ING Groep N.V.
Q4 2020 Earnings Call Transcript

Published: 12 Feb 2021

[Operator:]

Good morning. This is Patricia , welcoming you to ING's Fourth Quarter and Full Year 2020 Conference Call. Before handing this conference call over to Steven Van Rijswijk, Chief Executive Officer of ING Group, let me first say that today's comments may include forward-looking statements such as statements regarding future developments in our business, expectations for our future financial performance and any statement not involving a historical fact. Actual results may differ materially from those projected in any forward-looking statement. A discussion of factors that may cause actual results to differ from those in any forward-looking statements is contained in our public filings, including our most recent annual report on Form 20-F filed with the United States Securities and Exchange Commission and our earnings press release as posted on our website today. Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities. Good morning, Steven. Over to you.

[Steven Van Rijswijk:]

Thank you very much, and good morning, everyone, and welcome to our full year 2020 results call. I hope you're all in good health, and I'm happy to take you through today's presentation. I'm joined by our CFO, Tanate Phutrakul and our new CRO, Ljiljana Cortan, who joined us as of the 1st of January, and we're happy to have her on board. Welcome, Ljiljana. At the end of the presentation, we will always have time to take your questions. When we presented our 2019 results a year ago, I don't think anyone expected that the year 2020 would evolve the way it did. 2020 goes into history books due to the COVID-19 pandemic, which presented unprecedented challenges to our employees, customers and society. And also at ING, we have felt this effect. We continue to support our customers, employees and society during this time, and I'm sure I speak for many of us when I say that with the vaccination programs in the way, we very much look forward to circumstances normalizing again. During 2020, we have taken several actions to further build a sustainable company, and I'm pleased to see an increasing interest and recognition for our strong profile on ESG topics. Our digital model continues to be a clear advantage as we have added another 578,000 primary customers in 2020 and a number of mobile interactions continue to grow. I'm proud to say this support us to deliver strong performance with pricing discipline, good fee growth and cost control. The most notable effect of COVID-19 was on lending and deposits, with low lending demand turning historic strong loan growth into a small negative for 2020, while deposit inflow doubled and rates in the Euro swap market and non-Eurozone country declines. These factors have put pressure on NII, which we believe will be alleviated in normal circumstances. Full year risk costs were at EUR 2.7 billion or 43 basis points over average customer lending. Around 30% was in Stage 1 and 2, driven by IFRS 9-related provisions and management overlays. For 2021, we expect to move close to our through-the-cycle average of around 25 basis points. On asset quality, we have a strong and well-diversified loan book built through a proven risk management framework, which we did not change in our COVID-19. Our strong track record underscores that we are a low NPL bank also when compared to our Eurozone peers. The CET1 ratio improved from 15.3% to 15.5%, and this almost fully excludes the fourth quarter net profit as this has been added to the EUR 2.5 billion already reserved for future distributions, in line with our policy. This brings the total amount of reserves for future distributions to EUR 3.3 billion. We want to provide our shareholders with a healthy return and will start distribution of this amount with the delayed interim cash dividend over full year 2020 of EUR 0.12 per share, in line with the current ECB recommendation. We intend to distribute the remaining amount reserved after September 30, subject to prevailing ECB recommendations and relevant approvals. Looking forward, when economies recover, we are well positioned to capture growth again as we benefit from our geographical and product diversification.

[Operator:]

First question is from Mr. Robin van den Broek, Mediobanca.

[RobinvandenBroek:]

First of all, thank you for your strong message on cost of risk and capital return. I think it's very welcome. And with the risk of sounding a little bit greedy, but you're flagging excess capital above your 12.5% ambition. You've also indicated that your current expectation is that the vaccine rollout will be successful, loan growth will be restored in the second half of the year. I was just thinking about the time frame on releasing that buffer above 12.5%. I mean what kind of announcement, given the road map you could we expect with the full year '21 results? That will be question one. And the second one is a little bit the reasoning around NII. I guess the pressure from the portfolio is still there. Q4, you had a bit of a one-off from the FX ratio that went against that to offset that, and financial markets were a little bit stronger Q-on-Q. I'm just wondering, the trajectory from here on, should we expect that pressure will basically prevail in H1? And then when H2, we see recovery of loan growth come back on, that NII can have a flat to slightly growing structure again? Your thoughts around that will be very helpful.

[Steven Van Rijswijk:]

I will take the first question and then Tanate will take the second question. Yes. I mean we do have very strong capital. And like we said, we intend to move towards the ambition level of 12.5%. I mean clearly, the COVID pandemic is not over yet and, of course, we see the inoculation programs taking off. And with that, we believe that GDP growth, and then also loan growth, will be there as of the second half of this year. At the same point in time, we need to be mindful of the current uncertainty and potential cliff effects that we haven't seen coming as yet. But having said that, we will move over the next number of years to our 12.5%. But we're not giving a road map for that at this point in time. Tanate?

[TanatePhutrakul:]

Robin, let me give you a bit of guidance around net interest income. I think first of all, clearly, we flagged before in Q3 about this FX ratio hedging, and that has basically plateaued during the course of Q4, and we expect that plateauing to go into the future. I think if you talk about other things that could affect our NII in the future, loan growth is clearly one which we flag. Continued pricing discipline on origination margin has always been there and we expect that to continue, and we have started in a number of our markets charging negative rates for deposits coming in. You see that in the Netherlands, for example, we have decreased our threshold for charging negative rates from EUR 1 million to EUR 250,000. We introduced negative charging in Belgium. We introduced negative charging for new customers in Germany. So we do see that the impact of negative charging on our results will become a bit more material going forward as well.

[Operator:]

Our next question is from Mr. Omar Fall, Barclays.

[OmarFall:]

So I just want to go back to NII, please. Assuming you hit the TLTRO bonus threshold and the incremental negative charging effect, that looks like a benefit of around EUR 400 million or so. The replication portfolio drag should be pretty close to that amount on an annual basis, I'm guessing if you're investing around EUR 500 billion at the five year swap rate. Is that the right way to look at it, that these two elements kind of offset each other? I know you don't want to say how confident you are about hitting the TLTRO bonus threshold. But do these effects kind of offset each other, which basically means that should you return to volume growth and asset margins continue at the current positive trend, doesn't that mean that NII has a pretty good chance of rising this year? Set to aspire for rates, of course. And then the second question is just if you could give us a bit more sense of the glide path on fees. Obviously, we had the big jump in investment-driven products. How much product-related fees? How much more momentum do you think there is? Has the year started well? Are you seeing further evidence of, say, deposit transformation into fee-driven products, for instance? That would be great.

[Steven Van Rijswijk:]

I'll take the fee question and then Tanate will take the NII question. I think on fees, we see very good momentum. We are converting a number of our clients in using more investment products. And therefore, like we said on Germany, over 326,000 new investment product lines. And we do see that trend continuing also in the first month of this year. We have increased our daily banking packages in a number of markets, which the benefits you gradually see coming in, in the fourth quarter, but that's still only part of it, and continued benefit we would see in 2021. The number of payments is still at a subdued level, especially constrained by limited international travel. And though we, therefore, have been able to increase our fees with 5% quarter-on-quarter and also 5% year-on-year, this is on the back of lower payment levels than what we would see pre COVID, and especially international payment levels. So when we return to what we would call normality, those payment levels should increase. And therefore, also the fees on those payments should increase as well. And then last but not least, when we look at lending, we see, of course, a subdued number of structured loans which has decreased the lending fees for Wholesale Banking quite steeply over the past four quarters. And that should return to a level that we've seen pre-crisis as soon as lending demand picks up. So I think, in short, most of the elements are structural on the retail side, with, of course, an element of investment fees that could be lower if the volatility may reduce. But other than that, it's very structural and potentially a higher fee level for Wholesale Banking if lending activity picks up again.

[TanatePhutrakul:]

And Omar, just to address your question on NII, we obviously don't give disclosure on the replication impact on our results. And they can be volatile from year-to-year, depending on which part of the investments run off and get reinvested. But I can tell you about the management actions that we are taking, for example, as Steven mentioned at the top of the presentation, that if we are able to make the TLTRO III targets, we would book anywhere around EUR 300 million in the first half of 2021 on that benefit. But again, it's too tight to call for now. And just for actions already taken with respect to negative charging, that, as we have previously disclosed, would have a positive impact of around EUR 100 million and EUR 140 million full year impact as well, okay? And the last point, of course, that we are actively managing and discussing with our customer is that deposit inflow continues to come into the bank, and we are discussing other options for them to invest their money, including investment funds.

[Operator:]

Next question is from Mr. Stefan Nedialkov, Citi.

[StefanNedialkov:]

A couple of questions on NII and fees, unsurprisingly given that you guys are not giving overall group guidance for 2021. On NII, can you confirm that even if you don't meet your benchmark for the first TLTRO, you can still accrue benefit on your entire outstanding TLTRO amount as part of the second extension of TLTRO III? Meaning that if your loan growth picks up in the second half of '21, you can still accrue benefit on the TLTRO you took out in the first tranche. My second question is on the transformation of deposits into fees potentially of this around EUR 40 billion of deposit inflow that you saw in 2020, which is quite a bit higher versus your regular run rate. How much of that deposit base do you believe is sort of on the conservative/saving side of things versus something that can be shepherded into investment products? And I know that you kind of mentioned a little bit on that point, but if you can put some numbers around that, it will be really helpful. You guys obviously have a good digital platform. Beyond your own product, you also offer third-party product. For example, scalable capital in Germany, how much can that deposit, massive deposit inflow be diverted into your platform product, therefore, earning fees for you? And if I may, also related to that, there's a slide in your deck where you basically show annual mobile nondeposit sales increasing quite a lot from 2018 to 2020 from 46 per thousand to 74 per thousand. What is driving that growth? If you can give us a bit of color on investment product versus the AXA insurance products, et cetera, that will be very, very helpful.

[Steven Van Rijswijk:]

I will take the questions on fees and mobile sales growth and then Tanate will go back to NII. Maybe that's the topic of today. So Tanate will do NII, I will do fees. So in terms of mobile sales growth, let's start with that, Stefan. I mean we have a mobile- and digital-first mindset, and that means that we very much focus on the strength of our digital channels and our app environment. So we have a strong app environment and strong interaction with our clients. And we focus on end-to-end digitalization to make the interaction with our clients better, easier and smarter. And it also means that we are getting to better personalization of our clients because, in the end, if we get better personal interaction with our clients, that means clients contact us for particular questions, that means that drives better quality interaction but also drives better growth. And that is the reason why you also see there is an increased sales of products via the mobile app, because of the strength of our digital channels. And that's what we will continue to do, drive personalization because that drives better interaction, that drives growth, that drives primary customers. Looking at fees, yes, we, of course, have had a significant inflow in 2020. That also was due to the fact of the lower spending pattern of our clients. Over the past 4 or 5 years, you saw that there was a balance between deposits growth and lending growth, where the later years, especially there was more lending growth and fee growth. We continue to look at different ways to diversify our income and to also clients. So we have, like Tanate said, started to charge negative interest rates in various markets at different levels, and we continue to do so. We have built an app environment such that it is easy for people to invest and move their savings money to investment products. And so as an example, of the 300,000 clients that started to invest with ING in Germany, 20% were new to bank lines. And so also clients that normally would not be in ING changed their bank and started to invest through banks. So we will continue to do so. If lending demand picks up, then you may see a reversal of deposits compared to lending. And in the meantime, we continue to nurture our clients to use their money increasingly more, to use investment products. It is too hard to put a number on that at this point in time.

[TanatePhutrakul:]

Stefan, if we talk about NII and TLTRO mechanism, I guess, the first tranche, as you know, is a measurement from March last year to March this year so that, as we mentioned before, is tight and we see where we go on that and the measurement point for the second tranche being October of 2020 to December 2021. So indeed, it's a new measurement point. And given our expectations with resumption of loan growth in the latter part of this year, that's something that is before us, but still uncertain to determine today. Then your second question, which is around the EUR 40 billion of deposits inflow into the bank. How much of that is natural inflows? And how much of that is driven by COVID? I think it's clearly something which is extraordinary levels of inflows, even what you have seen in the past. So I think we hesitate to say how much of that would get converted into investment funds. But we do measure, as management, how many additional accounts are open, as Steven has mentioned, in terms of investment funds new to bank and how much our investors and savers are increasing their investment activities, okay? So something that is perhaps too early for us to give you guidance on, on how much of that deposit will be transferred to investment funds.

[Operator:]

Next question is from Mr. Benoit Petrarque, Kepler Cheuvreux.

[BenoitPetrarque:]

Just two questions on my side. So first of all, coming back to the loan growth for 2021. You are guiding for close to across-the-cycle average on cost of risk. So it looks like you are pretty optimistic on growth into 2021. And I was wondering if we should get a loan growth in line with your quarter cycle in 2021? Or are you thinking about something a bit higher bit also playing a catch-up on this very low growth in 2020? Just wondering how much loan growth you are likely to make in 2021, or if you could provide the direction at least. And then moving to the cost, I think there's clearly more focus on the cost control. It was down, on a clean basis, 1% in Q4. Could you talk about the short-term projects you are working on the cost side? And could you be a bit more specific on the cost trend into 2021, please?

[Steven Van Rijswijk:]

Yes, on the risk costs, what we have said is that we will move, and I'm looking at Ljiljana, who looks very stern at me as the new CRO, that we will move towards the through the cycle average of risk costs. And that is due to the fact that we have been very prudent in making reservations in the past number of quarters. You've seen significant overlays that we put in the second and the third quarter. Macroeconomic outlooks are improving, and that also means that we released some EUR 600 million of those overlays. But to be prudent again, we put again over EUR 400 million overlays on top of it to counter that effect of the releases of the EUR 600 million. And therefore, based on our conservative stance, the limited inflow and watch list, the low NPL level, the largely collateralized loan book and the good diversification that we have in the book, we are quite confident on that our risk costs will go back to a more normalized level and, therefore, move towards the through-the-cycle average. Now that is separate from the loan growth as such. But we do believe, what we have seen in our main markets, is that loan growth subsided on the back of lower working capital needs after the initial spike in March of 2020 with lower investments. And that's also because we're quite well diversified. If we look at Asia and we look at the US, there, we see already loan growth coming. And therefore, if also in Europe, and we believe in the second half of the year, based on the speed, depending on the speed of the inoculation programs, GDP will, again, be positive, and we will get back to a more normal economic activity. And also those peripheral investments, that means that also in Europe then growth will start to kick in. Now that's on the loan growth. Maybe to finalize on that point, Benoit, where that is at, again, the same levels of what we have seen over the '16, '19 period remains to be seen. We will, of course, remain prudent within our risk framework. And we will, of course, remain prudent in pricing because we believe it's important to be very strict on pricing in that regard. But we believe that we will see also, next to mortgage growth, also some business growth in the second half of 2021. On costs, you've seen the announcements that we've made in November on the Wholesale Bank and on Maggie. You've seen the announcements that we made on the branch network in the Netherlands in July. You've seen announcements on the branch network that we made in Belgium. We are working on branch network optimization in challengers and growth countries. And I will continue to focus on optimizing our network in line with the digital offering that we have. In that sense, COVID-19 has shown that our digital model is the right one and that we benefit from a digital-first and mobile-first mindset. I will also review business lines, and Tanate and I are continuing to review business lines, to see whether through the cycle, we make the appropriate return. And if not, we will take appropriate action. And when we take that action, we will announce it. I want to be clear on that the nose of the cost plane needs to come further down. And the second element of that is that I want to be clear on execution certainty. And as soon as we've analyzed further, we will make further announcements on next measures.

[Operator:]

Our next question is from Mr. Thomas Dewasmes of Goldman Sachs.

[ThomasDewasmes:]

Two questions, please. First one on costs. Just to confirm on your last comment on challenger markets. Are you then saying that your decision on what to do with cost is going to depend on the rate trajectory from here and perhaps how fast the curve can return to what it used to be just before the quick cuts with COVID-19? And then just on the cost of risk again, I appreciate that there has been quite a few lumpy items in 2020 with the fraud case, the Swiss franc mortgages, the oil price being very volatile. If I take your 25 bps guidance for next year, given you're seeing 6%, 7% year-on-year growth in deposits in Retail Banking, what is worrying you the most? Is that SME lending? Is that consumer lending? Where do you expect the cost of risk to materialize in the retail segment, please?

[Steven Van Rijswijk:]

On cost, well, let me make one thing clear. We hope for the best, but we cater for the worst. So I look at what the current interest rate curve is doing and I will base myself on that. And I will not hope for better interest rates at a later point in time. So we take measures with the current picture of the world in mind, not with a hopeful future picture in mind. And hence, I will continue to take action and not hope for interest rates to return to pre-COVID levels. That's number one. On the cost of risk guidance for 2021. And I've presented it also in the investor presentation in 2019, we have a very well-diversified book. Present in many countries. We have sector caps on some of the more volatile sectors, such as leveraged finance and real estate. We have put caps on those already a few years ago. And our exposure in a number of the more higher-risk sectors such as leisure, cafés, bars, restaurants, hotels, travel, so airlines, transportation, agriculture is quite limited. And as I've said before, we have provided in the last number of quarters with management overlays for potential risk costs that may come on a number of those high-risk sectors. So in that sense, based on our diversification, on our strong risk management framework and our as being a low NPL bank, I'm confident about the cost of risk levels next year.

[Operator:]

Next question is from Mr. Jon Peace, Crédit Suisse.

[JonPeace:]

So what will make you decide between whether to pay the full year '19 between dividend and buyback? And have you had any consultation with the ECB about how comfortable they will be for you to pay back potentially a double-digit percentage of your market cap later on this year? And how do you think about the stress test in this context as to whether that might ?

[Steven Van Rijswijk:]

Jon, I mean, you were breaking up a little bit, but clearly your question was about dividends. And in that sense, I will give the word to Tanate.

[TanatePhutrakul:]

So I think what you're asking is have we been in a bit of consultation with the ECB with respect to our dividend announcement. And we have been in discussions on this and we have been making sure that what we announced is in line with the ECB recommendations, right? And I suppose, Jon, to give you a sense of what we are doing in terms of these dividend announcements, it's all been very much in line with our dividend policy, right? Whether it's 2019, it's not that we're paying extra, it's simply paying what we actually originally thought that we could afford to pay and we can afford to pay in '19. And for 2020, it's the same thing, based on our 50% of resilient profit. That's all we're doing in terms of capital return intentions, okay? And in terms of discussion around 2019. I think it's also the case that we will simply look at a balance between cash distribution in form of dividend and also in terms of share buyback, and we maintain that flexibility. And it's really depending on how we see the intrinsic value based on the stock price at that prevailing moment in time.

[Operator:]

Next question is from Mr. Benjamin Goy, Deutsche Bank.

[BenjaminGoy:]

Two questions from my side, please. First, on primary customers. You added 600,000 in 2020, which is a good number, but it's lower than what you delivered in previous years and about 60% was driven by Germany. So I was wondering, in a year like 2020 where many people probably got comfortable using digital-only banks, why wasn't this growing faster and on a more broad-based basis? Or on a positive spin, do you expect 2021 to see higher growth and then also in other countries outside of Germany? And then secondly, a question for Ljiljana. Given the risk function is obviously crucial, and particular in these times, I was just wondering on her first impressions with some fresh pair of eyes on ING's risk management.

[Steven Van Rijswijk:]

On the primary customers, in a year whereby there is subdued economic activity, you will see that customers typically stick with their existing banks or do not use an additional amount of products. And hence, even in this year with a lower economic activity and economy is contracting, growing still with this amount of primary customers, but also growing the number of mobile sales on our app, was quite impressive. And therefore, I believe that when economic activity returns to more normalized levels, we will benefit that, both in terms of primary customers but also in terms of profitable growth. Because in the end, I want to have profitable growth, not only primary customers for the sake of primary customers, it has to come with a beneficial relationship for both the client and for ING. And then over to Ljiljana. What are your first impressions?

[LjiljanaCortan:]

Well, fresh pair of eyes confirms what has been shared with the markets already for years, that ING has a very stable and well-built risk management framework in place. Building further on this strong basis, I'm sure we are going to be able to capture the opportunities of the future, both with respect to our positioning as digital leader, but as well growth. As already said many times, we do have a structured framework around portfolio in sense of the risk policies, concentration limits, caps and some of those are actually already there for some years. So I do believe we are on the journey toward recovery. And I believe, as also correctly said by Steven, we are going to go towards the cycle average. However, that journey is going to be long, and we do not, not account for certain eventual bumps due to the uncertainties in front of us. However, very comfortable that we're going to be there, as already shared.

[Operator:]

Next question is from Mr. Raul Sinha, JP Morgan.

[RaulSinha:]

I've got a question on Basel IV capital. You're choosing not to disclose a ratio on the slides. And I just wanted to ask why that might be the case, given your ambition clearly is Basel IV fully loaded 12.5% long term. And if you could give us perhaps some of the moving parts that are still remaining to get from your current 15.5% down to a fully loaded Basel IV, that will be quite helpful. The second question is a broader question on mortgages. If I look at the loan book growth trajectory at ING, clearly, one of the features of this crisis has been the pickup in mortgage loan growth across your markets. And that clearly has helped offset some of the other books that have been shrinking quite dramatically. What do you think is the outlook for mortgage growth into '21? Are you worried that this might start to slow down? Or do you think there are enough, say, positive structural drivers that could still continue to drive positive loan growth for you on the mortgage side?

[Steven Van Rijswijk:]

Thank you, Raul. On Basel IV, I mean, the 12.5% ambition level is, let's say, the Basel IV ambition level. And basically, the 15.5% also. And that we still have, with all the measurements on Basel and other model adjustments, have 50 basis points to go. So last quarter, it was 60 basis points. This quarter, we included an additional impact of around 10 basis points. And hence, we have 50 basis points to go. So we're well capitalized also to include all Basel effects if they still were to come.

[RaulSinha:]

And what is the sort of, let's say, the remaining part? I mean I guess, TRIM is more or less done. But in terms of portfolios, perhaps maybe the Dutch mortgages, is there anything else we should keep in mind in terms of the moving parts?

[Steven Van Rijswijk:]

Yes. It's basically the day 1 implementation of the output factor of Basel were to come in 2023 or '24. And then on the loan growth. Yes, I mean, what we have seen, of course, is that the house prices continue to increase on the back of low interest rates. And that has helped, of course, the value of these houses, but also the affordability for people to pay for their houses. So a low interest rate environment is stimulating that. Of course, we need to be mindful of a cliff effect when the measures that are being taken by governments and banks alike would stop, what would that do with unemployment, for example. But as we've also seen in the previous crisis, in the financial crisis 2008, 2010, then mortgage demand continued. And we don't expect that to be different this time, especially not since the housing shortage in the various countries underpins the fact that there is a need for more houses to be mortgaged.

[Operator:]

Next question is from Mr. Kiri Vijayarajah of HSBC.

[KiriVijayarajah:]

Couple of questions from my side. Firstly, in the Wholesale Bank and the loan growth or rather the loan shrinkage there, looks like it's moderating. So where are we on that? Are we coming towards the end of that derisking process in areas like leveraged finance? And is the ambition, therefore, to start regrowing again more meaningfully in the Wholesale Bank as things recover? So is the message you're back in growth mode in wholesale for 2021? That's the first question. And then secondly, just coming back to the higher fee packages. I was just wondering, are there any particular geographies which have got more room to catch up in terms of the repricing effort? And also, kind of which geographies are you finding it harder to put fee increases through? So some color on that would be useful. Because, obviously, Germany is a big success story, but really on the other end of the spectrum, where are you finding the challenges on the fee side?

[Steven Van Rijswijk:]

I mean in terms of package fees, I mean, and I think it's a good question. What I want to say there is that we come from an environment whereby we historically charge very limited package fees in many of the countries in which we are operating in. So in many of the countries where we started as a direct bank, ING Direct a number of years ago, actually, we charge zero. So we come from in that sense, the bad news is it was zero. The good news is we have some upside. And hence, we will, of course, also look at the cost and making it equitable for our clients. We have, in most of the markets, quite some upside to go in terms of charging for our package fees. And that's what we are doing. Next, of course, to nudging our clients, for example, to using or nonuse of ATMs or using call centers. So it's either charging of package fees or charging of behavior fees or avoidance of costs. So that's the first element. The second element, of course, is that many banks are in the same boat as we are in. And hence, yes, it will determine how the market will develop itself in that respect. But again, we come from a very low fee environment and, therefore, we have substantial upside. With regards to the loan growth, the fourth quarter, in that sense for Wholesale Banking, was actually quite good given the circumstances, given the fact that end of year, a number of clients in Wholesale Banking are decreasing their balances. And although we have seen a small decrease with EUR 700 million in the light of low investment environment, we still have seen an up on, let's say, the daily banking and trade environment which is quite good and is a testimony of the first signals that we see in Asia and the US. And that means that if we can return to more normal economic levels, we believe that we will also see continued loan growth in Wholesale Banking. But of course, the vaccination programs have just started and economic activity is not yet where it is, so it will likely be more visible towards the second half of 2021.

[Operator:]

Our next question is from Ms. Daphne Tsang, Redburn Europe Limited.

[DaphneTsang:]

I've got one on NII, please. So your NIM is very resilient this quarter, which is good news. But excluding the balance sheet effect you are seeing improvement on better lending margin. I know you don't guide on the specific impact from replication portfolio, but can you share some color on the dynamic there between the product lending spreads and the continued drag from lower replication income, I think? Would you be able to leverage your pricing discipline to create that offset towards the direct which we see in Q4? And also on product lending spread, is there any mix shift effects there in 4Q that helps your margins which may not necessarily continue or may even reverse in the coming quarter as lending will kind of pick up in other areas outside of mortgage?

[TanatePhutrakul:]

I think what you're asking about the balance sheet impact and our net interest margin. I think probably a few points to make. As we mentioned before, we have had compression in the past couple of quarters because of this FX ratio hedging impact, and that has plateaued during the course of Q4. In fact, it went up slightly, okay? And if you wanted to see how that moves, is really looking at currencies like U.S. dollar, Polish zloty, Turkish lira against the euro. The bigger the difference, the better the FX ratio hedging results in ING's P&L. That's one. The second is that, as we always mentioned, we maintain risk and pricing discipline across the board, whether in consumer lending, business lending, mortgages or other areas, and you will see in the more detailed disclosure later today, that we maintain that pricing discipline on origination of new loans. So that's the second. And then the third, of course, is the fact that we do see that replication drag in our P&L. But at the same time, we have, as mentioned, introduced a number of actions on negative interest rates that will actually help kind of mitigate some of that. And maybe the last point to make is the fact that it is true that our net interest margin is down. But the impact of TLTRO having taken roughly EUR 55 billion of that funding, we have not booked any income against it, and that has a drag on our NIM of about 6 basis points. So that we'll see what happens at the end of Q1.

[DaphneTsang:]

And then just a follow-up question, please. On charging negative rates, which yield do you see more room to charge negative rate based on the announcement measures already in Netherlands, Belgium and other countries as well?

[TanatePhutrakul:]

Yes. So mostly in the Eurozone countries. And it's also, as we mentioned, it's about gradually, as we have done in the past, lowering the threshold of this negative charging. Again, as we mentioned in the Netherlands, we went from EUR 1 million threshold to EUR 250,000. We started charging EUR 1 million in Belgium. In Germany, for new to bank customers with savings of more than EUR 100,000, they do get charged negative rates on deposits with us. And in Spain, we have also introduced some fees for customers with higher amount of limits, but without a primary relationship with us. So it's in a number of geographies, principally in the Eurozone area.

[Operator:]

Next question is from Ms. Anke Reingen of RBC.

[AnkeReingen:]

First is just on the cost. You stressed that you're looking at bringing the nose down. I just wanted to confirm that this basically implies that costs should be lower than the EUR 9.4 billion underlying in 2020 and '21. And then you put up the slide about the ESG leadership. I mean just limiting it to like the financial implications. If you maybe just can talk a bit through about how you think this is basically maybe a competitive financial advantage because other banks are talking about selling asset management products, which is maybe less likely here or your potential on financing. If you can maybe help us to see, or is it controlling the damage just in terms of limiting it to the financial aspect of things.

[Steven Van Rijswijk:]

You have to come back to me with the ESG question because the line was breaking up a bit. But let me first answer the cost question, and then I will ask you to ask your question on ESG again. So yes, I can't make it any clearer than this. So what you've now seen is that the cost over the past years were going up. And this year, the last six months, we've shown that we have flattened the costs. And I've indicated that we intend to bring the costs playing or the cost playing further down. And that's exactly, as you mentioned, that means that we will bring the cost that we intend to bring the cost down compared to where they are from this level.

[AnkeReingen:]

On the ESG, so basically, can you talk a bit about in terms of financial impact about the opportunities and threats for ING?

[Steven Van Rijswijk:]

Well, maybe I can say a couple of things on that. So first of all, we have been working on our climate profile since 2015, and that has, for example, include the fact that we have decided to stop our coal investments or investments in coal and we'll completely stop that as of 2025. We have discussions with a number of auto sectors to actually decrease the emissions. And we work with those clients to decrease those emissions over a number of years. So we try to do that in an inclusive way. And why do we do that? Because the simplest way is just to say, well, we stop completely with financing industries, but then you change the bank book, but you do not change the world. And so what we will do is to work as much as we can in the different sectors with our clients for them to apply certain methodologies. And then within that, we very strictly measure in our Terra report that we have issued now, and you can see that on our website in the third quarter of last year for the second time, that on those nine sectors with the highest CO2 emissions, we manage a measure sector by sector, whether we are in line with the Paris Accord or not. And if not, we will take appropriate action to get in line with that Accord. So that's how we manage it both from a risk and from a reporting side. Now with regards to our ESG profile, because we're so prominent, we have been in dialogue with many of these clients. And that's why you also see that many of these clients choose us to issue, for example, green bonds and green loans or sustainable loans and sustainable bonds, and we link those bonds and loans to particular targets either that they make for that loan specifically, then it's a sustainable linked loan really links to what that loan is being used for, for example, renewable energy or more broadly that the company has broader sustainability KPIS. And then we link that to those KPIS, which KPIs need to be independently measurable and objectifiable to make sure there is real impact also with their client of their CO2 footprint. And that's how we steer both and internally our business but also influence and discuss with our clients.

[Operator:]

Next question is from Mr. Farquhar Murray, Autonomous.

[FarquharMurray:]

Just two brief questions from me. Firstly, on the latent impact of fee charge increases on travel-related card payments. Do you have a sense of how much more normal travel would add there? For instance, what our overseas transaction volumes running at currently versus more normal circumstances? And then secondly, just on the FX mortgage book charge you've taken. Could you just update me on how large that FX mortgage book is? I had a couple of hundred million in my head, but just wondered if it might have moved.

[Steven Van Rijswijk:]

On the fees, I mean, basically, our international travel is currently almost 0. So if you look at, let's say, the impact in our payment business, what you would see between, let's say, the first and the second quarter, the largest part of that impact comes from the fact that people do not travel. And of course, we made it up by an increased a number of payment packages, so an increase in the charge that we levy for payment packages and in a return to more normal of our, I would say, local credit cards and payment business. But if you look at, especially between the first and the second quarter, that dip will come from largely the nontravel, which is currently still the case. So as soon as travel returns again, we should have that amount back. For the FX mortgages, the amount of FX mortgages that we had in Poland, that would be an equivalent of around EUR 200 million.

[Operator:]

Our next question is from Ms. Giulia Aurora Miotto of Morgan Stanley.

[GiuliaMiotto:]

So first question, I want to go back to the excess capital. So we have been talking a lot about capital distribution, but I was wondering if there is any other plan about the excess capital. And I'm talking about, for example, considering M&A transaction or taking more restructuring costs, for example, to cut the costs down further. So that's my first question. And then, Steven, I was wondering, strategically, after the first few quarters in the job, shall we expect an Investor Day with new updated targets towards the end of this year? Or how are you thinking about that one?

[Steven Van Rijswijk:]

Any M&A plans? Yes, this is a question I've heard before. Clearly, we have capital and we intend to distribute it. With regards to M&A, we are a mobile-first and digital-first bank. And we want to provide a better and more diverse offer to our clients, I also discussed with an increase in mobile sales that I talked about half an hour ago. So that means that if you want to improve the offer to your clients, make it more personal. If we see investments that can improve our digital offer, for example, technology companies or people with a technology feature that we do not have, so you can make our interaction even better, faster, smarter and more personal, then we will look at those type of technologies or companies. And if we can see companies that add or augment our sales and services features in terms of diversification away from NII and more fees and commission business, we will look at those as well. That's the priority for M&A. When looking to IR Day, I mean, that question was also asked before. We're still in a COVID crisis, so there is still quite a bit of uncertainty. But I think that the uncertainty will subside in the second half of this year. And then we will likely announce an Investor Day in the first part of 2021, probably in the first quarter '22.

[Operator:]

Next question is from Mr. Tarik El Mejjad of Bank of America.

[TarikElMejjad:]

I'm just being mindful of time. Very good clarification. In terms of the dividends that you'll pay from September, I think the wording has been carefully chosen to give you some flexibility. But should we think about this payment be done within Q4? Or could it be spread out in 2022 as well?

[TanatePhutrakul:]

So Tarik, you recognized a finely crafted wording there. And I think we just want to be making sure that we respect the ECB recommendations. So when the ECB recommendations are lifted, we would take the necessary legal and regulatory steps to make those dividends available. But so far, what we want to confirm is it will be after September '21.

[Operator:]

Next question is from Mr. Jason Kalamboussis, KBC Securities.

[JasonKalamboussis:]

Quick questions. The first one is, I mean, you have highlighted overall, good outlook, how you're doing better in impairments, et cetera, versus peers. So costs remain probably the one area. They have slightly increased this year. You have peers that saw deeper decreases throughout the year. So I just wanted to understand why do you find that it's better to approach this from an ad hoc basis, reviewing area by area, rather than putting a cost larger target and drive the whole group to get there, which can be more efficient over 12 months? The second question was on Wholesale Banking. In the third quarter, we discussed about the fact that you have, by lowering your CET1 ratio at 12.5%, you were able to better price. I just wanted to understand how was the fourth quarter versus the third quarter? I'm also looking in the outlook for 2021. Do you find that with a number of peers like ABN, Natixis, SocGen all retrieving from areas, you are more likely to benefit and therefore being able eventually to still increase your pricing in some areas? And in which ones? The last one, just if you could give us a sense of what international payment fees were in '19 so that we know a bit what you can come back to once everything normalizes.

[Steven Van Rijswijk:]

With regards to the first question on why we do things ad hoc rather than doing a, I think that you mean a big bang. I understand the comment. Let me make clear that we do not do things ad hoc. And I would like to prevent to do things ad hoc. And that's why I want to announce things with execution certainty. And what I want to make sure is that we, as an organization, focus on making the business lines sufficiently profitable and resilient through the cycle. And that basically means that we're reviewing business line per business line, that we look at the way that our business develops in terms of our digital proposition and the requirement that has certain branches or provide other better services. And every time we do that, and we see that there is a requirement to actually cut costs or say, redesign our operations, then we will do so, and we will do so with execution certainty. That I find important. With regards to the Wholesale Banking, I mean, in terms of pricing in the fourth quarter, I think if you look at both Wholesale Banking and Retail Banking, in terms of our new production, we have been able to price up across. But that we benefited, of course, from lower funding costs. It was the larger part. And here and there, we were able to increase the price on the street in some of our books. With regards to the retrieval or the going back to, let's say, a small number of markets that we see with some of our peers, yes, of course, in the end, it's a question of demand and supply. But regardless of that, and also we have done that even before that time, we have always been disciplined in pricing. Either we get pricing with the right returns and then of course, with the right risk profile, and then we will distribute the loan. If not, we will not do it and we will return the money, and that we will continue to do. Because we're not a market share player, we want to be there to actually price the right through-the-cycle return with our clients and not to just gain market share for the sake of gaining market share. It's about profitable growth, not just growth.

[Operator:]

Our next question is from Mr. Stefan Nedialkov, Citi.

[StefanNedialkov:]

I requeued to ask two quick follow-ups. On capital and Basel IV impact, Raul asked the question. I wasn't 100% sure. Is the 50 basis points of remaining regulatory impact, does that include everything, i.e., TRIM, whatever TRIM is left, plus the DMB floors plus any additional Basel IV impact? Is all of that 50 basis points? And my second question goes back to this big NII discussion we have been having on the call. What other levers could you potentially have to improve margins here? For example, one thing that some banks have done in the past is, upon observing a higher duration and behavioral maturity of deposits, they increased their replicating portfolio. In COVID, are you noticing that behavioral maturities are increasing and potentially that could improve your deposit margins by extending durations?

[Steven Van Rijswijk:]

I will give Tanate two seconds to chew on the second question, because the answer on the first question is, yes, 50 basis points includes all.

[TanatePhutrakul:]

And I think, Stefan, with respect to duration management, we don't take a P&L view on how we manage duration. It's purely risk management driven. So the replication, the duration is there to make sure that we offset any market risk in our banking book, okay? So we don't do that. But having said that, we constantly review the duration of our liabilities given client behavior, of course. And the other factors that we have talked about, I think it's just more of the same, lending growth, margin discipline, negative charging and diversification, so different asset classes than before. I think if you look in 2020, where maybe there's opportunity going forward is the fact that, for example, consumer lending, we had traditionally been able to grow consumer lending in previous year. But this year, we see contraction, and I think that's related to COVID situation. So we do expect certain pockets of higher-margin loans like consumer lending to resume growing in 2021.

[StefanNedialkov:]

So is it fair to assume that behavioral maturities have not lengthened meaningfully during COVID?

[TanatePhutrakul:]

No, it hasn't materially changed. Yes.

[Operator:]

We have a question from Martina Matouskova of Jefferies.

[MartinaMatouskova:]

I think all the questions have been answered, so just one quick follow-up. Can you just refresh my memory how you look at the operational average, whether is it on a stated basis or adjusted basis? Because if I look at a consensus and I adjust everything, I think revenues are flat and the underlying OpEx is flat as well, which doesn't really give much of operational leverage. Is that something you are targeting? Or you think that consensus is kind of underestimating what you can deliver on the cost?

[Steven Van Rijswijk:]

Yes. So in the end, and I've said it also in a previous call, that I'm focused on positive . And it basically means that we want to make sure that there is a delta between the revenue and the costs. And that means that we're working on a few things, be very disciplined on our lending margins. We have started to charge negatively, changed behavioral fees, have more diversification in income, which you have seen coming through in this year as well and take actions on costs. And again, I'll repeat myself, but that plane needs to come down or the nose needs to come down. And that's the way we will create operational leverage.

[Operator:]

There are no further questions, sir. Please continue.

[Steven Van Rijswijk:]

So thank you very much for your time, and I hope to talk to you soon. And have a great day and everybody, have a great weekend. Thanks again.