiri Vijayarajah -- HSBC -- Analyst

Yeah. So just quickly. Firstly, a follow-up on that tiering question. Does all of the benefit get booked in the treasury unit that sits within the wholesale bank or does it feed through into some of the other divisions through the internal transfer price?

And then secondly, can I just come back to the volume decline in Belgium? I can understand about the repricing and trying to get a wider margin there. But I wonder is there any kind of change in risk appetite in Belgium mortgages? Are there any underlying worries about the Belgian housing market? And looking forward into next year, should we expect your market share in Belgium mortgages to maybe bounce back or do you think it's still going to sort of stay more subdued level, or at least grow slower than the rest of the market? Thank you.

Ralph Hamers -- Chief Executive Officer

Thank you, Kiri. I'll take the second one. Tanate takes the first one. So on Belgium, the fact that you see a bit of a decrease there that is not because of the development in the mortgage book. It is a particular client that has a bit of a swing in terms of outstanding drawdowns. Now, in the underlying development on the mortgage book, we are increasing our mortgage book in Belgium, because the market as a whole is growing. Our mark share maybe a bit down because as said, we are very disciplined in pricing. So, we try or we play a return game and not a volume game on this one. But with that, the mortgage book is increasing, although it may be at a bit lower market share, but the market as a whole is increasing. Thank you.

Tanate Phutrakul -- Chief Financial Officer

Your question on the impact of the tiering. So, as you know, we run a centralized treasury function but these impacts we will distribute into the business unit, depending on the level of liquidity each unit has. So a lot of the impact will be in the retail bank.

Kiri Vijayarajah -- HSBC -- Analyst

Got it. Thanks, guys.

Operator

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

Benjamin Goy -- Deutsche Bank -- Analyst

Yes, hi. Good morning. Two questions from my side. Fist, on negative rates and some competitors or in some markets increasingly discussions of on passing that on to retail clients as well. How do you see that influencing the competition? And also deposit flows, you still see there is an opportunity to gain customers or is there increasingly a cost associated with that?

And then secondly, your Stage 3 loans went up a bit in particular, driven by daily banking. So just wondering what was driving the increase? Thank you.

Ralph Hamers -- Chief Executive Officer

So Benjamin on the first one, so we do charge rates to the larger professional clients and the clients that have really large deposits with us and we certainly also do so in different currencies, and that's basically where I think -- where I can give any indication on that one. We are certainly looking at compensating the pressure on the savings side, more in terms of looking for growth in non-euro environments and growth in the lending book, the change in the asset mix, the repricing on the asset side.

Benjamin Goy -- Deutsche Bank -- Analyst

Sorry, there was in particular on retail client. So I know you don't charge it, but some others do. So just wondering how you see that going forward significant deposit inflows? And then the second question, what do you do with it in case this materializes?

Ralph Hamers -- Chief Executive Officer

Yeah. Well, we don't see that. So, let's not speculate on things that may happen.

Benjamin Goy -- Deutsche Bank -- Analyst

Okay. Understood.

Ralph Hamers -- Chief Executive Officer

Steven?

Steven van Rijswijk -- Chief Risk Officer

Yes. Regarding the NPL increase, for those indeed in the benign overall NPL increase back to 1.6%, which is the same level as where we were in the third quarter of 2018. So it also -- you also see that a few of the portfolios have a slight increase in the activity balance over from 1.5% to 1.6%. So, it's not particular to daily banking. It's -- these are various small portfolios, it has a slightly increased NPL level as a result of which the move-up is with 10 basis points.

Benjamin Goy -- Deutsche Bank -- Analyst

Thank you.

Operator

The next question is from Ms. Alicia Chung, Exane BNP Paribas. Go ahead, please.

Alicia Chung -- Exane BNP Paribas -- Analyst

Good morning, everyone. Just one question from me and it's really on the provision outlook for next year. I'd love to get your thoughts on that. I suppose what I'm wondering is, do you think we'll start moving closer to your through the cycle cost of risk? Because, I guess, there are a few moving parts to how we should think about provisions next year. I mean, obviously, we're starting to see a little bit of an uptick in terms of provision normalization in Wholesale Banking, where provisions deteriorated a little bit across a number of sectors.

And secondly, I see that NPLs are -- they've, obviously, crept up but also the coverage ratio has now fallen to a new low of 29%. I'm just wondering if you see 29% as a sustainable coverage ratio going forward and is a higher coverage ratio, not more prudent, appreciate there is an asset mix within that, but you do have a decent weight of that within Wholesale Banking.

And finally, I imagine you once start looking ahead implementing ECB guidelines on calendar provisioning and definition of default, which certainly for some of the banks, which has started implementing the definition of default so far taking it through higher P&Ls. So taking into account the underlying provision normalization, your current view very low coverage ratio and the upcoming regulatory guidelines on provisionings, how should we think about cost of risk next year? Thanks.

Steven van Rijswijk -- Chief Risk Officer

Wow, Alicia, thanks very much. So on the cost of risk, I mean, yes, there have been an increase in risk costs in this quarter, partially due to a changing benchmark in the mortgages in the Netherlands by, let's say, a year ago, we saw a release based on model updates, there were a couple of files in Wholesale Banking that led to some higher risk costs. There is an uptick in NPL but that's a limited extent. We see here and there, the watch list creeping up but it's based on a couple of files. So I think it's too early to call to change the risk outlook for what I've said before. So the risk costs are still. If you look at it over a nine-year to 10-year cycle at the low end of the spectrum and we see an uptick here and there. We see a slowdown or GDP forecast and conference here and there, but I think it's too early to call that this is a real change. If you then -- so in that sense, I would not change the outlook that I have given before, which is that for this year we will be well below the year sort of cycle average in risk costs and for next year. I do not see, at this point in time, a change in that outlook.

If you look at NPLs and the coverage ratio, I mean, the coverage ratio in the end is an outcome of the weighted provision and indeed, as you rightly pointed out, the business mix that we have, and we have a large mortgage book. In the end, the coverage ratios there are always relatively benign. And so, the mix what you see there is what you were -- what we end up at. And in that sense, there is not a change expected in that sense.

If you look at the definition of default in detail, that will likely come in the next coming quarters. We do not see impacts in that regard in cost of risk moving into our books.

Alicia Chung -- Exane BNP Paribas -- Analyst

Thank you. Very clear. If you don't mind, I would might just one other question. Just going back in terms of capital and headwinds from here, is it fair to say that between now and 2021 the main non-headwinds as far as you all are aware, is the TRIM, the definition of default, the macro prudential add-ons, and I guess, I would add to that calendar provisioning or is there anything else that you see in the pipeline?

Steven van Rijswijk -- Chief Risk Officer

I thought it was enough, Alicia. So, no, that's [Speech Overlap].

So TRIM, DoD and the macro prudential impact on mortgages Netherlands is currently what we have on stock. If there are something new, I will report on that.

Alicia Chung -- Exane BNP Paribas -- Analyst

Okay, great. And TRIM is just the corporate portfolio.

Steven van Rijswijk -- Chief Risk Officer

There's TRIM, there's basically TRIM. So TRIM, DoD, mortgages.

Alicia Chung -- Exane BNP Paribas -- Analyst

Okay. Thank you.

Steven van Rijswijk -- Chief Risk Officer

Thank you.

Operator

The next question is from Mr. Jason Kalamboussis KBC. Go ahead, please.

Jason Kalamboussis -- KBC Securities -- Analyst

Yes, hi there. Good morning. Couple of things. The first one is on fees and commission. Fully agree that for those that wanted to hear you, Ralph, you were saying that the second half we could see an uptick in fees and commission. But I just wanted to look, when I'm looking at consensus this year that line specifically has come down by 5%. So effectively the 5% to 10% growth targets that you have was eaten up already in a certain way. And when I look at also consensus -- if I look at the CAGR 2017 to 2021, it's probably a 3% or roughly about there. So, how should we take -- how should we see the outlook on fees and commissions in the short or longer term? And do you seek to the 5% to 10% or is it more likely to be a 5% because at the end of the day we even going forward, we are below that?

And the second thing is on costs. The EUR118 million, just a small clarification, the EUR118 million differential, let's say, EUR50 million was for KYC, we had the legal provisions of EUR40 million but then that was more than offsetting that. So if anything there is probably about the difference of EUR118 million minus EUR50 million would give you EUR70 million plus benefit of the VAT that is about EUR100 million. Is there any chance we get a bit more granularity? Is it all CLA so that we have an idea? And for the KYC, the EUR50 million, is it fair from your previous comments to assume that this is the kind of thing that we could expect year-on-year for at least the next one or two quarters until we get more clarification? Thank you.

Ralph Hamers -- Chief Executive Officer

Thank you, Jason. Well, look, fees, I'm not sure exactly what kind of numbers you're looking at. But don't forget that the fees are a net number, which basically means it's fees that we get paid minus the fees that we pay. And, I mean, you will go through a couple of numbers pretty quickly, but one point -- one part that is really distorting the fee growth picture historically is the real switch in Belgium, which we made from owned branches to agent branches, when we merged the two branch networks of Record and ING. And basically we have opened much more agent branches and closed more owned branches, which means that our cost go down on one side, but we pay out more fees and that payout of fees effects the net fee growth picture. Therefore -- and that's distorting the historical analysis. Therefore, I think this is the first quarter in which you see because now we have been able to neutralize that effect year-on-year, so this quarter last year versus this quarter, this year. Basically, you see that is more or less the same.

The underlying fees paid out to these -- to the agents in Belgium, and now you can see the real growth. And based on that and based on the growth of our primary customer base, based on the introduction of new products, the behavioral fees that we're introducing with some of the digital banks, some of the good mortgage production for which we get paid fees here and there as well. We do feel comfortable with continuing the guidance going forward of fee growth between 5% to 10%. That's one.

The second question on the cost. The -- I can't give you more granularity at this moment in time than what we have already given, which is the combination of the KYC increase of EUR50 million, yes, that is what we think you can expect the coming quarters. And there will be a better effect than of KYC cost going down because of the enhancement part being finished, but some of the structural parts being fully on stream then. So, we don't know exactly how that mix is going to look like. And then, yes, we do have a pretty big impact on CLA increases across the globe. So, we see that as well. Okay?

Jason Kalamboussis -- KBC Securities -- Analyst

Thank you very much for clear on the fees. Just on the -- and good to know that you reiterate strongly the 5% to 10% outlook on cost. Just the Record Bank, the commissioning and seeing there was -- you had said, I think in Q2 that it was not necessarily going to come in second half. Is it an item that we should be keeping in mind for first quarter of next year?

Ralph Hamers -- Chief Executive Officer

Yeah. Well, that's -- I mean, in the scheme of things that is like below EUR10 million and it will be Q4.

Jason Kalamboussis -- KBC Securities -- Analyst

Okay. Fantastic. Thank you very much.

Operator

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

Jean-Pierre Lambert -- Keefe, Bruyette & Woods Limited -- Analyst

Hello, good morning. So two points, if possible. The first one is KYC, I look at the staffing in the Netherlands has been growing since the second quarter last year by 635 people, staff. So is that KYC or is that related to the Orange Bridge? And is KYC concentrated mostly in the Netherlands, the KYC costs?

Second question is, on your budget process, which we are probably undergoing for the moment, how do you look at the cost base and how is that related to the pile of projects you have with diminishing returns? Do you feel that next year you need to accelerate on that more projects to absorb the KYC or you feel things are safe as they are for the moment and you don't see the need to accelerate initiatives? Thank you.

Ralph Hamers -- Chief Executive Officer

Thank you, Jean-Pierre. Well, on the cost or the FTE growth in the Netherlands, it's especially three components. The first one is that, with the Unite program between Netherlands and Belgium, we guided in the past already that you should look more and more at the combination of the cost factors and therefore, also the FTE factors between the Netherlands and Belgium, if it comes from the perspective of the domestic banking business. And so, we are preparing the Dutch systems and the Dutch channels for migration of the Belgium clients and therefore, we are less investing in some of the systems in Belgium and more in the Netherlands and hence, you would expect to see some FTE and cost growth in the Netherlands in order to prefer for that. So that's one effect of what you see happening in the Netherlands in terms of FTEs.

The second one is, certainly, also KYC, both for the domestic bank in terms of the file enhancement, the lookbacks and all the stuff that we need to do, but also the central KYC costs. So we have set up as we launched this program -- as a global program we set up a central team developing central tooling, which is partially in the Netherlands and partially in different other countries, are working on that and that also has a specific effect on the FTEs in the Netherlands.

And then thirdly, with a lot of the work coming from a more regulatory perspective, we do see also a further increase in people working on the risk side. If it comes to, for example, the modeling aspects of the of risk management, the data knowledge and the data scientist that we have to hire and we hired them all over the place, but specifically also in the Netherlands. So, yeah, it's -- I mean, you can't just point at one factor increasing -- that explains the increase in staff in the Netherlands. It's a combination of all these three things.

Now, on the cost base and the budgeting process, I think the only thing I can say there because we don't give kind of cost guidance per se. Just go back to the recipe that we have been using for the last couple of years, six years even, as to what you can expect from us, which is that over time you should expect the cost in market leaders to go down, because we do expect the income line to be flattish, if not, negative. And therefore, the cost should go down faster and that's what we're working on programs to support further efficiency gains between the market leaders activities, improving customer experiences and with that and more digital experience and with that also lower cost, that is what's happening. So expect cost to decrease there.

On the C&G side, honestly, we have good momentum. We're offering a good service, more and more customers choose for ING as their primary bank. We don't mind cost to grow there as long as we also see that it comes along with more business and good price business, so also better income. And as I said already, a large part of fee growth comes from these digital franchises and the growth franchise that we have in C&G. So cost could increase and continue to increase in the C&G environment, but we will certainly also look at the top line because if there is no top line, but only an increasing cost line, we will not accept that.

And then the third area where we -- that we look specifically at is the wholesale bank, in which we have a continuous program for efficiency running, depending on the pockets and that need to improvement -- that need improvements. You could expect if the wholesale bank does not deliver on income growth, that cost will be stable, if not, decrease. But, for example, if you just take a look at the financial markets franchise, you know that we have had a real transformation program in that area for the last two years, centralizing a lot of the trading, cancelling some of the product capabilities, over time the top line has been stable, if not, increasing. Now, I'm not counting the value adjustments but the client business. But just look at this quarter, cost vis-a-vis last year have gone down by 6% in financial markets. So, it is very much specific programs in order to improve specific performances in areas in order to make sure that if an area is not performing according to our wishes or not making the hurdles, we will have to improve either on the income side but also on the cost side.

Jean-Pierre Lambert -- Keefe, Bruyette & Woods Limited -- Analyst

Great. Thank you very much, Ralph.

Operator

The next question is from Mr. Jose Coll, Santander. Go ahead, please.

Jose Coll -- Santander -- Analyst

Hi, thank you for taking my questions. The first one is on OpEx and more specifically on Group salary costs. So when I look at the number of FTEs, it grows 2.8% versus third quarter last year and your salary costs, they grow 2.1% in the first nine months of this year versus the first nine months of last year. So, the question is, whether these FTE growth is driven by compliance staff, which should be non-revenue generating staff? And if so, whether they're making the same salary as your average base?

And the second question is, well, I suppose it's too early to talk about dividend guidance. But this may be a silly but honest question on your dividend policy. When you say you have a progressive dividend policy, does this mean that the amount that you pay in dividend should grow or is it the payout ratio that should grow? If you could please clarify? Thank you.

Ralph Hamers -- Chief Executive Officer

Well, Jose, on the first one, I don't know all the specifics here, we should maybe come back to that question on your salary cost versus the increase in FTEs. It is clear that we are getting more and more people in -- on compliance on KYC, but it is something we need to do. So, I mean, this is what it is. At the same time, also in that area, we see innovation coming through that and new technology coming through that both improves on the efficiency, as well as the effect of the side. So we'll continue to work on that.

We also see temporary staff in that area, in order to do the file enhancement. So that's also a picture that you see coming through in -- right there. And so, you see clearly that if you have kind of the external staff, some of these are also more expensive than internal staff, but they're also temporary. So, it's a mixed bag really. It is really difficult to draw conclusions there.

On the dividend policy, the dividend policy that we have had over the last couple of years is a progressive one. It's progressive in terms of that the amount growth. Thank you.

Jose Coll -- Santander -- Analyst

Thank you.

Ralph Hamers -- Chief Executive Officer

I think those were the questions then. Okay. Then, I'd like to thank you for being here with us this morning and going through the quarterly numbers. I'm sure during the day, you may have more questions, you know, the IR staff is there in order to answer more questions and more detailed questions as well.

For now just summarize the quarter, I think that the top line shows resilience in a time of real challenge, negative rate environment challenge and that resilience comes from the perspective -- from the fact that we do have a franchise that grows. We do have capabilities to improve margins and combined volume growth. So that's helpful. At the same time, we see the fee guidance that we've given now actually coming through because we have a clear picture now year-on-year. So you see that these franchises, these digital franchises, if you make them primary client driven that you see more cross by coming through and with that also more fees coming through. So that's the resilience on the income side.

On the cost side, two specific remarks to be made. One is the KYC and the other one the overall cost CLA-driven cost and some one-offs as a mix overall leading to a good picture of EUR1.3 billion bottom line, and I said, focusing on the client is important and with that, KYC and understanding truly your client is important as well.

Thanks very much, and I wish you a good day.

Operator

[Operator Closing Remarks]

Duration: 97 minutes

Call participants:

Ralph Hamers -- Chief Executive Officer

Stefan Nedialkov -- Citigroup -- Analyst

Tanate Phutrakul -- Chief Financial Officer

Pawel Dziedzic -- Goldman Sachs -- Analyst

Steven van Rijswijk -- Chief Risk Officer

Robin van den Broek -- Mediobanca -- Analyst

Johan Ekblom -- UBS -- Analyst

Tarik El Mejjad -- Bank of America -- Analyst

Adrian Cighi -- RBC Capital Markets -- Analyst

Raul Sinha -- JP Morgan -- Analyst

Omar Fall -- Barclays -- Analyst

Bart Jooris -- Degroof Petercam -- Analyst

Kiri Vijayarajah -- HSBC -- Analyst

Benjamin Goy -- Deutsche Bank -- Analyst

Alicia Chung -- Exane BNP Paribas -- Analyst

Jason Kalamboussis -- KBC Securities -- Analyst

Jean-Pierre Lambert -- Keefe, Bruyette & Woods Limited -- Analyst

Jose Coll -- Santander -- Analyst

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