ING Groep (ING) Q2 2022 Earnings Call Transcript

ING Groep (ING -1.51%)
Q2 2022 Earnings Call
Aug 04, 2022, 5:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the ING media call second quarter 2022. [Operator instructions] And just to remind you, this conference call is being recorded. Today, I'm pleased to present Steven Van Rijswijk. Please begin the meeting.

Steven Van Rijswijk -- Chief Executive Officer

Thank you very much, operator. Welcome, and thank you for joining us on the call. With me are Tanate Phutrakul, our CFO; and Ljiljana Cortan, our COO. We will give you an update of developments and results for the second quarter of 2022, which in short showed good -- showed some results in the context of ongoing economic and geopolitical challenges.

In line with our priorities, also this quarter, we continued our efforts to offer a superior customer experience with a focus on the digital customer journey and to contribute to a sustainable future. We managed to further grow our primary customer base by 228,000 to EUR 14.2 million. We service these clients with a digital and increasingly mobile experience. Around 53% of our customers now interact with us through their mobile device only, up from 52% a quarter ago and 37% in 2019, which illustrates how the pandemic has been a catalyst for the adoption of mobile banking.

This is also true for digital commerce and mobile payments. In the past quarter, we registered EUR 348 million mobile payment transactions. This is 29% more than in the first quarter, 66% more than the second quarter of last year, and even three times as much as in the second quarter of 2020. In terms of sustainability, we have the ambition to be a banking leader in the fight against climate change.

In the past quarter, we supported 128 sustainable deals, which puts the total number of deals in the first half at 205, which is three more than in 2021. In the past months, we also sharpened our targets and ambitions to reduce our carbon footprint, finance more green and renewable energy projects, and to support our wholesale banking clients to future-proof their business models and operations. As said, our results were robust despite the continuing geopolitical uncertainty and pressure on the global economy, which led to increasingly challenging operating conditions. Our pre-provision profit remains strong.

This was supported by higher interest income with the pressure on liability income turning into a tailwind, Brazilian fees, and expenses under control. We saw our core lending portfolio grow by just over EUR 10 billion. EUR 7 billion of that was in retail driven by mortgages in Germany, the Netherlands, and Australia as well as in business lending. Loan growth in wholesale banking was EUR 3 billion.

Our deposits grew by EUR 8.1 billion, mainly due to holiday allowances in the Netherlands and the increase of the threshold in Germany for negative rates. Fee income increased by almost 4% compared to last year, mainly coming from daily banking and retail. Fees on investment products reflected a lower activity in stock markets and trading as uncertainty increased. This was also visible in a lower deal flow in wholesale banking.

Expenses were well contained despite inflationary pressure and continued investments in our customer experience. Risk costs were EUR 202 million, which included an overlay reflecting increased macroeconomic uncertainties as well as releases of overlays we previously booked related to the pandemic and our Russian exposure. All in all, our net result came out at just under EUR 1.2 billion, significantly up from the first quarter, but lower than 2021. Our CET1 capital ratio stood at 14.7%.

And we will pay an interim dividend of EUR 0.17 per share over the first half of this year. And with that, we're happy to take your questions now.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from the line of Rutger Betlem from Financieele Dagblad. Please go ahead

Rutger Betlem -- Het Financieele Dagblad -- Analyst

Good morning, all, and thank you for taking my question. First question is about the interest rates. As a long way, earnings windfall in the form of higher interest is being threatened by a looming recession. Still, you remain positive on the NII.

What factors helped your confidence in that?

Steven Van Rijswijk -- Chief Executive Officer

OK. Thank you very much, Rutger. Well, I mean, look, clearly, there are economic headwinds. And of course, we've seen good lending growth in the first half of the year in mortgages, in business banking, and in wholesale banking.

In mortgages, that is because there are still shortage of housing in many of the markets in which we operate. So a clear desire for growth in ownership of homes. And in business banking and wholesale banking, you do see that most of the growth in the facilities are mostly short term, and the bigger, larger deals were off really there in the second quarter of this year. So with further assumed contraction, so we said that we expect a mild recession in the Netherlands, for example, we do expect that lending growth will be fairly limited.

But at the same time, it's not only about lending growth. We do have a stock of lending and therefore, that makes up a large amount of our revenues. And then the question is, of course, OK, are you either growing your loans, but we need to remain cautious and we need to look at what the demand is. And that demand we expect to go down also because we expect, for example, the number of home sales in the Netherlands to come down this year with 15% compared to the last year.

Last year, it was 218,000. This year, we forecast 190,000 homes sold. So that's an indicator. But if you look at the liability margins, i.e., the interest rates, those are increasing, though have been increasing, both on the short end, but especially also on the longer end.

And therefore, on balance, the potential decrease in loan volumes will be offset more than that by the growth in our liability income because those interest rates are rising pretty swiftly, and that gives us confidence to book a higher net interest income in the second half of this year.

Rutger Betlem -- Het Financieele Dagblad -- Analyst

Thank you. Second question. If for instance, the interest rates rise by one basis point, what would that mean for your earnings? Is there a forecast that to be made?

Steven Van Rijswijk -- Chief Executive Officer

Well, I mean, this becomes quite complicated quite quickly. So yeah, yeah. So it's a bit more difficult than that because then it also depends on where that basis point increase comes from. Is it a shorter end? Is it a longer end? Is it across the curve? So what we have said is because that really depends on how we do finance ourselves in a different market in which we are active.

So that is a compilation of all kinds of balance sheet within the balance sheet of RNG depending on the market in which we operate. You can imagine that a number of countries have their own balance sheets. So what we did, and I would like to point you to the investor update that we gave in the middle of June, to give some indication, and that has to do with the replication because a bank earns its income from, I simplified the matter by getting paid for the risk we take on lending and by the replication that we have on the deposits that we receive. So we are investing those deposits for a longer time frame.

And in general, an upward positive interest rates and an upward sloping curve are beneficial. And then the question is how long do we replicate because you also want to do that. You want to match your assets and liabilities. So we see we replicate 40% less than one year and 60% more than one year.

And that basically gave some indication. You have to look at the graph, what that could mean when we would -- in terms of the interest rates staying at a certain level and tracking certain interest rates more or less. Now sort of one basis point is too simple, too difficult to certainly answer because then we need to discuss tons and tons of assumptions what you exactly mean. But in general, you could say because quite a big part of our replication portfolio that was invested at lower rates a year ago is running off because it was less than one year and is now being reinvested that on that part, if you put it very simply that if that an increase with one basis point, we will then make one more basis point on that part of the portfolio.

And then you have to do that for each tenor of the replication. So because the interest curve across the board, both short term and long term, is increasing, it's almost like a parallel shift, if we call it, the whole curve goes up, we do see across the board an increase in our replication income.

Rutger Betlem -- Het Financieele Dagblad -- Analyst

Thank you.

Operator

And the next question comes from the line of [Inaudible] from NRC. Please go ahead.

Unknown speaker

Yes. Thank you. Hello, Mr. Van Rijswijk.

I got a question with regards to the depreciation on the Turkish activities. In your update, you were saying it is something that we have to do on paper due to internal accounting rules, international accounting rules. We all know there's hyperinflation, and Turkey is struggling with hyperinflation at the moment. But is that something with the levels of inflation in the Netherlands, we could expect in the near future as well on some of your Dutch activities? Or is our level of inflation on such a low point compared with Turkey that it's not realistic that something like that happens in the Netherlands as well?

Steven Van Rijswijk -- Chief Executive Officer

No. Indeed, these are accounting rules. And what it means is that in our international accounting standards is the aggregate sort of total inflation over a period of three years is together higher than 100%, then you need to revalue your assets and your liabilities. And what that means is that our equity that, on the one hand, means that our equity goes up.

So that would almost seem that we make more because our equity is higher. And to correct for that, you correct for that in your profit and loss statements by showing a loss there because that loss then filters back into your equity, and therefore, the two elements are offsetting each other. So it's nothing else than, by and large, in accounting treatment. Not so much what the real underlying operations do.

If you now look at the Netherlands, yes, we have high inflation. And let me look at the numbers. Inflation for 2022, according to our macroeconomist, is forecasted at 9.8%. And for 2023 still elevated at 3.9%.

But you already see, if you add those up, that is not getting anywhere close to 100%. So that situation happening here as far as we can see is very unlikely.

Unknown speaker

OK. That's clear. Thank you. I got one other question.

it's just to do with the reservations you make for default clients. I don't know if that's the right word in English. But with the recession you're predicting coming up in the Netherlands and also elsewhere in Europe, is there -- do you expect to make more reservations in the coming quarters with regards to default clients in -- due to the recession? Do you expect more clients now than being able to back on your lending?

Steven Van Rijswijk -- Chief Executive Officer

I'll give that question to our CRO, Ljiljana.

Ljiljana Cortan -- Chief Risk Officer

Thank you for the question. Yes, definitely, we do see ahead of us certain clouds that Steven mentioned with respect to the, I would say, affordability of the loans on the consumer side, but as well in the real sector on the corporate side. However, I would like us to remind you that we do have the portfolio that has a very low starting point in terms of the risk cost, meaning a very good asset quality. And that we have already in the second half, but also before in this year, taken significant provisions forward looking in order to manage for this eventual uncertainty.

So our second quarter risk costs actually reflect exactly these macro uncertainties and actually, they increased because of these macro uncertainties by EUR 181 million. And on top of that, we have replaced so far risk costs for the COVID-related overlays to the new so-called macroeconomic headwinds, including inflation and energy prices. So we do believe at this point of time, we are well prepared to navigate through the eventual storm in the second half of this year.

Unknown speaker

OK. Thank you very much.

Operator

And the next question comes from the line of Adrian Mirsanu from Mirsanu. Please go ahead.

Adrian Mirsanu -- Mirsanu.ro -- Analyst

Hello. Thank you for the invitation. I have two questions about Romanian market. My first one is I have seen last year that Romanian retail markets has delivered probably the biggest, the highest return on equity in the ING Group, somewhere between 30% to 40%, if I remember well.

And also, I've noticed that ING had registered an impressive organic growth in the market. And from this, my question is, which is the strategic, how should I say, target for ING Romania to increase the profitability or to increase the scale of the market share?

Steven Van Rijswijk -- Chief Executive Officer

Yes. Thank you very much, Mirsanu. Clearly, what we have said in Romania is what we call a universal bank. So in Romania, you have both retail activities, that is private individuals, and business banking, so smaller and midsized companies, as well as also banking.

And the two business models work slightly differently. If you look at the retail side, so that is private individuals and the business banking customers, it is important to have sufficient local scale. And why is that? Because the largest part of the cost infrastructure due to compartmentalization of capital, liquidity, data, systems, and products, therefore, a large part of the cost infrastructure also sits in the particular countries, in Romania, in Germany, in Spain, in the Netherlands. And so sufficient local scale helps to be able to offer a good customer proposition.

It helps to attract the right talent in the market because there's always this fight for talent going on, especially now, and to reach a good through-the-cycle profitability. Now in Romania, we are a top three bank. We also offer very good digital propositions. This quarter, we were the first bank to offer a fully online pre-approval, digital pre-approval process for mortgages.

We are the first bank to do so. So we are very pleased with our performance in Romania. Pleased with the way we interact with our customers, and we will continue to invest in that local scale, but especially also in the superior customer experience because we believe that the difference we can make is in providing a better experience. That, in the end, leads to better, more personal, more easy, more instant interactions.

And that, in the end, then also drives our profit and loss statement. Now so scale is important to be able to offer the right components to our clients in the markets. And in the end, we will then look whether we can realize the right profitability. And that, for sure, is also the case for Romania.

Adrian Mirsanu -- Mirsanu.ro -- Analyst

Thank you. I had another question about the corporate banking market. And here, I've just observed that other banks also reported here in Romania a very big growth rate on the corporate loans portfolio. And I was, or should I say, wondering how do you look to -- how do you expect to evolve here the corporate banking markets.

Because on the one side, there is an increase, a new demand for working capital. And on the other side, there are some adjusting, of course, of investment projects in these challenging conditions.

Steven Van Rijswijk -- Chief Executive Officer

Yes. Thank you. I mean here, we have to differentiate between the short term and the long term. So in the short term, indeed, to your point, we have seen an increase in working capital facilities, but those are relatively short term.

And although we had good growth in wholesale banking across the board, so in different countries for wholesale banking, given the current economic circumstances, it may well be that loan growth in the second half of the year is more subdued than we have seen in the first half of this year. There's a logical consequence of the economy. And we also need to be mindful of that, that we do not over credit and we stay very much focused on the strengths of our loan book in Romania and also elsewhere. The other point is more long term.

I mean, Romania, the second point is that Romania in the long term is growing. I mean if you look at the development of Romania, it's growing quicker in GDP than many other European markets. It has a very good, I would say, a well-educated employee base with a lot of technical capabilities. That's also why we are putting some of our central hubs in Romania for the strong technical engineering capabilities that you have in Romania.

And therefore, long term, we do expect further growth when the countries are developing. And because in wholesale banking, we have a network bank, i.e., we focus on international companies, Romanian companies doing business in Romania and outside, and foreign companies doing business outside and in Romania, as we, in the long term, expect further growth also coming from wholesale banking in Romania.

Adrian Mirsanu -- Mirsanu.ro -- Analyst

Many thanks.

Operator

And we have just one follow-up from Rutger Betlem. Please go ahead.

Rutger Betlem -- Het Financieele Dagblad -- Analyst

Yeah. Thank you. I have a follow-up question on the question that was asked earlier. And that's the impact of provisions and bankruptcies.

How should forecast on that?

Steven Van Rijswijk -- Chief Executive Officer

I'll give this again to Ljiljana.

Ljiljana Cortan -- Chief Risk Officer

Well, as you know, we do have and we have proven through our track record that we have a strong risk management framework in place, which makes sure that our asset quality remains of a good one. And this is clearly seen from the number of the indicators I've just mentioned. For example, an NPE ratio that remains stable. And actually, our Stage II ratio, which is the ratio that shows increased risk in the portfolio, but still performing even decreased this quarter.

So we do believe with our policies in place, with our prudent also provisioning process that we have applied. At this point of time, there is no need to change our guidance on the -- through the cost cycle, and we remain with that.

Rutger Betlem -- Het Financieele Dagblad -- Analyst

Thank you. Second question. If I look at the exposure in Russia, it's still quite a large sum. When do you expect to make a sort of progress in lowering the amount?

Steven Van Rijswijk -- Chief Executive Officer

Sorry, I missed that question. What is it, [Inaudible]? Exposures in Russia.

Rutger Betlem -- Het Financieele Dagblad -- Analyst

It's about the exposure in Russia was, I don't know, it was about EUR 6 billion, I think, if not EUR 4 billion, I think. It's still quite a large sum. And I was wondering when you expect to make further progress on lowering that demand.

Steven Van Rijswijk -- Chief Executive Officer

All right. I'll give you that question again to Ljiljana.

Ljiljana Cortan -- Chief Risk Officer

Well, you're correct, our exposure has come down by EUR 2.1 billion since the beginning of the crisis, which represents 33% of the overall stock. We do believe this is a very good result in a very difficult environment, and this is the result of the hard work of a central team, but as well our local teams, and cooperation with the clients in order to derisk where possible. Therefore, we have as well had the decrease of the risk cost in the second quarter based on this good deleveraging capacity. Going forward, we will continue doing so, even though we have to note that our portfolio in Russia is a combination of the short-term loans and long-term loans.

And clearly, long-term loans are always better collateralized. That's why we also have a lot of ECA covered. It means structured sovereign support to some of the facilities as well as private insurances. And these are clearly remaining on the book for the longer time.

Short-term loans, we have decreased as much as we could, and we will continue doing that clearly at a lower pace than what we've seen in the first and second quarter, having in mind that the majority of the opportunities has been already used.

Rutger Betlem -- Het Financieele Dagblad -- Analyst

And do you expect to take a bigger provision on that or --

Ljiljana Cortan -- Chief Risk Officer

As you know, we have currently approximately EUR 700 million of provisions for our Russian exposure, together with almost EUR 1.2 billion of capital that is reserved for the unexpected loss. Looking at our exposure, in Russia, we do believe that we are sufficiently currently provisioned and that for the worst case scenario, we would be well off. So at this point of time, there is no need to take anything additional.

Rutger Betlem -- Het Financieele Dagblad -- Analyst

If there are no further questions, I would like to ask a last one. Is that OK?

Steven Van Rijswijk -- Chief Executive Officer

That's OK, of course.

Rutger Betlem -- Het Financieele Dagblad -- Analyst

OK. Good, good, good. If you look at the current situation of the markets, the geopolitical tensions, the supply chain, the disruption, inflation, etc., what is the factor that worries you the most for the coming half of the year?

Steven Van Rijswijk -- Chief Executive Officer

Yes. Famous last words. But of course, the energy supply in Europe is, of course, of a big concern. Europe is dependent on gas deliveries from Russia to the tune of 45%.

We do believe that Europe is able to curtail that with about 60% in a year's timeframe, but that still means that on the remaining 40%, of that 40% to 45%, you run risk. Now countries are doing their best to curtail that. We also see that demands has come down already in the past quarters based on measures that have been taken. But if Russia will completely stop gas provision to Europe, that then can have an add-on impact on GDP, and we expect that at all negative impact in GDP to be 1% to 3%, so minus 1% to minus 3%, at least in the short term.

So that's currently a big short-term concern.

Rutger Betlem -- Het Financieele Dagblad -- Analyst

All right. Thank you so much.

Steven Van Rijswijk -- Chief Executive Officer

Thank you.

Operator

[Operator instructions] And we have a follow-up from Adrian Mirsanu. Please go ahead.

Adrian Mirsanu -- Mirsanu.ro -- Analyst

Thank you. I have one more question about the A&G strategy to limit exposure to finance oil and gas sector, for example, in the upcoming year period. Because I know they are mostly focused on green finance and green loans. And on the other hand, for example, in Romania, there is a lot of discussion about financing a very important project, Neptun Deep in the Black Sea.

I don't know if you know the project, and also in the gas infrastructure. So what I'm asking, in fact, is ING will not finance these kinds of projects in Romania? Or how it will, how should I say, it will be its position in this financing goals? Thank you very much.

Steven Van Rijswijk -- Chief Executive Officer

Yes. Thank you. And look, for us, sustainability in the heart of what we do is one of our two strategic pillars, next to providing a superior customer experience. And we really want to make the difference for people and for planet, and it also means that we have committed ourselves to a net zero emission level by 2050, i.e., the one-half degree path.

But that's a long way away in 2050. And that's why we said we also need to set intermediate targets because 2050, I'm sure I'm not working for ING anymore, and neither are probably my colleagues here around the room. So we need to make sure we also set intermediate targets, and we are driving that as well. And in doing that, that means if you follow half that client path, that means the oral needs to decrease global emissions by 45% by 2030.

So we are currently aligning our entire lending portfolio sector by sector on that minus 45% decreased by 2030 and even intermediate targets for that in 2025. In doing that, and we follow the guidance of the International Energy Agency, that means that you can also follow the road maps and glide paths of that International Energy Agency per sector. And for oil and gas, it means that we have decided not to finance new oil and gas fields. So we will continue to finance existing oil and gas fields and projects.

But when it pertains to new oil and gas fields, then we will not take a new financing. In the end, although I fully understand the dilemmas that we face in the world, especially at this day and age, I think what we now need to do as societies, both the public and private sector, is really make sure that we can transition ourselves to a greener world, but it also sometimes means that we need to make tough choices. We will always do that inclusive of our clients. We're in dialogue with our clients.

But we have decided not to finance new oil and gas fields, and we stand by that.

Adrian Mirsanu -- Mirsanu.ro -- Analyst

Thank you.

Operator

And as there are no further questions, I'll hand it back to the speakers for closing remarks.

Steven Van Rijswijk -- Chief Executive Officer

Thank you very much, operator. To wrap up the call, in the second quarter, we saw continued growth in our primary customers and the adoption of our digital and mobile offerings. And this led to robust results despite the continuing geopolitical uncertainty and pressure on the global economy, which led to increasingly challenging operating conditions. With that, we leave you for now.

If you have any further questions, you know how to contact our media team. Thank you very much for your attention. And hopefully, we will speak to you again next quarter. And for the ones of you who go on holiday, I wish you a great holiday as well.

Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Steven Van Rijswijk -- Chief Executive Officer

Rutger Betlem -- Het Financieele Dagblad -- Analyst

Unknown speaker

Ljiljana Cortan -- Chief Risk Officer

Adrian Mirsanu -- Mirsanu.ro -- Analyst

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