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ING Groep N.V. Annual Report 2011
3854_10-k_2012-03-21_8b705bda-581e-4bd4-b2b0-0ea598df3545.pdf
Annual Report
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ING
ING Bank Annual Report
2011
ING Bank N.V.
2011 Annual Report
Contents
1 Who we are
Management 3
ING at a glance 4
2 Report of the Management Board
Overview 6
Financial developments business lines 9
- Retail Banking 9
- Commercial Banking 10
Corporate governance 12
Conformity statement 13
3 Governance
Report of the Supervisory Board 14
4 Consolidated annual accounts
Consolidated balance sheet 16
Consolidated profit and loss account 17
Consolidated statement of comprehensive income 18
Consolidated statement of cash flows 19
Consolidated statement of changes in equity 20
Accounting policies for the consolidated annual accounts 21
Notes to the consolidated annual accounts 37
Risk management 105
Capital management 139
5 Parent company annual accounts
Parent company balance sheet 143
Parent company profit and loss account 144
Parent company statement of changes in equity 145
Accounting policies for the parent company annual accounts 146
Notes to the parent company annual accounts 147
6 Other information
Independent auditor's report 157
Proposed appropriation of result 158
7 Additional information
Additional Pillar 3 information 159
ING Bank Annual Report 2011
Who we are
1
Management
COMPOSITION OF THE BOARDS
ING Bank N.V. ('ING Bank') has a two-tier board system, consisting of a Supervisory Board and a Management Board Banking. The Supervisory Board supervises the policy of the Management Board Banking and the general course of events in the company and assists the Management Board Banking by providing advice. The Management Board Banking is responsible for the daily management of the company.
The composition of the Management Board Banking and the Supervisory Board of ING Bank was as follows.
MANAGEMENT BOARD BANKING
Composition on 31 December 2011
Jan H.M. Hommen (68), chairman
J.V. (Koos) Timmermans (1) (51), vice-chairman
Patrick G. Flynn (51), chief financial officer
Wilfred F. Nagel (2) (55), chief risk officer
William L. Connelly (53), CEO Commercial Banking
C.P.A.J. (Eli) Leenaars (50), CEO Retail Banking Direct and International
Hans van der Noordaa (50), CEO Retail Banking Benelux
(1) Appointed vice-chairman as of 1 October 2011.
(2) Appointed to the Management Board as of 5 October 2011.
SUPERVISORY BOARD
Composition on 31 December 2011
Jeroen van der Veer (64), chairman
Peter A.F.W. Elverding (63), vice-chairman
J.P. (Tineke) Bahlmann (61)
Henk W. Breukink (61)
Sjoerd van Keulen (65)
Piet C. Klaver (66)
Joost Ch.L. Kuiper (64)
Aman Mehta (1) (65)
Luc A.C.P. Vandewalle (67)
Lodewijk J. de Waal (61)
(1) Nominated for reappointment as of 14 May 2012.
COMMITTEES OF THE SUPERVISORY BOARD
Composition on 31 December 2011
Audit Committee
Joost Kuiper, chairman
Tineke Bahlmann
Henk Breukink
Aman Mehta
Luc Vandewalle
Risk Committee
Piet Klaver, chairman
Tineke Bahlmann
Sjoerd van Keulen
Joost Kuiper
Luc Vandewalle
Jeroen van der Veer
Remuneration Committee
Peter Elverding, chairman
Sjoerd van Keulen
Piet Klaver
Jeroen van der Veer
Lodewijk de Waal
Nomination Committee
Jeroen van der Veer, chairman
Peter Elverding
Sjoerd van Keulen
Piet Klaver
Lodewijk de Waal
ING Bank Annual Report 2011 3
Who we are
ING at a glance
ING BANK IS PART OF ING GROUP
ING GROUP
Our mission
ING's mission is to set the standard in helping our customers manage their financial future. We aim to deliver financial products and services in the way our customers want them delivered: with exemplary service, convenience and at competitive prices.
Our profile
ING is a global financial institution of Dutch origin, currently offering banking, investments, life insurance and retirement services to meet the needs of a broad customer base. Going forward, we will concentrate on our position as a strong European bank with attractive home market positions in Northern Europe and growth options in Central and Eastern Europe and Asia, while creating an optimal base for independent futures for our insurance operations (including investment management).
Our strategy
To serve the interests of our stakeholders, increase management focus and create value for our shareholders. ING is moving towards separation of its banking and insurance operations. ING is moving towards separation of its banking and insurance operations. We believe the widespread demand for greater simplicity, reliability and transparency makes this the best course of action. The separation is also part of the restructuring plan submitted to the European Commission in order to get approval for the Dutch state aid received during the financial crisis. In the future, ING Bank intends to be a strong European bank, with leading domestic banking positions in attractive, stable home markets, as well as a leading commercial bank in the Benelux and Central and Eastern Europe. We also intend to continue to selectively evolve our various ING Direct units into more mature full service banking models. These initiatives in Europe, coupled with our positions outside of Europe, should give the bank attractive growth potential in the long term. ING will build on its global presence and international network and capitalise on its leadership position in gathering savings, multi-channel distribution, simple propositions and marketing. We will focus on earning our customers' trust through transparent products, value for money and superior service. This reflects our universal customer ideal: saving and investing for the future should be easier.
Our customers
ING serves a broad customer base, comprising individuals, families, small businesses, large corporations, institutions and governments.
Our stakeholders
ING conducts business on the basis of clearly-defined business principles. In all our activities, we carefully weigh the interests of our various stakeholders: customers, employees, business relations and suppliers, society at large and shareholders.
Our corporate responsibility
ING wants to build its future on sustainable profit based on sound business ethics and respect for its stakeholders and to be a good corporate citizen. It is only by acting with professionalism and integrity that we will maintain our stakeholders' trust and preserve our reputation. Our Business Principles prescribe the corporate values we pursue and the responsibilities we have towards society and the environment: we act with integrity, we are open and clear, we respect each other and we are socially and environmentally responsible.
CREATING STRONGER STANDALONE BUSINESSES
Strategic priorities
Our strategic priorities are to strengthen the company's financial position, to restructure, to streamline the business portfolio, to repay the Dutch state aid and to build stronger banking and insurance/investment management businesses, all based on sound business ethics and good corporate citizenship.
Strong financial position
Solid earnings and a strong capital and funding position enable ING to support its customers also in uncertain times. On the banking side the core Tier 1 ratio, a key measure of financial strength, was at 9.6% at the end of 2011.
Restructuring and streamlining on track
The restructuring of the Group is on track, with our banking and insurance/investment management businesses operating as standalone companies from January 2011. Further progress on separation projects and divestments was made throughout 2011.
Repaying on core Tier 1 securities
It is one of ING's priorities to repay the remaining EUR 3 billion of capital support to the Dutch State as soon as possible. However, in light of the current challenging and changing financial and regulatory environment we take a cautious approach and maintain strong capital ratios as we build towards Basel III and satisfy other regulatory requirements.
ING Bank Annual Report 2011
Who we are
1
ING at a glance continued
Building stronger businesses
One of ING Bank's priorities is to generate capital and reach a core Tier 1 ratio of at least 10% by 2013. From 2013, the bank aims for moderate balance sheet growth in line with GDP growth and a strong focus on deposits generation.
ING BANK
ING Bank is active through two business lines: Retail Banking and Commercial Banking.
Retail Banking
Retail Banking provides retail and direct banking services to individuals and small and medium-sized enterprises throughout Europe, Asia and Canada, with a base in our Northern European home markets. Our ambition is to transform ING Direct into a full-service bank.
Commercial Banking
Commercial Banking offers services such as lending, payments and cash management in more than 40 countries to corporations, governments and other financial institutions.
ING Bank Annual Report 2011 5
Report of the Management Board
Overview
ING Bank is a large international player with an extensive global network in over 40 countries. It has leading banking positions in its home markets of the Netherlands, Belgium, Luxembourg, Germany and Poland. Furthermore, ING Bank has key positions in other Western, Central and Eastern European countries and Turkey. This is coupled with options outside of Europe which will give ING Bank interesting growth potential in the long term.
The retail banking operations are focused on delivering simple and transparent retail products at low costs through a multi-channel distribution approach. Commercial Banking supports its global clients through an extensive international network and offers core banking solutions and provides tailored solutions.
Since January 2011, ING Bank has been operating as a stand-alone business under the umbrella of ING Group.
FINANCIAL DEVELOPMENTS
Operating conditions were challenging in 2011, as financial markets continued to be volatile and the macroeconomic environment deteriorated further in the second half of the year. ING Bank's net result was EUR 4,005 million compared with a net result of EUR 4,495 million in 2010. The 2011 net result included EUR 821 million of gains on divestments, mainly related to the sale of ING Car Lease and Real Estate Investment Management, and EUR 66 million of operating net results from divested units. Special items after tax were EUR -450 million, mainly related to various restructuring programmes, costs related to the separation of Bank and Insurance, as well as a value adjustment of the Illiquid Assets Back-up Facility. In 2010, the net impact of divestments was EUR 481 million, mainly reflecting the gain on the sale of the Swiss and Asian Private Banking activities and the operating result from divested units. Special items after tax amounted to EUR -340 million and were related to the Bank's restructuring programs.
Underlying net result for 2011 was EUR 3,568 million, down 18.1% from EUR 4,354 million a year earlier. Underlying net result is derived from total net result by excluding the impact from divestments and special items.
Underlying result before tax dropped 15.4% to EUR 4,986 million from EUR 5,892 million in 2010, mainly reflecting the impact of the sovereign debt crisis in Europe. The decline was mainly due to EUR 588 million of impairments on Greek government bonds and EUR 181 million of losses on selective de-risking at ING Direct, while the previous year included EUR 275 million of capital gains on the sale of two Asian equity stakes. Excluding these items, underlying result before tax rose slightly by 2.5%.
Total underlying income declined 5.1% to EUR 16,115 million in 2011 from EUR 16,984 million in 2010. The underlying net interest result improved 1.2% to EUR 13,895 million, driven by a small increase in volumes, while the underlying interest margin was stable on 1.45%. The total interest margin, however, declined slightly to 1.42% from 1.44% in 2010, mainly due to a value adjustment of the Illiquid Assets Back-up Facility based on higher prepayment behaviour in the underlying
Alt-A securities (booked as special item). Underlying commission income remained flat on 2010, as increases in Commercial Banking (mainly Structured Finance) were offset by declines in Retail Banking. Underlying investment and other income dropped to EUR -36 million compared with EUR 1,004 million in 2010. This decline was due to EUR 588 million of impairments on Greek government bonds and EUR 181 million of losses on selective de-risking at ING Direct taken in 2011, while 2010 included EUR 275 million of capital gains on the sale of two Asian equity stakes.
Underlying operating expenses increased by 1.2% to EUR 9,462 million, mainly due to specific investments in the business and a modest year-on-year increase in staff costs. This was largely offset by stringent cost control and lower impairments on real estate development projects. The underlying cost/income ratio increased to 58.7% from 55.1% in 2010, mainly driven by lower income. Excluding market-related impacts, the cost/income ratio was 54.6% in 2011.
The underlying net addition to the provision for loan losses declined 4.3% to EUR 1,667 million from EUR 1,742 million in 2010. Risk costs in 2011 were 52 basis points of average risk-weighted assets compared with 53 basis points in 2010.
The underlying return on IFRS-EU equity was 10.5% in 2011, down from 13.2% in 2010.
BUSINESS DEVELOPMENTS
In 2011, ING Bank continued to show solid results despite the difficult macroeconomic environment and volatile financial markets. In addition to these challenging circumstances the vulnerable financial system remained a concern. The results were affected by the impairments on Greek government bonds. ING Bank withstood the market instability by carefully managing its exposure to sovereign bonds.
ING Bank has delivered on its priorities to strengthen its financial position, reduce risks, meet the restructuring requirements as imposed by the European Commission and to build a stronger bank.
The bank continued to make progress on meeting its Ambition 2013 targets. These are business improvement programme targets, mostly established in October 2009 and involve boosting underlying income, lowering overall costs, reducing risk costs and lifting return on equity.
In 2011, ING Bank's underlying income was EUR 16,115 million, underlying cost/income ratio was 58.7% and underlying return on equity based on IFRS-EU equity was 10.5%.
Given the changing market circumstances, new regulatory requirements and the fact that ING has realised to a large extent its Ambition 2013 goals, new performance goals have been set for 2015. These are: achieving a Return on (IFRS-EU) Equity of 10 - 13% under Basel III, while maintaining a core Tier 1 ratio of at least 10%, and bringing our cost/income ratio down to 50 - 53%.
ING Bank Annual Report 2011
Report of the Management Board
2
Overview continued
In 2011, ING Bank proved its ability to generate capital by making a net profit of EUR 4.0 billion. Capital generation is needed to repay the Dutch State and to improve capital ratios while making selective investments to improve services to our clients.
ING Bank comfortably passed the 2011 EU-wide stress test conducted by the European Banking Authority (EBA) confirming the solid capital position of ING Bank thanks to the actions taken to de-risk and de-leverage the balance sheet.
ING Bank's capital position also met the new EBA capital target. By the end of June 2012, European banks must meet a 9% threshold for their core Tier 1 ratio under the EBA definition which includes valuing sovereign bond holdings at market rates. ING Bank already met the 9% requirement in 2011. ING Bank is well prepared to meet the new capital requirements proposed by Basel III and also has focus on the liquidity requirements to be met from 2013.
ING Bank is on the Financial Stability Board's list of Global Systemically Important Financial Institutions (G-SIFIs) which means it will be forced to hold more capital because of its importance to the global financial system. The package of additional policy measures to address SIFI's has been submitted for approval to the G20 in November 2011 by the Financial Stability Board.
ING Bank continued to manage costs carefully. It is more necessary than ever to reduce expenses to adapt to the leaner environment and maintain our competitive position. Streamlining the organisation and enhancing efficiency are therefore key.
Retail Banking Netherlands, for example, is taking steps to further cut costs and improve efficiency through operational excellence. Unfortunately this leads to substantial job cuts. We will effectuate these with the utmost care. The strategic measures are focused on further process improvements by reducing complexity and streamlining workflow.
Additional IT investments will help to reduce costs while delivering faster and more accurate service. They will also enable customers to manage their financial affairs through their preferred banking channel.
In 2011, financial markets were confronted by a worsening of the sovereign debt crisis in Europe. ING Bank maintained a prudent approach to risk, substantially reducing its government bond exposure to southern Europe and de-risking its total investment book. In addition, ING Bank's exposure to asset-backed securities and to real estate development projects and investments declined sharply.
In 2011, ING Bank realised a number of divestments. With the sale of ING Direct USA, ING Bank met one of the principal restructuring requirements of the European Commission. With the divestment of ING Car Lease, ING continued to sharpen the focus on its core banking franchise. The divestment of ING Real Estate Investment Management, completed in October, fits with ING Bank's strategic objectives of reducing exposure to real estate, simplifying the company and further strengthening the capital base. WestlandUtrecht Bank is now run as a separate entity and is being prepared for sale.
ING Bank's large retail deposit base is a significant source of funding. It is among the largest in Europe and underlines that ING Bank has a good funding position compared to other banks. Thanks to our strong funding position, we have increased lending to our customers even in uncertain times. The fact that we continued to provide customers with credit and products underlines our focus on customer centricity and will help build trusting relationships.
ING Bank's net inflow of funds entrusted in 2011 was EUR 18.8 billion compared to EUR 25.1 billion in 2010. The net production of lending in 2011 was equal to 2010: EUR 25.6 billion of which EUR 19.7 billion in mortgages.(net inflow/production is adjusted for foreign-exchange impacts and divestments).
Despite our strong funding position, we need to become even more self-reliant. To achieve this, our One Bank ambition and the further integration of our balance sheet remained a top priority during the year.
OPERATIONAL EXCELLENCE
Achieving true operational excellence is a key priority. It goes far beyond just cost-cutting. Operational excellence is about constantly improving products, processes and systems to structurally and sustainably increase efficiency. For ING Bank it means a simpler organisation with more time to focus on the customer.
An example of progress made in the area of operational excellence, was the integration of the commercial banking business in Germany with ING-DiBa, the direct retail banking business in Germany. The creation of the One Bank in Germany will optimise the banking businesses and customer services by making more efficient use of capital and liquidity. Another example was the launch of a new initiative by ING Direct France which allows customers to open savings accounts through an online-only process.
CUSTOMER CENTRICITY
Customers' needs are constantly evolving, so it is crucial to keep close to them, anticipate their every requirement and provide new products and services.
In the Netherlands, for example, ING Business Banking introduced an innovative and easy tool, based on the bank's in-depth knowledge of every industrial sector, to help clients assess their financial needs.
ING Bank continued working with the Net Promoter Score (NPS), which measures customer loyalty. Feedback from customer service is used to improve ways of doing business. It is therefore a measurement tool as well as a means of changing business culture and driving growth. An example of improved customer centricity is the implementation of customer complaints procedures by ING Bank Slaski and ING Bank Turkey. The changes reduce the amount of time needed to resolve complaints and allow ING Bank to better analyse customer feedback and thus improve its processes, products and services.
ING Bank Annual Report 2011 7
Report of the Management Board
Overview continued
Mobile banking and social media initiatives are on the increase.
In several countries mobile banking has been introduced, including in the Netherlands where we launched a mobile banking app for private customers.
ING Bank uses social media like Facebook, Twitter and blogs to get closer to customers, to run special promotions, and to gather feedback to improve existing products and services and develop new ones.
ING Direct Canada, for example, used customer feedback to develop the THRiVE Chequing Account; an online, no-fee, daily checking account that pays interest.
TOP EMPLOYER
Being a top employer is another key priority of ING Bank because banking is a people's business. Having engaged and motivated employees is essential to achieving success.
As an employer, we play an important role in driving engagement. However, we are operating in a very challenging environment and the financial sector as a whole, and ING Bank in particular, is going through many changes. Staff therefore must handle a lot of concerns and uncertainties. It is of the utmost importance to us that our employees feel engaged and motivated, especially in these challenging times.
Several initiatives were taken in 2011 to enhance employee engagement, stimulate personal development and manage talent. ING Bank Slaski, for instance, developed an online programme to help staff map out their career opportunities. The programme is linked in with succession planning, the recruitment process and performance appraisals. As a result ING Bank Slaski has received Top Employer awards and continues to enjoy a strong standing in the Polish labour market.
Across ING Bank as a whole, the ING Commercial Bank Academy and ING Business School provide a coherent global learning and development strategy for staff around the world.
CONCLUSIONS
Looking ahead, ING Bank will continue to remain vigilant and focused on containing costs. This is all the more important as the bank operates in a fierce, competitive environment in difficult economic conditions and with increasing regulatory constraints.
ING Bank presented its banking strategy in January 2012. This strategy takes into account recent market, regulatory, consumer and technology trends.
In the short term the bank's priorities are to manage through the crisis, limiting balance sheet and risk-weighted asset growth and executing on-balance sheet optimisation.
We have strong funding capabilities and attractive home market positions in Northern Europe.
We will invest in IT to improve service and work towards operational excellence. We will continue to simplify the business portfolio and the organisation, while taking a prudent approach to capital and funding in the current unstable market conditions.
With our retail models converging, our ambition is to selectively evolve ING Direct into a full-service bank. ING Bank is well placed to capture growth opportunities in the high-growth markets of Central Europe and Asia. Our experience in lean and competitive markets has made us leaders in innovative distribution at low costs. This puts us in a good position as customers want simple, transparent and fairly priced products.
For Commercial Banking, we will continue to build on our existing strengths, such as our leading positions in the Benelux and in Structured Finance and Financial Markets, and our extensive international network in Central and Eastern Europe and beyond. Our intention is to sustain and further develop these pillars of our Commercial Banking franchise in order to support growth initiatives elsewhere.
ING Bank Annual Report 2011
Report of the Management Board
2
Financial developments business lines
RETAIL BANKING
Retail Banking's underlying result before tax declined to EUR 2,944 million from EUR 3,601 million in 2010 mainly due to EUR 363 million of impairments on Greek government bonds and EUR 181 million of losses from selective de-risking of exposures at ING Direct. Net production in client balances was EUR 51.1 billion, including a net inflow of EUR 22.5 billion in funds entrusted and EUR 27.3 billion in lending, of which EUR 19.7 billion was in residential mortgages and EUR 7.6 billion in other lending. Assets under management reported a net inflow of EUR 1.3 billion.
Total underlying income decreased by 4.4% to EUR 10,903 million. The interest result declined 1.0%, as the impact of higher volumes was more than offset by lower interest margins on most products, especially in the Netherlands. The interest results of ING Direct and Central Europe increased as volume growth outpaced the impact of lower margins. Commission income was 2.8% down as declines in the Benelux and Central Europe were only partly offset by increases in ING Direct and Asia. Investment and other income declined significantly, mainly due to the impairments on Greek government bonds and the losses from selective de-risking of exposures at ING Direct.
Underlying operating expenses were up 3.4% to EUR 6,768 million mainly due to increased staff costs, higher marketing spending, the introduction of new products and investments in the branch network in Spain. The underlying cost/income ratio increased to 62.1% from 57.4% in 2009.
The addition to the loan loss provisions declined 4.9% to EUR 1,191 million in 2011, or 67 basis points of average risk weighted assets compared with 70 basis points in 2010. This decline was mainly caused by lower risk costs in the Benelux, especially in the mid-corporate and SME segments, although the level remained elevated and started to increase again in the last quarter of 2011. Risk costs at ING Direct and Central Europe were higher compared with 2010.
The underlying return on equity, based on a 10% core Tier 1 ratio, dropped to 12.0% from 14.8% in 2010, due to the decline in results. In 2011, total risk-weighted assets increased by 2.0% to EUR 179 billion at year-end, mainly outside the Benelux.
RETAIL NETHERLANDS
The underlying result before tax of Retail Netherlands decreased 8.2% to EUR 1,261 million in 2011 from EUR 1,374 million in 2010, principally driven by lower income and higher expenses, partly offset by a decrease in risk costs. Total underlying income decreased 3.8% to EUR 4,146 million in 2011. This decrease was mainly the result of a 5.3% decline in interest result, due to increased competition for savings putting pressure on margins. Net production in residential mortgages was
EUR 3.6 billion, while volumes in other lending decreased EUR 0.2 billion and margins declined. Funds entrusted increased EUR 3.1 billion, mainly driven by a successful marketing campaign for a one-year deposit in the fourth quarter.
Operating expenses rose 2.2% to EUR 2,428 million in 2011, mainly as a consequence of higher pension costs following updated mortality tables and an impairment on software in WestlandUtrecht Bank. The addition to loan loss provisions decreased 18.4% to EUR 457 million, or 93 basis points of average risk-weighted assets, mainly due to lower additions for specific files in the mid-corporate and SME segments, although the level started to increase again in the last quarter of 2011.
RETAIL BELGIUM
The underlying result before tax of Retail Belgium fell 16.4% on 2010, as a slight decline in income was accompanied by higher operating expenses. Income decreased 0.8% compared to 2010, mainly due to EUR 17 million of impairments on Greek government bonds. Interest result remained flat, as a decline in margins was compensated by higher volumes, particularly in savings and lending. Net production in mortgages totaled EUR 3.0 billion in 2011, while production in other lending was EUR 3.2 billion. The net production in funds entrusted was EUR 3.0 billion, mainly driven by the success of the Orange Book savings product in the beginning of the year.
Operating expenses increased 6.5% on 2010 to EUR 1,432 million, mainly reflecting higher staff expenses, increased contribution to the deposit guarantee scheme and higher marketing expenses. The addition to the provision for loan losses declined 9.4%, to EUR 145 million, or 77 basis points of average risk weighted assets, mainly attributable to releases in the mid-corporate segment.
ING DIRECT
The underlying result before tax of ING Direct declined 31.1% to EUR 999 million compared to EUR 1,450 million in 2010. The decrease was due to EUR 326 million higher impairments on debt securities (including EUR 346 million of impairments on Greek government bonds) and EUR 181 million of losses from the selective sale of mainly unsecured and ABS exposures in the investment portfolio. Underlying income decreased to EUR 3,423 million from EUR 3,782 million last year, fully due to abovementioned impairments and losses. The interest result increased by 2.4%, or EUR 91 million, driven by higher volumes while the interest margin remained stable at 1.24%. The interest result in the US continued to benefit from the IFRS treatment on previously impaired bonds, which had a positive impact of EUR 168 million in 2011, down from EUR 230 million in 2010. The total net production in mortgages was EUR 12.4 billion while funds entrusted reported a net inflow of EUR 13.7 billion.
ING Bank Annual Report 2011 9
Report of the Management Board
Financial developments business lines continued
Operating expenses increased by 4.0%, reflecting higher marketing expenses (particularly in Germany, Italy, France and Spain) and higher costs to set up a limited number of branches in Spain and further roll out of payment accounts in France, Italy and Canada. The addition to loan loss provisions increased to EUR 462 million, or 61 basis points of average risk-weighted assets, from EUR 446 million in 2010 (or 59 basis points of average risk-weighted assets). The increase was driven by the lower anticipated recovery rates in the US, partially offset by lower risk costs in Germany.
RETAIL CENTRAL EUROPE
The underlying result before tax of Retail Central Europe rose 2.6% to EUR 158 million, driven by higher results in Poland, partly offset by lower results in Turkey due to increased risk costs. Underlying income in Central Europe increased 5.2% as higher income in Poland and Romania was partly offset by lower income in Turkey, mainly due to negative currency effects. Overall volumes in Poland remained relatively stable, while margins improved, particularly in savings and current accounts. In Turkey, a variable savings product was launched which led to a slight decrease in margin and an increase in volumes. In Romania, both volumes and margins remained largely stable in Romania. Net production of lending in Central Europe was EUR 3.5 billion, while the net inflow of funds entrusted was EUR 2.2 billion.
Operating expenses were up 1.6% driven by the increased client activity. The addition to loan loss provisions rose to EUR 97 million, or 42 basis points of average risk-weighted assets, compared with EUR 61 million, or 28 basis points of average risk-weighted assets, in 2010. Risk costs increased mainly in Turkey due to business growth, while the level in 2010 was low due to releases of specific provisions and improved data quality.
RETAIL ASIA
Retail Asia's underlying result before tax declined to EUR 72 million in 2011 from EUR 80 million in 2010. This decline was mainly the result of lower income, primarily as a result of unfavorable currency movements. Excluding currency impacts, underlying income was up, driven by ING Vysya Bank, where higher interest results were coupled with increased fee income and higher other income. Net production in lending was EUR 1.2 billion in 2011, while the net inflow of funds entrusted was EUR 0.5 billion. The increased profit contribution from ING Bank's share in the result of TMB in Thailand and higher dividends from Bank of Beijing were offset by higher funding costs resulting in an overall decline of the interest result.
Operating expenses were down 3.9% to EUR 173 million, but increased adjusted for currency effects, mainly as a result of business expansion in India. The addition to loan loss provisions rose by EUR 4 million to EUR 30 million, or 32 basis points of average risk-weighted assets in 2011, mainly as a result of higher non-performing loans at ING Vysya Bank.
COMMERCIAL BANKING
The underlying result before tax of Commercial Banking decreased 8.9% to EUR 2,020 million from EUR 2,217 million in 2010. ING Real Estate recorded a profit before tax of EUR 34 million compared with a loss of EUR 109 million in 2010. The underlying result before tax of Commercial Banking excluding Real Estate dropped 14.6% to EUR 1,986 million.
The decrease in the underlying result before tax of Commercial Banking excluding Real Estate was largely attributable to Financial Markets, whose result declined by EUR 420 million to EUR 499 million in 2011, partly caused by EUR 225 million of impairments on Greek government bonds. Excluding these impairments, underlying result of Financial Markets declined by EUR 195 million (or -21.2%), following adverse market circumstances as well as the winding down of the proprietary trading book in the US. Underlying result of General Lending and Payments and Cash Management (PCM) declined by 9.9% to EUR 410 million in 2011 from EUR 455 million in 2010. This was mainly driven by impairments on the restructuring portfolio, as well as higher expenses due to selective IT investments in PCM. The result of Structured Finance rose by 21.4% to EUR 1,139 million in 2011, driven by strong volume growth in the first half of 2011 resulting in higher interest results and commission income, while risk costs were lower. The result of Leasing & Factoring declined EUR 5 million to EUR 75 million entirely due to higher risk costs.
ING Real Estate reported an underlying profit before tax of EUR 34 million, compared with a loss of EUR 109 million in 2010. Negative fair value changes on the direct and indirect real estate investments as well as impairments on real estate development projects declined to EUR 273 million in 2011, compared with EUR 434 million in 2010. Excluding revaluations and impairments, underlying result before tax decreased EUR 18 million to EUR 307 million in 2011 from EUR 325 million in 2010, mainly due to higher risk costs at Real Estate Finance.
In 2011, net production of client balances was EUR 5.8 billion negative. Funds entrusted reported a net outflow of EUR 3.6 billion, while lending was EUR 1.7 billion down as demand was subdued. Assets under management declined EUR 0.6 billion.
Total underlying income of Commercial Banking declined 6.1% to EUR 5,023 million, mainly in Financial Markets, which included EUR 225 million of impairments on Greek government bonds in 2011, partly compensated by higher income from Structured Finance.
Underlying operating expenses were 4.4% lower on EUR 2,527 million driven by lower impairments on real estate development projects. The underlying cost/income ratio was 50.3%, slightly up from 49.4% in 2010.
Risk costs decreased to EUR 476 million compared with EUR 489 million in 2010. Declines in Structured Finance and General Lending were partly offset by higher risk costs in Real Estate Finance and Leasing. In 2011, risk costs were 35 basis points of average risk-weighted assets up from 33 basis points in 2010.
ING Bank Annual Report 2011
Report of the Management Board
2
Financial developments business lines continued
The underlying return on equity, based on a 10% core Tier 1 ratio, decreased slightly to 11.2% from 11.6% in 2010, due to the decline in results, partly offset by lower average risk-weighted assets supported by positive risk migration. At year-end 2011, however, risk-weighted assets were 3.5% higher than a year ago, due to the implementation of Capital Requirements Directive III in December 2011.
ING Bank Annual Report 2011 11
Report of the Management Board
Corporate governance
CORPORATE GOVERNANCE STATEMENT
This chapter is our Corporate Governance Statement, required pursuant to the Decree with respect to the contents of the annual report (Besluit tot vaststelling van nadere voorschriften omtrent de inhoud van het jaarverslag) (1).
(1) Dutch Bulletin of Acts (Staatsblad) 2009, 154.
FINANCIAL REPORTING PROCESS
As ING Bank N.V. is a consolidated subsidiary of ING Groep N.V. ('ING Group') its policies and procedures for establishing and maintaining adequate internal control over financial reporting are the same as those applied by ING Group for its consolidated financial statements with respect to ING Bank N.V. and the entities included in the latter's own consolidated financial statements.
Our internal control over financial reporting is a process designed under the supervision of our principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that:
- pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
- provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorisations of our management and directors; and
- provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As ING Group is subject to the US Sarbanes-Oxley Act, its Executive Board assessed the effectiveness of its internal control over financial reporting as of 31 December 2011, which was audited by ING Group's external auditor. For more information, please refer to the 2011 Annual Report of ING Group which is available on its website (www.ing.com).
EXTERNAL AUDITOR
After a maximum period of five years of performing the financial audit of ING Bank N.V., the lead audit partners of the external audit firm and the audit partners responsible for reviewing the audits, have to be replaced by other partners of the external audit firm. The Audit Committee provides recommendations to the Supervisory Board regarding these replacements based, among other things, on an annual evaluation of the provided services. In line with this requirement, the lead audit partner of Ernst & Young will be succeeded after the year-end audit 2011. The rotation of other partners involved with the audit of the financial statements of ING is subject to applicable independence legislation.
DUTCH BANKING CODE
Pursuant to the Decree with respect to the contents of the annual report of banks (Besluit tot vaststelling van nadere voorschriften omtrent de inhoud van het jaarverslag van banken) (1), ING Bank is to report on its application of the Dutch Banking Code (Code Banken). The Banking Code can be downloaded from the website of the Dutch Banking Association (www.nvb.nl). ING Bank's report on its application of the Banking Code can be found in the publication Application of the Dutch Banking Code by ING Bank N.V., which is available on the website of ING Group (www.ing.com).
(1) Dutch Bulletin of Acts (Staatsblad) 2010, 215.
AMSTERDAM, 12 MARCH 2012
THE MANAGEMENT BOARD BANKING
ING Bank Annual Report 2011
Report of the Management Board
2
Conformity statement
The Management Board is required to prepare the Annual Accounts and the Annual Report of ING Bank N.V. for each financial year in accordance with applicable Dutch law and International Financial Reporting Standards (IFRS) as adopted by the European Union.
Conformity statement pursuant to section 5:25c paragraph 2(c) of the Dutch Financial Supervision Act (Wet op het financieel toezicht).
The Management Board is responsible for maintaining proper accounting records, for safeguarding assets and for taking reasonable steps to prevent and detect fraud and other irregularities. It is responsible for selecting suitable accounting policies and applying them on a consistent basis, making judgments and estimates that are prudent and reasonable. It is also responsible for establishing and maintaining internal procedures which ensure that all major financial information is known to the Management Board, so that the timeliness, completeness and correctness of the external financial reporting are assured.
As required by section 5:25c paragraph 2(c) of the Dutch Financial Supervision Act, each of the signatories hereby confirms that to the best of his or her knowledge:
- the ING Bank N.V. 2011 Annual Accounts give a true and fair view of the assets, liabilities, financial position and profit or loss of ING Bank N.V. and the entities included in the consolidation taken as a whole;
- the ING Bank N.V. 2011 Annual Report gives a true and fair view of the position at the balance sheet date, the development and performance of the business during the financial year 2011 of ING Bank N.V. and the entities included in the consolidation taken as a whole, together with a description of the principal risks ING Bank N.V. is confronted with.
AMSTERDAM, 12 MARCH 2012
JAN H.M. HOMMEN
CEO, chairman of the Management Board
J.V. (KOOS) TIMMERMANS
vice-chairman of the Management Board
PATRICK G. FLYNN
CFO, member of the Management Board
WILFRED F. NAGEL
CRO, member of the Management Board
WILLIAM L. CONNELLY
CEO Commercial Banking, member of the Management Board
C.P.A.J. (ELI) LEENAARS
CEO Retail Banking Direct and International, member of the Management Board
HANS VAN DER NOORDAA
CEO Retail Banking Benelux, member of the Management Board
ING Bank Annual Report 2011 13
Governance
Report of the Supervisory Board
TO SHAREHOLDERS
The Supervisory Board hereby presents you the 2011 Annual Report of ING Bank N.V. The Annual Report includes the report of the Management Board, the Annual Accounts and Other information.
ANNUAL ACCOUNTS AND DIVIDEND
The Annual Accounts have been prepared by the Management Board and have been discussed by the Supervisory Board. They are presented to you for adoption. On 13 May 2011 ING Bank paid a dividend of EUR 3 billion, from other reserves, to ING Group. It is proposed to appropriate the 2011 result to other reserves.
MEETINGS
The Supervisory Board met nine times in 2011 of which eight meetings were regular meetings. On average, 94% of the Supervisory Board members were present at the scheduled meetings. Apart from closely monitoring the financial results in 2011, the Supervisory Board also frequently discussed the strategy, the progress in executing the restructuring plan of the European Commission (EC) as well as the repayment to the Dutch State. In the second half of 2011 the sovereign debt crisis and the impact on the banking business were also important topics on the agenda.
In 2011, the Audit Committee met five times, with one absentee once, to discuss the annual and quarterly results and the reports from the external auditor. The exposures on the Southern European countries, and more specifically the restructuring and impairment of Greek government bonds, were a topic of frequent debate during the year. Cost development within ING, as well as management actions concerned, were discussed several times during the year. Next to financial reporting, the Audit Committee also discussed topics such as internal control over financial reporting, the implementation of a new payments control framework for commercial payments, capital management and regulatory matters. In November a proposal for evaluation of the performance of the external auditor Ernst & Young was discussed. The results of the evaluation were discussed in the February 2012 Audit Committee meeting. Directly following the Audit Committee meetings, the members of the Audit Committee met with the internal and external auditors to confirm that all relevant topics were discussed in the Audit Committee meeting.
The Risk Committee met four times, with twice one absentee. In each Risk Committee meeting the financial risk reports and the non-financial risk reports were discussed. The risk appetite statements for 2011 were discussed and approved in February 2011. Management reported on the outcome of stress tests for banking. The exposure on the Southern European countries and the possible risks for ING as a result of the European financial crisis were closely monitored by the Risk Committee. Each meeting ended with a general discussion on possible future risks.
The Nomination Committee met four times in 2011, with one absentee once, to discuss the future composition of the Supervisory Board as well as the succession planning of the Management Board. The Nomination Committee discussed various appointments in the Management Board Banking, which were publicly announced in October 2011. The Nomination Committee advised positively on a number of Supervisory Board candidates for appointment in the 2012 Annual General Meeting (AGM). The Nomination Committee advised positively on the proposed Supervisory Board Nomination Procedure.
In 2011, the Remuneration Committee met seven times, with twice one absentee. In February 2011, the 2010 performance of the individual Management Board members was discussed on the basis of the group performance criteria and the individual targets. The impact of the new EU Capital Requirements Directive (CRD III) and the DNB Principles for Sound Remuneration was discussed throughout the year, resulting in positive advice on the proposed remuneration frameworks and implementation plans for ING Bank. During the year the Remuneration Committee advised positively on various retention packages in light of planned divestments.
COMPOSITION OF THE BOARDS
Composition of the Management Board Banking
As of 1 October 2011, Eric Boyer de la Giroday retired from the Management Board Banking as vice-chairman. As of the same date, Koos Timmermans succeeded him as vice-chairman of the Management Board Banking. Wilfred Nagel was appointed chief risk officer and member of the Management Board Banking per 5 October 2011.
COMPOSITION OF THE SUPERVISORY BOARD
Claus Dieter Hoffmann retired from the Supervisory Board at the end of the annual General Meeting in May 2011. Joan Spero stepped down from the Supervisory Board for personal reasons on 27 May 2011. Sjoerd van Keulen, Joost Kuiper and Luc Vandewalle were appointed to the Supervisory Board on 9 May 2011. Following the annual General Meeting, Jeroen van der Veer succeeded Peter Elverding as chairman of the Supervisory Board. Peter Elverding was appointed vice-chairman.
The Supervisory Board has nominated three new candidates for appointment at the 2012 AGM on 14 May 2012: Yvonne van Rooy, Jan Holsboer and Robert Reibestein. For the proposed appointments approval has been obtained from the Dutch central bank.
APPRECIATION FOR THE MANAGEMENT BOARD AND ING EMPLOYEES
The Supervisory Board would like to thank the members of the Management Board Banking for their continued commitment to ING in 2011. During 2011 decisive steps have been taken in executing the EC restructuring agreement. The Supervisory Board would also like to thank the over 70,000 employees of ING Bank N.V. who have continued to serve customers with their best efforts and made a large contribution to ING's results in the past year.
AMSTERDAM, 12 MARCH 2012
THE SUPERVISORY BOARD
ING Bank Annual Report 2011
Governance 3
ING Bank Annual Report 2011 15
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Consolidated annual accounts
Consolidated balance sheet of ING Bank
as at 31 December
| amounts in millions of euros | 2011 | 2010 |
|---|---|---|
| ASSETS | ||
| Cash and balances with central banks 1 | 28,112 | 9,519 |
| Amounts due from banks 2 | 45,323 | 51,828 |
| Financial assets at fair value through profit and loss 3 | ||
| – trading assets | 123,176 | 125,070 |
| – non-trading derivatives | 10,076 | 8,990 |
| – designated as at fair value through profit and loss | 2,838 | 3,066 |
| Investments 4 | ||
| – available-for-sale | 74,935 | 99,200 |
| – held-to-maturity | 8,868 | 11,693 |
| Loans and advances to customers 5 | 577,569 | 587,448 |
| Investments in associates 6 | 827 | 1,494 |
| Real estate investments 7 | 435 | 562 |
| Property and equipment 8 | 2,417 | 5,615 |
| Intangible assets 9 | 1,743 | 2,265 |
| Assets held for sale 10 | 62,483 | 300 |
| Other assets 11 | 22,363 | 26,023 |
| Total assets | 961,165 | 933,073 |
| EQUITY | ||
| Shareholders’ equity (parent) 12 | 34,367 | 34,452 |
| Minority interests | 693 | 617 |
| Total equity | 35,060 | 35,069 |
| LIABILITIES | ||
| Subordinated loans 13 | 18,408 | 21,021 |
| Debt securities in issue 14 | 130,926 | 125,066 |
| Amounts due to banks 15 | 72,233 | 72,852 |
| Customer deposits and other funds on deposit 16 | 479,364 | 519,304 |
| Financial liabilities at fair value through profit and loss 17 | ||
| – trading liabilities | 107,682 | 108,049 |
| – non-trading derivatives | 18,161 | 15,825 |
| – designated as at fair value through profit and loss | 13,021 | 12,707 |
| Liabilities held for sale 10 | 64,265 | 145 |
| Other liabilities 18 | 22,045 | 23,035 |
| Total liabilities | 926,105 | 898,004 |
| Total equity and liabilities | 961,165 | 933,073 |
References relate to the notes starting on page 37. These form an integral part of the consolidated annual accounts.
ING Bank Annual Report 2011
Consolidated annual accounts
Consolidated profit and loss account of ING Bank
for the years ended 31 December
| amounts in millions of euros | 2011 | 2011 | 2010 | 2010 | 2009 | 2009 |
|---|---|---|---|---|---|---|
| Interest income | 65,204 | 68,952 | 80,348 | |||
| Interest expense | -51,620 | -55,365 | -67,586 | |||
| Interest result 31 | 13,584 | 13,587 | 12,762 | |||
| Investment income 32 | -544 | 447 | -1,742 | |||
| Net result on disposals of group companies 33 | 813 | 313 | -13 | |||
| Gross commission income | 3,471 | 3,556 | 3,553 | |||
| Commission expense | -976 | -923 | -875 | |||
| Commission income 34 | 2,495 | 2,633 | 2,678 | |||
| Valuation results on non-trading derivatives 35 | 156 | -724 | -921 | |||
| Net trading income 36 | 311 | 1,195 | 833 | |||
| Share of profit from associates 6 | 32 | 104 | -388 | |||
| Other income 37 | 348 | 346 | 456 | |||
| Total income | 17,195 | 17,901 | 13,665 | |||
| Addition to loan loss provisions 5 | 1,670 | 1,751 | 2,973 | |||
| Intangible amortisation and other impairments 38 | 321 | 504 | 496 | |||
| Staff expenses 39 | 5,506 | 5,570 | 5,243 | |||
| Other operating expenses 40 | 4,399 | 4,093 | 4,453 | |||
| Total expenses | 11,896 | 11,918 | 13,165 | |||
| Result before tax | 5,299 | 5,983 | 500 | |||
| Taxation 41 | 1,216 | 1,408 | -43 | |||
| Net result (before minority interests) | 4,083 | 4,575 | 543 | |||
| Attributable to: | ||||||
| Shareholders of the parent | 4,005 | 4,495 | 684 | |||
| Minority interests | 78 | 80 | -141 | |||
| 4,083 | 4,575 | 543 | ||||
| 2011 | 2010 | 2009 | ||||
| Dividend per ordinary share (in euros) | 6.45 | 0.43 | 0.00 | |||
| Total amount of dividend paid (in millions of euros) | 3,000 | 200 | 0 |
References relate to the notes starting on page 37. These form an integral part of the consolidated annual accounts.
ING Bank Annual Report 2011
Consolidated annual accounts
Consolidated statement of comprehensive income of ING Bank
for the years ended 31 December
| amounts in millions of euros | 2011 | 2010 | 2009 |
|---|---|---|---|
| Net result | 4,083 | 4,575 | 543 |
| Unrealised revaluations after taxation (1) | -945 | -760 | 5,554 |
| Realised gains/losses transferred to profit and loss (1) | 406 | -293 | 877 |
| Changes in cash flow hedge reserve | -182 | -167 | -344 |
| Exchange rate differences | -477 | 1,089 | 333 |
| Other revaluations | -13 | 25 | -75 |
| Total amount recognised directly in equity (other comprehensive income) | -1,211 | -106 | 6,345 |
| Total comprehensive income | 2,872 | 4,469 | 6,888 |
| Comprehensive income attributable to: | |||
| Shareholders of the parent | 2,796 | 4,377 | 7,125 |
| Minority interests | 76 | 92 | -237 |
| 2,872 | 4,469 | 6,888 |
(1) Reference is made to Note 12 'Shareholders' equity (parent)' for a breakdown of the individual components.
The Unrealised revaluations after taxation comprises EUR -4 million (2010: EUR -10 million; 2009: EUR 2 million) related to the share of other comprehensive income of associates.
The Exchange rate differences comprises EUR -12 million (2010: EUR 100 million; 2009: EUR 70 million) related to the share of other comprehensive income of associates.
Reference is made to Note 41 'Taxation' for the disclosure on the income tax effects on each component of the other comprehensive income, except for the component Net result which is disclosed in the Consolidated profit and loss account.
ING Bank Annual Report 2011
Consolidated annual accounts
Consolidated statement of cash flows of ING Bank
for the years ended 31 December
| amounts in millions of euros | 2011 | 2010 | 2009 |
|---|---|---|---|
| Result before tax | 5,299 | 5,983 | 500 |
| Adjusted for | - depreciation | 1,338 | 1,533 |
| - addition to loan loss provisions | 1,670 | 1,751 | 2,973 |
| - other | 1,227 | 971 | 3,674 |
| Taxation paid | -1,067 | -488 | -551 |
| Changes in | - amounts due from banks, not available on demand | 2,208 | -4,333 |
| - trading assets | 1,662 | -14,641 | 47,893 |
| - non-trading derivatives | 1,407 | -2,062 | 827 |
| - other financial assets at fair value through profit and loss | 432 | 1,038 | 1,878 |
| - loans and advances to customers | -26,392 | -19,665 | 9,489 |
| - other assets | -2,095 | 1,769 | 2,298 |
| - amounts due to banks, not payable on demand | -6,731 | -9,831 | -67,410 |
| - customer deposits and other funds on deposit | 30,569 | 21,052 | 14,266 |
| - trading liabilities | -369 | 9,804 | -54,366 |
| - other financial liabilities at fair value through profit and loss | 75 | 952 | -2,557 |
| - other liabilities | -310 | -4,919 | -4,733 |
| Net cash flow from operating activities | 8,923 | -11,086 | -35,720 |
| Investments and advances | - group companies | ||
| - associates | -35 | -104 | -70 |
| - available-for-sale investments | -155,004 | -89,614 | -58,424 |
| - held-to-maturity investments | -141 | ||
| - real estate investments | -9 | -57 | -114 |
| - property and equipment | -422 | -450 | -541 |
| - assets subject to operating leases | -1,188 | -1,284 | -1,034 |
| - other investments | -263 | -241 | -275 |
| Disposals and redemptions | - group companies | 1,384 | 1,663 |
| - associates | 263 | 88 | |
| - available-for-sale investments | 155,826 | 88,333 | |
| - held-to-maturity investments | 2,370 | 2,620 | |
| - real estate investments | 83 | 289 | |
| - property and equipment | 52 | 40 | |
| - assets subject to operating leases | 43 | 53 | |
| - loan portfolio | 927 | 105 | |
| - other investments | 3 | ||
| Net cash flow from investing activities 44 | 4,027 | 1,303 | 4,819 |
| Proceeds from issuance of subordinated loans | 2,363 | 944 | 1,931 |
| Repayments of subordinated loans | -5,381 | -1,787 | -1,985 |
| Proceeds from borrowed funds and debt securities | 382,664 | 318,206 | 419,224 |
| Repayments of borrowed funds and debt securities | -380,424 | -308,939 | -397,639 |
| Issuance of ordinary shares/capital injection | 150 | ||
| Dividends paid | -3,000 | -200 | |
| Net cash flow from financing activities | -3,778 | 8,224 | 21,681 |
| Net cash flow 45 | 9,172 | -1,559 | -9,220 |
| Cash and cash equivalents at beginning of year | 17,188 | 18,170 | 27,395 |
| Effect of exchange rate changes on cash and cash equivalents | -143 | 577 | -5 |
| Cash and cash equivalents at end of year 46 | 26,217 | 17,188 | 18,170 |
As at 31 December 2011 Cash and cash equivalents includes Cash and balances with central banks of EUR 28,112 million (2010: EUR 9,519 million; 2009: EUR 12,602 million). Reference is made to Note 46 'Cash and cash equivalents'.
References relate to the notes starting on page 37. These form an integral part of the consolidated annual accounts.
ING Bank Annual Report 2011
Consolidated annual accounts
Consolidated statement of changes in equity of ING Bank
for the years ended 31 December
| amounts in millions of euros | Share capital | Share premium | Reserves | Total shareholders’ equity (parent) | Minority interests | Total equity |
|---|---|---|---|---|---|---|
| Balance as at 1 January 2009 | 525 | 16,392 | 5,972 | 22,889 | 1,232 | 24,121 |
| Unrealised revaluations after taxation | 5,554 | 5,554 | 5,554 | |||
| Realised gains/losses transferred to profit and loss | 877 | 877 | 877 | |||
| Changes in cash flow hedge reserve | -344 | -344 | -344 | |||
| Exchange rate differences | 333 | 333 | 333 | |||
| Other revaluations | 21 | 21 | -96 | -75 | ||
| Total amount recognised directly in equity | 6,441 | 6,441 | -96 | 6,345 | ||
| Net result | 684 | 684 | -141 | 543 | ||
| Total comprehensive income | 7,125 | 7,125 | -237 | 6,888 | ||
| Employee stock options and share plans | 58 | 58 | 58 | |||
| Dividends | ||||||
| Capital injection | 150 | 150 | 150 | |||
| Balance as at 31 December 2009 | 525 | 16,542 | 13,155 | 30,222 | 995 | 31,217 |
| Unrealised revaluations after taxation | -760 | -760 | -760 | |||
| Realised gains/losses transferred to profit and loss | -293 | -293 | -293 | |||
| Changes in cash flow hedge reserve | -167 | -167 | -167 | |||
| Exchange rate differences | 1,089 | 1,089 | 1,089 | |||
| Other revaluations | 13 | 13 | 12 | 25 | ||
| Total amount recognised directly in equity | -118 | -118 | 12 | -106 | ||
| Net result | 4,495 | 4,495 | 80 | 4,575 | ||
| Total comprehensive income | 4,377 | 4,377 | 92 | 4,469 | ||
| Employee stock options and share plans | 53 | 53 | 53 | |||
| Changes in the composition of the group (1) | -470 | -470 | ||||
| Dividends | -200 | -200 | -200 | |||
| Balance as at 31 December 2010 | 525 | 16,542 | 17,385 | 34,452 | 617 | 35,069 |
| Unrealised revaluations after taxation | -945 | -945 | -945 | |||
| Realised gains/losses transferred to profit and loss | 406 | 406 | 406 | |||
| Changes in cash flow hedge reserve | -182 | -182 | -182 | |||
| Exchange rate differences | -477 | -477 | -477 | |||
| Other revaluations | -11 | -11 | -2 | -13 | ||
| Total amount recognised directly in equity | -1,209 | -1,209 | -2 | -1,211 | ||
| Net result | 4,005 | 4,005 | 78 | 4,083 | ||
| Total comprehensive income | 2,796 | 2,796 | 76 | 2,872 | ||
| Employee stock options and share plans | 119 | 119 | 119 | |||
| Dividends | -3,000 | -3,000 | -3,000 | |||
| Balance as at 31 December 2011 | 525 | 16,542 | 17,300 | 34,367 | 693 | 35,060 |
(1) Changes in the composition of the group in 2010 mainly relates to the sale of ING Summit Industrial Fund LP. Reference is made to Note 26 'Companies acquired and companies disposed'.
In 2009, an amount of EUR 150 million additional share premium was received from ING Group to strengthen solvency.
Reserves include Revaluation reserve of EUR 550 million (2010: EUR 1,457 million; 2009: EUR 2,329 million), Currency translation reserve of EUR 209 million (2010: EUR 500 million; 2009: EUR -241 million) and Other reserves of EUR 16,541 million (2010: EUR 15,428 million; 2009: EUR 11,067 million). Changes in individual components are presented in Note 12 'Shareholders' equity (parent).
ING Bank Annual Report 2011
Consolidated annual accounts
Accounting policies for the consolidated annual accounts of ING Bank
AUTHORISATION OF ANNUAL ACCOUNTS
The consolidated annual accounts of ING Bank N.V. ('ING Bank') for the year ended 31 December 2011 were authorised for issue in accordance with a resolution of the Management Board on 12 March 2012. The Management Board may decide to amend the annual accounts as long as these are not adopted by the General Meeting of Shareholders. The General Meeting of Shareholders may decide not to adopt the annual accounts, but may not amend these. ING Bank N.V. is incorporated and domiciled in Amsterdam, the Netherlands. The principal activities of ING Bank are described in 'ING at a glance' in section 1.
BASIS OF PRESENTATION
ING Bank applies International Financial Reporting Standards as adopted by the European Union ('EU').
The following standards, interpretations and amendments to standards and interpretations became effective for ING Bank in 2011:
- Amendment to IAS 32 'Classification of Rights Issues';
- Amendment to IAS 24 'Related Party Disclosures';
- Amendment to IFRIC 14 'Prepayments of a Minimum Funding Requirement';
- IFRIC 19 'Extinguishing Financial Liabilities with Equity Instruments'; and
- 2010 Annual Improvements to IFRS.
None of these new or revised standards and interpretations had a significant effect on the consolidated annual accounts.
The following new or revised standards and interpretations were issued by the IASB, which become effective for ING Bank after 2011, if and when endorsed by the EU:
- Amendments to IFRS 7 'Disclosures – Transfers of Financial Assets', effective as of 2012;
- Amendments to IAS 12 'Deferred tax – Recovery of Underlying Assets', effective as of 2012;
- IFRS 10 'Consolidated Financial Statements', effective as of 2013;
- IFRS 11 'Joint Arrangements', effective as of 2013;
- IFRS 12 'Disclosure of Interests in Other Entities', effective as of 2013;
- IFRS 13 'Fair Value Measurement', effective as of 2013;
- IAS 28 'Investments in Associates and Joint Ventures', effective as of 2013;
- Amendments to IAS 1 'Presentation of Financial Statements – Presentation of Items of Other income', effective as of 2013;
- Amendments to IFRS 7 'Disclosures – Offsetting Financial Assets and Financial Liabilities', effective as of 2013; and
- Amendments to IAS 32 'Offsetting Financial Assets and Liabilities', effective as of 2014.
Although these new requirements are still being analysed and the final impact is not yet known, ING Bank does not expect the adoption of these new or revised standards and interpretations to have a significant effect on the equity and/or result of ING Bank.
Furthermore, in 2009 IFRS 9 'Financial Instruments' was issued, which was initially effective as of 2013. However in December 2011 the International Accounting Standards Board decided to amend this standard and to postpone the mandatory application of IFRS 9 until 2015. This standard is not yet endorsed by the EU and, therefore, is not yet part of IFRS-EU. Implementation of IFRS 9 – if and when endorsed by the EU – may have a significant impact on equity and/or result of ING Bank.
In June 2011 the revised IAS 19 'Employee Benefits' was issued, which will become effective as of 2013 if endorsed by the EU. At this moment, the revised standard is being analysed and the full impact is not yet known. One of the changes in the revised standard results in immediate recognition in equity of 'unrecognised actuarial gains and losses' as of the effective date. Unrecognised actuarial gains and losses as at 31 December 2011 are disclosed in Note 18 'Other liabilities' and amount to EUR 613 million (pre-tax). The impact of the revised standard will be affected by movements in the unrecognised actuarial gains and losses until the effective date and the impact of other changes in the revised standard.
International Financial Reporting Standards as adopted by the EU provide several options in accounting policies. ING Bank's accounting policies under these Standards and its decision on the options available are set out in the section 'Principles of valuation and determination of results' below.
In this document the term 'IFRS-EU' is used to refer to International Financial Reporting Standards as adopted by the EU, including the decisions ING Bank made with regard to the options available under International Financial Reporting Standards as adopted by the EU.
As explained in the section 'Principles of valuation and determination of results' and in Note 21 'Derivatives and hedge accounting' ING Bank applies fair value hedge accounting to portfolio hedges of interest rate risk (macro hedging) under the EU 'carve out' of IFRS-EU.
ING Bank Annual Report 2011
Consolidated annual accounts
Accounting policies for the consolidated annual accounts of ING Bank continued
The presentation of, and certain terms used in, the consolidated balance sheet, the consolidated profit and loss account, consolidated statement of cash flows, consolidated statement of changes in equity and certain notes have been changed to provide additional and more relevant information or (for changes in comparative information) to better align with the current period presentation. The impact of these changes is explained in the respective notes when significant.
The comparison of balance sheet items between 31 December 2011 and 31 December 2010 is impacted by the disposed companies as disclosed in Note 26 'Companies acquired and companies disposed' and by the held for sale classification as disclosed in Note 10 'Assets and liabilities held for sale'.
CRITICAL ACCOUNTING POLICIES
ING Bank has identified the accounting policies that are most critical to its business operations and to the understanding of its results. These critical accounting policies are those which involve the most complex or subjective decisions or assessments, and relate to the loan loss provision, the determination of the fair values of real estate and financial assets and liabilities, impairments and employee benefits. In each case, the determination of these items is fundamental to the financial condition and results of operations, and requires management to make complex judgements based on information and financial data that may change in future periods. As a result, determinations regarding these items necessarily involve the use of assumptions and subjective judgements as to future events and are subject to change, as the use of different assumptions or data could produce materially different results. For a further discussion of the application of these accounting policies, reference is made to the applicable notes to the consolidated financial statements and the information below under 'Principles of valuation and determination of results'.
LOAN LOSS PROVISIONS
Loan loss provisions are recognised based on an incurred loss model. Considerable judgement is exercised in determining the extent of the loan loss provision (impairment) and is based on the management's evaluation of the risk in the portfolio, current economic conditions, loss experience in recent years and credit, industry, geographical and concentration trends. Changes in such judgements and analyses may lead to changes in the loan loss provisions over time.
The identification of impairment and the determination of the recoverable amount are an inherently uncertain processes involving various assumptions and factors including the financial condition of the counterparty, expected future cash flows, observable market prices and expected net selling prices.
Future cash flows in a portfolio of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the portfolio and historical loss experience for assets with credit risk characteristics similar to those in the portfolio. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Current observable data may include changes in unemployment rates, property prices and commodity prices. The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.
FAIR VALUES OF REAL ESTATE
Real estate investments are recognised at fair value. The fair value of real estate investments is based on regular appraisals by independent qualified valuers. The fair values are established using valuation methods such as: comparable market transactions, capitalisation of income methods or discounted cash flow calculations. The underlying assumption used in the valuation is that the properties are let or sold to third parties based on the actual letting status. The discounted cash flow analyses and capitalisation of income method are based on calculations of the future rental income in accordance with the terms in existing leases and estimations of the rental values for new leases when leases expire and incentives like rental free periods. The cash flows are discounted using market based interest rates that reflect appropriately the risk characteristics of real estate.
Market conditions in recent years have led to a reduced level of real estate transactions. Transaction values were significantly impacted by low volumes of actual transactions. As a result comparable market transactions have been used less in valuing ING's real estate investments by independent qualified valuers. More emphasis has been placed on discounted cash flow analysis and capitalisation of income method.
The valuation of real estate involves various assumptions and techniques. The use of different assumptions and techniques could produce significantly different valuations. To illustrate the uncertainty of our real estate investments valuation, a sensitivity analysis on the changes in fair value of real estate is provided in the 'Risk management' section.
ING Bank Annual Report 2011
Consolidated annual accounts
Accounting policies for the consolidated annual accounts of ING Bank continued
FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES
Fair values of financial assets and liabilities are determined using quoted market prices, where available. Such quoted market prices are primarily obtained from exchange prices for listed instruments, where an exchange price is not available market prices may be obtained from independent market vendors, brokers or market makers. In general, positions are valued taking the bid price for a long position and the offer price for a short position. In some cases where positions are marked at mid-market prices, a fair value adjustment is calculated.
In certain markets that have become significantly less liquid or illiquid, the range of prices for the same security from different price sources can be significant. Selecting the most appropriate price within this range requires judgement. The choice of different prices could produce significantly different estimates of fair value.
For certain financial assets and liabilities, quoted market prices are not available. For these financial assets and liabilities fair value is determined using valuation techniques. These valuation techniques range from discounting of cash flows to valuation models, where relevant pricing factors including the market price of underlying reference instruments, market parameters (volatilities, correlations and credit ratings) and customer behaviour are taken into account. All valuation techniques used are subject to internal review and approval. Most data used in these valuation techniques are validated on a daily basis.
Valuation techniques are subjective in nature and significant judgement is involved in establishing fair values for certain financial assets and liabilities. Valuation techniques involve various assumptions regarding pricing factors. The use of different valuation techniques and assumptions could produce significantly different estimates of fair value.
Price testing is performed to assess whether the process of valuation has led to an appropriate fair value of the position and to an appropriate reflection of these valuations in the profit and loss account. Price testing is performed to minimise the potential risks for economic losses due to incorrect or misused models.
Reference is made to Note 30 'Fair value of financial assets and liabilities' for the basis of the determination of the fair values of the financial instruments and related sensitivities.
IMPAIRMENTS
Impairments evaluation is a complex process that inherently involves significant judgements and uncertainties that may have a significant impact on ING Bank's consolidated financial statements. Impairments are especially relevant in two areas: Available-for-sale debt and equity securities and Goodwill/Intangible assets.
All debt and equity securities (other than those carried at fair value through profit and loss) are subject to impairment testing every reporting period. The carrying value is reviewed in order to determine whether an impairment loss has been incurred. Evaluation for impairment includes both quantitative and qualitative considerations. For debt securities, such considerations include actual and estimated incurred credit losses indicated by payment default, market data on (estimated) incurred losses and other current evidence that the issuer may be unlikely to pay amounts when due. Equity securities are impaired when management believes that, based on (the combination of) a significant or prolonged decline, of the fair value below the acquisition price, there is sufficient reason to believe that the acquisition cost may not be recovered. 'Significant' and 'prolonged' are interpreted on a case-by-case basis for specific equity securities. Generally 25% and 6 months are used as triggers. Upon impairment, the full difference between the acquisition cost and fair value is removed from equity and recognised in net result. Impairments on debt securities may be reversed if there is a decrease in the amount of the impairment which can be objectively related to an observable event. Impairments on equity securities cannot be reversed.
Impairments on other debt instruments (Loans and held-to-maturity investments) are part of the loan loss provision as described above.
Impairment reviews with respect to goodwill and intangible assets are performed at least annually and more frequently if events indicate that impairment may have occurred. Goodwill is tested for impairment by comparing the carrying value (including goodwill) of the reporting unit to the best estimate of the recoverable amount of that reporting unit. The carrying value is determined as the IFRS-EU net asset value including goodwill. The recoverable amount is estimated as the higher of fair value less cost to sell and value in use. Several methodologies are applied to arrive at the best estimate of the recoverable amount. A reporting unit is the lowest level at which goodwill is monitored. Intangible assets are tested for impairment by comparing the carrying value with the best estimate of the recoverable amount.
The identification of impairment is an inherently uncertain process involving various assumptions and factors, including financial condition of the counterparty, expected future cash flows, statistical loss data, discount rates, observable market prices, etc. Estimates and assumptions are based on management's judgement and other information available prior to the issuance of the financial statements. Significantly different results can occur as circumstances change and additional information becomes known.
ING Bank Annual Report 2011 23
Consolidated annual accounts
Accounting policies for the consolidated annual accounts of ING Bank continued
EMPLOYEE BENEFITS
Group companies operate various defined benefit retirement plans covering a significant number of ING Bank's employees.
The liability recognised in the balance sheet in respect of the defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of the plan assets, together with adjustments for unrecognised actuarial gains and losses and unrecognised past service costs.
The determination of the defined benefit plan liability is based on internal and external actuarial models and calculations. The defined benefit obligation is calculated using the projected unit credit method. Inherent in these actuarial models are assumptions including discount rates, rates of increase in future salary and benefit levels, mortality rates, trend rates in health care costs, consumer price index, and the expected return on plan assets. The assumptions are based on available market data and the historical performance of plan assets and are updated annually.
The actuarial assumptions may differ significantly from the actual results due to changes in market conditions, economic and mortality trends, and other assumptions. Any changes in these assumptions could have a significant impact on the defined benefit plan liabilities and future pension costs. The effects of changes in actuarial assumptions and experience adjustments are not recognised in the profit and loss account unless the accumulated changes exceed 10% of the greater of the defined benefit obligation and the fair value of the plan assets. If such is the case the excess is then amortised over the employees' expected average remaining working lives. Reference is made to Note 18 'Other liabilities' for the weighted averages of basic actuarial assumptions in connection with pension and other post-employment benefits.
PRINCIPLES OF VALUATION AND DETERMINATION OF RESULTS
CONSOLIDATION
ING Bank ('the Bank') comprises ING Bank N.V. and all subsidiaries. The consolidated financial statements of ING Bank comprise the accounts of ING Bank N.V. and all entities in which it either owns, directly or indirectly, more than half of the voting power or over which it has control of their operating and financial policies, through situations including, but not limited to:
- Ability to appoint or remove the majority of the board of directors;
- Power to govern such policies under statute or agreement; and
- Power over more than half of the voting rights through an agreement with other investors.
A list of principal subsidiaries is included in Note 25 'Principal subsidiaries'.
The existence and effect of potential voting rights that are currently exercisable or convertible are considered in assessing whether ING Bank controls another entity. For interests in investment vehicles, the existence of control is determined taking into account both ING Bank's financial interests for own risk and its role as investment manager.
The results of the operations and the net assets of subsidiaries are included in the profit and loss account and the balance sheet from the date control is obtained until the date control is lost. On disposal, the difference between the sales proceeds, net of directly attributable transaction costs, and the net assets is included in net result.
A subsidiary which ING Bank has agreed to sell but is still legally owned by ING Bank may still be controlled by ING Bank at the balance sheet date and, therefore, still be included in the consolidation. Such a subsidiary may be presented as a held for sale disposal group if certain conditions are met.
All intercompany transactions, balances and unrealised surpluses and deficits on transactions between Bank companies are eliminated. Where necessary, the accounting policies used by subsidiaries are changed to ensure consistency with ING Bank's policies. In general, the reporting dates of subsidiaries are the same as the reporting date of ING Bank N.V.
ING Bank N.V. and its Dutch group companies are subject to legal restrictions regarding the amount of dividends they can pay to their shareholders. The Dutch Civil Code contains the restriction that dividends can only be paid up to an amount equal to the excess of the company's own funds over the sum of the paid-up capital and reserves required by law. Additionally, certain Bank companies are subject to restrictions on the amount of funds they may transfer in the form of dividends, or otherwise, to the parent company.
Furthermore, in addition to the restrictions in respect of minimum capital requirements that are imposed by industry regulators in the countries in which the subsidiaries operate, other limitations exist in certain countries.
ING Bank's interests in jointly controlled entities are accounted for using proportionate consolidation. ING Bank proportionately consolidates its share of the joint ventures' individual income and expenses, assets and liabilities, and cash flows on a line-by-line basis with similar items in ING Bank's financial statements. ING Bank recognises the portion of gains or losses on the sale of assets to the joint venture that is attributable to the other venturers. ING Bank does not recognise its share of profits or losses from the joint venture that results from the purchase of assets by ING Bank from the joint venture until it resells the assets to a third party. However, if a loss on the transaction provides evidence of a reduction in the net realisable value of current assets or an impairment loss, the loss is recognised immediately.
ING Bank Annual Report 2011
Consolidated annual accounts
4
Accounting policies for the consolidated annual accounts of ING Bank continued
Disposal groups held for sale
Disposal groups held for sale are measured at the lower of their carrying amount or fair value less cost to sell. Disposal groups (and non-current assets) are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This is only the case when the sale is highly probable and the disposal group (or assets) is available for immediate sale in its present condition; management must be committed to the sale, which is expected to occur within one year from the date of classification as held for sale.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of the consolidated financial statements necessitates the use of estimates and assumptions. These estimates and assumptions affect the reported amounts of the assets and liabilities and the amounts of the contingent liabilities at the balance sheet date, as well as reported income and expenses for the year. The actual outcome may differ from these estimates.
The process of setting assumptions is subject to internal control procedures and approvals, and takes into account internal and external studies, industry statistics, environmental factors and trends, and regulatory requirements.
SEGMENT REPORTING
An operating segment is a distinguishable component of ING Bank, engaged in providing products or services, subject to risks and returns that are different from those of other operating segments. A geographical area is a distinguishable component of ING Bank engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments. The geographical analyses are based on the location of the office from which the transactions are originated.
FOREIGN CURRENCY TRANSLATION
Functional and presentation currency
Items included in the financial statements of each of ING Bank's entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The consolidated financial statements are presented in euros, which is the Bank's functional and presentation currency.
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transactions. Exchange rate differences resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the profit and loss account, except when deferred in equity as part of qualifying cash flow hedges or qualifying net investment hedges.
Exchange rate differences on non-monetary items, measured at fair value through profit and loss, are reported as part of the fair value gain or loss. Non-monetary items are retranslated at the date the fair value is determined. Exchange rate differences on non-monetary items measured at fair value through the revaluation reserve are included in the revaluation reserve in equity.
Exchange rate differences in the profit and loss account are generally included in Net trading income. Reference is made to Note 36 'Net trading income', which discloses the amounts included in the profit and loss account. Exchange rate differences relating to the disposal of available-for-sale debt and equity securities are considered to be an inherent part of the capital gains and losses recognised in Investment income. As mentioned below in Group companies, relating to the disposals of group Companies, any exchange rate difference deferred in equity is recognised in the profit and loss account in Net result on disposals of group companies. Reference is made to Note 12 'Shareholders' equity (parent)', which discloses the amounts included in the profit and loss account.
Group companies
The results and financial positions of all group companies that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
- Assets and liabilities included in each balance sheet are translated at the closing rate at the date of that balance sheet;
- Income and expenses included in each profit and loss account are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and
- All resulting exchange rate differences are recognised in a separate component of equity.
On consolidation exchange rate differences arising from the translation of a monetary item that forms part of the net investment in a foreign operation, and of borrowings and other instruments designated as hedges of such investments, are taken to shareholders' equity. When a foreign operation is sold, the corresponding exchange rate differences are recognised in the profit and loss account as part of the gain or loss on sale.
Goodwill and fair value adjustments arising from the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the exchange rate prevailing at the balance sheet date.
ING Bank Annual Report 2011 25
Consolidated annual accounts
Accounting policies for the consolidated annual accounts of ING Bank continued
FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES
The fair values of financial instruments are based on quoted market prices at the balance sheet date where available. The quoted market price used for financial assets held by ING Bank is the current bid price; the quoted market price used for financial liabilities is the current ask price.
The fair values of financial instruments that are not traded in an active market are determined using valuation techniques. ING Bank uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date.
Reference is made to Note 30 'Fair values of financial assets and liabilities' for the basis of the determination of the fair values of financial instruments.
FINANCIAL ASSETS
Recognition of financial assets
All purchases and sales of financial assets classified as fair value through profit and loss, held-to-maturity and available-for-sale and trading that require delivery within the time frame established by regulation or market convention ('regular way' purchases and sales) are recognised at trade date, which is the date on which ING Bank commits to purchase or sell the asset. Loans and receivables are recognised at settlement date, which is the date on which the bank receives or delivers the asset.
Derecognition of financial assets
Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where ING Bank has transferred substantially all risks and rewards of ownership. If ING Bank neither transfers nor retains substantially all the risks and rewards of ownership of a financial asset, it derecognises the financial asset if it no longer has control over the asset. In transfers where control over the asset is retained, ING Bank continues to recognise the asset to the extent of its continuing involvement. The extent of continuing involvement is determined by the extent to which ING Bank is exposed to changes in the value of the asset.
Realised gains and losses on investments
Realised gains and losses on investments are determined as the difference between the sale proceeds and (amortised) cost. For equity securities the cost is determined using a weighted average per portfolio. For debt securities, the cost is determined by specific identification.
CLASSIFICATION OF FINANCIAL INSTRUMENTS
Financial assets at fair value through profit and loss
Financial assets at fair value through profit and loss include equity securities, debt securities, derivatives, loans and receivables and other and comprise the following sub-categories: trading assets, non-trading derivatives and financial assets designated as at fair value through profit and loss by management.
A financial asset is classified as at fair value through profit and loss if acquired principally for the purpose of selling in the short term or if designated by management as such. Management will make this designation only if this eliminates a measurement inconsistency or if the related assets and liabilities are managed on a fair value basis. Transaction costs on initial recognition are expensed as incurred. See also Non-trading derivatives that do not qualify for hedge accounting.
Interest income from debt securities and loans and receivables classified as at fair value through profit and loss is recognised in Interest income in the profit and loss account, using the effective interest method. Dividend income from equity instruments classified as at fair value through profit and loss is generally recognised in Investment income in the profit and loss account, when dividend has been declared. For derivatives, reference is made to the 'Derivatives and hedge accounting'-section. For all other financial assets classified as at fair value through profit and loss changes in fair value are recognised in Net trading income.
Investments
Investments (including loans quoted in active markets) are classified either as held-to-maturity or available-for-sale and are initially recognised at fair value plus transaction costs. Investment debt securities and loans quoted in active markets with fixed maturity where management has both the intent and the ability to hold to maturity are classified as held-to-maturity. Investment securities and actively traded loans intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices, are classified as available-for-sale.
ING Bank Annual Report 2011
Consolidated annual accounts
Accounting policies for the consolidated annual accounts of ING Bank continued
Available-for-sale financial assets
Available-for-sale financial assets include available-for-sale debt securities and available-for-sale equity securities. Available-for-sale financial assets are initially recognised at fair value plus transaction costs. For available-for-sale debt securities, the difference between cost and redemption value is amortised. Interest income is recognised using the effective interest method. Available-for-sale financial assets are subsequently measured at fair value. Interest income from debt securities classified as available-for-sale is recognised in Interest income in the profit and loss account using the effective interest method. Dividend income from equity instruments classified as available-for-sale is generally recognised in Investment income in the profit and loss account when the dividend has been declared. Unrealised gains and losses arising from changes in the fair value are recognised in equity. When the securities are disposed of, the related accumulated fair value adjustments are included in the profit and loss account as Investment income. For impairments of available-for-sale financial assets reference is made to the section 'Impairment of other financial assets'. Investments in prepayment sensitive securities such as Interest-Only and Principal-Only strips are generally classified as available-for-sale.
Held-to-maturity investments
Non-derivative financial assets with fixed or determinable payments and fixed maturity which ING Bank has the positive intent and ability to hold to maturity and which are designated by management as held-to-maturity assets are initially recognised at fair value plus transaction costs. Subsequently, they are carried at amortised cost using the effective interest method less any impairment losses. Interest income from debt securities classified as held-to-maturity is recognised in Interest income in the profit and loss account using the effective interest method. Held-to-maturity investments include only debt securities.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognised at fair value plus transaction costs. Subsequently, they are carried at amortised cost using the effective interest method less any impairment losses. Loans and receivables include Cash and balances with central banks, Amounts due from banks, Loans and advances to customers and Other assets and are reflected in these balance sheet lines. Interest income from loans and receivables is recognised in Interest income in the profit and loss account using the effective interest method.
Credit risk management classification
Credit risk management disclosures are provided in the section 'Risk management'. The relationship between credit risk classifications in that section and the consolidated balance sheet classifications above is explained below:
- Lending risk arises when ING Bank grants a loan to a customer, or issues guarantees on behalf of a customer and mainly relates to the balance sheet classification Loans and advances to customers and off balance sheet items e.g. obligations under financial guarantees and letters of credit;
- Investment risk comprises the credit default and migration risk that is associated with ING Bank's investment portfolio and among others relates to the balance sheet classifications Investments (available-for-sale and held-to-maturity) and Loans and advances to customers;
- Money market risk arises when ING Bank places short term deposits with a counterparty in order to manage excess liquidity and mainly relates to the balance sheet classification Amounts due from banks;
- Pre-settlement risk arises when a counterparty defaults on a transaction before settlement and ING Bank has to replace the contract by a trade with another counterparty at the then prevailing (possibly unfavourable) market price. The pre-settlement risk classification mainly relates to the balance sheet classification Financial assets at fair value through profit and loss (trading assets and non-trading derivatives) and to security financing; and
- Settlement risk arises when there is an exchange of value (funds, instruments or commodities) for the same or different value dates and receipt is not verified or expected until ING Bank has paid or delivered its side of the trade. Settlement risk mainly relates to the risk arising on disposal of financial instruments that are classified in the balance sheet as Financial assets at fair value through profit and loss (trading assets and non-trading derivatives) and Investments (available-for-sale and held-to-maturity).
Maximum credit risk exposure
The maximum credit risk exposure for items on the balance sheet is generally the carrying value for the relevant financial assets. For the off-balance sheet items the maximum credit exposure is the maximum amount that could be required to be paid. Collateral received is not taken into account when determining the maximum credit risk exposure.
The manner in which ING Bank manages credit risk and determines credit risk exposures for that purpose is explained in the 'Risk management' section.
DERIVATIVES AND HEDGE ACCOUNTING
Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently measured at fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and valuation techniques, such as discounted cash flow models and option pricing models, as appropriate. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair values are negative.
ING Bank Annual Report 2011
Consolidated annual accounts
Accounting policies for the consolidated annual accounts of ING Bank continued
Some credit protection contracts that take the legal form of a derivative, such as certain credit default swaps, are accounted for as financial guarantees.
Certain derivatives embedded in other contracts are measured as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract, the host contract is not carried at fair value through profit and loss, and if a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative. These embedded derivatives are measured at fair value with changes in fair value recognised in the profit and loss account. An assessment is carried out when ING Bank first becomes party to the contract. A reassessment is carried out only when there is a change in the terms of the contract that significantly modifies the expected cash flows.
The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. ING Bank designates certain derivatives as hedges of the fair value of recognised assets or liabilities or firm commitments (fair value hedges), hedges of highly probable future cash flows attributable to a recognised asset or liability or a forecast transaction (cash flow hedges), or hedges of a net investment of a foreign operation. Hedge accounting is used for derivatives designated in this way provided certain criteria are met.
At the inception of the transaction ING Bank documents the relationship between hedging instruments and hedged items, its risk management objective, together with the methods selected to assess hedge effectiveness. ING Bank also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of the hedged items.
ING Bank applies fair value hedge accounting to portfolio hedges of interest rate risk (macro hedging) under the EU 'carve out' of IFRS-EU. The EU 'carve-out' macro hedging enables a group of derivatives (or proportions) to be viewed in combination and jointly designated as the hedging instrument and removes some of the limitations in fair value hedge accounting relating to hedging core deposits and under-hedging strategies. Under the IFRS-EU 'carve-out', hedge accounting may be applied to core deposits and ineffectiveness only arises when the revised estimate of the amount of cash flows in scheduled time buckets falls below the designated amount of that bucket.
ING Bank applies fair value hedge accounting for portfolio hedges of interest rate risk (macro hedging) under the EU 'carve-out' to its retail operations. The net exposures of retail funding (savings and current accounts) and retail lending (mortgages) are hedged. The hedging activities are designated under a portfolio fair value hedge on the mortgages. Changes in the fair value of the derivatives are recognised in the profit and loss account, together with the fair value adjustment on the mortgages (hedged items) insofar as attributable to interest rate risk (the hedged risk).
Fair value hedges
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognised in the profit and loss account, together with fair value adjustments to the hedged item attributable to the hedged risk. If the hedge relationship no longer meets the criteria for hedge accounting, the cumulative adjustment of the hedged item is, in the case of interest bearing instruments, amortised through the profit and loss account over the remaining term of the original hedge or recognised directly when the hedged item is derecognised. For non-interest bearing instruments, the cumulative adjustment of the hedged item is recognised in the profit and loss account only when the hedged item is derecognised.
Cash flow hedges
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the profit and loss account. Amounts accumulated in equity are recycled to the profit and loss account in the periods in which the hedged item affects net result. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the profit and loss account. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is transferred immediately to the profit and loss account.
Net investment hedges
Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity; the gain or loss relating to the ineffective portion is recognised immediately in the profit and loss account. Gains and losses accumulated in equity are included in the profit and loss account when the foreign operation is disposed.
Non-trading derivatives that do not qualify for hedge accounting
Derivative instruments that are used by ING Bank as part of its risk management strategies but which do not qualify for hedge accounting under ING Bank's accounting policies are presented as non-trading derivatives. Non-trading derivatives are stated at fair value with changes in the fair value taken to the profit and loss account.
ING Bank Annual Report 2011
Consolidated annual accounts
4
Accounting policies for the consolidated annual accounts of ING Bank continued
OFFSETTING OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
Financial assets and financial liabilities are offset, and the net amount reported in the balance sheet when ING Bank has a current legally enforceable right to set off the recognised amounts and intends to either settle on a net basis or to realise the asset and settle the liability simultaneously. Offsetting is applied to certain interest rate swaps for which the services of a central clearing house are used. Furthermore, offsetting is also applied to certain current accounts for which the product features and internal procedures allow net presentation under IFRS.
REPURCHASE TRANSACTIONS AND REVERSE REPURCHASE TRANSACTIONS
Securities sold subject to repurchase agreements ('repos') are retained in the consolidated balance sheet. The counterparty liability is included in Amounts due to banks, Customer deposits and other funds on deposit or Trading as appropriate.
Securities purchased under agreements to resell ('reverse repos') are recognised as Loans and advances to customers or Amounts due from banks, as appropriate. The difference between the sale and repurchase price is treated as interest and amortised over the life of the agreement using the effective interest method.
IMPAIRMENTS OF LOANS AND ADVANCES TO CUSTOMERS (LOAN LOSS PROVISIONS)
ING Bank assesses periodically and at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset, but before the balance sheet date, (a 'loss event') and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The following circumstances, among others, are considered objective evidence that a financial asset or group of assets is impaired:
- The borrower has sought or has been placed in bankruptcy or similar protection and this leads to the avoidance of or delays in repayment of the financial asset;
- The borrower has failed in the repayment of principal, interest or fees and the payment failure has remained unsolved for a certain period;
- The borrower has demonstrated significant financial difficulty, to the extent that it will have a negative impact on the expected future cash flows of the financial asset;
- The credit obligation has been restructured for non-commercial reasons. ING Bank has granted concessions, for economic or legal reasons relating to the borrower's financial difficulty, the effect of which is a reduction in the expected future cash flows of the financial asset; and
- Historical experience, updated for current events where necessary, provides evidence that a proportion of a group of assets is impaired although the related events that represent impairment triggers are not yet captured by ING Bank's credit risk systems.
ING Bank does not consider events that may be expected to occur in the future as objective evidence and, consequently, they are not used as a basis for concluding that a financial asset or group of assets is impaired.
In determining the impairment, expected future cash flows are estimated on the basis of the contractual cash flows of the assets in the portfolio and historical loss experience for assets with credit risk characteristics similar to those in the portfolio. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist. Losses expected as a result of future events, no matter how likely, are not recognised.
ING Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and then individually or collectively for financial assets that are not individually significant. If ING Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.
If there is objective evidence that an impairment loss on an asset carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account ('Loan loss provision') and the amount of the loss is recognised in the profit and loss account under 'Addition to loan loss provision'. If the asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.
ING Bank Annual Report 2011 29
Consolidated annual accounts
Accounting policies for the consolidated annual accounts of ING Bank continued
For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors' ability to pay all amounts due according to the contractual terms of the assets being evaluated. The collective evaluation of impairment includes the application of a 'loss confirmation period' to default probabilities. The loss confirmation period is a concept which recognises that there is a period of time between the emergence of impairment triggers and the point in time at which those events are captured by ING Bank's credit risk systems. Accordingly, the application of the loss confirmation period ensures that impairments that are incurred but not yet identified are adequately reflected in ING Bank's loan loss provision. Although the loss confirmation periods are inherently uncertain, ING Bank applies estimates to sub-portfolios (e.g. large corporations, small and medium size enterprises and retail portfolios) that reflect factors such as the frequency with which customers in the sub-portfolio disclose credit risk sensitive information and the frequency with which they are subject to review by ING Bank's account managers. Generally, the frequency increases in relation to the size of the borrower. Loss confirmation periods are based on historical experience and are validated, and revised where necessary, through regular back-testing to ensure that they reflect recent experience and current events.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor's credit rating), the previously recognised impairment loss is reversed by adjusting the provision. The amount of the reversal is recognised in the profit and loss account.
When a loan is uncollectible, it is written off against the related loan loss provision. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are recognised in the profit and loss account.
IMPAIRMENT OF OTHER FINANCIAL ASSETS
At each balance sheet date, ING Bank assesses whether there is objective evidence that a financial asset or a group of financial assets is impaired. (In the specific case of equity investments classified as available-for-sale, (the combination of) a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired). 'Significant' and 'prolonged' are interpreted on a case-by-case basis for specific equity securities; generally 25% and six months are used as triggers. If any objective evidence exists for available-for-sale debt and equity investments, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the net result – is removed from equity and recognised in the profit and loss account. Impairment losses on equity instruments can never be reversed. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the profit and loss account, the impairment loss is reversed through the profit and loss account.
INVESTMENTS IN ASSOCIATES
Associates are all entities over which ING Bank has significant influence but not control. Significant influence generally results from a shareholding of between 20% and 50% of the voting rights, but also is the ability to participate in the financial and operating policies through situations including, but not limited to one or more of the following:
- Representation on the board of directors;
- Participation in the policymaking process; and
- Interchange of managerial personnel.
Investments in associates are initially recognised at cost and subsequently accounted for using the equity method of accounting.
ING Bank's investment in associates (net of any accumulated impairment loss) includes goodwill identified on acquisition. ING Bank's share of its associates' post-acquisition profits and losses is recognised in the profit and loss account, and its share of post-acquisition changes in reserves is recognised in equity. The cumulative post-acquisition changes are adjusted against the carrying amount of the investment. When ING Bank's share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, ING Bank does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.
Unrealised gains on transactions between ING Bank and its associates are eliminated to the extent of ING Bank's interest in the associates. Unrealised losses are also eliminated unless they provide evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by ING Bank. The reporting dates of all material associates are consistent with the reporting date of ING Bank.
For interests in investment vehicles the existence of significant influence is determined taking into account both ING Bank's financial interests for own risk and its role as investment manager.
ING Bank Annual Report 2011
Consolidated annual accounts
Accounting policies for the consolidated annual accounts of ING Bank continued
REAL ESTATE INVESTMENTS
Real estate investments are recognised at fair value at the balance sheet date. Changes in the carrying amount resulting from revaluations are recognised in the profit and loss account. On disposal the difference between the sale proceeds and carrying value is recognised in the profit and loss account.
The fair value of real estate investments is based on regular appraisals by independent qualified valuers. For each reporting period every property is valued either by an independent valuer or internally. Indexation is used when a property is valued internally. The index is based on the results of the independent valuations carried out in that period. Market transactions and disposals made by ING Bank are monitored as part of the validation procedures to test the indexation methodology. Valuations performed earlier in the year are updated if necessary to reflect the situation at the year-end. All properties are valued independently at least every five years and more frequently if necessary.
The fair values represent the estimated amount for which the property could be exchanged on the date of valuation between a willing buyer and willing seller in an at-arm's-length transaction after proper marketing wherein the parties each acted knowledgeably, prudently and without compulsion. Fair values are based on appraisals using valuation methods such as: comparable market transactions, capitalisation of income methods or discounted cash flow calculations. The underlying assumption used in the valuation is that the properties are let or sold to third parties based on the actual letting status. The discounted cash flow analyses and capitalisation of income method are based on calculations of the future rental income in accordance with the terms in existing leases and estimations of the rental values for new leases when leases expire and incentives like rental free periods. The cash flows are discounted using market based interest rates that reflect appropriately the risk characteristics of real estate.
ING Bank owns a large real estate portfolio, widely diversified by region, by investment segment (Office, Retail and Residential) and by investment type (Core, Value Add and Opportunistic). The valuation of different investments is performed using different discount rates ('yields'), dependent on specific characteristics of each property, including occupancy, quality of rent payments and specific local market circumstances. For ING's main direct properties in its main locations, the yields applied in the 2011 year-end valuation generally are in the range of 5% to 8%.
The valuation of real estate investments takes (expected) vacancies into account. Occupancy rates differ significantly from investment to investment.
For real estate investments held through (minority shares in) real estate investment funds, the valuations are performed under the responsibility of the funds' asset manager.
Subsequent expenditures are recognised as part of the asset's carrying amount only when it is probable that future economic benefits associated with the item will flow to ING Bank and the cost can be measured reliably. All other repairs and maintenance costs are recognised in the profit and loss account.
PROPERTY AND EQUIPMENT
Property in own use
Land and buildings held for own use are stated at fair value at the balance sheet date. Increases in the carrying amount arising on revaluation of land and buildings held for own use are credited to the revaluation reserve in shareholders' equity. Decreases in the carrying amount that offset previous increases of the same asset are charged against the revaluation reserve directly in equity; all other decreases are charged to the profit and loss account. Increases that reverse a revaluation decrease on the same asset previously recognised in net result are recognised in the profit and loss account. Depreciation is recognised based on the fair value and the estimated useful life (in general 20-50 years). Depreciation is calculated on a straight-line basis. On disposal the related revaluation reserve is transferred to retained earnings.
The fair value of land and buildings is based on regular appraisals by independent qualified valuers or internally, similar to appraisals of Real estate investments. Subsequent expenditure is included in the asset's carrying amount when it is probable that future economic benefits associated with the item will flow to ING Bank and the cost of the item can be measured reliably.
Property obtained from foreclosures
Property obtained from foreclosures is stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Property obtained from foreclosures is included in Other assets – Property development and obtained from foreclosures.
Property development
Property developed and under development for which ING Bank has the intention to sell the property after its completion is included in Other assets – Property development and obtained from foreclosures.
ING Bank Annual Report 2011 31
Consolidated annual accounts
Accounting policies for the consolidated annual accounts of ING Bank continued
Property development and under development for which ING Bank has the intention to sell the property under development after its completion and where there is not yet a specifically negotiated contract is measured at direct construction cost incurred up to the balance sheet date, including borrowing costs incurred during construction and ING Bank's own directly attributable development and supervision expenses less any impairment losses. Profit is recognised using the completed contract method (on sale date of the property). Impairment is recognised if the estimated selling price in the ordinary course of business, less applicable variable selling expenses is lower than carrying value.
Property under development for which ING Bank has the intention to sell the property under development after its completion and where there is a specifically negotiated contract is valued using the percentage of completion method (pro rata profit recognition). The stage of completion is measured by reference to costs incurred to date as a percentage of total estimated costs for each contract.
Property under development is stated at fair value (with changes in fair value recognised in profit and loss) if ING Bank has the intention to recognise the property under development after completion as real estate investments.
Equipment
Equipment is stated at cost less accumulated depreciation and any impairment losses. The cost of the assets is depreciated on a straight-line basis over their estimated useful lives, which are generally as follows: for data processing equipment two to five years and four to ten years for fixtures and fittings. Expenditure incurred on maintenance and repairs is recognised in the profit and loss account as incurred. Expenditure incurred on major improvements is capitalised and depreciated.
Assets under operating leases
Assets leased out under operating leases in which ING Bank is the lessor are stated at cost less accumulated depreciation and any impairment losses. The cost of the assets is depreciated on a straight-line basis over the lease term. Reference is made to the section 'Leases'.
Disposals
The difference between the proceeds on disposal and net carrying value is recognised in the profit and loss account in under Other income.
Borrowing costs
Borrowing costs incurred for the construction of any qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use. Borrowing costs are determined at the weighted average cost of capital of the project.
LEASES
The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement at inception date.
ING Bank as the lessee
The leases entered into by ING Bank are primarily operating leases. The total payments made under operating leases are recognised in the profit and loss account on a straight-line basis over the period of the lease.
When an operating lease is terminated before the lease period has expired, any penalty payment required to be made to the lessor is recognised as an expense in the period in which termination takes place.
ING Bank as the lessor
When assets are held subject to a finance lease, the present value of the lease payments is recognised as a receivable under Loans and advances to customers or Amounts due from banks. The difference between the gross receivable and the present value of the receivable is unearned lease finance income. Lease income is recognised over the term of the lease using the net investment method (before tax), which reflects a constant periodic rate of return. When assets are held subject to an operating lease, the assets are included under Assets under operating leases.
ACQUISITIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
Acquisitions and goodwill
ING Bank's acquisitions are accounted for using the acquisition method of accounting. The consideration for each acquisition is measured at the aggregate of the fair values (at the date of exchange) of assets given, liabilities incurred or assumed, and equity instruments issued in exchange for control of the acquiree. Goodwill, being the difference between the cost of the acquisition (including assumed debt) and ING Bank's interest in the fair value of the acquired assets, liabilities and contingent liabilities as at the date of acquisition, is capitalised as an intangible asset. The results of the operations of the acquired companies are included in the profit and loss account from the date control is obtained.
ING Bank Annual Report 2011
Consolidated annual accounts
Accounting policies for the consolidated annual accounts of ING Bank continued
Where applicable, the consideration for the acquisition includes any asset or liability resulting from a contingent consideration arrangement, measured at its acquisition-date fair value. Subsequent changes in the fair value of contingent consideration classified as an asset or liability are accounted for in accordance with relevant IFRSs, taking into account the initial accounting period below. Changes in the fair value of the contingent consideration classified as equity are not recognised.
Where a business combination is achieved in stages, ING Bank's previously held interests in the assets and liabilities of the acquired entity are remeasured to fair value at the acquisition date (i.e. the date ING Bank attains control) and the resulting gain or loss, if any, is recognised in the profit or loss account. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognised in other comprehensive income are reclassified to the profit or loss account, where such treatment would be appropriate if that interest were disposed of. Acquisition-related costs are recognised in the profit or loss account as incurred and presented in the profit and loss account as Other operating expenses.
Until 2009, before IFRS 3 'Business Combinations' was revised the accounting of previously held interests in the assets and liabilities of the acquired entity were not remeasured at the acquisition date and the acquisition-related costs were considered to be part of the total consideration.
The initial accounting for the fair value of the net assets of the companies acquired during the year may be determined only provisionally as the determination of the fair value can be complex and the time between the acquisition and the preparation of the Annual Accounts can be limited. The initial accounting shall be completed within a year after acquisition.
Goodwill is only capitalised on acquisitions after the implementation date of IFRS-EU (1 January 2004). Accounting for acquisitions before that date has not been restated; goodwill and internally generated intangibles on these acquisitions were recognised directly in shareholders' equity. Goodwill is allocated to reporting units for the purpose of impairment testing. These reporting units represent the lowest level at which goodwill is monitored for internal management purposes. This test is performed annually or more frequently if there are indicators of impairment. Under the impairment tests, the carrying value of the reporting units (including goodwill) is compared to its recoverable amount which is the higher of its fair value less costs to sell and its value in use.
Adjustments to the fair value as at the date of acquisition of acquired assets and liabilities that are identified within one year after acquisition are recognised as an adjustment to goodwill; any subsequent adjustment is recognised as income or expense. On disposal of ING Bank companies, the difference between the sale proceeds and carrying value (including goodwill) and the unrealised results (including the currency translation reserve in equity) is included in the profit and loss account.
Computer software
Computer software that has been purchased or generated internally for own use is stated at cost less amortisation and any impairment losses. Amortisation is calculated on a straight-line basis over its useful life. This period will generally not exceed three years. Amortisation is included in Other operating expenses.
Other intangible assets
Other intangible assets are capitalised and amortised over their expected economic life which is generally between three and ten years. Intangible assets with an indefinite life are not amortised.
TAXATION
Income tax on result for the year comprises current and deferred tax. Income tax is recognised in the profit and loss account but it is recognised directly in equity if the tax relates to items that are recognised directly in equity.
Deferred income tax
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets and liabilities are not discounted.
Deferred tax assets are recognised where it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising from investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by ING Bank and it is probable that the difference will not reverse in the foreseeable future. The tax effects of income tax losses available for carry forward are recognised as an asset where it is probable that future taxable profits will be available against which these losses can be utilised.
ING Bank Annual Report 2011 33
Consolidated annual accounts
Accounting policies for the consolidated annual accounts of ING Bank continued
Deferred tax related to fair value remeasurement of available-for-sale investments and cash flow hedges, which are recognised directly in equity, is also recognised directly in equity and is subsequently recognised in the profit and loss account together with the deferred gain or loss.
FINANCIAL LIABILITIES
Financial liabilities at amortised cost
Financial liabilities at amortised cost include the following sub-categories: Preference shares, other borrowed funds, debt securities in issue, subordinated loans, amounts due to banks and customer deposits and other funds on deposit.
Preference shares, which carry a mandatory coupon or are redeemable on a specific date or at the option of the shareholder, are classified as financial liabilities. The dividends on these preference shares are recognised in the profit and loss account as Interest expense using the effective interest method.
Borrowings are recognised initially at their issue proceeds (fair value of consideration received) net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between proceeds, net of transaction costs, and the redemption value is recognised in the profit and loss account over the period of the borrowings using the effective interest method.
If ING Bank purchases its own debt, it is removed from the balance sheet, and the difference between the carrying amount of the liability and the consideration paid is included in the profit and loss account.
Financial liabilities at fair value through profit and loss
Financial liabilities at fair value through profit and loss comprise the following sub-categories: trading liabilities, non-trading derivatives and other financial liabilities designated as at fair value through profit and loss by management. Trading liabilities include equity securities, debt securities, funds on deposit and derivatives. Designation by management will take place only if it eliminates a measurement inconsistency or if the related assets and liabilities are managed on a fair value basis. ING Bank has designated an insignificant part of the issued debt, relating to market-making activities, at fair value through profit and loss. This issued debt consists mainly of own bonds. The designation as fair value through profit and loss eliminates the inconsistency in the timing of the recognition of gains and losses. All other financial liabilities are measured at amortised cost.
Financial guarantee contracts
Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such financial guarantees are initially recognised at fair value and are subsequently measured at the higher of the discounted best estimate of the obligation under the guarantee and the amount initially recognised less, cumulative amortisation to reflect revenue recognition principles.
OTHER LIABILITIES
Employee benefits – pension obligations
ING Bank companies operate various pension schemes. The schemes are generally funded through payments to insurance companies or trustee-administered funds, determined by periodic actuarial calculations. ING Bank has both defined benefit and defined contribution plans.
A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.
The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains and losses and unrecognised past service costs. The defined benefit obligation is calculated annually by internal and external actuaries using the projected unit credit method.
The expected value of assets is calculated using the expected rate of return on plan assets. Differences between the expected return and the actual return on these plan assets and actuarial changes in the defined benefit obligation are not recognised in the profit and loss account, unless the accumulated differences and changes exceed 10% of the greater of the defined benefit obligation and the fair value of the plan assets. The excess is recognised in the profit and loss account over employees' remaining working lives. In accordance with IFRS-EU transition provisions, the corridor was reset to nil at the date of transition to IFRS-EU.
The value of any plan asset recognised is restricted to the sum of any past service costs not yet recognised and the present value of any economic benefit available in the form of refunds from the plan or reductions in the future contributions to the plan.
ING Bank Annual Report 2011
Consolidated annual accounts
4
Accounting policies for the consolidated annual accounts of ING Bank continued
For defined contribution plans, ING Bank pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. ING Bank has no further payment obligations once the contributions have been paid. The contributions are recognised as staff expenses when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.
Other post-employment obligations
Some ING Bank companies provide post-employment healthcare benefits to certain employees and former employees. The entitlement to these benefits is usually conditional on the employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment using an accounting methodology similar to that for defined benefit pension plans.
Other provisions
A provision involves a present obligation arising from past events, the settlement of which is expected to result in an outflow from the company of resources embodying economic benefits, however the timing or the amount is uncertain. Provisions are discounted when the effect of the time value of money is material using a pre-tax discount rate. The determination of provisions is an inherently uncertain process involving estimates regarding amounts and timing of cash flows.
Reorganisation provisions include employee termination benefits when ING Bank is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy.
INCOME RECOGNITION
Interest
Interest income and expense are recognised in the profit and loss account using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, ING Bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Once a financial asset or a group of similar financial assets has been written down as a result of impairment, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.
All interest income and expenses from trading positions and non-trading derivatives are classified as interest income and interest expenses in the profit and loss account. Changes in the 'clean fair value' are included in Net trading income and Valuation results on non-trading derivatives.
Fees and commissions
Fees and commissions are generally recognised as the service is provided. Loan commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognised as an adjustment to the effective interest rate on the loan. Loan syndication fees are recognised as income when the syndication has been completed and ING Bank has retained no part of the loan package for itself or has retained a part at the same effective interest rate as the other participants. Commission and fees arising from negotiating, or participating in the negotiation of, a transaction for a third-party – such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses – are recognised on completion of the underlying transaction. Portfolio and other management advisory and service fees are recognised based on the applicable service contracts as the service is provided. Asset management fees related to investment funds are recognised on a pro-rata basis over the period the service is provided. The same principle is applied for wealth management, financial planning and custody services that are continuously provided over an extended period of time. Fees received and paid between banks for payment services are classified as commission income and expenses.
Lease income
The proceeds from leasing out assets under operating leases are recognised on a straight-line basis over the life of the lease agreement. Lease payments received in respect of finance leases when ING Bank is the lessor are divided into an interest component (recognised as interest income) and a repayment component.
EXPENSE RECOGNITION
Expenses are recognised in the profit and loss account as incurred or when a decrease in future economic benefits related to a decrease in an asset or an increase in a liability has arisen that can be measured reliably.
Share-based payments
Share-based payment expenses are recognised as a staff expense over the vesting period. A corresponding increase in equity is recognised for equity-settled share-based payment transactions. The fair value of equity-settled share-based
ING Bank Annual Report 2011 35
Consolidated annual accounts
Accounting policies for the consolidated annual accounts of ING Bank continued
payment transactions is measured at the grant date. Rights granted will remain valid until the expiry date, even if the share based payment scheme is discontinued. The rights are subject to certain conditions, including a pre-determined continuous period of service.
GOVERNMENT GRANTS
Government grants are recognised where there is reasonable assurance that the grant will be received and all attached conditions will be complied with. When the grant relates to an expense item, the grant is recognised over the period necessary to match the grant on a systematic basis to the expense that it is intended to compensate. In such case, the grant is deducted from the related expense in the profit and loss account.
FIDUCIARY ACTIVITIES
ING Bank commonly acts as trustee and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. These assets and income arising thereon are excluded from these financial statements, as they are not assets of ING Bank.
STATEMENT OF CASH FLOWS
The statement of cash flows has been drawn up in accordance with the indirect method, classifying cash flows as cash flows from operating, investing and financing activities. In the net cash flow from operating activities, the result before tax is adjusted for those items in the profit and loss account, and changes in balance sheet items, which do not result in actual cash flows during the year.
For the purposes of the statement of cash flows, Cash and cash equivalents comprise balances with less than three months' maturity from the date of acquisition, including cash and non-restricted balances with central banks, treasury bills and other eligible bills, amounts due from other banks and amounts due to banks. Investments qualify as a cash equivalent if they are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.
Cash flows arising from foreign currency transactions are translated into the functional currency using the exchange rates at the date of the cash flows.
The net cash flow shown in respect of Loans and advances to customers relates only to transactions involving actual payments or receipts. The Addition to loan loss provisions which is deducted from the item Loans and advances to customers in the balance sheet has been adjusted accordingly from the result before tax and is shown separately in the statement of cash flows.
The difference between the net cash flow in accordance with the statement of cash flows and the change in Cash and cash equivalents in the balance sheet is due to exchange rate differences and is accounted separately for as part of the reconciliation of the net cash flow and the balance sheet change in Cash and cash equivalents.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank
Amounts in millions of euros, unless stated otherwise
ASSETS
1 CASH AND BALANCES WITH CENTRAL BANKS
| Cash and balances with central banks | ||
|---|---|---|
| 2011 | 2010 | |
| Amounts held at central banks | 26,481 | 7,983 |
| Cash and bank balances | 1,631 | 1,536 |
| 28,112 | 9,519 |
2 AMOUNTS DUE FROM BANKS
| Amounts due from banks | ||||||
|---|---|---|---|---|---|---|
| Netherlands | International | Total | ||||
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |
| Loans and advances to banks | 13,752 | 14,416 | 29,556 | 34,640 | 43,308 | 49,056 |
| Cash advances, overdrafts and other balances | 1,322 | 1,754 | 700 | 1,039 | 2,022 | 2,793 |
| 15,074 | 16,170 | 30,256 | 35,679 | 45,330 | 51,849 | |
| Loan loss provision | -7 | -21 | -7 | -21 | ||
| 15,074 | 16,170 | 30,249 | 35,658 | 45,323 | 51,828 |
As at 31 December 2011, Amounts due from banks included receivables with regard to securities, which have been acquired in reverse repurchase transactions amounting to EUR 2,925 million (2010: EUR 4,621 million), and receivables related to finance lease contracts amounted to EUR 76 million (2010: EUR 82 million).
As at 31 December 2011, the balance sheet value included debt securities which were lent or sold in repurchase transactions amounting to nil (2010: nil) and EUR 2,267 million (2010: EUR 1,381 million), respectively.
As at 31 December 2011, the non-subordinated receivables amounted to EUR 45,304 million (2010: EUR 51,788 million) and the subordinated receivables amounted to EUR 19 million (2010: EUR 40 million).
No individual amount due from banks has terms and conditions that materially impact the amount, timing or certainty of the consolidated cash flows of ING Bank. For details on significant concentrations see 'Risk management' section.
3 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT AND LOSS
| Financial assets at fair value through profit and loss | ||
|---|---|---|
| 2011 | 2010 | |
| Trading assets | 123,176 | 125,070 |
| Non-trading derivatives | 10,076 | 8,990 |
| Designated as at fair value through profit and loss | 2,838 | 3,066 |
| 136,090 | 137,126 | |
| Trading assets by type | ||
| --- | --- | --- |
| 2011 | 2010 | |
| Equity securities | 3,264 | 5,310 |
| Debt securities | 18,207 | 27,925 |
| Derivatives | 59,139 | 42,390 |
| Loans and receivables | 42,566 | 49,445 |
| 123,176 | 125,070 |
The increase in trading derivatives and other non-trading derivatives for which no hedge accounting is applied is mainly due to changes in fair value resulting from changes in market interest rates. The increase is substantially mitigated by a similar increase in Trading derivates and Other non-trading derivatives (liabilities) as disclosed in Note 17 'Financial liabilities at fair value through profit and loss'.
As at 31 December 2011, the balance sheet value included equity securities which were lent or sold in repurchase transactions amounting to EUR 591 million (2010: EUR 69 million) and nil (2010: nil), respectively. As at 31 December 2011, the balance sheet value included debt securities which were lent or sold in repurchase transactions amounting to EUR 47 million (2010: EUR 65 million) and EUR 1,752 million (2010: EUR 667 million) respectively.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
As at 31 December 2011, Trading assets included receivables of EUR 40,904 million (2010: EUR 47,894 million) with regard to reverse repurchase transactions.
| Non-trading derivatives by type | ||
|---|---|---|
| 2011 | 2010 | |
| Derivatives used in | ||
| – fair value hedges | 2,885 | 3,714 |
| – cash flow hedges | 4,069 | 2,876 |
| – hedges of net investments in foreign operations | 136 | 72 |
| Other non-trading derivatives | 2,986 | 2,328 |
| 10,076 | 8,990 |
Other non-trading derivatives mainly include interest rate swaps for which no hedge accounting is applied.
| Designated as at fair value through profit and loss by type | ||
|---|---|---|
| 2011 | 2010 | |
| Equity securities | 30 | 142 |
| Debt securities | 1,808 | 2,354 |
| Loans and receivables | 1,000 | 570 |
| 2,838 | 3,066 |
Included in the Financial assets designated as at fair value through profit and loss is a portfolio of loans and receivables which is economically hedged by credit derivatives. The hedges do not meet the criteria for hedge accounting and the loans are recorded at fair value to avoid an accounting mismatch. The maximum credit exposure of the loans and receivables included in Financial assets designated as at fair value through profit and loss approximates its carrying value. The cumulative change in fair value of the loans attributable to changes in credit risk is not significant.
The notional value of the related credit derivatives is EUR 64 million (2010: EUR 205 million). The change in fair value of the credit derivatives attributable to changes in credit risk since the loans were first designated amounts to EUR –1 million (2010: nil) and the change for the current year is nil (2010: nil).
The changes in fair value of the (designated) loans attributable to changes in credit risk have been calculated by determining the changes in credit spread implicit in the fair value of bonds issued by entities with similar credit characteristics.
4 INVESTMENTS
| Investments by type | ||
|---|---|---|
| 2011 | 2010 | |
| Available-for-sale investments | ||
| – equity securities | 2,466 | 2,741 |
| – debt securities | 72,469 | 96,459 |
| 74,935 | 99,200 | |
| Held-to-maturity investments | ||
| – debt securities | 8,868 | 11,693 |
| 8,868 | 11,693 | |
| 83,803 | 110,893 |
The fair value of the securities classified as held-to-maturity amounts to EUR 8,835 million as at 31 December 2011 (2010: EUR 11,854 million).
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
Exposure to debt securities
ING Bank's exposure to debt securities is included in the following balance sheet lines:
| Debt securities | ||
|---|---|---|
| 2011 | 2010 | |
| Available-for-sale investments | 72,469 | 96,459 |
| Held-to-maturity investments | 8,868 | 11,693 |
| Loans and advances to customers | 22,435 | 27,866 |
| Due from banks | 7,321 | 8,122 |
| Available-for-sale investments and Assets at amortised cost | 111,093 | 144,140 |
| Trading assets | 18,207 | 27,925 |
| Designated as at fair value through profit and loss | 1,808 | 2,354 |
| Financial assets at fair value through profit and loss | 20,015 | 30,279 |
| 131,108 | 174,419 |
ING Bank's total exposure to debt securities included in available-for-sale investments and assets at amortised cost of EUR 111,093 million (2010: EUR 144,140 million) is specified as follows by type of exposure:
| Debt securities by type and balance sheet line (total) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Available-for-sale investments | Held-to-maturity investments | Loans and advances to customers | Due from banks | Total | ||||||
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |
| Government bonds | 47,255 | 49,973 | 881 | 950 | 1,081 | 1,037 | 49,217 | 51,960 | ||
| Covered bonds | 6,537 | 4,974 | 7,209 | 9,212 | 7,469 | 7,818 | 6,591 | 6,943 | 27,806 | 28,947 |
| Corporate bonds | 1,088 | 904 | 425 | 162 | 1,513 | 1,066 | ||||
| Financial institution bonds | 15,192 | 24,015 | 421 | 425 | 134 | 244 | 736 | 1,179 | 16,483 | 25,863 |
| Bond portfolio (excluding ABS) | 70,072 | 79,866 | 8,511 | 10,587 | 9,109 | 9,261 | 7,327 | 8,122 | 95,019 | 107,836 |
| US agency RMBS | 402 | 10,921 | 10 | 402 | 10,931 | |||||
| US prime RMBS | 18 | 706 | 18 | 706 | ||||||
| US Alt-A RMBS | 156 | 2,431 | 156 | 2,431 | ||||||
| US subprime RMBS | 22 | 87 | 22 | 87 | ||||||
| Non-US RMBS | 1,128 | 1,381 | 50 | 9,549 | 13,245 | -6 | 10,671 | 14,676 | ||
| CDO/CLO | 55 | 77 | 416 | 497 | 471 | 574 | ||||
| Other ABS | 441 | 592 | 357 | 358 | 2,190 | 3,540 | 2,988 | 4,490 | ||
| CMBS | 175 | 397 | 689 | 1,171 | 1,323 | 1,346 | 2,409 | |||
| ABS portfolio | 2,397 | 16,592 | 357 | 1,107 | 13,326 | 18,605 | -6 | 16,074 | 36,304 | |
| 72,469 | 96,458 | 8,868 | 11,694 | 22,435 | 27,866 | 7,321 | 8,122 | 111,093 | 144,140 |
In 2011, changes in debt securities include the classification of ING Direct USA as a disposal group held for sale. Reference is made to Note 10 'Assets and liabilities held for sale'.
Asset backed security portfolio
The table below shows certain ABS (US Subprime RMBS, Alt-A RMBS, CMBS and CDO/CLOs) that were considered pressurised asset classes. It includes exposures in all relevant balance sheet lines, including not only loans and advances and investments available-for-sale as disclosed above, but also financial assets designated as at fair value through profit and loss.
ING Bank Annual Report 2011 39
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
Exposures, revaluations and losses on pressurised ABS bonds
| 31 December 2011 | Change in 2011 | 31 December 2010 | |||||
|---|---|---|---|---|---|---|---|
| Balance Sheet Value (1) | Pre-tax revaluation reserve | Changes through equity (pre-tax) | Changes through profit and loss (pre-tax) | Other changes | Balance Sheet Value (1) | Pre-tax revaluation reserve | |
| US Subprime RMBS | 22 | -6 | -8 | -51 | 87 | 6 | |
| US Alt-A RMBS | 206 | -34 | -248 | -77 | -1,957 | 2,488 | 214 |
| CDO/CLOs | 702 | -36 | -43 | -22 | -32 | 799 | 7 |
| CMBS | 1,349 | -57 | 92 | -1 | -1,163 | 2,421 | -149 |
| Total | 2,279 | -127 | -205 | -108 | -3,203 | 5,795 | 78 |
(1) For assets classified as loans and receivables: amortised cost; otherwise: fair value.
Other changes includes mainly redemptions/prepayments and the classification of ING Direct USA as a disposal group held for sale. Reference is made to Note 10 'Assets and liabilities held for sale'.
Reference is made to Note 30 'Fair value of financial assets and liabilities' for disclosure by fair value hierarchy and Note 32 'Investment income' for impairments on available-for-sale debt securities.
Greece, Italy, Ireland, Portugal and Spain
In the first half of 2010 concerns arose regarding the creditworthiness of several southern European countries, which later spread to a few other European countries. As a result of these concerns the value of sovereign debt decreased and exposures in those countries are being monitored closely. With regard to troubled European countries, ING Bank's main focus is on Greece, Italy, Ireland, Portugal and Spain as these countries have either applied for support from the European Financial Stability Facility ('EFSF') or receive support from the ECB via government bond purchases in the secondary market. Within these countries, ING Bank's main focus is on exposure to Government bonds and Unsecured Financial institutions' bonds. The following disclosure focuses in particular on ING Bank's balance sheet exposure with regard to Government bonds and Unsecured Financial institutions' bonds in Greece, Italy, Ireland, Portugal and Spain. At 31 December 2011, ING Bank's balance sheet value of 'Government bonds' and Unsecured Financial institutions' bonds to Greece, Italy, Ireland, Portugal and Spain and the related pre-tax revaluation reserve in equity was as follows:
Greece, Italy, Ireland, Portugal and Spain – Government bonds and Unsecured Financial institutions' bonds (1)
| 2011 | Balance Sheet value | Pre-tax revaluation reserve | Pre-tax impairments (2) | Amortised cost value | Fair value for investments held-to-maturity |
|---|---|---|---|---|---|
| Greece | |||||
| Government bonds available-for-sale | 151 | -588 | 739 | ||
| Italy | |||||
| Government bonds available-for-sale | 826 | -224 | 1,050 | ||
| Government bonds at amortised costs (loans) | 97 | 97 | |||
| Financial institutions available-for-sale | 549 | -41 | 590 | ||
| Financial institutions at amortised costs (held-to-maturity) | 30 | 30 | 28 | ||
| Financial institutions at amortised costs (loans) | 131 | 131 | |||
| Ireland | |||||
| Financial institutions available-for-sale | 44 | -1 | 45 | ||
| Financial institutions at amortised costs (held-to-maturity) | 34 | 34 | 35 | ||
| Financial institutions at amortised costs (loans) | 122 | 122 | |||
| Portugal | |||||
| Government bonds available-for-sale | 438 | -211 | 649 | ||
| Financial institutions available-for-sale | 78 | -15 | 93 | ||
| Spain | |||||
| Government bonds available-for-sale | 324 | -85 | 409 | ||
| Government bonds at amortised costs (held-to-maturity) | 170 | 170 | 170 | ||
| Financial institutions available-for-sale | 95 | -5 | 100 | ||
| Financial institutions at amortised costs (loans) | 85 | -1 | 86 | ||
| Total | 3,174 | -583 | -588 | 4,345 | 233 |
(1) Exposures are included based on the parent country of the issuer.
(2) Pre-tax impairments relate to bonds held at 31 December 2011. In addition, no impairments were recognised in 2011 on Greek government bonds that were no longer held at 31 December 2011. The total amount of impairments recognised on Greek Government bonds in 2011 is therefore EUR 588 million as explained below.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
The impact on ING Bank's revaluation reserve in relation to sovereign and unsecured financial institutions debt is limited per 31 December 2011: the negative impact on troubled countries is offset by opposite positive movements in bonds of financially stronger European countries and by the positive impact from lower interest rates in general. Furthermore, in the course of 2011, ING Bank reduced its sovereign debt exposure to these troubled countries.
On 21 July 2011 a Private Sector Initiative to support Greece was announced. This initiative involves a voluntary exchange of existing Greek government bonds together with a Buyback Facility. Based on this initiative, ING Bank impaired its Greek government bonds maturing up to 2020 in the second quarter of 2011 (EUR 187 million). The decrease in market value in the third quarter of 2011 of these impaired bonds was recognised as re-impairment (EUR 91 million). Due to the outcome of the EC meeting on 26 October 2011, the Greek government bonds maturing from 2020 were impaired in the third quarter of 2011 (EUR 177 million). ING Bank impaired all its Greek Government bonds to market value at 31 December 2011. This resulted in a re-impairment in the fourth quarter of 2011 of EUR 133 million, bringing the total impairments on Greek government bonds to EUR 588 million. The total Greek government bond portfolio has now been written down by approximately 80%.
Reference is made to Note 30 'Fair value of financial assets and liabilities' for disclosure by fair value hierarchy and Note 32 'Investment income' for impairments on available-for-sale debt securities.
Further information on ING Bank's risk exposure with regard to Greece, Italy, Ireland, Portugal and Spain is provided in the 'Risk management' section.
Changes in available-for-sale and held-to-maturity investments
| Available-for-sale equity securities | Available-for-sale debt securities | Held-to-maturity | Total | |||||
|---|---|---|---|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |
| Opening balance | 2,741 | 3,682 | 96,459 | 88,500 | 11,693 | 14,409 | 110,893 | 106,591 |
| Additions | 134 | 162 | 154,870 | 89,452 | 141 | 155,004 | 89,755 | |
| Amortisation | 169 | 98 | -14 | -13 | 155 | 85 | ||
| Transfers and reclassifications | 384 | 12 | 282 | -282 | 384 | 12 | ||
| Changes in the composition of the group and other changes | -35 | -10 | -22,587 | -444 | -23,066 | -10 | ||
| Changes in unrealised revaluations | -464 | -225 | 1,336 | 297 | 872 | 72 | ||
| Impairments | -65 | -32 | -734 | -146 | -799 | -178 | ||
| Reversal of impairments | 74 | 74 | ||||||
| Disposals and redemptions | -258 | -905 | -157,172 | -85,582 | -2,369 | -2,620 | -159,799 | -89,107 |
| Exchange rate differences | 29 | 57 | 54 | 3,558 | 2 | 58 | 85 | 3,673 |
| Closing balance | 2,466 | 2,741 | 72,469 | 96,459 | 8,868 | 11,693 | 83,803 | 110,893 |
In 2011, Changes in the composition of the group and other changes relates mainly to the classification of ING Direct USA as a disposal group held for sale. Reference is made to Note 10 'Assets and liabilities held for sale'.
Reference is made to Note 32 'Investment income' for details on impairments.
Transfers and reclassifications of available-for-sale and held-to-maturity investments
| Available-for-sale equity securities | Available-for-sale debt securities | Held-to-maturity | Total | |||||
|---|---|---|---|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |
| To/from held-to-maturity | 282 | 282 | ||||||
| To/from available-for-sale | -282 | -282 | ||||||
| To/from Investments in associates | 384 | 12 | 384 | 12 | ||||
| 384 | 12 | 282 | -282 | 384 | 12 |
In 2011, To/from investment in associates in relation to available-for-sale equity securities relates mainly to the real estate funds for which significant influence ceased to exist due to the sale of ING Real Estate Investment Management.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
Held-to-maturity debt securities – sale and reclassification to available-for-sale investments (2010)
In the second quarter of 2010 EUR 51 million of Greek government bonds that were classified as held-to-maturity investments were sold. Furthermore, EUR 282 million of Greek government bonds were reclassified from held-to-maturity to available-for-sale investments. As the decisions to sell and reclassify were based on the significant deterioration in the issuer's creditworthiness compared to the credit rating at initial recognition, this sale and reclassification does not impact the intent for the remainder of the held-to-maturity investment portfolio.
Reclassifications to Loans and advances to customers and Amounts due from banks (2009 and 2008)
Reclassifications out of available-for-sale investments to loans and receivables are allowed under IFRS-EU as of the third quarter of 2008. In the first quarter of 2009 and in the fourth quarter of 2008 ING Bank reclassified certain financial assets from Investments available-for-sale to Loans and advances to customers and Amounts due from banks. ING Bank identified assets eligible for reclassification, for which at the reclassification date it had the intention to hold for the foreseeable future. The table below provides information on the two reclassifications made in the first quarter of 2009 and in the fourth quarter of 2008. Information is provided for both reclassifications (see columns) as at the date of reclassification and as at the end of the subsequent reporting periods (see rows). This information is disclosed under IFRS-EU as long as the reclassified assets continue to be recognised in the balance sheet.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
| Reclassifications to Loans and advances to customers and Amounts due from banks | ||
|---|---|---|
| Q1 2009 | Q4 2008 | |
| As per reclassification date | ||
| Fair value | 22,828 | 1,594 |
| 2.1% - | 4.1% - | |
| Range of effective interest rates (weighted average) | 11.7% | 21% |
| Expected recoverable cash flows | 24,052 | 1,646 |
| Unrealised fair value losses in shareholders' equity (before tax) | -1,224 | -69 |
| Recognised fair value gains (losses) in shareholders' equity (before tax) between the beginning of the year in which the reclassification took place and the reclassification date | nil | -79 |
| Recognised fair value gains (losses) in shareholders' equity (before tax) in the year prior to reclassification | -192 | -20 |
| Recognised impairment (before tax) between the beginning of the year in which the reclassification took place and the reclassification date | nil | nil |
| Recognised impairment (before tax) in the year prior to reclassification | nil | nil |
Impact on the financial years after reclassification:
| 2011 | ||
|---|---|---|
| Carrying value as at 31 December | 14,419 | 633 |
| Fair value as at 31 December | 13,250 | 648 |
| Unrealised fair value losses recognised in shareholders' equity (before tax) as at 31 December | -446 | -8 |
| Effect on shareholders' equity (before tax) as at 31 December if reclassification had not been made | -1,169 | 15 |
| Effect on result (before tax) if reclassification had not been made | nil | nil |
| Effect on result (before tax) for the year (mainly interest income) | 390 | 28 |
| Recognised impairments (before tax) | nil | nil |
| Recognised provision for credit losses (before tax) | nil | nil |
| 2010 | ||
| --- | --- | --- |
| Carrying value as at 31 December | 16,906 | 857 |
| Fair value as at 31 December | 16,099 | 889 |
| Unrealised fair value losses recognised in shareholders' equity (before tax) as at 31 December | -633 | -65 |
| Effect on shareholders' equity (before tax) as at 31 December if reclassification had not been made | -807 | 32 |
| Effect on result (before tax) if reclassification had not been made | nil | nil |
| Effect on result (before tax) for the year (mainly interest income) | 467 | 34 |
| Recognised impairments (before tax) | nil | nil |
| Recognised provision for credit losses (before tax) | nil | nil |
| 2009 | ||
| --- | --- | --- |
| Carrying value as at 31 December | 20,551 | 1,189 |
| Fair value as at 31 December | 20,175 | 1,184 |
| Unrealised fair value losses in shareholders' equity (before tax) as at 31 December | -902 | -67 |
| Effect on shareholders' equity (before tax) as at 31 December if reclassification had not been made | -376 | -5 |
| Effect on result (before tax) if reclassification had not been made | nil | nil |
| Effect on result (before tax) after the reclassification until 31 December (mainly interest income) | 629 | n/a |
| Effect on result (before tax) for the year (mainly interest income) | n/a | 47 |
| Recognised impairments (before tax) | nil | nil |
| Recognised provision for credit losses (before tax) | nil | nil |
| 2008 | ||
| --- | --- | --- |
| Carrying value as at 31 December | 1,592 | |
| Fair value as at 31 December | 1,565 | |
| Unrealised fair value losses recognised in shareholders' equity (before tax) as at 31 December | -192 | -79 |
| Effect on shareholders' equity (before tax) as at 31 December if reclassification had not been made | n/a | -28 |
| Effect on result (before tax) if reclassification had not been made | n/a | nil |
| Effect on result (before tax) after the reclassification until 31 December (mainly interest income) | n/a | 9 |
| Recognised impairments (before tax) | nil | nil |
| Recognised provision for credit losses (before tax) | n/a | nil |
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
Available-for-sale equity securities – listed and unlisted
| 2011 | 2010 | |
|---|---|---|
| Listed | 1,722 | 2,159 |
| Unlisted | 744 | 582 |
| 2,466 | 2,741 |
As at 31 December 2011, the balance sheet value included equity securities which were lent in repurchase transactions amounting to nil (2010: nil). As at 31 December 2011, the balance sheet value included debt securities which were lent or sold in repurchase transactions amounting to EUR 143 million and EUR 21,183 million respectively (2010: EUR 2,477 million and EUR 14,275 million).
5 LOANS AND ADVANCES TO CUSTOMERS
Loans and advances to customers analysed by type
| Netherlands | International | Total | ||||
|---|---|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |
| Loans to, or guaranteed by, public authorities | 29,281 | 28,671 | 25,867 | 27,282 | 55,148 | 55,953 |
| Loans secured by mortgages | 168,382 | 161,938 | 160,404 | 172,801 | 328,786 | 334,739 |
| Loans guaranteed by credit institutions | 379 | 308 | 8,260 | 8,356 | 8,639 | 8,664 |
| Personal lending | 5,012 | 5,125 | 19,389 | 16,618 | 24,401 | 21,743 |
| Asset backed securities | 13,328 | 18,605 | 13,328 | 18,605 | ||
| Corporate loans | 48,504 | 52,195 | 103,706 | 100,723 | 152,210 | 152,918 |
| 251,558 | 248,237 | 330,954 | 344,385 | 582,512 | 592,622 | |
| Loan loss provisions | -2,002 | -1,932 | -2,941 | -3,242 | -4,943 | -5,174 |
| 249,556 | 246,305 | 328,013 | 341,143 | 577,569 | 587,448 |
Loans and advances to customers analysed by subordination
| 2011 | 2010 | |
|---|---|---|
| Non-subordinated | 571,970 | 582,025 |
| Subordinated | 5,599 | 5,423 |
| 577,569 | 587,448 |
At 31 December 2011, the balance sheet value included debt securities which were lent or sold in repurchase transactions amounting to nil (2010: nil) and EUR 1,778 million (2010: EUR 727 million), respectively.
As at 31 December 2011, Loans and advances to customers included receivables with regard to securities which have been acquired in reverse repurchase transactions related to the banking operations amounting to EUR 1,228 million (2010: EUR 1,609 million).
No individual loan or advance has terms and conditions that materially affect the amount timing or certainty of the consolidated cash flows of ING Bank. For details on significant concentrations see 'Risk management' section.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
Loans and advances to customers and Amounts due from banks include finance lease receivables, are detailed as follows:
| Finance lease receivables | ||
|---|---|---|
| 2011 | 2010 | |
| Maturities of gross investment in finance lease receivables | ||
| – within 1 year | 5,386 | 5,060 |
| – more than 1 year but less than 5 years | 9,407 | 9,700 |
| – more than 5 years | 5,875 | 6,089 |
| 20,668 | 20,849 | |
| Unearned future finance income on finance leases | –3,228 | –3,328 |
| Net investment in finance leases | 17,440 | 17,521 |
| Maturities of net investment in finance lease receivables | ||
| – within 1 year | 4,697 | 4,363 |
| – more than 1 year but less than 5 years | 8,035 | 8,294 |
| – more than 5 years | 4,708 | 4,864 |
| 17,440 | 17,521 | |
| Included in | ||
| – Amounts due from banks | 76 | 82 |
| – Loans and advances to customers | 17,364 | 17,439 |
| 17,440 | 17,521 |
The allowance for uncollectible finance lease receivables included in the loan loss provisions amounted to EUR 223 million as at 31 December 2011 (2010: EUR 177 million).
No individual finance lease receivable has terms and conditions that would materially affect the amount, timing or certainty of consolidated cash flows of ING Bank.
| Loan loss provisions analysed by type | ||||||
|---|---|---|---|---|---|---|
| Netherlands | International | Total | ||||
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |
| Loans to, or guaranteed by, public authorities | 1 | 2 | 3 | 3 | 3 | |
| Loans secured by mortgages | 503 | 416 | 712 | 1,183 | 1,215 | 1,599 |
| Loans guaranteed by credit institutions | 4 | 1 | 5 | 22 | 9 | 23 |
| Personal lending | 119 | 131 | 597 | 536 | 716 | 667 |
| Asset backed securities | 2 | 2 | ||||
| Corporate loans | 1,375 | 1,384 | 1,630 | 1,519 | 3,005 | 2,903 |
| 2,002 | 1,932 | 2,948 | 3,263 | 4,950 | 5,195 | |
| Included in | ||||||
| – Amounts due from banks | 7 | 21 | 7 | 21 | ||
| – Loans and advances to customers | 2,002 | 1,932 | 2,941 | 3,242 | 4,943 | 5,174 |
| 2,002 | 1,932 | 2,948 | 3,263 | 4,950 | 5,195 | |
| Changes in the loan loss provisions | ||||||
| --- | --- | --- | ||||
| 2011 | 2010 | |||||
| Opening balance | 5,195 | 4,399 | ||||
| Changes in the composition of the group | –3 | |||||
| Write-offs | –1,304 | –1,166 | ||||
| Recoveries | 112 | 105 | ||||
| Increase in loan loss provisions | 1,670 | 1,751 | ||||
| Exchange rate differences | –83 | 155 | ||||
| Other changes | –637 | –49 | ||||
| Closing balance | 4,950 | 5,195 |
In 2011, Other changes relates for EUR 565 million to the classification of ING Direct USA as a disposal group held for sale. Reference is made to Note 10 'Assets and liabilities held for sale'.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
6 INVESTMENTS IN ASSOCIATES
| Investments in associates | |||||||
|---|---|---|---|---|---|---|---|
| 2011 | Interest held (%) | Fair value of listed investment | Balance sheet value | Total assets | Total liabilities | Total income | Total expenses |
| TMB Public Company Limited | 25 | 424 | 485 | 16,100 | 14,847 | 377 | 301 |
| ING Real Estate Asia Retail Fund Ltd | 26 | 87 | 868 | 512 | 81 | 37 | |
| ING European Infrastructure Fund | 29 | 32 | 636 | 546 | 11 | 45 | |
| ING Real Estate Asia Value Fund LP | 26 | 29 | 256 | 140 | 12 | 8 | |
| Other investments in associates | 194 | ||||||
| 827 |
Other investments in associates represents a large number of associates with an individual balance sheet value of less than EUR 25 million.
Accumulated impairments of EUR 38 million (2010: EUR 71 million) have been recognised.
As a result of the sale of ING Real Estate Investment Management in 2011, as disclosed in Note 26 'Companies acquired and companies disposed', ING Bank is no longer the investment manager of certain funds. Significant influence therefore ceased to exist for these funds.
The values presented in the table above could differ from the values presented in the individual annual accounts of the associates, due to the fact that the individual values have been brought in line with ING Bank's accounting principles.
In general the reporting dates of all material associates are consistent with the reporting date of ING Bank. However, for practical reasons, the reporting dates of certain associates differ slightly from the reporting date of ING Bank, but, in any case, the difference between the reporting date of the largest associates and that of ING Bank is no more than three months.
Where the listed fair value is lower than the balance sheet value, an impairment review and an evaluation of the going concern basis has been performed.
| Investments in associates | |||||||
|---|---|---|---|---|---|---|---|
| 2010 | Interest held (%) | Fair value of listed investment | Balance sheet value | Total assets | Total liabilities | Total income | Total expenses |
| TMB Public Company Limited | 25 | 644 | 474 | 14,055 | 12,826 | 321 | 262 |
| ING Real Estate Asia Retail Fund | 28 | 107 | 782 | 450 | 51 | 53 | |
| Lion Properties Fund | 4 | 86 | 3,412 | 1,428 | 1,606 | 1,150 | |
| Lion Industrial Trust | 8 | 85 | 2,691 | 1,583 | 247 | 130 | |
| ING Industrial Fund Australia | 8 | 81 | 85 | 1,830 | 756 | 162 | 86 |
| Steadfast Capital Fund II LP | 68 | 74 | 145 | 3 | 2 | ||
| Lion Value Fund | 30 | 69 | 341 | 109 | 53 | 10 | |
| ING REI Investment DOF B.V. | 3 | 59 | 2,235 | 414 | 199 | 175 | |
| ING European Infrastructure Fund | 29 | 47 | 775 | 614 | 698 | 670 | |
| Lion Gables Apartment Fund LP | 6 | 44 | 1,767 | 984 | 231 | 35 | |
| ING Nationale-Nederlanden PTE | 20 | 40 | 194 | 9 | 85 | 38 | |
| ING Office Fund Australia | 2 | 29 | 37 | 1,972 | 391 | 1,920 | 1,574 |
| Lion Mexico Fund | 7 | 27 | 384 | 6 | 34 | 18 | |
| Other investments in associates | 260 | ||||||
| 1,494 |
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
| Changes in investments in associates | ||
|---|---|---|
| 2011 | 2010 | |
| Opening balance | 1,494 | 1,396 |
| Additions | 35 | 104 |
| Changes in the composition of the group | -4 | |
| Transfers to and from Investments | -384 | -12 |
| Revaluations | -4 | -10 |
| Share of results | 52 | 107 |
| Dividends received | -71 | -129 |
| Disposals | -263 | -88 |
| Impairments | -20 | -3 |
| Exchange rate differences | -46 | 167 |
| Other changes | 34 | -34 |
| Closing balance | 827 | 1,494 |
In 2011, Transfers to and from Investments relates mainly to the real estate funds for which significant influence ceased to exist due to the sale of ING Real Estate Investment Management.
In 2011, share of results of EUR 52 million (2010: EUR 107 million) less impairment of EUR 20 million (2010: EUR 3 million) are presented in the profit and loss account in Share of result from associates for EUR 32 million (2010: EUR 104 million).
7 REAL ESTATE INVESTMENTS
| Changes in real estate investments | ||
|---|---|---|
| 2011 | 2010 | |
| Opening balance | 562 | 2,283 |
| Additions | 9 | 57 |
| Changes in the composition of the group | -1,621 | |
| Transfers to and from Other assets | -23 | |
| Transfers to and from Property in own use | -31 | |
| Fair value gains/(losses) | -22 | -50 |
| Disposals | -83 | -289 |
| Exchange rate differences | 205 | |
| Closing balance | 435 | 562 |
In 2010, Changes in the composition of the group comprises the sale of ING Summit Industrial Fund LP. Reference is made to Note 26 'Companies acquired and companies disposed'.
The total amount of rental income recognised in profit and loss for the year ended 31 December 2011 was EUR 111 million (2010: EUR 234 million). The total amount of contingent rent recognised in the profit and loss account for the year ended 31 December 2011 was nil (2010: nil).
The total amount of direct operating expenses (including repairs and maintenance) in relation to Real Estate investments that generated rental income for the year ended 31 December 2011 was EUR 84 million (2010: EUR 101 million). The total amount of direct operating expenses (including repairs and maintenance) incurred on real estate investments that did not generate rental income for the year ended 31 December 2011 was EUR 2 million (2010: EUR 6 million).
| Real estate investments by year of most recent appraisal by independent qualified valuers | |
|---|---|
| in percentages | 2011 |
| Most recent appraisal in 2011 | 75 |
| Most recent appraisal in 2010 | 25 |
| 100 |
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
ING Bank's real estate is included in the following balance sheet lines:
| Real estate exposure | ||
|---|---|---|
| 2011 | 2010 | |
| Real estate investments | 435 | 883 |
| Investments in associates | 238 | 833 |
| Other assets – property development and obtained from foreclosures | 1,512 | 2,088 |
| Property and equipment – property in own use | 1,244 | 1,329 |
| Investments – available-for-sale | 262 | 38 |
| 3,691 | 5,171 |
Furthermore, the exposure is impacted by third party interests, leverage in funds and off-balance commitments, resulting in an overall exposure of EUR 4.2 billion (2010: EUR 5.2 billion). Reference is made to the section 'Risk management'.
8 PROPERTY AND EQUIPMENT
| Property and equipment by type | ||
|---|---|---|
| 2011 | 2010 | |
| Property in own use | 1,244 | 1,329 |
| Equipment | 1,167 | 1,231 |
| Assets under operating leases | 6 | 3,055 |
| 2,417 | 5,615 | |
| Changes in property in own use | ||
| --- | --- | --- |
| 2011 | 2010 | |
| Opening balance | 1,329 | 1,364 |
| Additions | 38 | 45 |
| Changes in de composition of the group | -12 | |
| Transfers to and from Other assets | -32 | -4 |
| Transfers to and from Real Estate investments | 31 | |
| Depreciation | -24 | -26 |
| Revaluations | -14 | -24 |
| Impairments | -29 | -26 |
| Reversal of impairments | 11 | 5 |
| Disposals | -25 | -17 |
| Exchange rate differences | -29 | 12 |
| Closing balance | 1,244 | 1,329 |
| Gross carrying amount as at 31 December | 2,040 | 2,140 |
| Accumulated depreciation as at 31 December | -641 | -669 |
| Accumulated impairments as at 31 December | -155 | -142 |
| Net carrying value | 1,244 | 1,329 |
| Revaluation surplus | ||
| Opening balance | 485 | 492 |
| Revaluation in year | -31 | -7 |
| Closing balance | 454 | 485 |
The cost or the purchase price amounted to EUR 1,586 million (2010: EUR 1,655 million). Cost or the purchase price less accumulated depreciation and impairments would have been EUR 790 million (2010: EUR 844 million) had property in own use been valued at cost instead of at fair value.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
| Property in own use by year of most recent appraisal by independent qualified valuers | |
|---|---|
| in percentages | 2011 |
| Most recent appraisal in 2011 | 57 |
| Most recent appraisal in 2010 | 12 |
| Most recent appraisal in 2009 | 12 |
| Most recent appraisal in 2008 | 10 |
| Most recent appraisal in 2007 | 9 |
| 100 |
Changes in equipment
| Data processing equipment | Fixtures and fittings and other equipment | Total | ||||
|---|---|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |
| Opening balance | 309 | 293 | 922 | 919 | 1,231 | 1,212 |
| Additions | 154 | 147 | 230 | 258 | 384 | 405 |
| Changes in the composition of the group | -2 | -4 | -14 | -1 | -16 | -5 |
| Disposals | -16 | -8 | -11 | -15 | -27 | -23 |
| Depreciation | -146 | -138 | -201 | -218 | -347 | -356 |
| Impairments | -1 | -1 | ||||
| Exchange rate differences | -6 | 8 | -13 | 11 | -19 | 19 |
| Other changes | 5 | 12 | -44 | -32 | -39 | -20 |
| Closing balance | 298 | 309 | 869 | 922 | 1,167 | 1,231 |
| Gross carrying amount as at 31 December | 1,408 | 1,447 | 2,226 | 2,228 | 3,634 | 3,675 |
| Accumulated depreciation as at 31 December | -1,109 | -1,137 | -1,357 | -1,306 | -2,466 | -2,443 |
| Accumulated impairments as at 31 December | -1 | -1 | -1 | -1 | ||
| Net carrying value as at 31 December | 298 | 309 | 869 | 922 | 1,167 | 1,231 |
Changes in assets under operating leases
| Cars | Other leased-out assets | Total | ||||
|---|---|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |
| Opening balance | 3,053 | 2,986 | 2 | 5 | 3,055 | 2,991 |
| Additions | 1,188 | 1,284 | 1,188 | 1,284 | ||
| Changes in the composition of the group | -3,250 | -3 | -3,250 | -3 | ||
| Disposals | -43 | -53 | -43 | -53 | ||
| Depreciation | -594 | -784 | -2 | -3 | -596 | -787 |
| Exchange rate differences | -12 | 13 | -12 | 13 | ||
| Transfer and other changes | -336 | -390 | -336 | -390 | ||
| Closing balance | 6 | 3,053 | 2 | 6 | 3,055 | |
| Gross carrying amount as at 31 December | 16 | 4,617 | 18 | 16 | 4,635 | |
| Accumulated depreciation as at 31 December | -10 | -1,564 | -16 | -10 | -1,580 | |
| Net carrying value as at 31 December | 6 | 3,053 | 2 | 6 | 3,055 |
In 2011, Changes in the composition of the group comprises the sale of ING Car Lease. Reference is made to Note 26 'Companies acquired and companies disposed'.
Depreciation of assets under operating leases is included in the profit and loss account in Other income as a deduction from operating lease income.
Transfer and other changes relates mainly to the transfer of cars under operating lease to Other assets due to the expiration of the lease contract.
No individual operating lease has terms and conditions that materially affect the amount, timing or certainty of the consolidated cash flows of ING Bank.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
ING Bank leases assets to third parties under operating leases as lessor. The future minimum lease payments to be received under non-cancellable operating leases are as follows:
| Future minimum lease payments by maturity | ||
|---|---|---|
| 2011 | 2010 | |
| Within 1 year | 1 | 1,155 |
| More than 1 year but less than 5 years | 4 | 1,887 |
| More than 5 years | 1 | 13 |
| 6 | 3,055 |
9 INTANGIBLE ASSETS
| Changes in intangible assets | ||||||||
|---|---|---|---|---|---|---|---|---|
| Goodwill | Software | Other | Total | |||||
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |
| Opening balance | 1,502 | 1,463 | 589 | 669 | 174 | 245 | 2,265 | 2,377 |
| Capitalised expenses | 129 | 114 | 129 | 114 | ||||
| Additions | 134 | 127 | 134 | 127 | ||||
| Disposals | -2 | -1 | -3 | |||||
| Amortisation | -332 | -312 | -39 | -52 | -371 | -364 | ||
| Impairments | -32 | -15 | -28 | -47 | -28 | |||
| Reversal of impairments | 1 | 1 | ||||||
| Changes in the composition of the group | -54 | -3 | 3 | -15 | -19 | -72 | -16 | |
| Exchange rate differences | -140 | 47 | -7 | 6 | -16 | 11 | -163 | 64 |
| Other changes | -97 | -8 | -19 | 12 | -16 | -11 | -132 | -7 |
| Closing balance | 1,179 | 1,502 | 476 | 589 | 88 | 174 | 1,743 | 2,265 |
| Gross carrying amount as at 31 December | 1,211 | 1,502 | 1,779 | 1,799 | 187 | 343 | 3,177 | 3,644 |
| Accumulated amortisation as at 31 December | -1,280 | -1,161 | -99 | -161 | -1,379 | -1,322 | ||
| Accumulated impairments as at 31 December | -32 | -23 | -49 | -8 | -55 | -57 | ||
| Net carrying value as at 31 December | 1,179 | 1,502 | 476 | 589 | 88 | 174 | 1,743 | 2,265 |
Amortisation of software is included in the profit and loss account in Other operating expenses and the amortisation of other intangible assets is included in the profit and loss account in Intangible amortisation and other impairments.
Goodwill
Changes in Goodwill
A goodwill impairment of EUR 32 million was recognised in 2011. The impairment relates to the reporting unit ING Real Estate. In 2011, Changes in the composition of the group relates mainly to the disposal of ING Car Lease. Other changes relates to the classification of ING Direct USA as a disposal group held for sale. Reference is made to Note 10 'Assets and liabilities held for sale'. No goodwill impairment was recognised in 2010.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
Allocation of Goodwill to reporting units
Goodwill is allocated to reporting units as follows:
| Goodwill allocation to reporting units | ||
|---|---|---|
| 2011 | 2010 | |
| Retail Central Europe | 738 | 870 |
| Retail Belgium | 50 | 49 |
| Retail Netherlands | 1 | 1 |
| ING Direct | 364 | 468 |
| Commercial Banking - Lease | 11 | 68 |
| ING Real Estate | 32 | |
| Commercial Banking - Other | 14 | 14 |
| 1,178 | 1,502 |
Goodwill impairment testing
Goodwill is tested for impairment at the lowest level at which it is monitored for internal management purposes. This level is defined as the so called 'reporting units' as set out above. Goodwill is tested for impairment by comparing the carrying value of the reporting unit to the best estimate of the recoverable amount of that reporting unit. The carrying value is determined as the IFRS-EU net asset value including goodwill. The recoverable amount is estimated as the higher of fair value less cost to sell and value in use. Several methodologies are applied to arrive at the best estimate of the recoverable amount.
As a first step of the impairment test, the best estimate of the recoverable amount of reporting units to which goodwill is determined separately for each relevant reporting unit based on Price to Earnings, Price to Book, and Price to Assets under management ratios. The main assumptions in this valuation are the multiples for Price to Earnings, Price to Book and Price to Assets under management; these are developed internally but are either derived from or corroborated against market information that is related to observable transaction in the market for comparable businesses. Earnings and carrying values are equal to or derived from the relevant measure under IFRS. If the outcome of this first step indicates that the difference between recoverable amount and carrying value may not be sufficient to support the amount of goodwill allocated to the reporting unit, an additional analysis is performed in order to determine a recoverable amount in a manner that better addresses the specific characteristics of the relevant reporting unit.
More details on this additional analysis and the outcome thereof are presented below for each of the relevant reporting units. For other reporting units, the goodwill allocated to these reporting units was fully supported in the first step.
ING Real Estate
During 2011 the ING Real Estate business changed significantly. The Real Estate Development business was reduced by selling/closing development projects and ING sold REIM (the ING Real Estate Investment Management business). As a consequence, there were indications in the fourth quarter of 2011 that the recoverable amount of the reporting unit ING Real Estate had fallen below book value. A full goodwill impairment review was performed for the reporting unit ING Real Estate in the fourth quarter of 2011. The reporting unit Real Estate equals the segment ING Real Estate as disclosed in Note 42 'Operating segments'. The 2010 impairment test for ING Real Estate showed that the recoverable amount based on fair value using market multiples for Price/Book was at least equal to book value. The outcome of the impairment test performed in the fourth quarter of 2011 indicated that the fair value has become less than book value by an amount that exceeded the goodwill of ING Real Estate, indicating that the full amount of goodwill relating to ING Real Estate is impaired. As a result, the goodwill of EUR 32 million (pre-tax) was written down. The related charge is included in the profit and loss account in the line Intangibles amortisation and other impairments. Goodwill is recognised in the Corporate Line segment and, therefore, this charge is included in the segment reporting in the Corporate Line Bank segment.
Retail Central Europe
For the reporting unit Retail Central Europe the recoverable amount is determined as the sum of the recoverable amounts of the most important components. For certain components, a market price is available based on listed equity securities. In such case, the listed market price is used to determine the recoverable amount. For certain other components, the recoverable amount is determined by a cash flow model taking into account recent market related developments. The most important assumptions in the model are the estimated expected profit based on internal financial budgets/forecasts (4 years medium term plan plus additional 2 years longer term forecast), the terminal growth rate thereafter (approximately $3.5\%$), the required capital level (ultimately migrating to approximately $10\%$) and the discount rate (between approximately $10\%$ and $13\%$). It was concluded that the goodwill allocated to Retail Central Europe is not impaired.
ING Bank Annual Report 2011 51
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
10 ASSETS AND LIABILITIES HELD FOR SALE
Assets and liabilities held for sale include disposal groups whose carrying amount will be recovered principally through a sale transaction rather than through continuing operations. This relates to businesses for which a sale is agreed upon or a sale is highly probable at the balance sheet date but for which the transaction has not yet fully closed. For 31 December 2011 this relates to ING Direct USA. For 31 December 2010 this relates mainly to ING Real Estate Investment Management (ING REIM) and Clarion Real Estate Securities.
Reference is made to Note 26 'Companies acquired and companies disposed' for more details on occurred and expected significant disposals.
| Assets held for sale | ||
|---|---|---|
| 2011 | 2010 | |
| Cash and balances with central banks | 4,980 | |
| Amounts due from banks | 314 | |
| Financial assets at fair value through profit and loss | 3 | 5 |
| Available-for-sale investments | 22,605 | |
| Held to maturity investments | 444 | |
| Loans and advances to customers | 31,805 | 100 |
| Investments in associates | 43 | |
| Property and equipment | 75 | 9 |
| Intangible assets | 166 | 15 |
| Other assets | 2,091 | 128 |
| 62,483 | 300 | |
| Liabilities held for sale | ||
| --- | --- | --- |
| 2011 | 2010 | |
| Customer deposits and other funds on deposit | 64,103 | |
| Other liabilities | 162 | 145 |
| 64,265 | 145 |
Cumulative other comprehensive income include EUR 244 million (2010: EUR 1 million) related to Assets and liabilities held for sale.
In addition to the entities presented as Held for sale above, ING is considering potential investments, including those that are listed under the European Commission Restructuring plan in Note 29 'Related parties'. However, none of these businesses qualify as held for sale as at 31 December 2011 as the potential investments are not yet available for immediate sale in their present condition and/or a sale is not yet highly probable to occur.
11 OTHER ASSETS
| Other assets by type | ||
|---|---|---|
| 2011 | 2010 | |
| Deferred tax assets | 2,437 | 2,969 |
| Property development and obtained from foreclosures | 1,512 | 2,088 |
| Income tax receivable | 459 | 401 |
| Accrued interest and rents | 11,183 | 12,836 |
| Other accrued assets | 530 | 930 |
| Pension assets | 2,511 | 2,266 |
| Other | 3,731 | 4,533 |
| 22,363 | 26,023 |
Other includes EUR 1,840 million (2010: EUR 1,875 million) related to transactions still to be settled at balance sheet date.
Disclosures in respect of deferred tax assets and pension assets are provided in Note 18 'Other liabilities'.
Accrued interest and rents includes EUR 4,172 million (2010: EUR 4,911 million) accrued interest on assets measured at amortised cost under the IAS 39 classification Loans and receivables.
The total amount of borrowing costs relating to Property development and obtained from foreclosures, capitalised in 2011 is EUR 7 million (2010: EUR 18 million).
ING Bank Annual Report 2011
Consolidated annual accounts
4
Notes to the consolidated annual accounts of ING Bank continued
| Property development and obtained from foreclosures | ||
|---|---|---|
| 2011 | 2010 | |
| Property under development | 400 | 821 |
| Property developed | 1,055 | 1,016 |
| Property obtained from foreclosures | 57 | 251 |
| 1,512 | 2,088 | |
| Gross carrying amount as at 31 December | 2,648 | 3,175 |
| Accumulated impairments as at 31 December | -1,136 | -1,087 |
| Net carrying value | 1,512 | 2,088 |
ING Bank Annual Report 2011 53
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
EQUITY
12 SHAREHOLDERS' EQUITY (PARENT)
| Shareholders' equity (parent) | |||
|---|---|---|---|
| 2011 | 2010 | 2009 | |
| Share capital | 525 | 525 | 525 |
| Share premium | 16,542 | 16,542 | 16,542 |
| Revaluation reserve | 550 | 1,457 | 2,329 |
| Currency translation reserve | 209 | 500 | -241 |
| Other reserves | 16,541 | 15,428 | 11,067 |
| Shareholders' equity (parent) | 34,367 | 34,452 | 30,222 |
The following equity components cannot be freely distributed: The Revaluation reserve, Share of associates reserve (included in Other reserves), Currency translation reserve and the part of the Other reserves that relates to non-distributable reserves of the former Stichting Regio Bank and the former Stichting Vakbondsspaarbank SPN and legal reserves.
As at 31 December 2011, Other reserves included an amount of EUR 836 million (2010: EUR 741 million; 2009: EUR 645 million) related to the former Stichting Regio Bank and former Stichting Vakbondsspaarbank SPN.
| Share capital | ||||||||
|---|---|---|---|---|---|---|---|---|
| Preference shares (par value EUR 1.13) | Ordinary shares (par value EUR 1.13) | |||||||
| Number x1 | Amount in euros | Number x1,000 | Amounts in millions of euros | |||||
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |
| Authorised share capital | 50 | 50 | 57 | 57 | 1,600,000 | 1,600,000 | 1,808 | 1,808 |
| Unissued share capital | 43 | 43 | 49 | 49 | 1,134,965 | 1,134,965 | 1,283 | 1,283 |
| Issued share capital | 7 | 7 | 8 | 8 | 465,035 | 465,035 | 525 | 525 |
No shares have been issued during 2011, 2010 or 2009.
Preference shares are presented in the balance sheet under liabilities. Reference is made to Note 18 'Other liabilities'.
Ordinary shares
All shares are in registered form. No share certificates have been issued. Shares may be transferred by means of a deed of transfer, subject to the approval of the Management Board of ING Bank. The par value of ordinary shares is EUR 1.13.
The authorised ordinary share capital of ING Bank consists of 1,600 million shares of which as at 31 December 2011 465 million shares have been issued and fully paid.
Dividend restrictions
ING Bank N.V. and its Dutch group companies are subject to legal restrictions regarding the amount of dividends they can pay to their shareholders. The Dutch Civil Code contains the restriction that dividends can only be paid up to an amount equal to the excess of the company's own funds over the sum of the paid-up capital, and reserves required by law. Additionally, certain Bank companies are subject to restrictions on the amount of funds they may transfer in the form of dividends or otherwise to the parent company.
Furthermore, in addition to the restrictions in respect of minimum capital requirements that are imposed by industry regulators in the countries in which the subsidiaries operate, other limitations exist in certain countries.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
| Changes in revaluation reserve | ||||
|---|---|---|---|---|
| 2011 | Property revaluation reserve | Available-for-sale reserve | Cash flow hedge reserve | Total |
| Opening balance | 350 | 1,746 | -639 | 1,457 |
| Unrealised revaluations after taxation | -14 | -1,117 | -1,131 | |
| Realised gains/losses transferred to profit and loss | 406 | 406 | ||
| Changes in cash flow hedge reserve | -182 | -182 | ||
| Closing balance | 336 | 1,035 | -821 | 550 |
| Changes in revaluation reserve | ||||
| --- | --- | --- | --- | --- |
| 2010 | Property revaluation reserve | Available-for-sale reserve | Cash flow hedge reserve | Total |
| Opening balance | 387 | 2,414 | -472 | 2,329 |
| Unrealised revaluations after taxation | -37 | -375 | -412 | |
| Realised gains/losses transferred to profit and loss | -293 | -293 | ||
| Changes in cash flow hedge reserve | -167 | -167 | ||
| Closing balance | 350 | 1,746 | -639 | 1,457 |
| Changes in revaluation reserve | ||||
| --- | --- | --- | --- | --- |
| 2009 | Property revaluation reserve | Available-for-sale reserve | Cash flow hedge reserve | Total |
| Opening balance | 436 | -4,165 | -128 | -3,857 |
| Unrealised revaluations after taxation | -49 | 5,702 | 5,653 | |
| Realised gains/losses transferred to profit and loss | 877 | 877 | ||
| Changes in cash flow hedge reserve | -344 | -344 | ||
| Closing balance | 387 | 2,414 | -472 | 2,329 |
| Changes in currency translation reserve | ||||
| --- | --- | --- | --- | --- |
| 2011 | 2010 | 2009 | ||
| Opening balance | 500 | -241 | -475 | |
| Unrealised revaluations after taxation | 186 | -348 | -99 | |
| Exchange rate differences | -477 | 1,089 | 333 | |
| Closing balance | 209 | 500 | -241 |
The unrealised revaluations after taxation relate to changes in the value of hedging instruments that are designated as net investment hedges.
| Changes in other reserves | |||||
|---|---|---|---|---|---|
| 2011 | Retained earnings | Share of associates reserve | Treasury shares | Other reserves | Total |
| Opening balance | 14,661 | 26 | 741 | 15,428 | |
| Result for the year | 3,918 | 87 | 4,005 | ||
| Dividend | -3,000 | -3,000 | |||
| Employee stock options and share plans | 119 | 119 | |||
| Other | -552 | 313 | 228 | -11 | |
| Closing balance | 15,146 | 339 | 1,056 | 16,541 | |
| Changes in other reserves | |||||
| --- | --- | --- | --- | --- | --- |
| 2010 | Retained earnings | Share of associates reserve | Treasury shares | Other reserves | Total |
| Opening balance | 10,422 | 645 | 11,067 | ||
| Result for the year | 4,399 | 96 | 4,495 | ||
| Dividend | -200 | -200 | |||
| Employee stock options and share plans | 53 | 53 | |||
| Other | -13 | 26 | 13 | ||
| Closing balance | 14,661 | 26 | 741 | 15,428 |
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
Changes in other reserves
| 2009 | Retained earnings | Share of associates reserve | Treasury shares | Other reserves | Total |
|---|---|---|---|---|---|
| Opening balance | 9,610 | 128 | 566 | 10,304 | |
| Result for the year | 684 | 684 | |||
| Employee stock options and share plans | 58 | 58 | |||
| Other | 70 | -128 | 79 | 21 | |
| Closing balance | 10,422 | 0 | 645 | 11,067 |
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
LIABILITIES
13 SUBORDINATED LOANS
Subordinated loans relate to subordinated capital debentures and private loans which may be included in the calculation of the capital ratio.
Subordinated liabilities include EUR 6,850 million (2010: EUR 8,438 million) of loans that qualify as Tier 1 capital. These loans have been placed with ING Bank N.V. by ING Group.
The average interest rate on the subordinated loans is 4.7% (2010: 5.4%). The interest expense during the year 2011 was EUR 867 million (2010: EUR 1,024 million).
On 12 December 2011 ING announced the launch of three separate exchange offers in Europe and tender offers in the United States of America, on a total of seven series of outstanding subordinated securities of ING entities with a total nominal value of approximately EUR 5.8 billion. All tender and exchange offers announced on 12 December 2011 were successfully completed on 23 December 2011 with an average participation of approximately 60%. As part of this initiative, EUR 1.6 billion intercompany debt from ING Bank N.V. to ING Groep N.V. was repaid. In addition ING Bank issued two new senior bonds with a nominal value of GBP 0.4 billion and EUR 0.4 billion respectively. The overall transaction resulted in a total gain of EUR 93 million (EUR 71 million after tax) for ING Bank N.V., including related hedge results and transaction costs. This gain is recognised in Other income.
14 DEBT SECURITIES IN ISSUE
Debt securities in issue relate to debentures and other issued debt securities with either fixed interest rates or interest rates based on interest rate levels, such as certificates of deposit and accepted bills issued by ING Bank, except for subordinated items. Debt securities carried at fair value through profit and loss are separately included in financial liabilities at fair value through profit and loss. ING Bank does not have debt securities that are issued on terms other than those available in the normal course of business. The maturities of the debt securities are as follows:
| Debt securities in issue – maturities | ||
|---|---|---|
| 2011 | 2010 | |
| Fixed rate debt securities | ||
| Within 1 year | 51,459 | 63,472 |
| More than 1 year but less than 2 years | 5,800 | 6,177 |
| More than 2 years but less than 3 years | 10,347 | 5,816 |
| More than 3 years but less than 4 years | 5,943 | 9,580 |
| More than 4 years but less than 5 years | 7,541 | 5,648 |
| More than 5 years | 20,182 | 10,516 |
| Total fixed rate debt securities | 101,272 | 101,209 |
| Floating rate debt securities | ||
| Within 1 year | 14,873 | 12,259 |
| More than 1 year but less than 2 years | 7,590 | 4,321 |
| More than 2 years but less than 3 years | 3,569 | 2,555 |
| More than 3 years but less than 4 years | 1,207 | 2,038 |
| More than 4 years but less than 5 years | 162 | 864 |
| More than 5 years | 2,253 | 1,820 |
| Total floating rate debt securities | 29,654 | 23,857 |
| Total debt securities | 130,926 | 125,066 |
As of 31 December 2011, ING Bank had unused lines of credit available including the payment of commercial paper borrowings relating to debt securities in issue of EUR 8,118 million (2010: EUR 6,462 million).
The following bonds were all issued under the Credit Guarantee Scheme of the State of the Netherlands and are part of ING Group's regular medium-term funding operations. ING pays a fee of 84 basis points over the issued bonds to the Dutch State to participate in the Credit Guarantee Scheme.
- ING Bank issued 3 year government guaranteed senior unsecured bonds amounting to USD 6 billion in January 2009. USD 5 billion of the issue was priced at a fixed rate of 80 basis points over mid-swaps. USD 1 billion was priced at a variable rate of 80 basis points over 3 month LIBOR.
- ING Bank issued a 5 year EUR 4 billion fixed rate government guaranteed senior unsecured bond in February 2009. The issue was priced at a fixed rate of 3.375%, 75 basis points over mid-swaps.
- ING Bank issued a 5 year USD 2 billion fixed rate government guaranteed senior unsecured bond in March 2009. The issue was priced at a fixed coupon of 3.90%, 145 basis points over USD mid-swaps.
ING Bank Annual Report 2011 57
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
15 AMOUNTS DUE TO BANKS
Amounts due to banks include non-subordinated debt due to banks, other than amounts in the form of debt securities. As at 31 December 2011 liabilities concerning securities sold in repurchase transactions amounted to EUR 11,145 million (2010: EUR 12,200 million).
| Amounts due to banks by type | ||||||
|---|---|---|---|---|---|---|
| Netherlands | International | Total | ||||
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |
| Non-interest bearing | 1,350 | 1,893 | 808 | 701 | 2,158 | 2,594 |
| Interest bearing | 40,648 | 37,429 | 29,427 | 32,829 | 70,075 | 70,258 |
| 41,998 | 39,322 | 30,235 | 33,530 | 72,233 | 72,852 |
16 CUSTOMER DEPOSITS AND OTHER FUNDS ON DEPOSIT
| Customer deposits and other funds on deposit | ||
|---|---|---|
| 2011 | 2010 | |
| Savings accounts | 291,516 | 324,581 |
| Credit balances on customer accounts | 114,362 | 128,553 |
| Corporate deposits | 61,990 | 55,024 |
| Other | 11,496 | 11,146 |
| 479,364 | 519,304 | |
| Customer deposits and other funds on deposit by type | ||
| --- | --- | --- |
| Netherlands | ||
| 2011 | 2010 | |
| Non-interest bearing | 13,294 | 13,522 |
| Interest bearing | 146,229 | 140,253 |
| 159,523 | 153,775 |
In 2011, the decrease in Customer deposits and other funds on deposits is mainly caused by the classification of ING Direct USA as a disposal group held for sale. Reference is made to Note 10 'Assets and liabilities held for sale'.
No funds have been entrusted to ING Bank by customers on terms other than those prevailing in the normal course of business. As at 31 December 2011 Customer deposits and other funds on deposit included liabilities with regard to securities sold in repurchase transactions amounting to EUR 5,730 million (2010: EUR 5,272 million).
Savings accounts relate to the balances on savings accounts, savings books, savings deposits and time deposits of personal customers. The interest payable on savings accounts, which is contractually added to the accounts, is also included.
17 FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT AND LOSS
| Financial liabilities at fair value through profit and loss | ||
|---|---|---|
| 2011 | 2010 | |
| Trading liabilities | 107,682 | 108,049 |
| Non-trading derivatives | 18,161 | 15,825 |
| Designated as at fair value through profit and loss | 13,021 | 12,707 |
| 138,864 | 136,581 | |
| Trading liabilities by type | ||
| --- | --- | --- |
| 2011 | 2010 | |
| Equity securities | 3,332 | 4,811 |
| Debt securities | 9,607 | 16,707 |
| Funds on deposit | 38,696 | 44,767 |
| Derivatives | 56,047 | 41,764 |
| 107,682 | 108,049 |
The increase in trading derivatives and other non-trading derivatives for which no hedge accounting is applied is mainly due to changes in fair value resulting from changes in market interest rates. The increase is substantially mitigated by a similar increase in Trading derivates and Other non-trading derivatives (assets) as disclosed in Note 3 'Financial assets at fair value through profit and loss'.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
As at 31 December 2011, the Funds on deposit include amounts payable of EUR 38,011 million (2010: EUR 43,995 million) with regard to mainly repurchase transactions.
| Non-trading derivatives by type | ||
|---|---|---|
| 2011 | 2010 | |
| Derivatives used in | ||
| – fair value hedges | 9,168 | 8,216 |
| – cash flow hedges | 6,054 | 4,820 |
| – hedges of net investments in foreign operations | 146 | 108 |
| Other non-trading derivatives | 2,793 | 2,681 |
| 18,161 | 15,825 |
Other non-trading derivatives mainly include interest rate swaps for which no hedge accounting is applied.
| Designated as at fair value through profit and loss by type | ||
|---|---|---|
| 2011 | 2010 | |
| Debt securities | 11,271 | 10,533 |
| Funds entrusted | 632 | 934 |
| Subordinated liabilities | 1,118 | 1,240 |
| 13,021 | 12,707 |
In 2011, the change in the fair value of financial liabilities designated as at fair value through profit and loss attributable to changes in the credit risk of that liability is EUR 377 million (2010: EUR 179 million) and EUR 595 million (2010: EUR 218 million) on a cumulative basis. This change has been determined as the amount of change in fair value of the financial liability that is not attributable to changes in market conditions that gave rise to market risk (i.e. mainly interest rate risk based on yield curves).
The amount that ING Bank is contractually required to pay at maturity to the holders of financial liabilities designated as at fair value through profit and loss is EUR 13,726 million (2010: EUR 12,438 million).
18 OTHER LIABILITIES
| Other liabilities by type | ||
|---|---|---|
| 2011 | 2010 | |
| Deferred tax liabilities | 1,735 | 1,385 |
| Income tax payable | 806 | 1,066 |
| Pension benefits | 99 | 143 |
| Post-employment benefits | 105 | 98 |
| Other staff-related liabilities | 609 | 665 |
| Other taxation and social security contributions | 750 | 724 |
| Accrued interest | 10,550 | 11,624 |
| Costs payable | 1,322 | 1,745 |
| Reorganisation provision | 521 | 333 |
| Other provisions | 500 | 385 |
| Prepayments received under property under development | 83 | 173 |
| Amounts to be settled | 1,568 | 2,139 |
| Other | 3,397 | 2,555 |
| 22,045 | 23,035 |
Deferred taxes are calculated on all temporary differences under the liability method using tax rates applicable in the jurisdictions in which ING Bank is liable to taxation.
Other staff-related liabilities include vacation leave provisions, variable compensation provisions, jubilee provisions and disability/illness provisions.
Other mainly relates to year-end accruals in the normal course of business none of which are individually material.
As at 31 December 2011 Other liabilities includes an amount of EUR 7.91 (2010: EUR 7.91) for seven preference shares with a par value of EUR 1.13 each.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
Changes in deferred tax
| Net liability | Change through equity | Change through net result | Changes in the composition of the group | Exchange rate differences | Other | Net liability | |
|---|---|---|---|---|---|---|---|
| 2010 | 2011 | ||||||
| Investments | –318 | –79 | –12 | –2 | –1 | 266 | –146 |
| Real estate investments | 2 | 2 | |||||
| Financial assets and liabilities at fair value through profit and loss | –552 | –162 | 7 | –707 | |||
| Depreciation | 6 | 1 | 22 | 9 | 2 | 40 | |
| Other provisions | –58 | 1 | –45 | 2 | 5 | –95 | |
| Receivables | –22 | –9 | –10 | –2 | –43 | ||
| Loans and advances to customers | 462 | 97 | 208 | –1 | 7 | 97 | 870 |
| Cash flow hedges | –197 | –91 | 6 | –282 | |||
| Pension and post-employment benefits | 420 | 1 | 48 | –1 | 468 | ||
| Unused tax losses carried forward | –1,183 | –1 | 286 | 22 | 29 | 224 | –623 |
| Other | –142 | –64 | 52 | –4 | –28 | –186 | |
| –1,584 | –135 | 394 | 20 | 42 | 561 | –702 | |
| Comprising | |||||||
| – deferred tax liabilities | 1,385 | 1,735 | |||||
| – deferred tax assets | –2,969 | –2,437 | |||||
| –1,584 | –702 |
In 2011, the amounts presented in the column Other relate mainly to the classification of ING Direct USA as a disposal group held for sale. Reference is made to Note 10 'Assets and liabilities held for sale'.
Changes in deferred tax
| Net liability | Change through equity | Change through net result | Changes in the composition of the group | Exchange rate differences | Other | Net liability | |
|---|---|---|---|---|---|---|---|
| 2009 | 2010 | ||||||
| Investments | –513 | 39 | 203 | –50 | 3 | –318 | |
| Financial assets and liabilities at fair value through profit and loss | –333 | –18 | –192 | 3 | –12 | –552 | |
| Depreciation | 18 | 5 | –10 | –7 | 6 | ||
| Other provisions | –69 | –1 | 38 | 6 | –24 | –8 | –58 |
| Receivables | –188 | –1 | 155 | 6 | –7 | 13 | –22 |
| Loans and advances to customers | 717 | –215 | –5 | –15 | –20 | 462 | |
| Cash flow hedges | –172 | –20 | –4 | –1 | –197 | ||
| Pension and post-employment benefits | 426 | 13 | –19 | 420 | |||
| Unused tax losses carried forward | –1,143 | 1 | –23 | –2 | –23 | 7 | –1,183 |
| Other | –402 | –8 | 246 | 3 | –1 | 20 | –142 |
| –1,659 | –8 | 230 | –2 | –121 | –24 | –1,584 | |
| Comprising | |||||||
| – deferred tax liabilities | 1,499 | 1,385 | |||||
| – deferred tax assets | –3,158 | –2,969 | |||||
| –1,659 | –1,584 |
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
| Deferred tax in connection with unused tax losses carried forward | ||
|---|---|---|
| 2011 | 2010 | |
| Total unused tax losses carried forward | 3,173 | 4,895 |
| Unused tax losses carried forward not recognised as a deferred tax asset | 881 | 716 |
| Unused tax losses carried forward recognised as a deferred tax asset | 2,292 | 4,179 |
| Average tax rate | 27.2% | 28.3% |
| Deferred tax asset | 623 | 1,183 |
The following tax loss carry forwards and tax credits will expire as follows at 31 December:
| Total unused tax losses carried forward analysed by expiry terms | ||||
|---|---|---|---|---|
| No deferred tax asset recognised | Deferred tax asset recognised | |||
| 2011 | 2010 | 2011 | 2010 | |
| Within 1 year | 19 | 12 | 10 | 27 |
| More than 1 year but less than 5 years | 150 | 189 | 134 | 78 |
| More than 5 years but less than 10 years | 267 | 157 | 896 | 2,857 |
| More than 10 years but less than 20 years | 299 | 267 | 621 | |
| Unlimited | 146 | 91 | 1,252 | 596 |
| 881 | 716 | 2,292 | 4,179 |
Deferred tax assets are recognised for temporary deductible differences, for tax loss carry forwards and unused tax credits only to the extent that realisation of the related tax benefit is probable.
The deferred tax asset includes balances for which the utilisation is dependent on future taxable profits whilst the related entities have incurred losses in either the current or the preceding year. The aggregate amount for the most significant entities where this applies is EUR 281 million (2010: EUR 857 million). This can be specified by jurisdiction as follows:
| Breakdown by jurisdiction | ||
|---|---|---|
| 2011 | 2010 | |
| The Netherlands | 190 | |
| United States | 508 | |
| Great Britain | 116 | 89 |
| Australia | 36 | 40 |
| Spain | 11 | |
| Germany | 5 | 19 |
| France | 66 | |
| Mexico | 32 | |
| Italy | 26 | |
| 281 | 857 |
In 2011 the deferred tax assets for banking operations for which the utilisation is dependent on future taxable profits, as disclosed above, decreased significantly compared to 2010, as a result of the announced sale of ING Direct USA. Reference is made to Note 26 'Companies acquired and companies disposed'.
In 2011, ING Group has reconsidered its method of determining the breakdown by jurisdiction. The recoverability is now determined at the level of the fiscal unity within that jurisdiction and not at the level of the individual company. Also the offsetting of deferred tax assets with deferred tax liabilities was revised. The comparatives provided in this table have been adjusted accordingly.
Recognition is based on the fact that it is probable that the entity will have taxable profits and/or can utilise tax planning opportunities before expiration of the deferred tax assets. Changes in circumstances in future periods may adversely impact the assessment of the recoverability. The uncertainty of the recoverability is taken into account in establishing the deferred tax assets.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
As of 31 December 2011 and 31 December 2010, ING Bank had no significant temporary differences associated with the parent company's investments in subsidiaries, branches and associates and interest in joint ventures as any economic benefit from those investments will not be taxable at parent company level.
Changes in reorganisation provision
| 2011 | 2010 | |
|---|---|---|
| Opening balance | 333 | 490 |
| Changes in the composition of the group | 1 | 29 |
| Additions | 396 | 167 |
| Interest | 5 | 5 |
| Releases | -9 | -58 |
| Charges | -214 | -303 |
| Exchange rate differences | 2 | 5 |
| Other changes | 7 | -2 |
| Closing balance | 521 | 333 |
As at 31 December 2011, the provision for reorganisation, of which EUR 385 million relates to termination benefits, mainly related to Dutch Retail Banking activities and as well as other restructuring activities.
As at 31 December 2010, the provision for reorganisation, of which EUR 224 million relates to termination benefits, mainly related to the merger of the Dutch Retail Banking activities as well as other restructuring activities.
Changes in other provisions
| Litigation | Other | Total | ||||
|---|---|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |
| Opening balance | 249 | 270 | 136 | 305 | 385 | 575 |
| Changes in the composition of the group | -27 | -2 | -1 | -2 | -28 | |
| Additions | 12 | -1 | 135 | 29 | 147 | 28 |
| Charges | -14 | -5 | -22 | -19 | -36 | -24 |
| Exchange rate differences | -3 | 2 | 10 | 3 | 7 | 5 |
| Other changes | 11 | 10 | -12 | -181 | -1 | -171 |
| Closing balance | 255 | 249 | 245 | 136 | 500 | 385 |
In general, Reorganisation and Other provisions are of a short-term nature.
The amounts included in Other provisions are based on best estimates with regard to amounts and timing of cash flows required to settle the obligation.
Pension and post-employment benefits
| Summary of pension benefits | |||||
|---|---|---|---|---|---|
| 2011 | 2010 | 2009 | 2008 | 2007 | |
| Defined benefit obligation | 10,410 | 10,424 | 9,234 | 9,049 | 9,253 |
| Fair value of plan assets | 13,435 | 11,551 | 10,208 | 8,670 | 9,463 |
| -3,025 | -1,127 | -974 | 379 | -210 | |
| Unrecognised actuarial gains/(losses) | 613 | -996 | -816 | -1,117 | 260 |
| Net liability (asset) recognised in the balance sheet | -2,412 | -2,123 | -1,790 | -738 | 50 |
| Presented as | |||||
| - Other liabilities | 99 | 143 | 240 | 374 | 489 |
| - Other assets | -2,511 | -2,266 | -2,030 | -1,112 | -439 |
| -2,412 | -2,123 | -1,790 | -738 | 50 |
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
| Summary of post-employment benefits | |||||
|---|---|---|---|---|---|
| 2011 | 2010 | 2009 | 2008 | 2007 | |
| Defined benefit obligation | 107 | 98 | 86 | 97 | 94 |
| 107 | 98 | 86 | 97 | 94 | |
| Unrecognised past service costs | 1 | 1 | 2 | 1 | 2 |
| Unrecognised actuarial gains/(losses) | -3 | -1 | 1 | 1 | |
| 105 | 98 | 89 | 98 | 97 |
ING Bank maintains defined benefit retirement plans in some of the countries of operation. These plans provide benefits that are related to the remuneration and service of employees upon retirement. The benefits in some of these plans are subject to various forms of indexation. The indexation is, in some cases, at the discretion of management; in other cases it is dependent upon the sufficiency of plan assets.
Several Dutch subsidiaries of ING Bank participate in the Stichting Pensioenfonds ING, in which also Dutch subsidiaries of ING Verzekeringen N.V. participate. ING Bank N.V. and ING Verzekeringen N.V. are jointly and severally liable for deficits in the Stichting Pensioenfonds ING if the coverage ratio is below certain levels.
Annual contributions are paid to the funds at a rate necessary to adequately finance the accrued liabilities of the plans calculated in accordance with local legal requirements. Plans in all countries comply with applicable local regulations governing investments and funding levels.
ING Bank provides other post-employment employee benefits to certain employees and former employees. These are primarily post-employment healthcare benefits and discounts on ING products provided to employees and former employees.
Certain group companies sponsor defined contribution pension plans. The assets of all ING Bank's defined contribution plans are held in independently administered funds. Contributions are generally determined as a percentage of pay. These plans do not give rise to balance sheet provisions, other than relating to short-term timing differences included in current liabilities.
Actuarial gains and losses related to pensions and post-employment benefits for the year ended 31 December 2011 includes EUR 1,279 million (2010: EUR 675 million; 2009: EUR 283 million; 2008: EUR -1,678 million; 2007: EUR -481 million) experience gain adjustments for assets and EUR -43 million (2010: EUR 117 million; 2009: EUR 37 million; 2008: EUR 73 million; 2007: EUR 11 million) experience gain adjustments for liabilities.
| Changes in defined benefit obligation | ||||
|---|---|---|---|---|
| Pension benefits | Post-employment benefits other than pensions | |||
| 2011 | 2010 | 2011 | 2010 | |
| Opening balance | 10,424 | 9,234 | 98 | 86 |
| Current service cost | 220 | 196 | 3 | 5 |
| Interest cost | 550 | 510 | 5 | 4 |
| Participants contributions | 2 | 3 | ||
| Benefits paid | -416 | -407 | -1 | -1 |
| Actuarial gains and losses | -356 | 864 | 1 | 4 |
| Past service cost | -9 | -1 | ||
| Changes in the composition of the group and other changes | 17 | -17 | ||
| Effect of curtailment or settlement | -47 | -4 | ||
| Exchange rate differences | 25 | 46 | 1 | |
| Closing balance | 10,410 | 10,424 | 107 | 98 |
| Relating to | ||||
| - funded plans | 10,355 | 10,365 | ||
| - unfunded plans | 55 | 59 | 107 | 98 |
| 10,410 | 10,424 | 107 | 98 |
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
In 2011, effect of curtailment or settlement relates mainly to a curtailment in relation to the restructuring in Retail Netherlands.
The estimated unrecognised past service cost and unrecognised actuarial gains and losses for the defined benefit plans to be amortised to pension and other staff-related liability costs during 2012 are nil and EUR 18 million, respectively.
Changes in fair value of plan assets
| Pension benefits | ||
|---|---|---|
| 2011 | 2010 | |
| Opening balance | 11,551 | 10,208 |
| Expected return on plan assets | 569 | 590 |
| Employer's contribution | 380 | 453 |
| Participants contributions | 15 | 2 |
| Benefits paid | -396 | -402 |
| Actuarial gains and losses | 1,266 | 675 |
| Changes in the composition of the group and other changes | 9 | -19 |
| Exchange rate differences | 41 | 44 |
| Closing balance | 13,435 | 11,551 |
The actual return on the plan assets amounted to EUR 1,835 million (2010: EUR 1,265 million) and exceeds the expected return on plan assets. This resulted in a large movement with regard to Actuarial gains and losses. The difference is caused by the decreased market interest rate that has an impact on the valuation of the debt securities in the plan assets.
No plan assets are expected to be returned to ING Bank during 2012.
Pension investment strategy
The primary financial objective of ING Employee Benefit Plans (the Plans) is to secure participant retirement benefits. As such, the key objective in the Plans' financial management is to promote stability and, where appropriate, growth in funded status (i.e. the ratio of market value of assets to liabilities). The investment strategy for the Plans' portfolio of assets (the Funds') balances the requirement to generate returns with the need to control risk. The asset mix is recognised as the primary mechanism to influence the reward and risk structure of the Funds in an effort to accomplish the Plans' funding objectives. Desirable target allocations amongst identified asset classes are set and within each asset class, careful consideration is given to balancing the portfolios among industry sectors, geographical areas, interest rate sensitivity, dependence on economic growth, currency and other factors affecting investment returns. The assets are managed by professional investment firms. They are bound by precise mandates and are measured against specific benchmarks. Factors considered by the fund managers include, balancing security concentration, investment style, and reliance on particular active investment strategies. The asset mixes of the Funds are reviewed on a regular basis. Generally, the Funds' asset mixes will be rebalanced to the target mixes as individual portfolios approach their minimum or maximum levels.
Categories of plan assets in percentages
| Target allocation | Percentage of plan assets | Weighted average expected long term rate of return | |||
|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | 2011 | 2010 | |
| Equity securities | 18 | 18 | 35 | 6.9 | 7.5 |
| Debt securities | 76 | 76 | 51 | 3.8 | 4.3 |
| Other | 6 | 6 | 14 | 5.2 | 6.0 |
| 100 | 100 | 100 | 5.7 | 5.7 |
Equity securities include ING Groep N.V. ordinary shares of nil (0.00% of total plan assets) at 31 December 2011 (2010: EUR 1 million, 0.01% of total plan assets). Debt securities include investments in ING Groep N.V. of EUR 28 million (0.30% of total plan assets) as at 31 December 2011 (2010: EUR 36 million, 0.42% of total plan assets). Other includes mainly real estate. Plan assets do not include any real estate or other assets used by the Bank.
Determination of expected return on assets
An important aspect of financial reporting is the assumption used for return on assets (ROA). The ROA is updated at least annually, taking into consideration the Plans' asset allocation, historical returns on the types of assets held in the Funds, and the current economic environment. Based on these factors, it is expected that the Funds' assets will earn an average annual percentage in the long-term. This estimate takes into account a reduction for administrative expenses and non-ING investment manager fees paid from the Funds. For estimation purposes, it is assumed the long-term asset mixes will be consistent with the current mixes. Changes in the asset mixes could impact the amount of recognised pension income or expense, the funded status of the Plan, and the need for future cash contributions.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
Weighted averages of basic actuarial assumptions in annual % as at 31 December
| Pension benefits | Post-employment benefits other than pensions | |||
|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | |
| Discount rates | 5.30 | 5.40 | 4.10 | 4.70 |
| Mortality rates | 1.00 | 1.00 | 1.00 | 1.00 |
| Expected rates of salary increases (excluding promotion increases) | 2.00 | 2.70 | 2.70 | 2.70 |
| Medical cost trend rates | 6.10 | 6.10 | ||
| Indexation | 1.80 | 1.80 | 2.00 | 2.00 |
The assumptions above are weighted by defined benefit obligations. The rates used for salary developments, interest discount factors and other adjustments reflect country-specific conditions.
The presented discount rate is the weighted average of the discount rates that are applied in different countries. These rates are based on AA corporate bond yields of the specific countries with durations matching the pension liabilities.
An increase of 1% in the assumed medical cost trend rate for each future year would have resulted in an additional accumulated defined benefit obligation of EUR 5 million as at 31 December 2011 (2010: EUR 5 million) and an increase in the charge for the year of EUR 1 million (2010: EUR 1 million). A decrease of 1% in the medical cost trend rate for each future year would have resulted in lower defined benefit obligation of EUR 5 million as at 31 December 2011 (2010: EUR 5 million) and a decrease in the charge for the year of EUR 2 million (2010: EUR 2 million).
The actuarial assumption for Indexation for inflation decreased to 1.8% in 2010 mainly as a result of a revised best estimate assumption for future indexation in the pension plan in the Netherlands. As a result of the uncertain circumstances the probability of granting indexation in the short-term future decreased. In 2011, this assumption remained at 1.8% reflecting the uncertainty of granting indexation in the short-term future.
Expected cash flows
For 2012 the expected contributions to pension plans are EUR 353 million.
The following benefit payments, which reflect expected future service as appropriate, are expected to be made by the plans:
| Benefit payments | |
|---|---|
| Pension benefits | |
| 2012 | 348 |
| 2013 | 324 |
| 2014 | 308 |
| 2015 | 335 |
| 2016 | 313 |
| Years 2017-2021 | 2,128 |
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
19 ASSETS BY CONTRACTUAL MATURITY
Amounts presented in these tables by contractual maturity are the amounts as presented in the balance sheet.
Assets by contractual maturity
| 2011 | Less than 1 month (1) | 1–3 months | 3–12 months | 1–5 years | Over 5 years | Maturity not applicable | Total |
|---|---|---|---|---|---|---|---|
| Cash and balances with central banks | 28,112 | 28,112 | |||||
| Amounts due from banks | 26,168 | 4,420 | 5,211 | 8,146 | 1,378 | 45,323 | |
| Financial assets at fair value through profit and loss | |||||||
| – trading assets | 40,037 | 7,797 | 12,062 | 25,727 | 37,553 | 123,176 | |
| – non-trading derivatives | 358 | 217 | 1,038 | 4,495 | 3,968 | 10,076 | |
| – designated as at fair value through profit and loss | 58 | 78 | 766 | 1,031 | 905 | 2,838 | |
| Investments | |||||||
| – available-for-sale | 3,395 | 2,513 | 8,445 | 32,121 | 25,995 | 2,466 | 74,935 |
| – held-to-maturity | 285 | 999 | 1,029 | 6,314 | 241 | 8,868 | |
| Loans and advances to customers | 72,243 | 14,703 | 34,874 | 144,691 | 311,058 | 577,569 | |
| Intangible assets | 157 | 317 | 1,269 | 1,743 | |||
| Assets held for sale (2) | 62,483 | 62,483 | |||||
| Other assets | 8,714 | 2,331 | 6,010 | 1,879 | 3,429 | 22,363 | |
| Remaining assets (where maturities are not applicable) (3) | 3,679 | 3,679 | |||||
| Total assets | 179,370 | 95,541 | 69,592 | 224,721 | 384,527 | 7,414 | 961,165 |
(1) Includes assets on demand.
(2) Assets held for sale consist of the assets of the disposal groups classified as held for sale as disclosed in Note 10 'Assets and liabilities held for sale'. The maturity is based on the classification as disposal group held for sale.
(3) Included in remaining assets where maturities are not applicable are property and equipment, real estate investments and investments in associates. Due to their nature remaining assets consist mainly of assets expected to be recovered after more than 12 months.
Assets by contractual maturity
| 2010 | Less than 1 month (1) | 1–3 months | 3–12 months | 1–5 years | Over 5 years | Maturity not applicable | Total |
|---|---|---|---|---|---|---|---|
| Cash and balances with central banks | 9,519 | 9,519 | |||||
| Amounts due from banks | 30,770 | 4,608 | 4,706 | 9,447 | 2,297 | 51,828 | |
| Financial assets at fair value through profit and loss | |||||||
| – trading assets | 42,785 | 8,873 | 11,564 | 34,456 | 27,392 | 125,070 | |
| – non-trading derivatives | 320 | 81 | 484 | 4,144 | 3,961 | 8,990 | |
| – designated as at fair value through profit and loss | 120 | 46 | 737 | 1,145 | 1,018 | 3,066 | |
| Investments | |||||||
| – available-for-sale | 4,067 | 2,996 | 9,111 | 45,573 | 34,712 | 2,741 | 99,200 |
| – held-to-maturity | 328 | 880 | 1,142 | 8,786 | 557 | 11,693 | |
| Loans and advances to customers | 70,931 | 14,592 | 34,282 | 139,693 | 327,950 | 587,448 | |
| Intangible assets | 196 | 393 | 1,676 | 2,265 | |||
| Assets held for sale (2) | 300 | 300 | |||||
| Other assets | 10,065 | 2,092 | 6,502 | 3,048 | 4,316 | 26,023 | |
| Remaining assets (where maturities are not applicable) (3) | 7,671 | 7,671 | |||||
| Total assets | 168,905 | 34,168 | 69,024 | 246,685 | 402,203 | 12,088 | 933,073 |
(1) Includes assets on demand.
(2) Assets held for sale consist of the assets of the disposal groups classified as held for sale as disclosed in Note 10 'Assets and liabilities held for sale'. The maturity is based on the classification as disposal group held for sale.
(3) Included in remaining assets where maturities are not applicable are property and equipment, real estate investments and investments in associates. Due to their nature remaining assets consist mainly of assets expected to be recovered after more than 12 months.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
20 LIABILITIES BY MATURITY
The tables below include all financial liabilities by maturity based on contractual, undiscounted cash flows. Furthermore, the undiscounted future coupon interest on financial liabilities payable will be included in a separate line and in the relevant maturity bucket. Derivative liabilities are included on a net basis if cash flows are settled out. For other derivative liabilities the contractual gross cash flow payable is included.
Non-financial liabilities are included based on a breakdown of the balance sheet amounts by expected maturity. Reference is made to the Liquidity risk paragraph in the 'Risk management' section for a description on how liquidity risk is managed.
| Liabilities by maturity | |||||||
|---|---|---|---|---|---|---|---|
| 2011 | Less than 1 month (1) | 1-3 months | 3-12 months | 1-5 years | Over 5 years | Adjust-ment (1) | Total |
| Subordinated loans | 1,634 | 23 | 3,988 | 12,252 | 511 | 18,408 | |
| Debt securities in issue | 28,883 | 24,725 | 12,723 | 42,162 | 20,469 | 1,964 | 130,926 |
| Amounts due to banks | 49,608 | 11,691 | 3,825 | 1,808 | 5,317 | -16 | 72,233 |
| Customer deposits and other funds on deposit | 397,750 | 25,895 | 40,658 | 12,205 | 2,080 | 776 | 479,364 |
| Financial liabilities at fair value through profit and loss | |||||||
| - other trading liabilities | 38,507 | 3,109 | 907 | 2,774 | 5,705 | 633 | 51,635 |
| - trading derivatives | 3,026 | 4,373 | 11,493 | 26,834 | 23,103 | -12,782 | 56,047 |
| - non-trading derivatives | 769 | 620 | 3,868 | 11,518 | 7,421 | -6,035 | 18,161 |
| - designated as at fair value through profit and loss | 301 | 398 | 2,062 | 6,006 | 4,526 | -272 | 13,021 |
| Financial liabilities | 520,478 | 70,811 | 75,559 | 107,295 | 80,873 | -15,221 | 839,795 |
| Liabilities held for sale (2) | 64,265 | 64,265 | |||||
| Other liabilities | 8,474 | 2,482 | 6,587 | 3,071 | 1,431 | 22,045 | |
| Remaining liabilities (where maturities are not applicable) | |||||||
| Non-financial liabilities | 8,474 | 66,747 | 6,587 | 3,071 | 1,431 | 86,310 | |
| Total liabilities | 528,952 | 137,558 | 82,146 | 110,366 | 82,304 | -15,221 | 926,105 |
| Coupon interest due on financial liabilities | 6,799 | 1,053 | 4,550 | 10,364 | 41,339 | 64,105 |
(1) Includes liabilities on demand.
(2) This column reconciles the contractual undiscounted cash flows on financial liabilities to the balance sheet values. The adjustments mainly relate to the impact of discounting, and for derivatives, to the fact the contractual cash flows are presented on a gross basis (unless the cash flows are actually settled net).
(3) Liabilities held for sale consist of the liabilities of the disposal groups classified as held for sale as disclosed in Note 10 'Assets and liabilities held for sale'. The maturity is based on the classification as disposal group held for sale.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
| Liabilities by contractual maturity | |||||||
|---|---|---|---|---|---|---|---|
| 2010 | Less than 1 month (1) | 1–3 months | 3–12 months | 1–5 years | Over 5 years | Adjust-ment (2) | Total |
| Subordinated loans | 243 | 1,151 | 3,525 | 15,700 | 402 | 21,021 | |
| Debt securities in issue | 20,577 | 36,140 | 19,014 | 36,999 | 11,871 | 465 | 125,066 |
| Amounts due to banks | 44,480 | 15,781 | 6,082 | 2,154 | 4,371 | -16 | 72,852 |
| Customer deposits and other funds on deposit | 451,926 | 25,142 | 28,132 | 12,376 | 1,728 | 519,304 | |
| Financial liabilities at fair value through profit and loss | |||||||
| – other trading liabilities | 46,084 | 5,329 | 1,182 | 9,377 | 3,779 | 534 | 66,285 |
| – trading derivatives | 3,096 | 3,255 | 9,615 | 27,747 | 18,930 | -20,879 | 41,764 |
| – non-trading derivatives | 357 | 101 | 4,462 | 18,218 | 5,978 | -13,291 | 15,825 |
| – designated as at fair value through profit and loss | 260 | 472 | 1,014 | 6,094 | 4,996 | -129 | 12,707 |
| Financial liabilities | 567,023 | 87,371 | 69,501 | 116,490 | 67,353 | -32,914 | 874,824 |
| Liabilities held for sale (3) | 145 | 145 | |||||
| Other liabilities | 8,697 | 2,203 | 7,043 | 3,401 | 1,691 | 23,035 | |
| Non-financial liabilities | 8,697 | 2,203 | 7,188 | 3,401 | 1,691 | 23,180 | |
| Total liabilities | 575,720 | 89,574 | 76,689 | 119,891 | 69,044 | -32,914 | 898,004 |
| Coupon interest due on financial liabilities | 2,803 | 1,565 | 3,559 | 11,484 | 50,711 | 70,122 |
(1) Includes liabilities on demand.
(2) This column reconciles the contractual undiscounted cash flows on financial liabilities to the balance sheet values. The adjustments mainly relate to the impact of discounting, and for derivatives, to the fact the contractual cash flows are presented on a gross basis (unless the cash flows are actually settled net).
(3) Liabilities held for sale consist of the liabilities of the disposal groups classified as held for sale as disclosed in Note 10 'Assets and liabilities held for sale'. The maturity is based on the classification as disposal group held for sale.
21 DERIVATIVES AND HEDGE ACCOUNTING
Use of derivatives and hedge accounting
As described in the 'Risk management' section, ING Bank uses derivatives (principally interest rate swaps and cross currency interest rate swaps) for economic hedging purposes in the management of its asset and liability portfolios and structural positions. The objective of economic hedging is to enter into positions with an opposite risk profile to an identified exposure to reduce that exposure. The impact of ING Bank's hedging activities is to optimise the overall cost to ING Bank of accessing debt capital markets and to mitigate the market risk which would otherwise arise from structural imbalances in the duration and other profiles of its assets and liabilities. In addition, hedging activities are undertaken to hedge against the interest rate risk in the mortgage offer period in relation to retail mortgages and to lock in the interest margin in relation to interest bearing assets and the related funding.
The accounting treatment of hedge transactions varies according to the nature of the instrument hedged and whether the hedge qualifies under the IFRS-EU hedge accounting rules. Derivatives that qualify for hedge accounting under IFRS-EU are classified and accounted in accordance with the nature of the instrument hedged and the type of IFRS-EU hedge model that is applicable. The three models applicable under IFRS-EU are: fair value hedge accounting, cash flow hedge accounting and net investment hedge accounting. These are described under the relevant headings below. The company's detailed accounting policies for these three hedge models are set out in section 'Principles of valuation and determination of results'.
To qualify for hedge accounting under IFRS-EU, strict criteria must be met. Certain hedges that are economically effective from a risk management perspective do not qualify for hedge accounting under IFRS-EU. The fair value changes of derivatives relating to such non qualifying hedges are taken to the profit and loss account. However, in certain cases, the Bank mitigates the profit and loss account volatility by designating hedged assets and liabilities at fair value through profit and loss. If hedge accounting is applied under IFRS-EU, it can arise that during the hedge a hedge relationship no longer qualifies for hedge accounting, and hedge accounting cannot be continued, even if the hedge remains economically effective. As a result, the volatility arising from undertaking economic hedging in the profit and loss account may be higher than would be expected from an economic point of view.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
With respect to exchange rate and interest rate derivative contracts, the notional or contractual amounts of these instruments is indicative of the nominal value of transactions outstanding at the balance sheet date; however they do not represent amounts at risk. ING Bank uses credit derivatives to manage its exposure to credit risk, including total return swaps and credit default swaps, to sell or buy protection for credit risk exposures in the loan, investment and trading portfolios. Hedge accounting is not applied in relation to credit derivatives.
Fair value hedge accounting
ING Bank's fair value hedges principally consist of interest rate swaps and cross-currency interest rate swaps that are used to protect against changes in the fair value of fixed-rate instruments due to movements in market interest rates.
Gains and losses on derivatives designated under fair value hedge accounting are recognised in the profit and loss account. The effective portion of the fair value change on the hedged item is also recognised in the profit and loss account. As a result, only the net accounting ineffectiveness has an impact on the net result.
For the year ended 31 December 2011, ING Bank recognised EUR –1,122 million (2010: EUR –747 million) of fair value changes on derivatives designated under fair value hedge accounting in the profit and loss account. This amount was offset by EUR 1,155 million (2010: EUR 754 million) fair value changes recognised on hedged items. This resulted in EUR 33 million net accounting ineffectiveness recognised in the profit and loss account. As at 31 December 2011 the fair values of outstanding derivatives designated under fair value hedge accounting was EUR –6,283 million (2010: EUR –4,502 million), presented in the balance sheet as EUR 2,885 million (2010: EUR 3,714 million) positive fair values under assets and EUR 9,168 million (2010: EUR 8,216 million) negative fair values under liabilities.
ING Bank applies fair value hedge accounting to portfolio hedges of interest rate risk (macro hedging) under the EU 'carve out' of IFRS-EU. The EU 'carve-out' macro hedging enables a group of derivatives (or proportions) to be viewed in combination and jointly designated as the hedging instrument and removes some of the limitations in fair value hedge accounting relating to hedging core deposits and under-hedging strategies. Under the IFRS-EU 'carve-out', hedge accounting may be applied to core deposits and ineffectiveness only arises when the revised estimate of the amount of cash flows in scheduled time buckets falls below the designated amount of that bucket. ING Bank applies the IFRS-EU 'carve-out' to its retail operations in which the net exposure of retail funding (savings and current accounts) and retail lending (mortgages) is hedged. The hedging activities are designated under a portfolio fair value hedge on the mortgages using the IFRS-EU provisions.
Cash flow hedge accounting
ING Bank's cash flow hedges principally consist of (forward) interest rate swaps and cross-currency interest rate swaps that are used to protect against its exposure to variability in future interest cash flows on non-trading assets and liabilities that bear interest at variable rates or are expected to be refunded or reinvested in the future. The amounts and timing of future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities, based on contractual terms and other relevant factors including estimates of prepayments and defaults. The aggregate principal balances and interest cash flows for the respective portfolios form the basis for identifying the notional amount subject to interest rate risk that is designated under cash flow hedge accounting.
Gains and losses on the effective portions of derivatives designated under cash flow hedge accounting are recognised in Shareholders' equity. Interest cash flows on these derivatives are recognised in the profit and loss account in interest result consistent with the manner in which the forecast cash flows affect net result. The gains and losses on ineffective portions of such derivatives are recognised immediately in the profit and loss account.
For the year ended 31 December 2011, ING Bank recognised EUR –182 million (2010: EUR –167 million) in equity as effective fair value changes on derivatives under cash flow hedge accounting. The balance of the cash flow hedge reserve in equity as at 31 December 2011 was EUR –1,104 million (2010: EUR –836 million) gross and EUR –821 million (2010: EUR –639 million) after deferred tax. This cash flow hedge reserve will fluctuate with the fair value changes of the underlying derivatives and will be reflected in the profit and loss account under Interest income/ expense over the remaining term of the underlying hedged items. The cash flow hedge reserve relates to a large number of derivatives and hedged items with varying maturities up to 47 years, with the largest concentration in the range of 1 year to 6 years. Accounting ineffectiveness on derivatives designated under cash flow hedge accounting resulted in a loss of EUR 1 million (2010: EUR 2 million gain), that was recognised in the profit and loss account.
As at 31 December 2011, the fair value of outstanding derivatives designated under cash flow hedge accounting was EUR –1,985 million (2010: EUR –1,944 million), presented in the balance sheet as EUR 4,069 million (2010: EUR 2,876 million) positive fair values under assets and EUR 6,054 million (2010: EUR 4,820 million) negative fair values under liabilities.
As at 31 December 2011 the fair value of outstanding non-derivatives designated as hedging instruments for cash flow hedge accounting purposes was nil (2010: nil).
ING Bank Annual Report 2011 69
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
Included in Interest income and interest expense on non-trading derivatives is EUR 2,630 million (2010: EUR 3,243 million) and EUR 2,821 million (2010: EUR 2,951 million), respectively, relating to derivatives used in cash flow hedges.
Hedges of net investments in foreign operations
ING Bank's net investment hedges principally consist of derivatives (including currency forwards and swaps) and non-derivative financial instruments such as foreign currency denominated funding that are used to protect against foreign currency exposures on foreign subsidiaries.
Gains and losses on the effective portions of derivatives designated under net investment hedge accounting are recognised in Shareholders' equity. The balance in equity is recognised in the profit and loss account when the related foreign subsidiary is disposed. The gains and losses on ineffective portions are recognised immediately in the profit and loss account.
As at 31 December 2011, the fair values of outstanding derivatives designated under net investment hedge accounting was EUR –10 million (2010: EUR –36 million), presented in the balance sheet as EUR 136 million (2010: EUR 72 million) positive fair values under assets and EUR 146 million (2010: EUR 108 million) negative fair values under liabilities.
As at 31 December 2011, there were EUR 1,180 million (2010: EUR 1,751 million) non-derivatives designated as hedging instruments for net investment hedge accounting purposes.
Accounting ineffectiveness recognised in the profit and loss account for the year ended 31 December 2011 on derivatives and non-derivatives designated under net investment hedge accounting was EUR 8 million (2010: EUR 5 million).
22 ASSETS NOT FREELY DISPOSABLE
The assets not freely disposable consist primarily of interest bearing securities pledged to secure deposits from De Nederlandsche Bank (the Dutch central bank) and other banks and serve to secure margin accounts and are used for other purposes required by law. The assets not freely disposable are as follows:
| Assets not freely disposable | ||
|---|---|---|
| 2011 | 2010 | |
| Investments | 1,359 | 8,405 |
| Loans and advances to customers | 28,417 | 35,977 |
| Banks | 18,033 | 15,027 |
| Other assets | 4,431 | 5,630 |
| 52,240 | 65,040 |
Banks include Amounts due from banks and balances with central banks. In some jurisdictions ING Bank N.V. has an obligation to maintain a reserve with central banks.
Loans and advances to customers, not freely disposable, includes the loan to the Dutch State in connection with the Illiquid Assets Back-Up Facility agreement as disclosed in Note 29 'Related parties' and loans that for liquidity purposes have been pledged as collateral in the United States of EUR 9 billion (2010: EUR 7 billion), Germany of EUR 5 billion (2010: EUR 5 billion) and Canada of nil (2010: EUR 5 billion).
The table does not include assets relating to repurchase and stock lending transactions. Reference is made to Note 3 'Financial assets at fair value through profit and loss', Note 4 'Investments' and Note 5 'Loans and advances to customers' for the relevant amounts.
There are no terms and conditions relating to the collateral represented in the above table which are individually significant.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
23 CONTINGENT LIABILITIES AND COMMITMENTS
In the normal course of business ING Bank is party in activities whose risks are not reflected in whole or in part in the consolidated financial statements. In response to the needs of its customers, the Bank offers financial products related to loans. These products include traditional off-balance sheet credit-related financial instruments.
| Contingent liabilities and commitments | ||||||
|---|---|---|---|---|---|---|
| 2011 | Less than 1 month | 1-3 months | 3-12 months | 1-5 years | Over 5 years | Total |
| Contingent liabilities in respect of | ||||||
| - discounted bills | 1 | 1 | 2 | |||
| - guarantees | 18,614 | 867 | 820 | 1,484 | 3,832 | 25,617 |
| - irrevocable letters of credit | 9,271 | 6,156 | 1,569 | 193 | 17 | 17,206 |
| - other | 452 | 45 | 65 | 8 | 570 | |
| 28,338 | 7,069 | 2,454 | 1,685 | 3,849 | 43,395 | |
| Irrevocable facilities | 35,972 | 14,858 | 5,211 | 24,354 | 5,793 | 86,188 |
| 64,310 | 21,927 | 7,665 | 26,039 | 9,642 | 129,583 | |
| Contingent liabilities and commitments | ||||||
| --- | --- | --- | --- | --- | --- | --- |
| 2010 | Less than 1 month | 1-3 months | 3-12 months | 1-5 years | Over 5 years | Total |
| Contingent liabilities in respect of | ||||||
| - discounted bills | 1 | 1 | 1 | 3 | ||
| - guarantees | 15,555 | 472 | 1,132 | 1,350 | 3,202 | 21,711 |
| - irrevocable letters of credit | 7,333 | 6,070 | 1,914 | 192 | 31 | 15,540 |
| - other | 333 | 22 | 64 | 9 | 428 | |
| 23,222 | 6,565 | 3,111 | 1,551 | 3,233 | 37,682 | |
| Irrevocable facilities | 38,082 | 16,552 | 5,251 | 24,686 | 5,456 | 90,027 |
| 61,304 | 23,117 | 8,362 | 26,237 | 8,689 | 127,709 |
Guarantees relate both to credit and non-credit substitute guarantees. Credit-substitute guarantees are guarantees given by ING Bank in respect of credit granted to customers by a third party. Many of them are expected to expire without being drawn on and therefore do not necessarily represent future cash outflows. In addition to the items included in contingent liabilities, ING Bank has issued guarantees as a participant in collective arrangements of national industry bodies and as a participant in government required collective guarantee schemes which apply in different countries.
Irrevocable letters of credit mainly secure payments to a third-party for a customer's foreign and domestic trade transactions in order to finance a shipment of goods. ING Bank's credit risk in these transactions is limited since these transactions are collateralised by the commodity shipped and are of a short duration.
Other contingent liabilities include acceptances of bills and are of a short-term nature. Other contingent liabilities also include contingent liabilities resulting from the normal operations of the Real estate business including obligations under development and construction contracts. None of the items included in Other contingent liabilities are individually significant.
Irrevocable facilities mainly constitute unused portions of irrevocable credit facilities granted to corporate clients. Many of these facilities are for a fixed duration and bear interest at a floating rate. ING Bank's credit risk and interest rate risk in these transactions is limited. The unused portion of irrevocable credit facilities is partly secured by customers' assets or counter-guarantees by the Central Governments and exempted bodies under the regulatory requirements. Irrevocable facilities also include commitments made to purchase securities to be issued by governments and private issuers.
Furthermore, ING Bank leases assets from third parties under operating leases as lessee. The future rental commitments to be paid under non-cancellable operating leases are as follows:
ING Bank Annual Report 2011 71
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
| 2012 | 234 |
|---|---|
| 2013 | 193 |
| 2014 | 148 |
| 2015 | 140 |
| 2016 | 120 |
| Years after 2016 | 248 |
24 SPECIAL PURPOSE ENTITIES AND SECURITISATION
Securitisation
ING Bank as originator
ING Bank enters into synthetic securitisation programmes in order to reduce credit risk on certain assets. In synthetic securitisations, ING Bank enters into a credit default swap with securitisation Special Purpose Entities (SPEs), in relation to which ING Bank purchases credit protection in respect of residential mortgage loans and loans to small and medium-sized enterprises. The SPEs have in turn hedged their exposure with investors through the issue of credit linked notes or credit linked commercial paper. As a result of these transactions, ING Bank has transferred a substantial part of the credit risk related to these loan portfolios to third-party investors. In general, the third-party investors in securities issued by the SPE have recourse only to the assets of the SPE and not to ING Bank.
After securitisation of these assets ING Bank continues to recognise them on its balance sheet under Loans and advances to customers. These transactions are therefore not off-balance sheet arrangements.
| Assets under synthetic securitisation programmes | ||
|---|---|---|
| 2011 | 2010 | |
| Loans to small and medium-sized enterprises | 5,251 | 5,273 |
| Mortgages | 6,245 | 6,476 |
| Total | 11,496 | 11,749 |
ING Bank as sponsor of multi-seller conduit
In the normal course of business, ING Bank structures financing transactions for its clients by assisting them in obtaining sources of liquidity by selling the clients' receivables or other financial assets to an SPE. The SPE issues asset-backed commercial paper to the market to fund the purchases. ING Bank, in its role as administrative agent, facilitates these transactions by providing structuring, accounting, funding and operations services.
ING Bank supports the commercial paper programmes by providing the SPE with short-term standby liquidity facilities. These liquidity facilities are intended primarily to cover temporarily disruptions in the commercial paper market. Once drawn these facilities bear normal credit risk. A number of programmes are supported by granting structured liquidity facilities to the SPE, in which ING Bank covers at least some of the credit risk incorporated in these programmes itself (in addition to normal liquidity facilities), and might suffer credit losses as a consequence. Furthermore, under a Programme Wide Credit Enhancement ING Bank guarantees to a limited amount all remaining losses incorporated in the SPE to the commercial paper investors. All facilities, which vary in risk profile, are granted to the SPE subject to normal ING Bank credit and liquidity risk analysis procedures. The fees received for services provided and for facilities are charged subject to market conditions. The SPE is included in the consolidation of ING Bank. These transactions are therefore not off-balance sheet arrangements.
The normal non-structured standby liquidity facilities and the structured facilities are reported under irrevocable facilities.
Collateralised debt obligations (CDO)-transactions
Within ING Bank, SPEs are used for CDO transactions. In a typical CDO transaction an SPE is used to issue structured, rated securities which are backed (or collateralised) by a pool of transferable debt securities. Besides investing in CDOs ING Bank often has different roles in these transactions:
- the arranger of the transaction; ING Bank structures the SPE, acquires the assets for the SPE and sells the CDOs to investors;
- collateral manager of the assets in the SPE; ING Bank manages the assets based on strict conditions of the SPEs charter.
ING Bank receives market-rate fees for structuring, asset managing and distributing CDO-securities to investors. The total amount of these fees is not significant.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
ING Bank as investor
As part of its investment activities, ING Bank invests in securitisations by purchasing notes or by selling credit protection in the market using credit default swaps from securitisation SPEs. For certain own asset securitisation programmes ING Bank acts as a market maker and holds limited positions in this capacity.
Other entities
ING Bank is also a party to other SPEs used in, for example, structured finance and leasing transactions.
Investment funds
ING Bank as fund manager and investor
ING Bank sets up investment funds for which it acts as a fund manager and sole investor at the inception of the fund. Subsequently, ING Bank will seek third-party investors to invest in the fund, thereby reducing the interest of ING Bank. In general, ING Bank will maintain a small percentage of interest in these funds. These funds are included in the consolidated financial statements of the ING Bank if and when control exists, taking into account both ING Bank's financial interests for own risk and its role as investment manager.
ING Bank as fund manager
ING Bank acts as fund manager for several funds. Fees related to these management activities are charged on an arm's-length basis. In general, as a fund manager ING Bank will hold these funds in a fiduciary capacity. These funds are therefore generally not included in the consolidated financial statements of ING Bank.
25 PRINCIPAL SUBSIDIARIES
The principal subsidiaries of ING Bank N.V. and their place of incorporation are as follows:
| Bank Mendes Gans N.V. | The Netherlands |
|---|---|
| ING Lease Holding N.V. | The Netherlands |
| ING Corporate Investments B.V. | The Netherlands |
| ING Vastgoed Management Holding B.V. | The Netherlands |
| ING Commercial Finance B.V. | The Netherlands |
| WestlandUtrecht Bank N.V. | The Netherlands |
| ING België N.V. | Belgium |
| Record Bank N.V. | Belgium |
| ING Luxembourg S.A. | Luxembourg |
| ING Bank Slaski S.A. | Poland |
| ING Financial Holdings Corporation | United States of America |
| ING Vysya Bank Ltd. | India |
| ING Direct N.V. | Canada, Germany, Spain, Australia, France, United States of America, Italy, United Kingdom |
| ING Bank A.S. | Turkey |
26 COMPANIES ACQUIRED AND COMPANIES DISPOSED
Acquisitions effective in 2011
There were no significant acquisitions in 2011.
Disposals effective in 2011
ING REIM Europe, ING REIM Asia and Clarion Real Estate Securities (CRES)
ING announced in February 2011 that it has reached agreement with CB Richard Ellis Group, Inc., to sell ING REIM Europe, ING REIM Asia and Clarion Real Estate Securities (CRES), ING REIM's US-based manager of listed real estate securities, as well as part of ING's equity interests in funds managed by these businesses.
In July 2011 ING announced the completion of the sale of Clarion Real Estate Securities (CRES) to CB Richard Ellis. The sale resulted in a net gain on divestment of EUR 182 million. CRES was previously included in the segment ING Real Estate.
In October 2011 ING announced that it had completed the sale of REIM's Asian and European operations to US-based CBRE Group Inc., thereby completing the divestment of ING REIM. The divestment of ING REIM has resulted in an after-tax gain on disposal of approximately EUR 245 million. As a result of the agreement at closing ING continues to have certain contingent income and expenses however no significant impact on the result on divestment is expected. REIMs Asian and European operations were previously included in the segment ING Real Estate.
Clarion Partners
In June 2011 ING announced the completion of the sale of the private market real estate investment manager of its US operations, Clarion Partners, to Clarion Partners management in partnership with Lightyear Capital LLC for USD 100 million. The sale resulted in a net gain on divestment of EUR 39 million. Clarion Partners was previously included in the segment ING Real Estate.
ING Bank Annual Report 2011 73
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
ING Car Lease
In September 2011 ING completed the sale of ING Car Lease to BMW Group fleet management division Alphabet for total proceeds of EUR 696 million and a net transaction result of EUR 347 million. ING Car Lease was previously partly included in both the Commercial Banking and Retail Banking segments.
Disposals occurred in 2012
ING Direct USA
In June 2011 ING announced that it reached an agreement to sell ING Direct USA to Capital One Financial Corporation, a leading US-based financial holding company. In February 2012 ING announced that the transaction closed. Total proceeds of the transaction are approximately USD 9.0 billion (or approximately EUR 6.9 billion), including USD 6.3 billion in cash and USD 2.7 billion in the form of 54.0 million shares in Capital One, based on the share price of USD 49.29 at closing on 16 February 2012. These shares represented a 9.7% stake in Capital One at closing. The transaction has resulted in a positive result after tax of approximately EUR 0.5 billion.
In 2011 ING Direct USA is still included in the segment ING Direct. After this sale, ING Direct USA will no longer be consolidated.
In connection with the divestment of ING Direct USA, ING also completed the adjustment of the agreement with the Dutch State concerning the structure of the Illiquid Assets Back-up Facility (IABF) which was also announced on 16 June 2011. The amendment serves to de-link the IABF from ING Direct USA by putting ING Bank in its place as counterparty for the Dutch State. The IABF is further amended to ensure a continued alignment between ING and the State regarding exposure to the Alt-A portfolio. Only the part of the IABF covering ING Direct USA, currently approximately 85% of the total IABF-portfolio, is adjusted in the amendment. The ING Insurance part of the IABF remains unaltered. Reference is made to Note 29 'Related Parties' for details on the original agreement and the amendments made.
Most significant companies disposed in 2011
| Clarion Partners | Clarion Real Estate securities | ING REIM Asia and Europe | ING Car Lease | Total | |
|---|---|---|---|---|---|
| Sales proceeds | |||||
| Cash proceeds (1) | 69 | 224 | 365 | 696 | 1,354 |
| Sales proceeds | 69 | 224 | 365 | 696 | 1,354 |
| Assets | |||||
| Loans and advances to customers | 1 | 104 | 105 | ||
| Amounts due from banks | 1 | 3 | 94 | 103 | 201 |
| Financial assets at fair value through profit and loss | 5 | 5 | |||
| Property and equipment | 3,275 | 3,275 | |||
| Miscellaneous other assets | 20 | 44 | 82 | 341 | 487 |
| Liabilities | |||||
| Amounts due to banks | 101 | 101 | |||
| Customer deposits and other funds on deposit | 3,028 | 3,028 | |||
| Miscellaneous other liabilities | 10 | 19 | 116 | 333 | 478 |
| Net assets | 16 | 28 | 61 | 361 | 466 |
| % disposed | 100% | 100% | 100% | 100% | |
| Net assets disposed | 16 | 28 | 61 | 361 | 466 |
| Gain/loss on disposal (2) | 39 | 182 | 245 | 347 | 813 |
(1) Cash outflow / inflow on group companies in the cash flow statement includes cash outflows / inflows on individually immaterial disposals in addition to the cash flow presented.
(2) The gain/loss on disposal comprises the sales proceeds, the net assets disposed, the expenses directly related to the disposal and the realisation of unrealised reserves.
Acquisitions effective in 2010
There were no significant acquisitions in 2010.
Disposals effective in 2010
In October 2009 ING reached an agreement to sell its Asian Private Banking business for a consideration of USD 1,463 million (EUR 985 million). The Asia franchise offers private banking services in 11 markets, including Hong Kong, the Philippines and Singapore. The transaction generated a net profit for ING of EUR 332 million. The sale was completed in the first half of 2010. The Asian Private Banking Business was previously included in the segment Retail Asia.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
In October 2009 ING reached an agreement to sell its Swiss Private Banking business to Julius Baer for a consideration of EUR 345 million (CHF 520 million) in cash. The transaction generated a net profit for ING of EUR 73 million. The sale was completed in January 2010. The Swiss Private Banking business was included in the segment Retail CE.
In August 2010 ING announced that it has agreed to sell its 50% stake in ING Summit Industrial Fund LP ('Summit'), a Canadian light industrial property portfolio to a joint venture between KingSett Capital and Alberta Investment Management Corporation (AIMCo). The sale was completed in November 2010. The transaction value for 100% of Summit is CAD 2.0 billion (EUR 1.4 billion) and includes assumed debt. In addition to its direct investment in Summit, ING has an indirect participation through its 7.8% unit holding of ING Industrial Fund (IIF), an ING-managed listed property fund in Australia which owns the remaining 50% in Summit. As part of the transaction, IIF has agreed to simultaneously sell its stake in Summit to KingSett/AIMCo. Consequently, ING's indirect participation in Summit will end as well. Separately, ING sold ING Real Estate Canada, the manager of Summit, to KingSett/AIMCo for an undisclosed amount. The transaction had no material impact on ING Group's 2010 results and capital ratios. The transaction resulted in a net loss of EUR 26 million in 2010. Summit was previously included in the segment ING Real Estate.
Most significant companies disposed in 2010
| Asia Private Banking business (3) | Swiss Private Banking business (3) | ING Summit Industrial Fund LP | Total | |
|---|---|---|---|---|
| Sales proceeds | ||||
| Cash proceeds (1) | 985 | 345 | 333 | 1,663 |
| Sales proceeds | 985 | 345 | 333 | 1,663 |
| Assets | ||||
| Cash assets | 4 | 179 | 183 | |
| Investments | 41 | 236 | 277 | |
| Loans and advances to customers | 2,390 | 816 | 6 | 3,212 |
| Amounts due from banks | 1,171 | 1,177 | 39 | 2,387 |
| Financial assets at fair value through profit and loss | 397 | 8 | 405 | |
| Real estate investments | 1,620 | 1,620 | ||
| Miscellaneous other assets | 20 | 46 | 57 | 123 |
| Liabilities | ||||
| Amounts due to banks | 180 | 755 | 952 | 1,887 |
| Customer deposits and other funds on deposit | 3,098 | 1,382 | 4,480 | |
| Miscellaneous other liabilities | 92 | 53 | 52 | 197 |
| Net assets | 653 | 272 | 718 | 1,643 |
| % disposed | 100% | 100% | 50% (4) | |
| Net assets disposed | 653 | 272 | 359 | 1,284 |
| Gain/loss on disposal (2) | 332 | 73 | -26 | 379 |
(1) Cash outflow / inflow on group companies in the cash flow statement includes cash outflows / inflows on individually immaterial disposals in addition to the cash flow presented.
(2) The gain/loss on disposal comprises the sales proceed, the net assets disposed, the expenses directly related to the disposal and the realisation of unrealised reserves.
(3) As per 31 December 2009 recognised as a disposal group held for sale.
(4) After disposal of the 50% stake ING has no remaining stake in Summit.
2009
Goodwill recognised in 2009 amounted to EUR 39 million as disclosed in Note 9 'Intangible assets'. This includes EUR 26 million in relation to the consolidation of 3W Holding B.V as disclosed above. There were no significant acquisitions in 2009.
In August 2009 ING obtained control of its 50% owned joint venture 3W Holding B.V., a real estate development company. ING obtained a majority representation in the Supervisory Board of 3W Holding B.V. and entered into an option agreement that allows ING to acquire the remaining 50%. As a result of obtaining control, 3W Holding B.V. is fully included in the consolidation as of September 2009. Net assets upon consolidation amounted to EUR -21 million. The estimated consideration payable for obtaining the remaining 50% under the option agreement is approximately EUR 5 million. Therefore, goodwill of EUR 26 million is recognised. This goodwill is mainly attributable to operational synergies arising from obtaining control of the professional network of 3W and the future business potential in the southern Netherlands where 3W is active.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
| 3W Holding B.V. | |
|---|---|
| General | |
| Date of full consolidation | 1 September 2009 |
| Purchase consideration payable | 5 |
| Assets | |
| Miscellaneous other assets | 51 |
| Liabilities | |
| Customer deposits and other funds on deposit | 21 |
| Miscellaneous other liabilities | 51 |
| Net assets | -21 |
| Goodwill recognised | 26 |
| Profit since date of full consolidation | -16 |
| Income if fully consolidated as of start of year | -5 |
| Profit if fully consolidated as of start of year | -19 |
Disposals effective in 2009
In 2009 there were no significant disposals.
27 LEGAL PROCEEDINGS
ING Bank companies are involved in litigation and arbitration proceedings in the Netherlands and in a number of foreign jurisdictions, including the United States, involving claims by and against them which arise in the ordinary course of their businesses, including in connection with their activities as insurers, lenders, employers, investors and taxpayers. In certain of such proceedings, very large or indeterminate amounts are sought, including punitive and other damages. While it is not feasible to predict or determine the ultimate outcome of all pending or threatened legal and regulatory proceedings, the Company's management is of the opinion that neither it nor any of its subsidiaries is aware of any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Company is aware) which may have or have in the recent past had a significant effect on the financial position or profitability of the Company.
Because of the geographic spread of its business, ING may be subject to tax audits in numerous jurisdictions at any point in time. Although ING believes that it has adequately provided for all its tax positions, the ultimate resolution of these audits may result in liabilities which are different from the amounts recognised.
Purported class litigation has been filed in the United States District Court for the Southern District of New York alleging violations of the federal securities laws with respect to disclosures made in connection with the 2007 and 2008 offerings of ING's Perpetual Hybrid Capital Securities. The Court has determined that the claims relating to the 2007 offerings were without merit and has dismissed them. The challenged disclosures that survived the Court's ruling relate solely to the June 2008 offering, and primarily to ING Group's investments in certain residential mortgage-backed securities. At this moment it is not practicable to provide an estimate of the (potential) financial effect.
In January 2010 ING lodged an appeal with the General Court of the European Union against specific elements of the European Commission's decision regarding ING's restructuring plan. In its appeal, ING contests the way the Commission has calculated the amount of state aid ING received and the disproportionality of the price leadership restrictions specifically and the disproportionality of restructuring requirements in general. In July 2011 the appeal case was heard orally by the General Court of the European Union. On 2 March 2012, the Court partially annulled the Commission's decision of 18 November 2009 and as a result a new decision must be issued by the Commission. Interested parties can file an appeal against the General Court's judgment before the Court of Justice of the European Union within two months and ten days after the date of the General Court's judgment.
In January 2011 the Association of Stockholders (Vereniging van Effectenbezitters, "VEB") has issued a writ alleging that investors were misled by the prospectus that was issued with respect to the September 2007 rights issue of Fortis N.V. (now: Ageas N.V.) against Ageas N.V., the underwriters of such rights issue, including ING Bank, and former directors of Fortis N.V. According to the VEB the prospectus shows substantive incorrect and misleading information. The VEB states that the impact and the risks of the subprime crisis for Fortis and Fortis' liquidity position have been reflected incorrectly in the prospectus. The VEB requests a declaratory decision stating that the summoned parties have acted wrongfully and are therefore responsible for the damages suffered by the investors in Fortis. The amount of damages of EUR 18 billion
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
has not been substantiated yet. ING will defend itself against this claim; at this time ING is not able to assess the future outcome. Therefore at this moment it is not practicable to provide an estimate of the (potential) financial effect.
In July 2011, the Dutch ING Pensioners' Collective Action Foundation (Stichting Collectieve Actie Pensioengerechtigden ING Nederland), together with two trade unions (FNV Bondgenoten and CNV Dienstenbond) and a number of individual pensioners, instituted legal proceedings against ING's decision not to provide funding for indexing pensions insured with Stichting Pensioenfonds ING (the Dutch ING Pension Fund) per 1 January 2011. In July 2011, also the Interest Group ING General Managers' Pensions (Belangenvereniging ING-Directiepensioenen), together with a number of individual retired Dutch General Managers of ING, instituted legal proceedings against ING's decision not to provide funding for indexing Dutch General Managers' pensions per 1 January 2011. It is not feasible to predict the ultimate outcome of these legal proceedings although legal proceedings instituted by Stichting Pensioenfonds ING on the same issue were ruled in ING's favour. The ultimate outcome of these proceedings may result in liabilities and provisions for such liabilities which are different from the amounts recognised. At this moment it is not practicable to provide an estimate of the (potential) financial effect of such proceedings.
In addition to the foregoing procedures, ING Bank remains in discussions with authorities in the US concerning ING Bank's compliance with Office of Foreign Asset Control requirements. ING Bank has received requests for information from US Government agencies including the US Department of Justice and the New York County District Attorney's Office. ING Bank is cooperating fully with the ongoing investigations and is engaged in discussions to resolve these matters with the US authorities; however, it is not yet possible to reliably estimate the timing or amount of any potential settlement, which could be significant. At this moment it is not practicable to provide an estimate of the (potential) financial effect.
28 JOINT VENTURES
Joint ventures are included proportionally in the consolidated financial statements as follows:
| Most significant joint ventures | |||||
|---|---|---|---|---|---|
| 2011 | Interest held (%) | Assets | Liabilities | Income | Expenses |
| Postkantoren B.V. | 50 | 57 | 69 | 16 | 21 |
| 57 | 69 | 16 | 21 | ||
| Most significant joint ventures | |||||
| --- | --- | --- | --- | --- | --- |
| 2010 | Interest held (%) | Assets | Liabilities | Income | Expenses |
| Postkantoren B.V. | 50 | 91 | 100 | 30 | 28 |
| 91 | 100 | 30 | 28 |
29 RELATED PARTIES
In the normal course of business, ING Bank enters into various transactions with related parties. Parties are considered to be related if one party has the ability to control or exercise significant influence over the other party in making financial or operating decisions. Transactions have taken place on an arm's length basis and include rendering or receiving of services, leases, transfers under finance arrangements and provisions of guarantees or collateral.
| Transactions with joint ventures and associates | ||||
|---|---|---|---|---|
| Joint ventures | Associates | |||
| 2011 | 2010 | 2011 | 2010 | |
| Receivables | 122 | 114 | 1,156 | 1,236 |
| Liabilities | 5 | 41 | 12 | 38 |
| Income received | 6 | 6 | 144 | 127 |
| Expenses paid | 20 | 11 |
In addition to the transactions with joint ventures and associates, ING Bank also enters into transactions with ING Group, ING Insurance and its subsidiaries. ING Bank together with ING Insurance forms the ING Group. These transactions vary from financing activities to regular purchases and sales transactions.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
Transactions with ING Groep N.V. and ING Verzekeringen N.V.
| ING Groep N.V. | ING Verzekeringen N.V. | |||
|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | |
| Receivables | 2,869 | 736 | 1,888 | 3,141 |
| Liabilities | 7,515 | 9,411 | 13,211 | 8,541 |
| Income received | 306 | 194 | 542 | 343 |
| Expenses paid | 868 | 825 | 338 | 236 |
Liabilities to ING Groep N.V. mainly include long-term funding. Liabilities to ING Verzekeringen N.V. mainly include short-term deposits made by ING Verzekeringen N.V.
As part of the exchange offers disclosed in Note 13 'Subordinated loans' EUR 1.6 billion intercompany debt from ING Bank N.V. to ING Groep N.V. was repaid.
In 2011, EUR 1.7 billion (2010: EUR 1.8 billion) ING Bank mortgages were sold through the ING Insurance intermediary sales agents.
In March 2009 ING Insurance and ING Bank agreed to put in place a liquidity facility under which ING Insurance can borrow up to EUR 1.5 billion (USD 2 billion) from ING Bank. The terms of this facility are at arm's length.
ING Bank provides various letters of credit directly and indirectly to ING Insurance operating companies. At 31 December, 2011 none of these Letters of Credit have been drawn.
The overall risk exposure of ING Insurance on ING Bank is mitigated through collateralisation.
Transactions with key management personnel (Management/Executive Board and Supervisory Board) and post-employment benefit plans are transactions with related parties. Transactions with post-employment benefit plans are disclosed in Note 18 'Other liabilities'.
In 2011, ING made a number of changes in the composition of the Management Board for Banking. Two of the Management Board members of ING Bank N.V. are also Executive Board members of ING Groep N.V. The total remuneration of the Executive Board of ING Groep N.V. and the Supervisory Board is borne by ING Groep N.V. The remuneration of the members and former members of the Executive Board and Supervisory Board are charged in full by ING Group to its subsidiaries, on the basis of a general allocation formula.
| Key management personnel compensation (Executive Board and Management Board) (1) | |||
|---|---|---|---|
| 2011 amounts in thousands of euros | Executive Board of ING Groep N.V. (2) | Management Board of ING Bank N.V. (3) | Total |
| Base salary and variable compensation in cash | 2,666 | 4,526 | 7,192 |
| Pension costs | 315 | 1,602 | 1,917 |
| Retirement benefit | 1,828 | 1,828 | |
| Fair market value of variable compensation in stock | 1,147 | 1,147 | |
| Total compensation | 2,981 | 9,103 | 12,084 |
(1) In January 2011, an additional Board member was added to the Management Board Banking. In October 2011 a Board Member stepped down from the Management Board Banking. His successor and another member joined the Management Board that same month.
(2) Includes the compensation earned in the capacity as Executive Board member. One Executive Board member stepped down from the Executive Board as per 1 October 2011, therefore his compensation is included till October 2011.
(3) Excluding members that are also members of the Executive Board of ING Groep N.V.
| Key management personnel compensation (Executive Board and Management Board) | |||
|---|---|---|---|
| 2010 amounts in thousands of euros | Executive Board of ING Groep N.V. | Management Board of ING Bank N.V. (1) | Total |
| Base salary and variable compensation in cash | 2,853 | 3,650 | 6,503 |
| Pension costs | 292 | 542 | 834 |
| Fair market value of variable compensation in stock | 1,150 | 1,150 | |
| Total compensation | 3,145 | 5,342 | 8,487 |
(1) Excluding three members that are also members of the Executive Board of ING Groep N.V.
The Executive Board members decided to forego the variable remuneration in relation to performance year 2010. The above table outlines the actual situation,
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
| Key management personnel compensation (Supervisory Board) | ||
|---|---|---|
| amounts in thousands of euros | 2011 | 2010 |
| Base salary | 857 | 1,010 |
| Total compensation | 857 | 1,010 |
The disclosures relating to remuneration of the Supervisory Board reflect the amounts relating to ING Group as a whole.
Loans and advances to key management personnel
| amounts in thousands of euros | Amount outstanding 31 December | Average interest rate | Repayments | |||
|---|---|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |
| Executive Board members ING Groep N.V. (1) | 1,968 | 1,968 | 3.6% | 3.6% | ||
| Management Board members of ING Bank N.V. | 750 | 13 | 3.3% | 4.3% | 4 | |
| Supervisory Board members | 282 | 282 | 8.6% | 8.6% | ||
| Total | 3,000 | 2,263 | 4 |
(1) Includes the Executive Board member that stepped down from the Executive Board as per 1 October 2011
In 2011, the total remuneration costs amounted to EUR 3.0 million (2010: EUR 3.1 million) for members and former members of the Executive Board, of these remuneration costs EUR 1.5 million (2010: EUR 1.6 million) was allocated to ING Bank. The total remuneration costs amounted EUR 0.9 million (2010: EUR 1.0 million) for members and former members of the Supervisory Board, of these remuneration costs EUR 0.5 million (2010: EUR 0.5 million) was allocated to ING Bank.
There are no significant provisions for doubtful debts or individually significant bad debt expenses recognised on outstanding balances with related parties.
Transactions with the Dutch State
Illiquid Assets Back-up Facility
ING Group and the Dutch State reached an agreement on an Illiquid Assets Back-Up Facility ('IABF') on 26 January 2009. The transaction closed on 31 March 2009. The Facility covers the Alt-A portfolios of ING Direct USA, with a par value of approximately EUR 26 billion. Under the IABF, ING transferred 80% of the economic ownership of its Alt-A portfolio to the Dutch State. As a result, an undivided 80% interest in the risk and rewards on the portfolio was transferred to the Dutch State. ING retained 100% of the legal ownership of its Alt-A portfolio. The transaction price was 90% of the par value with respect to the 80% proportion of the portfolio of which the Dutch State had become the economic owner. The transaction price remains payable by the Dutch State to ING and will be redeemed over the remaining life. Furthermore, under the IABF ING pays a guarantee fee to the State and receives a funding fee and a management fee. As a result of the transaction ING derecognised 80% of the Alt-A portfolio from its balance sheet and recognised a receivable from the Dutch State. The transferred Alt-A portfolio was previously included in Available-for-sale debt securities. The Dutch State also acquired certain consent rights with respect to the sale or transfer of the 20% proportion of the Alt-A portfolio that is retained by ING.
Under the terms of the transaction as agreed on 26 January 2009, the overall sales proceeds amounted to EUR 19.8 billion at the transaction date. The amortised cost (after prior impairments) at the transaction date was also approximately EUR 19.7 billion. The transaction resulted in a profit in the first quarter of 2009 of EUR 45 million after tax (the difference between the sales proceeds and the amortised cost). The fair value under IFRS-EU at the date of the transaction was EUR 13.5 billion.
In order to obtain approval from the European Commission on ING Groep N.V.'s Restructuring Plan (see below), ING agreed in to make additional Illiquid Assets Back-up Facility payments as part of the overall agreement with the European Commission to the Dutch State corresponding to an adjustment of the fees for the Illiquid Assets Back-up Facility. In total, these additional Illiquid Assets Back-up Facility payments as part of the overall agreement with the European Commission amounted to a net present value of EUR 1.3 billion pre-tax, which was recognised as a one-off charge for ING Groep N.V. (as it was not charged to ING Bank N.V.) in the fourth quarter of 2009. The remainder of the IABF as agreed in January 2009, including the transfer price of the securities of 90%, remained unaltered.
The difference between the total sales proceeds and the fair value under IFRS-EU represents a 'Government grant' under IAS 20. This government grant is considered to be an integral part of the transaction and is therefore accounted for as part of the result on the transaction.
The transaction resulted in a reduction of the negative revaluation -and therefore an increase in equity- of EUR 3.9 billion (after tax).
ING Bank Annual Report 2011 79
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
The valuation method of the 20% Alt-A securities in the IFRS-EU balance sheet is not impacted by the IABF. The methodology used to determine the fair value for these assets in the balance sheet under IFRS-EU is disclosed in Note 30 'Fair value of financial assets and liabilities'.
As at 31 December 2011, the remaining outstanding amount from the transaction price that remained payable by the Dutch State is EUR 8.9 billion (2010: EUR 11.4 billion) for ING Bank. The net amount of other unamortised components of the total sales proceeds, as explained above, amounts to EUR 0.1 billion (2010: EUR 0.4 billion) receivable by ING Bank.
In connection with the sale of ING Direct USA as disclosed in Note 26 'Companies acquired and companies disposed', ING has reached an agreement with the Dutch State to adjust the structure of the Illiquid Assets Back-up Facility (IABF). This adjustment served to de-link the IABF from ING Direct USA by putting ING Bank in its place as counterparty for the Dutch State and became effective at the closing of the sale in February 2012. Under the terms of the original transaction ING Direct USA held on its balance the remaining 20% of the Alt-A portfolio, ensuring an alignment of interests between ING and the Dutch state regarding the performance of the portfolio.
Upon closing of the sale ING provided a counter guarantee to the Dutch State covering 25% of the 80% part of the Dutch State. This guarantee covered realised cash losses if they would exceed the 35% that is implied by the market value of the portfolio in June 2011. This adjustment therefore lowered the risk exposure for the Dutch State. The impact on equity and result of the alignment for ING Bank was limited.
Only the part covering ING Direct USA, which currently covers approximately 85% of the total portfolio, is adjusted in the agreement and the guarantee only relates to the portfolio of ING Direct USA. The ING Insurance US and Bancorp part of the IABF remains unaltered.
European Commission Restructuring Plan
In 2009, ING Groep N.V. submitted a Restructuring Plan to the European Commission as part of the process to receive approval for the government support measures. The European Commission has, by decision of 18 November 2009, formally approved the Restructuring Plan. The main elements of the Restructuring Plan as announced on 26 October 2009 are as follows:
- Elimination of double leverage and significant reduction of ING Bank's balance sheet;
- Divestment of all Insurance and Investment Management activities;
- Divestment of ING Direct USA;
- Creation of a new company in the Dutch retail market composed of Interadvies (including Westland Utrecht and the mortgage activities of Nationale-Nederlanden) and the existing consumer lending portfolio of ING Retail in the Netherlands. This business, once separated, needs to be divested;
- Restriction to be a price leader in any EU country for certain retail and SME banking products and restriction to acquire financial institutions or other businesses that would delay the repayment of the non-voting equity securities. These restrictions will apply for the shorter period of three years or until the non-voting equity securities have been repaid in full to the Dutch State;
- An agreement with the Dutch State to alter the repayment terms of 50% of the non-voting equity securities;
- Repayment of EUR 5 billion of the non-voting equity securities issued in November 2008 by ING Groep N.V. to the Dutch State;
- Additional Illiquid Assets Back-Up Facility payments as part of the overall agreement with the European Commission will have to be made to the Dutch State in the form of fee adjustments relating to the Illiquid Assets Back-Up Facility which resulted in a one-off pre-tax charge to ING Groep N.V. of EUR 1.3 billion in the fourth quarter of 2009;
- Launch of a EUR 7.5 billion rights issue, in order to finance the repayment of 50% of the non-voting equity securities and a mitigation of the capital impact of the additional Illiquid Assets Back-Up Facility payment as part of the overall agreement with the European Commission to the Dutch State of EUR 1.3 billion;
- Execution of the Restructuring Plan before the end of 2013;
- If the overall return on the (remaining) non-voting equity securities (core Tier 1 securities) issued to the Dutch State is expected to be lower than 10% p.a., the European Commission may consider the imposition of additional behavioural constraints; and
- The calling of Tier 2 capital and Tier 1 hybrids will in the future be proposed case by case to the Commission for authorisation, for the shorter period of three years starting from the date of the Commission decision or up to the date on which ING has fully repaid the non-voting equity securities (core Tier 1 securities) to the Dutch State (including the relevant accrued interest of core Tier 1 coupons and exit premium fees).
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
On 28 January 2010, ING lodged an appeal against specific elements of the European Commission's decision. By judgment of 2 March 2012, the Court partially annulled the Commission's decision of 18 November 2009, as a result of which a new decision has to be taken by the Commission. Interested parties can file an appeal against the General Court's judgment before the Court of Justice of the European Union within two months and ten days after the date of the General Court's judgment.
Credit Guarantee Scheme
As part of the measures adopted to protect the financial sector, the Dutch State introduced a EUR 200 billion credit guarantee scheme for the issuance of medium term debt instruments by banks (the Credit Guarantee Scheme). ING Bank N.V. issued government guaranteed debt instruments under this Credit Guarantee Scheme ('Government Guaranteed Bonds') as part of its regular medium-term funding operations. The relevant Rules of the Credit Guarantee Scheme promulgate the rules applicable to any issues under the Credit Guarantee Scheme and include information such as scope, denomination, tenor and fees payable by the banks.
ING Group pays a fee of 84 basis points over the issued bonds to the Dutch State to participate in the Credit Guarantee Scheme. Reference is made to Note 14 'Debt securities in issue'.
Other
Following the transactions as disclosed in this note, the Dutch State is a related party of ING. All other transactions between ING and the Dutch State are of a normal business nature and at arm's length.
In the framework of the transactions with the Dutch State disclosed in this note, certain arrangements with respect to corporate governance and executive remuneration were agreed with the Dutch State which will remain in place as long as the Dutch State owns at least 250 million non-voting equity securities of ING Groep N.V., or as long as the Illiquid Assets Back-Up Facility is in place (which ever expires last). The arrangements set forth after the second and fourth bullet hereunder remain valid as long as any of the Government Guaranteed Bonds is outstanding. These arrangements require that:
- the Dutch State may recommend two candidates (the 'State Nominees') for appointment to the Supervisory Board of ING Groep N.V. Certain decisions of the Supervisory Board require approval of the State Supervisory Board members;
- ING must develop a sustainable remuneration policy for the Executive Board and Senior Management that is aligned to new international standards and submit this to its General Meeting for adoption. This remuneration policy shall include incentive schemes which are linked to long-term value creation, thereby taking account of risk and restricting the potential for 'rewards for failure'. This new remuneration policy, amongst others, must include objectives relating to corporate and social responsibility;
- members of the Executive Board may not receive any performance-related payment - either in cash, options, shares or bearer depository receipts - for the years 2008 and 2009 until the adoption of the new remuneration policy in 2010;
- severance payments to Executive Board members are limited to a maximum of one year's fixed salary, in line with the Tabaksblat Code;
- ING has undertaken to support growth of the lending to corporates and consumers (including mortgages) for an amount of EUR 25 billion, on market conforming terms;
- ING agreed to pro-actively use EUR 10 billion of the Dutch Guarantee Scheme during 2009;
- ING has committed itself to maintaining the Dutch payment system PIN on its payment debit cards as long as other market participants, representing a substantial market share, are still making use of this payment system; and
- appointment of the Chief Executive Officer of the Executive Board of ING Groep N.V. requires approval of the State Nominees.
ING Bank Annual Report 2011 81
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
30 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
The following table presents the estimated fair values of ING Bank's financial assets and liabilities. Certain balance sheet items are not included in the table, as they do not meet the definition of a financial asset or liability. The aggregation of the fair values presented below does not represent, and should not be construed as representing, the underlying value of ING Bank.
| Fair value of financial assets and liabilities | ||||
|---|---|---|---|---|
| Estimated fair value | Balance sheet value | |||
| 2011 | 2010 | 2011 | 2010 | |
| Financial assets | ||||
| Cash and balances with central banks | 28,112 | 9,519 | 28,112 | 9,519 |
| Amounts due from banks | 45,269 | 51,651 | 45,323 | 51,828 |
| Financial assets at fair value through profit and loss | ||||
| - trading assets | 123,176 | 125,070 | 123,176 | 125,070 |
| - non-trading derivatives | 10,076 | 8,990 | 10,076 | 8,990 |
| - designated as at fair value through profit and loss | 2,838 | 3,066 | 2,838 | 3,066 |
| Investments | ||||
| - available-for-sale | 74,935 | 99,200 | 74,935 | 99,200 |
| - held-to-maturity | 8,835 | 11,854 | 8,868 | 11,693 |
| Loans and advances to customers | 585,041 | 588,216 | 577,569 | 587,448 |
| Other assets (1) | 15,444 | 18,299 | 15,444 | 18,299 |
| 893,726 | 915,865 | 886,341 | 915,113 | |
| Financial liabilities | ||||
| Amounts due to banks | 72,687 | 73,226 | 72,233 | 72,852 |
| Customer deposits and other funds on deposit | 480,265 | 516,698 | 479,364 | 519,304 |
| Debt securities in issue | 133,871 | 126,150 | 130,926 | 125,066 |
| Financial liabilities at fair value through profit and loss | ||||
| - trading liabilities | 107,682 | 108,049 | 107,682 | 108,049 |
| - non-trading derivatives | 18,161 | 15,825 | 18,161 | 15,825 |
| - designated as at fair value through profit and loss | 13,021 | 12,707 | 13,021 | 12,707 |
| Other liabilities (2) | 16,837 | 18,063 | 16,837 | 18,063 |
| Subordinated loans | 17,031 | 20,618 | 18,408 | 21,021 |
| 859,555 | 891,336 | 856,632 | 892,887 |
(1) Other assets do not include (deferred) tax assets, property held for sale, pension assets and deferred charges.
(2) Other liabilities do not include (deferred) tax liabilities, pension liabilities, prepayments received under property under development, other provisions and other taxation and social security contributions.
The estimated fair values correspond to the amounts at which the financial instruments at our best estimate could have been traded at the balance sheet date between knowledgeable, willing parties in arm's-length transactions. The fair value of financial assets and liabilities is based on quoted market prices, where available. Such quoted market prices are primarily obtained from exchange prices for listed instruments. Where an exchange price is not available, market prices are obtained from independent market vendors, brokers or market makers. Because substantial trading markets do not exist for all financial instruments various techniques have been developed to estimate the approximate fair values of financial assets and liabilities that are not actively traded. These techniques are subjective in nature and involve various assumptions about the relevant pricing factors, especially for inputs that are not readily available in the market (such as credit spreads for own-originated loans and advances to customers). Changes in these assumptions could significantly affect the estimated fair values. Consequently, the fair values presented may not be indicative of the net realisable value. In addition, the calculation of the estimated fair value is based on market conditions at a specific point in time and may not be indicative of future fair values.
Due to a change in market practices for pricing derivatives, ING Bank is in the process of adopting discounting curve that reflects the Overnight Indexed Swap ('OIS') instead of the previously used term EURIBOR rate. In addition, ING refined its calculation methodology for reflecting credit risk in derivatives and issued liabilities. The impact of both these changes is recorded in the profit and loss account; the overall financial effect in 2011 was not material.
The following methods and assumptions were used by ING Bank to estimate the fair value of the financial instruments:
ING Bank Annual Report 2011
Consolidated annual accounts
4
Notes to the consolidated annual accounts of ING Bank continued
Financial assets
Cash and balances with central banks
The carrying amount of cash approximates its fair value.
Amounts due from banks
The fair values of receivables from banks are generally based on quoted market prices or, if unquoted, on estimates based on discounting future cash flows using available market interest rates offered for receivables with similar characteristics, similar to Loans and advances to customers described below.
Financial assets at fair value through profit and loss and Investments
Derivatives
Derivatives contracts can either be exchange traded or over the counter (OTC). The fair value of exchange-traded derivatives is determined using quoted market prices in an active market and those derivatives are classified in Level 1 of the fair value hierarchy. For those instruments not actively traded, fair values are estimated based on valuation techniques. OTC derivatives and derivatives trading in an inactive market are valued using valuation techniques because quoted market prices in an active market are not available for such instruments. The valuation techniques and inputs depend on the type of derivative and the nature of the underlying instruments. The principal techniques used to value these instruments are based on discounted cash flows, Black-Scholes option models and Monte Carlo simulation. These valuation models calculate the present value of expected future cash flows, based on 'no-arbitrage' principles. These models are commonly used in the banking industry. Inputs to valuation models are determined from observable market data where possible. Certain inputs may not be observable in the market directly, but can be determined from observable prices via valuation model calibration procedures. The inputs used include prices available from exchanges, dealers, brokers or providers of consensus pricing, yield curves, credit spreads, default rates, recovery rates, dividend rates, volatility of underlying interest rates, equity prices and foreign currency exchange rates. These inputs are determined with reference to quoted prices, recently executed trades, independent market quotes and consensus data, where available.
Equity securities
The fair values of publicly traded equity securities are based on quoted market prices when available. Where no quoted market prices are available, fair value is determined based on quoted prices for similar securities or other valuation techniques.
The fair value of private equity is based on quoted market prices, if available. In the absence of quoted prices in an active market, fair value is estimated on the basis of an analysis of the investee's financial position and results, risk profile, prospects, price, earnings comparisons and revenue multiples and by reference to market valuations for similar entities quoted in an active market.
Debt securities
Fair values for debt securities are based on quoted market prices, where available. Quoted market prices may be obtained from an exchange, dealer, broker, industry group, pricing service or regulatory service. If quoted prices in an active market are not available, fair value is determined by management based on an analysis of available market inputs, which may include values obtained from one or more pricing services or by a valuation technique that discounts expected future cash flows using a market interest rate curves, referenced credit spreads, maturity of the investment and estimated prepayment rates where applicable.
Certain asset backed securities in the United States are valued using external price sources that are obtained from third party pricing services and brokers.
In order to determine which independent price in the range of prices obtained best represents fair value under IAS 39, ING Bank applies a discounted cash flow model to calculate an indicative fair value. The key input to this model is a discount rate derived from an internal matrix that is used to construct the discount rate per security by applying credit and liquidity spreads relevant to the characteristics of such asset classes. The main assumptions in this matrix include:
- a base spread;
- a liquidity risk premium;
- an additional credit spread, based on:
- seniority in the capital structure - an adjustment is applied to each security based on its position in the capital structure;
- vintage - an adjustment is applied for underwriting guidelines deteriorating from 2004 to 2007 in combination with differences in home price developments for these vintages.
The spreads are expressed in basis points and reflect the current market characteristics for credit and liquidity.
ING Bank Annual Report 2011 83
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
The indicative fair value obtained through the discounted cash flow model is then used to select the independently obtained price that is closest to the indicative price. In addition, judgement is applied in the event that the resulting indicative fair value is closest to the highest obtained vendor price and that price is a significant outlier compared to other obtained vendor prices. In such cases, the second highest obtained vendor price is deemed the most representative of fair value. The indicative price is not itself used for valuing the security; rather, it is used to select the most appropriate price obtained from independent external sources. As a result, each security in the portfolio is priced based on an external price, without modification by ING Bank.
Loans and receivables
Reference is made to Loans and receivables to customers below.
Loans and advances to customers
For loans and advances that are repriced frequently and have had no significant changes in credit risk, carrying amounts represent a reasonable estimate of fair values. The fair values of other loans are estimated by discounting expected future cash flows using interest rates offered for similar loans to borrowers with similar credit ratings. The fair values of mortgage loans are estimated by discounting future cash flows using interest rates currently being offered for similar loans to borrowers with similar credit ratings.
Other assets
The other assets are stated at their carrying value which is not materially different from their fair value.
Financial liabilities
Subordinated loans
The fair value of the subordinated loans is estimated using discounted cash flows based on interest rates and credit spreads that apply to similar instruments.
Amounts due to banks
The fair values of payables to banks are generally based on quoted market prices or, if not available, on estimates based on discounting future cash flows using available market interest rates and credit spreads for payables to banks with similar characteristics.
Customer deposits and other funds on deposit
The carrying values of customer deposits and other funds on deposit with no stated maturity approximate their fair values. The fair values of deposits with stated maturities have been estimated based on discounting future cash flows using the interest rates currently applicable to deposits of similar maturities.
Financial liabilities at fair value through profit and loss
The fair values of securities in the trading portfolio and other liabilities at fair value through profit and loss are based on quoted market prices, where available. For those securities not actively traded, fair values are estimated based on internal discounted cash flow valuation techniques using interest rates and credit spreads that apply to similar instruments. Reference is made to Financial assets at fair value through profit and loss above.
Debt securities in issue and other borrowed funds
The fair value of debt securities in issue and other borrowed funds is generally based on quoted market prices or, if not available, on estimated prices by discounting expected future cash flows using a current market interest rate and credit spreads applicable to the yield, credit quality and maturity.
Other liabilities
The other liabilities are stated at their carrying value which is not materially different from their fair value.
Fair value hierarchy
ING Bank has categorised its financial instruments that are measured in the balance sheet at fair value into a three level hierarchy based on the priority of the inputs to the valuation. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to valuation techniques based on unobservable inputs. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide reliable pricing information on an ongoing basis. The fair value hierarchy consists of three levels, depending on whether fair values were determined based upon quoted prices in an active market (Level 1), valuation techniques with observable inputs (Level 2) or valuation techniques that incorporate inputs which are unobservable and which have a more than insignificant impact on the fair value of the instrument (Level 3). Financial assets in Level 3 include for example illiquid debt securities, complex OTC and credit derivatives, certain complex loans (for which current market information about similar assets to use as observable, corroborated data for all significant inputs into a valuation model is not available) and asset backed securities for which there is no active market and a wide dispersion in quoted prices.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
Observable inputs reflect market data obtained from independent sources. Unobservable inputs are inputs which are based on ING Bank's own assumptions about the factors that market participants would use in pricing an asset or liability, developed based on the best information available in the circumstances. Unobservable inputs may include volatility, correlation, spreads to discount rates, default rates and recovery rates, prepayment rates and certain credit spreads.
The fair values of the financial instruments carried at fair value were determined as follows:
| Methods applied in determining fair values of financial assets and liabilities | ||||
|---|---|---|---|---|
| 2011 | Level 1 | Level 2 | Level 3 | Total |
| Assets | ||||
| Trading assets | 32,878 | 89,319 | 979 | 123,176 |
| Non-trading derivatives | 46 | 9,232 | 798 | 10,076 |
| Financial assets designated as at fair value through profit and loss | 225 | 1,150 | 1,463 | 2,838 |
| Available-for-sale investments | 49,490 | 23,194 | 2,251 | 74,935 |
| 82,639 | 122,895 | 5,491 | 211,025 | |
| Liabilities | ||||
| Trading liabilities | 20,308 | 86,434 | 940 | 107,682 |
| Financial liabilities designated as at fair value through profit and loss | 1,150 | 7,599 | 4,272 | 13,021 |
| Non-trading derivatives | 145 | 17,135 | 881 | 18,161 |
| 21,603 | 111,168 | 6,093 | 138,864 | |
| Methods applied in determining fair values of financial assets and liabilities | ||||
| --- | --- | --- | --- | --- |
| 2010 | Level 1 | Level 2 | Level 3 | Total |
| Assets | ||||
| Trading assets | 49,536 | 73,866 | 1,668 | 125,070 |
| Non-trading derivatives | 71 | 8,418 | 501 | 8,990 |
| Financial assets designated as at fair value through profit and loss | 570 | 1,943 | 553 | 3,066 |
| Available-for-sale investments | 47,311 | 49,290 | 2,599 | 99,200 |
| 97,488 | 133,517 | 5,321 | 236,326 | |
| Liabilities | ||||
| Trading liabilities | 33,293 | 73,315 | 1,441 | 108,049 |
| Financial liabilities designated as at fair value through profit and loss | 1,833 | 7,649 | 3,225 | 12,707 |
| Non-trading derivatives | 802 | 14,275 | 748 | 15,825 |
| 35,928 | 95,239 | 5,414 | 136,581 |
Level 1 – Quoted prices in active markets
This category includes financial instruments whose fair value is determined directly by reference to published quotes in an active market. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis.
Level 2 – Valuation technique supported by observable inputs
This category includes financial instruments whose fair value is determined using a valuation technique (e.g. a model), where inputs in the model are taken from an active market or are observable. If certain inputs in the model are unobservable, but all significant inputs are, the instrument is still classified in this category, provided that the impact of those unobservable inputs on the overall valuation is insignificant. Included in this category are items whose value is derived from quoted prices of similar instruments, but for which the prices are modified based on other market observable external data.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
Level 3 – Valuation technique supported by unobservable inputs
This category includes financial instruments whose fair value is determined using a valuation technique (e.g. a model) for which more than an insignificant part of the inputs in terms of the overall valuation are not market observable. This category also includes financial assets and liabilities whose fair value is determined by reference to price quotes but for which the market is considered inactive. Level 3 Available-for-sale investments include mainly asset backed securities in the United States as described above under ‘Debt securities’. Level 3 Trading assets, Non-trading derivatives and Assets designated as at fair value through profit and loss and Level 3 Financial liabilities at fair value through profit and loss include financial instruments with different characteristics and nature, which are valued on the basis of valuation techniques that feature one or more significant inputs that are unobservable. An instrument in its entirety is classified as valued using significant unobservable inputs if a significant portion of the instrument’s fair value is driven by unobservable inputs. Unobservable in this context means that there is little or no current market data available from which the price at which an arm’s length transaction would be likely to occur can be derived. More details on the determination of the fair value of these instruments is included above under ‘Derivatives’, ‘Debt securities’ and ‘Loans and advances to customers’.
| 2011 | Trading assets | Non-trading derivatives | Financial assets designated as at fair value through profit and loss | Available-for-sale investments | Total |
|---|---|---|---|---|---|
| Opening balance | 1,668 | 501 | 553 | 2,599 | 5,321 |
| Amounts recognised in profit and loss account during the year | –341 | 254 | –28 | –112 | –227 |
| Revaluation recognised in equity during the year | –120 | –120 | |||
| Purchase of assets | 750 | 105 | 905 | 944 | 2,704 |
| Sale of assets | –559 | –88 | –521 | –1,168 | |
| Maturity/settlement | –441 | –75 | –100 | –378 | –994 |
| Transfers into Level 3 | 95 | 13 | 225 | 191 | 524 |
| Transfers out of Level 3 | –191 | –2 | –203 | –396 | |
| Changes in the composition of the group and other changes | –1 | –194 | –195 | ||
| Exchange rate differences | –2 | –1 | 45 | 42 | |
| Closing balance | 979 | 798 | 1,463 | 2,251 | 5,491 |
Main changes in fair value hierarchy (2011 compared to 2010)
Changes in the composition of the group and other changes includes the decrease of the Level 3 assets in relation to the classification of ING Direct USA as a disposal group held for sale. Reference is made to Note 10 ‘Assets and liabilities held for sale’. Furthermore Changes in the composition of the group and other changes includes the increase of the Level 3 assets in relation to shares in real estate investment funds; this increase includes mainly as a result of the reclassification of associates to investments available-for sale as disclosed in Note 6 ‘Investments in associates’.
Transfers into Level 3 includes certain bonds which were transferred to Level 3 in 2011 as a result of reduced market liquidity and/or pricing sources that could no longer be classified as market observable.
There were no significant transfers between Level 1 and 2.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
Changes in Level 3 Assets
| 2010 | Trading assets | Non-trading derivatives | Financial assets designated as at fair value through profit and loss | Available-for-sale investments | Total |
|---|---|---|---|---|---|
| Opening balance | 970 | 334 | 691 | 1,750 | 3,745 |
| Amounts recognised in profit and loss account during the year | 84 | -267 | -43 | 124 | -102 |
| Revaluation recognised in equity during the year | 302 | 302 | |||
| Purchase of assets | 1,364 | 508 | 372 | 758 | 3,002 |
| Sale of assets | -851 | -215 | -426 | -582 | -2,074 |
| Maturity/settlement | -274 | -2 | -97 | -359 | -732 |
| Transfers into Level 3 | 471 | 143 | 21 | 647 | 1,282 |
| Transfers out of Level 3 | -124 | -3 | -158 | -285 | |
| Exchange rate differences | 28 | 38 | 117 | 183 | |
| Closing balance | 1,668 | 501 | 553 | 2,599 | 5,321 |
Main changes in fair value hierarchy (2010 compared to 2009)
Amounts in each of the levels of the fair value hierarchy are impacted by changes in the volume of portfolios and fluctuations in pricing levels and foreign currency rates.
The amount in Level 3 is impacted by improved market activity in this area leading to increased trading and increases in portfolio volume in financial instruments that qualify for Level 3.
Level 3 assets increased because certain bonds were transferred to Level 3 in 2010 as a result of reduced market liquidity and/or pricing sources that could no longer be classified as market observable.
Changes in Level 3 Liabilities
| 2011 | Trading liabilities | Non-trading derivatives | Financial liabilities designated as at fair value through profit and loss | Total |
|---|---|---|---|---|
| Opening balance | 1,441 | 748 | 3,225 | 5,414 |
| Amounts recognised in profit and loss account during the year | 46 | 55 | 113 | 214 |
| Revaluation recognised in equity during the year | ||||
| Issue of liabilities | 1,138 | 502 | 1,613 | 3,253 |
| Early repayment of liabilities | -705 | -47 | -402 | -1,154 |
| Maturity/settlement | -928 | -400 | -645 | -1,973 |
| Transfers into Level 3 | 125 | 25 | 441 | 591 |
| Transfers out of Level 3 | -175 | -2 | -80 | -257 |
| Exchange rate differences | -2 | 7 | 5 | |
| Closing balance | 940 | 881 | 4,272 | 6,093 |
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
Changes in Level 3 Liabilities
| 2010 | Trading liabilities | Non-trading derivatives | Financial liabilities designated as at fair value through profit and loss | Total |
|---|---|---|---|---|
| Opening balance | 857 | 487 | 2,589 | 3,933 |
| Amounts recognised in profit and loss account during the year | 119 | –323 | 85 | –119 |
| Issue of liabilities | 1,679 | 484 | 2,241 | 4,404 |
| Early repayment of liabilities | –876 | –122 | –863 | –1,861 |
| Maturity/settlement | –326 | –1 | –561 | –888 |
| Transfers into Level 3 | 165 | 223 | 388 | |
| Transfers out of Level 3 | –176 | –266 | –442 | |
| Exchange rate differences | –1 | –1 | ||
| Closing balance | 1,441 | 748 | 3,225 | 5,414 |
Amounts recognised in profit and loss account during the year (Level 3)
| 2011 | Held at balance sheet date | Derecognised during the year | Total |
|---|---|---|---|
| Assets | |||
| Trading assets | –343 | 2 | –341 |
| Non-trading derivatives | 254 | 254 | |
| Financial assets designated as at fair value through profit and loss | –28 | –28 | |
| Available-for-sale investments | –125 | 13 | –112 |
| –242 | 15 | –227 | |
| Liabilities | |||
| Trading liabilities | 46 | 46 | |
| Non-trading derivatives | 55 | 55 | |
| Financial liabilities designated as at fair value through profit and loss | 113 | 113 | |
| 214 | 214 |
Amounts recognised in profit and loss account during the year (Level 3)
| 2010 | Held at balance sheet date | Derecognised during the year | Total |
|---|---|---|---|
| Assets | |||
| Trading assets | 59 | 25 | 84 |
| Non-trading derivatives | –267 | –267 | |
| Financial assets designated as at fair value through profit and loss | –16 | –27 | –43 |
| Available-for-sale investments | 109 | 15 | 124 |
| –115 | 13 | –102 | |
| Liabilities | |||
| Trading liabilities | 119 | 119 | |
| Non-trading derivatives | –323 | –323 | |
| Financial liabilities designated as at fair value through profit and loss | 85 | 85 | |
| –119 | –119 |
Sensitivities of fair values in Level 3
Reasonably likely changes in the non-observable assumptions used in the valuation of Level 3 assets and liabilities would not have a significant impact on equity and net result, other than explained below for investments in asset backed securities in the United States.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
Asset backed securities in the United States
Level 3 assets include EUR 92 million at 31 December 2011 and EUR 878 million at 31 December 2010 for investments in asset backed securities in the United States. These assets are valued using external price sources that are obtained from third party pricing services and brokers. In 2011, these asset backed securities in the United States decreased mainly as result of the classification of ING Direct USA as a disposal group held for sale. Reference is made to Note 10 'Assets and liabilities held for sale'.
During 2008, the trading volumes in the relevant markets reduced significantly and the market became inactive. The dispersion between prices for the same security from different price sources increased significantly. In order to ensure that the most accurate and relevant sources available are used in determining the fair value of these securities, the valuation process was further enhanced during 2008 by using information from additional pricing sources and enhancing the process of selecting the most appropriate price.
Generally, up to four different pricing services are utilised. Management carefully reviews the prices obtained in conjunction with other information available, including, where relevant, trades in the market, quotes from brokers and internal evaluations. If the dispersion between different prices for the same securities is limited, a hierarchy exists that ensures consistent selection of the most appropriate price. If the dispersion between different prices for the same security is significant, additional processes are applied to select the most appropriate price, including an internally developed price validation matrix and a process to challenge the external price source.
Valuation for these securities is inherently complex and subjective. Although each security in the portfolio is priced based on an external price, without modification by ING Bank, and management is confident that it has selected the most appropriate price in the current market circumstances, the valuation of these portfolios would have been different had different prices been selected. The sensitivity analysis shows that the highest and the lowest available market prices do not materially impact the valuation of these assets as at 31 December 2011.
Asset backed security portfolio
| Fair value hierarchy of pressurised ABS bonds | ||||
|---|---|---|---|---|
| 2011 | Level 1 | Level 2 | Level 3 | Total |
| US Subprime RMBS | 11 | 11 | 22 | |
| US Alt-A RMBS | 201 | 5 | 206 | |
| CDO/CLOs | 6 | 12 | 268 | 286 |
| CMBS | 2 | 175 | 1 | 178 |
| Total pressurised ABS | 8 | 399 | 285 | 692 |
| Fair value hierarchy of pressurised ABS bonds | ||||
| --- | --- | --- | --- | --- |
| 2010 | Level 1 | Level 2 | Level 3 | Total |
| US Subprime RMBS | 17 | 70 | 87 | |
| US Alt-A RMBS | 1,851 | 637 | 2,488 | |
| CDO/CLOs | 9 | 292 | 301 | |
| CMBS | 1 | 400 | 9 | 410 |
| Total pressurised ABS | 10 | 2,268 | 1,008 | 3,286 |
Greece, Italy, Ireland, Portugal and Spain
Of the Government and Unsecured Financial institutions' bonds exposure in Greece, Italy, Ireland, Portugal and Spain as disclosed in Note 4 'Investments', EUR 2.5 billion is classified as available-for-sale and is measured at fair value (with the revaluation recognised in equity, taking into account impairments that are recognised in the profit and loss account). The table below provide the fair value hierarchy per year-end 2011 for the Greek, Italian, Irish, Portuguese and Spanish Government and Unsecured Financial institutions' bond exposure measured at fair value.
ING Bank Annual Report 2011 89
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
| Fair value hierarchy of Greek, Italian, Irish, Portuguese and Spanish bonds at fair value | ||||
|---|---|---|---|---|
| 2011 | Level 1 | Level 2 | Level 3 | Total |
| Greece | ||||
| Government bonds | 115 | 36 | 151 | |
| Italy | ||||
| Government bonds | 498 | 86 | 242 | 826 |
| Financial institutions | 199 | 350 | 549 | |
| Ireland | ||||
| Financial institutions | 44 | 44 | ||
| Portugal | ||||
| Government bonds | 438 | 438 | ||
| Financial institutions | 30 | 48 | 78 | |
| Spain | ||||
| Government bonds | 312 | 12 | 324 | |
| Financial institutions | 95 | 95 | ||
| Total | 1,616 | 611 | 278 | 2,505 |
Classification of bonds in Levels 2 and 3 is mainly a result of decreased trading liquidity in the relevant markets.
31 INTEREST RESULT
| Interest result | |||
|---|---|---|---|
| 2011 | 2010 | 2009 | |
| Interest income on loans | 26,373 | 24,844 | 24,891 |
| Interest income on impaired loans | 61 | 40 | 24 |
| Total interest income on loans | 26,434 | 24,884 | 24,915 |
| Interest income on available-for-sale securities | 3,463 | 3,532 | 3,923 |
| Interest income on held-to-maturity securities | 400 | 549 | 612 |
| Interest income on trading portfolio | 27,480 | 32,692 | 40,843 |
| Interest income on non-trading derivatives | 1,536 | 1,709 | 3,936 |
| Other interest income | 5,891 | 5,586 | 6,119 |
| Total interest income | 65,204 | 68,952 | 80,348 |
| Interest expense on deposits by banks | 902 | 652 | 1,266 |
| Interest expense on customer deposits and other funds on deposit | 9,383 | 8,324 | 10,976 |
| Interest expense on debt securities | 3,230 | 2,504 | 2,344 |
| Interest expense on subordinated loans | 867 | 1,024 | 981 |
| Interest on trading liabilities | 27,209 | 32,847 | 40,024 |
| Interest on non-trading derivatives | 1,658 | 2,166 | 4,483 |
| Other interest expense | 8,371 | 7,848 | 7,512 |
| Total interest expense | 51,620 | 55,365 | 67,586 |
| Interest result | 13,584 | 13,587 | 12,762 |
| Interest margin | |||
| --- | --- | --- | --- |
| in percentages | 2011 | 2010 | 2009 |
| Interest margin | 1.42 | 1.44 | 1.34 |
In 2011, the growth in average total assets led to an increase of the interest result amounting to EUR 136 million (in 2010 the decline in average total assets led to a decrease of the interest result amounting to EUR 90 million; in 2009 the decline in average assets led to a decrease of the interest result of EUR 929 million). The decrease of the interest margin by 2 basis points led to a decline of the interest result with EUR 139 million (in 2010 the increase of the interest margin by 10 basis points led to an increase of the interest result with EUR 915 million; in 2009 the increase of the interest margin by 25 basis points led to an increase of the interest result with EUR 2,406 million).
In 2011, total interest income and total interest expense for items not valued at fair value through profit and loss were EUR 35,992 million and EUR 22,296 million respectively (2010: EUR 34,347 million and EUR 19,947 million; 2009: EUR 35,352 million and EUR 22,618 million).
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
32 INVESTMENT INCOME
| Investment income | |||
|---|---|---|---|
| 2011 | 2010 | 2009 | |
| Income from real estate investments | 24 | 128 | 157 |
| Dividend income | 49 | 59 | 46 |
| 73 | 187 | 203 | |
| Realised gains/losses on disposal of equity securities | 39 | 338 | 24 |
| Impairments of available-for-sale equity securities | -65 | -32 | -49 |
| Realised gains/losses and impairments on equity securities | -26 | 306 | -25 |
| Impairments of available-for-sale debt securities | -734 | -146 | -1,491 |
| Reversal of impairments of available-for-sale debt securities | 74 | ||
| Realised gains/losses on disposal of debt securities | 91 | 150 | 159 |
| Realised gains/losses and impairments on debt securities | -569 | 4 | -1,332 |
| Change in fair value of real estate investments | -22 | -50 | -588 |
| Investment income | -544 | 447 | -1,742 |
In 2011, an impairment of EUR 588 million was recognised on Greek government bonds which is included in Impairments of available-for-sale debt securities. Reference is made to the 'Risk management' section for further information on impairments.
Impairment and reversal of impairment on investments are presented within Investment income, which is part of Total income. This can be specified for each segment as follows:
| Impairments /reversals of impairments on investments per operating segment | ||||||
|---|---|---|---|---|---|---|
| Impairments | Reversal of impairments | |||||
| 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |
| Retail Belgium | -22 | |||||
| ING Direct | -464 | -107 | -1,394 | 30 | ||
| Commercial Banking (excluding Real Estate) | -301 | -70 | -129 | 44 | ||
| Corporate Line Banking | -13 | -1 | -17 | |||
| -800 | -178 | -1,540 | 74 |
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
33 NET RESULT ON DISPOSALS OF GROUP COMPANIES
| Net result on disposals of group companies | |
|---|---|
| 2011 | |
| Clarion Real Estate Securities | 182 |
| ING REIM Asia and Europe | 245 |
| ING Car Lease | 347 |
| Clarion Partners | 39 |
| 813 | |
| Net result on disposals of group companies | |
| --- | --- |
| 2010 | |
| Asian Private Banking business | 332 |
| Swiss Private Banking business | 73 |
| ING Summit Industrial Fund LP | -26 |
| Other | -66 |
| 313 |
In 2010 Other includes EUR –24 million related to the sale of certain associates. The remainder includes result on disposal of certain real estate funds and other disposals that are individually not significant.
| Net result on disposals of group companies | |
|---|---|
| 2009 | |
| Other | -13 |
| -13 |
Reference is made to Note 26 'Companies acquired and companies disposed' for more details.
34 COMMISSION INCOME
| Gross fee and commission income | |||
|---|---|---|---|
| 2011 | 2010 | 2009 | |
| Funds transfer | 916 | 861 | 859 |
| Securities business | 681 | 695 | 780 |
| Asset management fees | 353 | 515 | 584 |
| Brokerage and advisory fees | 347 | 329 | 317 |
| Insurance broking | 161 | 190 | 188 |
| Other | 1,013 | 966 | 825 |
| 3,471 | 3,556 | 3,553 |
Other include commission fees of EUR 26 million (2010: EUR 15 million; 2009: EUR 18 million) in respect of underwriting syndication loans.
| Fee and commission expenses | |||
|---|---|---|---|
| 2011 | 2010 | 2009 | |
| Funds transfer | 313 | 257 | 200 |
| Securities business | 126 | 125 | 159 |
| Management fees | 10 | 19 | 24 |
| Brokerage and advisory fees | 68 | 70 | 43 |
| Other | 459 | 452 | 449 |
| 976 | 923 | 875 |
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
35 VALUATION RESULTS ON NON-TRADING DERIVATIVES
| Valuation results on non-trading derivatives | |||
|---|---|---|---|
| 2011 | 2010 | 2009 | |
| Change in fair value of derivatives relating to | |||
| – fair value hedges | –1,122 | –747 | –1,301 |
| – cash flow hedges (ineffective portion) | –1 | 2 | –2 |
| – other non-trading derivatives | –380 | –802 | –242 |
| Net result on non-trading derivatives | –1,503 | –1,547 | –1,545 |
| Change in fair value of assets and liabilities (hedged items) | 1,155 | 754 | 1,181 |
| Valuation results on assets and liabilities designated as at fair value through profit and loss (excluding trading) | 504 | 69 | –557 |
| Net valuation results | 156 | –724 | –921 |
The Valuation results on assets and liabilities designated as at fair value through profit and loss includes fair value changes on private equity funds and certain issued debt securities. Valuation results on assets and liabilities designated as at fair value through profit and loss are mainly due to changes in the fair value of financial liabilities driven by changes in market conditions and changes in own credit risk as disclosed in Note 20 'Financial liabilities at fair value through profit and loss'. In 2011 market conditions includes in particular credit spread developments.
36 NET TRADING INCOME
| Net trading income | |||
|---|---|---|---|
| 2011 | 2010 | 2009 | |
| Securities trading results | –133 | 231 | 331 |
| Foreign exchange transactions results | –389 | 726 | –127 |
| Derivatives trading results | 882 | 174 | 814 |
| Other | –49 | 64 | –185 |
| 311 | 1,195 | 833 |
Securities trading results include the results of making markets in instruments such as government securities, equity securities, corporate debt securities, money-market instruments, interest rate derivatives such as swaps, options, futures and forward contracts. Foreign exchange transactions results include gains and losses from spot and forward contracts, options, futures, and translated foreign currency assets and liabilities.
The portion of trading gains and losses for the year ended 31 December 2011 relating to trading securities still held as at 31 December amounted to EUR –66 million (2010: EUR 19 million; 2009: EUR 105 million).
The majority of the risks involved in security and currency trading is economically hedged with derivatives. Securities trading results are partly off-set by results on these derivatives. The result of these derivatives is included in Derivatives trading results.
37 OTHER INCOME
| Other income | |||
|---|---|---|---|
| 2011 | 2010 | 2009 | |
| Net operating lease income | 176 | 213 | 175 |
| Income post office | –7 | 99 | |
| Income from real estate development projects | 31 | 36 | 59 |
| Other | 148 | 97 | 123 |
| 348 | 346 | 456 |
Net operating lease income comprises income of EUR 772 million (2010: EUR 1,000 million; 2009: EUR 967 million) and depreciation of EUR 596 million (2010: EUR 787 million; 2009: EUR 792 million).
In 2011, Other includes a gain of EUR 93 million on the repurchase of subordinated loans as disclosed in Note 13 'Subordinated loans'.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
38 INTANGIBLE AMORTISATION AND OTHER IMPAIRMENTS
| Intangible amortisation and (reversals of) impairments | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Impairment losses | Reversals of impairments | Total | |||||||
| 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |
| Property and equipment | 29 | 27 | 8 | -11 | -5 | -12 | 18 | 22 | -4 |
| Property development | 217 | 403 | 450 | -7 | 217 | 403 | 443 | ||
| Goodwill | 32 | 32 | |||||||
| Software and other intangible assets | 15 | 28 | 8 | -1 | 15 | 27 | 8 | ||
| (Reversals of) other impairments | 293 | 458 | 466 | -11 | -6 | -19 | 282 | 452 | 447 |
| Amortisation of other intangible assets | 39 | 52 | 49 | ||||||
| 321 | 504 | 496 |
In 2011, impairments are recognised on Property development (in the segment ING Real Estate) due to the sale or termination of large projects in Germany and the Netherlands and on the reassessment of Dutch and Spanish real estate development projects.
In 2011, a goodwill impairment of EUR 32 million is recognised. Reference is made to Note 9 'Intangible assets'.
In 2010, impairments on property development are recognised on a large number of Real Estate development projects in The Netherlands, Spain and the United States. The unfavourable economic circumstances in all regions resulted in lower expected sales prices.
In 2009, impairments on Property development are recognised on a large number of Real Estate development projects in Europe, Australia and the United States. Circumstances that have led to these impairments are unfavourable economic circumstances in all regions that have resulted into lower expected sales prices, changes in strategy of ING Real Estate Development whereby certain projects are not developed further and operational inefficiencies in a limited number of projects.
Impairments on Loans and advances to customers are presented under Addition to loan loss provisions. Impairments on Investments are presented under Investment income. Reference is made to the 'Risk management' section for further information on impairments.
39 STAFF EXPENSES
| Staff expenses | |||
|---|---|---|---|
| 2011 | 2010 | 2009 | |
| Salaries | 3,705 | 3,835 | 3,555 |
| Pension and other staff-related benefit costs | 171 | 200 | 178 |
| Social security costs | 525 | 532 | 510 |
| Share-based compensation arrangements (1) | 119 | 79 | 58 |
| External employees | 683 | 627 | 660 |
| Education | 69 | 61 | 57 |
| Other staff costs | 234 | 236 | 225 |
| 5,506 | 5,570 | 5,243 |
(1) The increase in Share-based compensation arrangements can be explained by ING's implementation of a global deferral plan as well as regulatory developments which require payment of variable remuneration in stock in lieu of cash.
| Number of employees | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Netherlands | International | Total | |||||||
| 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |
| Average number of employees at full time equivalent basis | 19,027 | 19,415 | 19,678 | 52,148 | 51,872 | 52,899 | 71,175 | 71,287 | 72,577 |
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
| Pension and other staff-related benefit costs | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Pension benefits | Post-employment benefits other than pensions | Other | Total | |||||||||
| 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |
| Current service cost | 220 | 196 | 210 | 3 | 5 | -11 | 1 | 1 | -24 | 224 | 202 | 175 |
| Past service cost | -9 | -1 | 20 | -1 | -9 | -1 | 19 | |||||
| Interest cost | 550 | 510 | 504 | 5 | 4 | 5 | 6 | 5 | 7 | 561 | 519 | 516 |
| Expected return on assets | -569 | -590 | -546 | -8 | 1 | 1 | -577 | -589 | -545 | |||
| Amortisation of unrecognised past service costs | -1 | -1 | ||||||||||
| Amortisation of unrecognised actuarial (gains)/losses | -18 | 21 | 20 | 1 | 1 | 1 | 5 | -17 | 22 | 26 | ||
| Effect of curtailment or other settlement | -47 | -4 | -88 | -47 | -4 | -88 | ||||||
| Other | -10 | -15 | 15 | -10 | -15 | 15 | ||||||
| Defined benefit plans | 127 | 132 | 120 | 8 | 9 | -7 | -10 | -7 | 4 | 125 | 134 | 117 |
| Defined contribution plans | 46 | 66 | 61 |
Stock option and share plans
ING Group has granted option rights on ING Groep N.V. shares and conditional rights on depositary receipts (share awards) for ING shares to a number of senior executives of the Bank (members of the Management Board, general managers and other officers nominated by the Management Board), to a considerable number of employees of ING Bank. The purpose of the option and share schemes, apart from promoting a lasting growth of ING Bank, is to attract, retain and motivate senior executives and staff.
In 2011, ING granted two types of share awards, deferred shares and performance shares. The entitlement to the share awards is granted conditionally. If the participant remains in employment for an uninterrupted period between the grant date and the vesting date, the entitlement becomes unconditional. In addition to the employment condition, the performance shares contain a performance condition. The number of ING depositary receipts that would ultimately be granted at the end of a performance period is dependent on ING's performance over that period.
In 2011 no share awards (2010: nil; 2009: nil) were granted to the members of the Executive Board of ING Groep N.V., 129,070 share awards were granted to the Management Board of ING Bank N.V. To senior management and other employees of ING Bank 11,316,095 share awards (2010: 20,552,533; 2009: 3,275,201) were granted.
Every year, the ING Group Executive Board decides whether the option and share schemes are to be continued and, if so, to what extent. In 2010 the Group Executive Board decided not to continue the option scheme as from 2011. The existing option schemes up and until 2010 will be run off in the coming years.
The option rights are valid for a period of five or ten years. Option rights that are not exercised within this period lapse. Option rights granted will remain valid until the expiry date, even if the option scheme is discontinued. The option rights are subject to certain conditions, including a pre-determined continuous period of service. The exercise prices of the options are the same as the quoted prices of ING Group shares at the date on which the options are granted.
ING Group holds its own shares in order to fulfil its obligations with regard to the existing stock option plan and to hedge the position risk of the options concerned (the so-called delta hedge). As at 31 December 2011 42,126,329 own shares (2010: 45,213,891) were held in connection with the option plan compared to 108,138,551 options outstanding (2010: 124,836,694). As a result the granted option rights were (delta) hedged, taking into account the following parameters: strike price, opening price, zero coupon interest rate, dividend yield, expected volatility and employee behaviour. The hedge used to be rebalanced regularly at predetermined points in time. In December 2010 ING Groep N.V. announced that it will no longer rebalance its hedge portfolio. This decision is an effort to simplify the management and administration of ING's various employee share and option programmes. The remaining shares in the hedge portfolio will be used to fund the obligations arising from exercise and vesting. Once all shares in the hedge portfolio are used ING will fund these obligations by issuing new shares.
Exposure arising from the share plan is not hedged. The obligations with regard to these plans will in the future be funded either by cash, newly issued shares or remaining shares from the delta hedge portfolio at the discretion of the holder.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
In December 2009 ING Groep N.V. completed a rights issue of EUR 7.5 billion. Outstanding stock options and share awards have been amended to reflect the impact of the rights issue through an adjustment factor that reflects the fact that the exercise price of the rights issue was less than the fair value of the shares. As a result, exercise prices and outstanding share options and share awards have been amended through an adjustment factor of approximately 1.3.
On 6 April 2010 ING Groep N.V. announced that it bought 13,670,000 (depository receipts for) ordinary shares for its delta hedge portfolio, which is used to hedge employee options and facilitate employee share programmes. The shares were bought in the open market between 23 March and 6 April 2010 at an average price of EUR 7.47 per share.
On 2 June 2010 ING Groep N.V. announced that it bought 2,080,000 (depository receipts for) ordinary shares for its delta hedge portfolio, which is used to hedge employee options and facilitate employee share programmes. The shares were bought in the open market on 1 and 2 June 2010 at an average price of EUR 6.33 per share.
On 8 September 2010 ING Groep N.V. announced that it sold 3,590,000 (depository receipts for) ordinary shares of its delta hedge portfolio, which is used to hedge employee options and facilitate employee share programmes. The shares were sold in the open market on 7 and 8 September 2010 at an average price of EUR 7.39 per share.
Changes in option rights outstanding
| Options outstanding (in numbers) | Weighted average exercise price (in euros) | |||||
|---|---|---|---|---|---|---|
| 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |
| Opening balance | 75,673,707 | 73,393,164 | 52,906,156 | 16.23 | 17.95 | 26.36 |
| Granted | 11,251,643 | 7,714,884 | 7.35 | 3.97 | ||
| Exercised or transferred | -3,282,099 | -417,682 | -329,607 | 15.56 | 9.01 | 27.44 |
| Forfeited | -1,439,379 | -1,597,054 | -2,583,773 | 12.86 | 13.82 | 28.42 |
| Rights issue | 17,035,619 | |||||
| Expired | -7,003,542 | -6,956,364 | -1,350,115 | 23.69 | 21.52 | 32.55 |
| Closing balance | 63,948,687 | 75,673,707 | 73,393,164 | 15.53 | 16.23 | 17.95 |
The weighted average share price at the date of exercise for options exercised in 2011 is EUR 8.09 (2010: EUR 7.46; 2009: EUR 8.57).
Changes in option rights non-vested
| Options non-vested (in numbers) | Weighted average grant date fair value (in euros) | |||||
|---|---|---|---|---|---|---|
| 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |
| Opening balance | 30,044,041 | 28,843,472 | 22,346,408 | 3.13 | 3.61 | 6.03 |
| Granted | 11,251,643 | 7,714,884 | 3.26 | 2.55 | ||
| Vested or transferred | -10,808,607 | -8,865,571 | -6,660,929 | 3.91 | 4.81 | 6.48 |
| Forfeited | -980,925 | -1,185,503 | -1,250,537 | 3.07 | 3.36 | 5.83 |
| Rights issue | 6,693,646 | |||||
| Closing balance | 18,254,509 | 30,044,041 | 28,843,472 | 2.68 | 3.13 | 3.61 |
Summary of stock options outstanding and exercisable
| 2011
Range of exercise price in euros | Options outstanding as at 31 December 2011 | Weighted average remaining contractual life | Weighted average exercise price | Options exercisable as at 31 December 2011 | Weighted average remaining contractual life | Weighted average exercise price |
| --- | --- | --- | --- | --- | --- | --- |
| 0.00 – 5.00 | 7,913,460 | 6.25 | 2.87 | | 0.00 | 0.00 |
| 5.00 – 10.00 | 14,056,383 | 6.35 | 7.98 | 3,715,334 | 1.17 | 9.67 |
| 10.00 – 15.00 | 4,162,719 | 2.36 | 14.27 | 4,162,719 | 2.36 | 14.27 |
| 15.00 – 20.00 | 16,333,906 | 4.45 | 17.29 | 16,333,906 | 4.45 | 17.29 |
| 20.00 – 25.00 | 14,086,126 | 2.10 | 23.44 | 14,086,126 | 2.10 | 23.44 |
| 25.00 – 30.00 | 7,396,093 | 4.32 | 25.19 | 7,396,093 | 4.32 | 25.19 |
| | 63,948,687 | | | 45,694,178 | | |
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
Summary of stock options outstanding and exercisable
| 2010 | Options outstanding as at 31 December 2010 | Weighted average remaining contractual life | Weighted average exercise price | Options exercisable as at 31 December 2010 | Weighted average remaining contractual life | Weighted average exercise price |
|---|---|---|---|---|---|---|
| Range of exercise price in euros | ||||||
| 0.00 – 5.00 | 8,773,967 | 7.31 | 2.87 | |||
| 5.00 – 10.00 | 15,311,887 | 7.32 | 7.97 | 4,113,363 | 2.18 | 9.58 |
| 10.00 – 15.00 | 5,047,147 | 2.60 | 14.32 | 4,882,293 | 2.43 | 14.32 |
| 15.00 – 20.00 | 18,598,763 | 5.19 | 17.35 | 8,692,067 | 3.55 | 17.84 |
| 20.00 – 25.00 | 15,237,921 | 3.20 | 23.47 | 15,237,921 | 3.20 | 23.47 |
| 25.00 – 30.00 | 12,704,022 | 3.33 | 25.85 | 12,704,022 | 3.33 | 25.85 |
| 75,673,707 | 45,629,666 |
As at 31 December 2011, the aggregate intrinsic values of options outstanding and exercisable were EUR 21 million and nil respectively.
As at 31 December 2011, total unrecognised compensation costs related to stock options amounted to EUR 14 million (2010: EUR 38 million; 2009: EUR 36 million). These costs are expected to be recognised over a weighted average period of 1.1 years (2010: 1.9 years; 2009: 1.5 years).
The fair value of options granted is recognised as an expense under personnel expenses and is allocated over the vesting period of the options. The fair values of the option awards have been determined using a Monte Carlo Simulation. This model takes the risk free interest rate into account (ranging from 2.02% to 4.62%), as well as the expected life of the options granted (from 5 to 9 years), the exercise price, the current share price (EUR 2.90 - EUR 26.05), the expected volatility of the certificates of ING Group shares (25% - 84%) and the expected dividend yield (0.94% to 8.99%). The source for implied volatilities used for the valuation of the stock options is ING's trading system. The implied volatilities in this system are determined by ING's traders and are based on market data implied volatilities not on historical volatilities.
Due to timing differences in granting option rights and buying shares to hedge them, an equity difference can occur if shares are purchased at a different price than the exercise price of the options. However, ING Group does not intentionally create a position and occurring positions are closed as soon as possible. If option rights expire, the results on the (sale of) shares which were bought to hedge these option rights are either debited or credited to Shareholders' equity.
40 OTHER OPERATING EXPENSES
| Other operating expenses | |||
|---|---|---|---|
| 2011 | 2010 | 2009 | |
| Depreciation of property and equipment | 371 | 382 | 365 |
| Amortisation of software | 332 | 312 | 282 |
| Computer costs | 707 | 693 | 637 |
| Office expenses | 737 | 659 | 679 |
| Travel and accommodation expenses | 120 | 102 | 99 |
| Advertising and public relations | 594 | 591 | 539 |
| External advisory fees | 332 | 363 | 399 |
| Postal charges | 82 | 87 | 111 |
| Addition/(releases) of provision for reorganisations and relocations | 387 | 109 | 339 |
| Other | 737 | 795 | 1,003 |
| 4,399 | 4,093 | 4,453 |
Other operating expenses include lease and sublease payments in respect of operating leases of EUR 148 million (2010: EUR 192 million; 2009: EUR 161 million). In 2009, Other operating expenses also includes the expenses related to the industry-wide deposit guarantee scheme in the Netherlands due to the bankruptcy of DSB Bank and premiums for deposit guarantee schemes in other countries.
For Addition/(releases) of provision for reorganisations and relocations reference is made to the disclosure on the reorganisation provision in Note 18 'Other liabilities'.
No individual operating lease has terms and conditions that materially affect the amount, timing or certainly of the consolidated cash flows of ING Bank.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
41 TAXATION
Profit and loss account
| Taxation by type | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Netherlands | International | Total | |||||||
| 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |
| Current taxation | -211 | 256 | 237 | 1,033 | 922 | 424 | 822 | 1,178 | 661 |
| Deferred taxation | 497 | 139 | -481 | -103 | 91 | -223 | 394 | 230 | -704 |
| 286 | 395 | -244 | 930 | 1,013 | 201 | 1,216 | 1,408 | -43 | |
| Reconciliation of the weighted average statutory income tax rate to ING Bank's effective income tax rate | |||||||||
| --- | --- | --- | --- | --- | |||||
| 2011 | 2010 | 2009 | |||||||
| Result before tax | 5,299 | 5,983 | 500 | ||||||
| Weighted average statutory tax rate | 27.7% | 28.7% | 6.1% | ||||||
| Weighted average statutory tax amount | 1,469 | 1,719 | 30 | ||||||
| Associates exemption | -209 | -213 | -8 | ||||||
| Other income not subject to tax | -194 | -120 | -242 | ||||||
| Expenses not deductible for tax purposes | 72 | 53 | 25 | ||||||
| Impact on deferred tax from change in tax rates | 12 | 7 | |||||||
| Deferred tax benefit from previously unrecognised amounts | -32 | ||||||||
| Current tax benefit from previously unrecognised amounts | 1 | ||||||||
| Write down/reversal of deferred tax assets | 63 | 13 | 236 | ||||||
| Adjustment to prior periods | 2 | -51 | -52 | ||||||
| Effective tax amount | 1,216 | 1,408 | -43 | ||||||
| Effective tax rate | 22.9% | 23.5% | -8.7% |
The weighted average statutory tax rate does not differ significantly in 2011 compared to 2010.
The weighted average statutory tax rate increased significantly in 2010 compared to 2009. This is caused by the fact that in 2010 profits were realised in a significant part of the tax jurisdictions that incurred losses in 2009.
The effective tax rate in 2011 was lower than the weighted average statutory tax rate. This is mainly caused by exempt income, which was only partly offset by non-deductible expenses and write-down of deferred tax assets.
The effective tax rate in 2010 was lower than the weighted average statutory tax, mainly caused by tax exempt income.
Adjustment to prior periods in 2011 relates to final tax assessments and other marginal corrections.
Adjustment to prior periods in 2010 relates to a tax settlement.
Comprehensive income
| Income tax related to components of other comprehensive income | |||
|---|---|---|---|
| 2011 | 2010 | 2009 | |
| Unrealised revaluations | -318 | 61 | 2,376 |
| Realised gains/losses transferred to profit and loss (reclassifications from equity to profit and loss) | 189 | -17 | 480 |
| Changes in cash flow hedge reserve | -91 | -20 | -45 |
| Exchange rate differences | 37 | -20 | -7 |
| Other revaluations | 48 | -12 | -2 |
| Total income tax related to components of other comprehensive income | -135 | -8 | 2,802 |
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
42 OPERATING SEGMENTS
ING Bank's operating segments relate to the internal segmentation by business lines. As at 31 December 2011 ING Bank identifies the following operating segments:
| Operating segments of ING Bank |
|---|
| Retail Netherlands |
| Retail Belgium |
| ING Direct |
| Retail Central Europe (CE) |
| Retail Asia |
| Commercial Banking (excluding Real Estate) |
| ING Real Estate |
| Corporate Line Banking |
The Management Board Banking sets the performance targets and approves and monitors the budgets prepared by the business lines. Business lines formulate strategic, commercial and financial policy in conformity with the strategy and performance targets set by the Management Board.
The accounting policies of the operating segments are the same as those described under Accounting policies for the consolidated annual accounts. Transfer prices for inter-segment transactions are set at arm's length. Corporate expenses are allocated to business lines based on time spent by head office personnel, the relative number of staff, or on the basis of income, expenses and/or assets of the segment.
ING Bank evaluates the results of its operating segments using a financial performance measure called underlying result. The information presented in this note is in line with the information presented to the Management Board. Underlying result is defined as result under IFRS-EU excluding the impact of divestments and special items. Disclosures on comparative years also reflect the impact of current year's divestments.
The following table specifies the main sources of income of each of the segments:
| Segment | Main source of income |
|---|---|
| Retail Netherlands | Income from retail and private banking activities in the Netherlands. The main products offered are current and savings accounts, mortgages and other consumer lending in the Netherlands. |
| Retail Belgium | Income from retail and private banking activities in Belgium. The main products offered are similar to those in the Netherlands. |
| Retail CE | Income from retail and private banking activities in Central Europe. The main products offered are similar to those in the Netherlands. |
| Retail Asia | Income from retail banking activities in Asia. The main products offered are similar to those in the Netherlands. |
| ING Direct | Income from direct retail banking activities. The main products offered are savings accounts and mortgages. |
| Commercial Banking (excluding Real Estate) | Income from wholesale banking activities. A full range of products is offered from cash management to corporate finance. |
| ING Real Estate | Income from real estate activities. |
| Corporate Line Banking | Corporate Line Banking is a reflection of capital management activities and certain expenses that are not allocated to the banking businesses. ING Group applies a system of capital charging for its banking operations in order to create a comparable basis for the results of business units globally, irrespective of the business units' book equity and the currency they operate in. |
This note does not provide information on the revenue specified to each product or service as this is not reported internally and is therefore not readily available.
ING Bank Annual Report 2011 99
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
| Operating segments | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2011 | Retail Netherlands | Retail Belgium | ING Direct | Retail CE | Retail Asia | Commercial Banking | ING Real Estate | Corporate Line Banking | Total segments | Eliminations | Total |
| Underlying income | |||||||||||
| Net interest result | 3,613 | 1,606 | 3,865 | 705 | 143 | 3,257 | 482 | 224 | 13,895 | 13,895 | |
| Commission income | 481 | 336 | 166 | 249 | 59 | 933 | 44 | -12 | 2,256 | 2,256 | |
| Total investment and other income | 52 | 89 | -608 | 74 | 73 | 304 | 3 | -23 | -36 | -36 | |
| Total underlying income | 4,146 | 2,031 | 3,423 | 1,028 | 275 | 4,494 | 529 | 189 | 16,115 | 16,115 | |
| Underlying expenditure | |||||||||||
| Operating expenses | 2,428 | 1,432 | 1,962 | 773 | 173 | 2,178 | 349 | 167 | 9,462 | 9,462 | |
| Additions to loan loss provision | 457 | 145 | 462 | 97 | 30 | 330 | 146 | 1,667 | 1,667 | ||
| Total underlying expenses | 2,885 | 1,577 | 2,424 | 870 | 203 | 2,508 | 495 | 167 | 11,129 | 11,129 | |
| Underlying result before taxation | 1,261 | 454 | 999 | 158 | 72 | 1,986 | 34 | 22 | 4,986 | 4,986 | |
| Taxation | 316 | 108 | 349 | 30 | 14 | 398 | 87 | 37 | 1,339 | 1,339 | |
| Minority interests | 1 | 29 | 30 | 26 | -7 | 79 | 79 | ||||
| Underlying net result | 945 | 346 | 649 | 99 | 28 | 1,562 | -46 | -15 | 3,568 | 3,568 | |
| Reconciliation between IFRS-EU and Underlying income, expenses and net result | |||||||||||
| --- | --- | --- | --- | ||||||||
| 2011 | Income | Expenses | Net result | ||||||||
| Underlying | 16,115 | 11,129 | 3,568 | ||||||||
| Divestments | 1,226 | 278 | 887 | ||||||||
| Special items | -146 | 489 | -450 | ||||||||
| IFRS-EU | 17,195 | 11,896 | 4,005 |
Divestments in 2011 mainly reflects the results on the sale of ING Real Estate Investment Management (REIM) and ING Car Lease as well as the operating result of the divested units.
Special items in 2011 includes costs for the Retail Netherlands change programme and strategic repositioning initiatives at Commercial Banking, additional costs for the combining of ING Bank and Postbank in the Netherlands, the transformation programme in Belgium, further restructuring at ING Real Estate following the sale of ING REIM, and costs related to the separation of Banking and Insurance, as well as an adjustment of the Illiquid Assets Back-up Facility based on higher prepayment behaviour in the underlying Alt-A securities and the result on the repurchase of subordinated loans executed in December 2011 as disclosed in Note 37 'Other income' and Note 13 'Subordinated loans'.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
Operating segments
| 2010 | Retail Netherlands | Retail Belgium | ING Direct | Retail CE | Retail Asia | Commercial Banking | ING Real Estate | Corporate Line Banking | Total segments | Eliminations | Total |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Underlying income | |||||||||||
| Net interest result | 3,816 | 1,608 | 3,774 | 670 | 169 | 3,233 | 439 | 18 | 13,727 | 13,727 | |
| Commission income | 498 | 345 | 152 | 278 | 55 | 910 | 28 | -13 | 2,253 | 2,253 | |
| Total investment and other income | -4 | 95 | -144 | 28 | 62 | 677 | 62 | 228 | 1,004 | 1,004 | |
| Total underlying income | 4,310 | 2,048 | 3,782 | 976 | 286 | 4,820 | 529 | 233 | 16,984 | 16,984 | |
| Underlying expenditure | |||||||||||
| Operating expenses | 2,376 | 1,345 | 1,886 | 761 | 180 | 2,107 | 536 | 159 | 9,350 | 9,350 | |
| Additions to loan loss provision | 560 | 160 | 446 | 61 | 26 | 387 | 102 | 1,742 | 1,742 | ||
| Total underlying expenses | 2,936 | 1,505 | 2,332 | 822 | 206 | 2,494 | 638 | 159 | 11,092 | 11,092 | |
| Underlying result before taxation | 1,374 | 543 | 1,450 | 154 | 80 | 2,326 | -109 | 74 | 5,892 | 5,892 | |
| Taxation | 361 | 91 | 463 | 31 | 15 | 483 | 27 | -3 | 1,468 | 1,468 | |
| Minority interests | -6 | 1 | 21 | 22 | 28 | 4 | 70 | 70 | |||
| Underlying net result | 1,013 | 458 | 986 | 102 | 43 | 1,815 | -140 | 77 | 4,354 | 4,354 |
Reconciliation between IFRS-EU and Underlying income, expenses and net result
| 2010 | Income | Expenses | Net result |
|---|---|---|---|
| Underlying | 16,984 | 11,092 | 4,354 |
| Divestments | 917 | 370 | 481 |
| Special items | 456 | -340 | |
| IFRS-EU | 17,901 | 11,918 | 4,495 |
Divestments in 2010 mainly relates to the sale of Private Banking businesses in Asia and Switzerland and to the sale of ING's 50% stake in Summit Industrial Fund LP as well as the operating result of the in 2010 and 2011 divested units.
Special items in 2010 mainly relates to the combining of the Dutch retail activities, the Belgium retail transformation program, the cost related to the separation of Banking and Insurance and restructuring cost.
Operating segments
| 2009 | Retail Netherlands | Retail Belgium | ING Direct | Retail CE | Retail Asia | Commercial Banking | ING Real Estate | Corporate Line Banking | Total segments | Eliminations | Total |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Underlying income | |||||||||||
| Net interest result | 3,303 | 1,619 | 3,136 | 675 | 110 | 3,513 | 428 | 68 | 12,852 | 12,852 | |
| Commission income | 528 | 339 | 167 | 261 | 43 | 811 | 6 | 16 | 2,171 | 2,171 | |
| Total investment and other income | 39 | 100 | -1,541 | -76 | 43 | 554 | -654 | -184 | -1,719 | -1,719 | |
| Total underlying income | 3,870 | 2,058 | 1,762 | 860 | 196 | 4,878 | -220 | -100 | 13,304 | 13,304 | |
| Underlying expenditure | |||||||||||
| Operating expenses | 2,475 | 1,280 | 1,663 | 660 | 132 | 1,817 | 591 | 328 | 8,946 | 8,946 | |
| Additions to loan loss provision | 527 | 200 | 766 | 116 | 39 | 967 | 239 | 2,854 | 2,854 | ||
| Total underlying expenses | 3,002 | 1,480 | 2,429 | 776 | 171 | 2,784 | 830 | 328 | 11,800 | 11,800 | |
| Underlying result before taxation | 868 | 578 | -667 | 84 | 25 | 2,094 | -1,050 | -428 | 1,504 | 1,504 | |
| Taxation | 229 | 79 | -252 | 29 | 5 | 373 | -216 | -118 | 129 | 129 | |
| Minority interests | 2 | 1 | 5 | 10 | 29 | 29 | 76 | 76 | |||
| Underlying net result | 639 | 497 | -416 | 50 | 10 | 1,692 | -863 | -310 | 1,299 | 1,299 |
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
Reconciliation between IFRS-EU and Underlying income, expenses and net result
| 2009 | Income | Expenses | Net result |
|---|---|---|---|
| Underlying | 13,304 | 11,800 | 1,299 |
| Divestments | 258 | 639 | –176 |
| Special items | 103 | 726 | –439 |
| IFRS-EU | 13,665 | 13,165 | 684 |
Divestments in 2009 mainly relates to the operational result of the in 2009, 2010 and 2011 divested units.
Special items in 2009 reflects mainly the net impact of transaction result on the Illiquid Asset Back-up Facility and restructuring costs.
Interest income and interest expenses breakdown by operating segments
| 2011 | Retail Netherlands | Retail Belgium | ING Direct | Retail CE | Retail Asia | Commercial Banking | ING Real Estate | Corporate Line Banking | Total external |
|---|---|---|---|---|---|---|---|---|---|
| Interest income | 8,169 | 2,959 | 10,506 | 1,455 | 583 | 38,715 | 1,282 | 1,534 | 65,203 |
| Interest expense | 1,708 | 1,202 | 6,910 | 735 | 385 | 37,295 | 239 | 3,146 | 51,620 |
| 6,461 | 1,757 | 3,596 | 720 | 198 | 1,420 | 1,043 | –1,612 | 13,583 |
Interest income and interest expenses breakdown by operating segments
| 2010 | Retail Netherlands | Retail Belgium | ING Direct | Retail CE | Retail Asia | Commercial Banking | ING Real Estate | Corporate Line Banking | Total external |
|---|---|---|---|---|---|---|---|---|---|
| Interest income | 7,916 | 3,093 | 10,059 | 1,545 | 452 | 43,120 | 1,145 | 1,621 | 68,951 |
| Interest expense | 1,524 | 1,015 | 6,310 | 817 | 261 | 42,509 | 263 | 2,665 | 55,364 |
| 6,392 | 2,078 | 3,749 | 728 | 191 | 611 | 882 | –1,044 | 13,587 |
Interest income and interest expenses breakdown by operating segments
| 2009 | Retail Netherlands | Retail Belgium | ING Direct | Retail CE | Retail Asia | Commercial Banking | ING Real Estate | Corporate Line Banking | Total external |
|---|---|---|---|---|---|---|---|---|---|
| Interest income | 8,039 | 3,020 | 10,532 | 1,603 | 399 | 54,143 | 1,259 | 1,353 | 80,348 |
| Interest expense | 2,200 | 1,541 | 7,451 | 950 | 246 | 52,531 | 178 | 2,489 | 67,586 |
| 5,839 | 1,479 | 3,081 | 653 | 153 | 1,612 | 1,081 | –1,136 | 12,762 |
IFRS-EU balance sheets by segment are not reported internally to, and not managed by, the chief operating decision maker. IFRS-EU balance sheet information is prepared for the Banking operations as a whole.
Further balance sheet related information for the banking operations is provided by segment in the section 'Risk Management'.
ING Bank Annual Report 2011
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
43 INFORMATION ON GEOGRAPHICAL AREAS
ING Bank's business lines operate in seven main geographical areas: the Netherlands, Belgium, Rest of Europe, North America, Latin America, Asia and Australia. The Netherlands is ING Bank's country of domicile. Geographical distribution of income is based on the origin of revenue.
A geographical area is a distinguishable component of the Bank engaged in providing products or services within a particular economic environment that is subject to risks and returns that are different from those of segments operating in other economic environments. The geographical analyses are based on the location of the office from which the transactions are originated.
| Geographical areas | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2011 | Netherlands | Belgium | Rest of Europe | North America | Latin America | Asia | Australia | Other | Eliminations | Total |
| Total income | 6,353 | 2,498 | 4,969 | 1,908 | 44 | 897 | 525 | 1 | 17,195 | |
| Total assets | 512,211 | 169,599 | 310,809 | 179,095 | 9,685 | 44,181 | 41,939 | 207 | -306,561 | 961,165 |
| Geographical areas | ||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| 2010 | Netherlands | Belgium | Rest of Europe | North America | Latin America | Asia | Australia | Other | Eliminations | Total |
| Total income | 6,378 | 2,666 | 5,147 | 2,320 | 180 | 784 | 427 | -1 | 17,901 | |
| Total assets | 496,336 | 150,528 | 312,579 | 169,932 | 13,558 | 40,969 | 42,151 | 153 | -293,133 | 933,073 |
| Geographical areas | ||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| 2009 | Netherlands | Belgium | Rest of Europe | North America | Latin America | Asia | Australia | Other | Eliminations | Total |
| Total income | 4,778 | 2,894 | 5,073 | -129 | 229 | 733 | 88 | -1 | 13,665 | |
| Total assets | 450,618 | 145,856 | 305,036 | 153,804 | 12,167 | 35,218 | 33,687 | 134 | -254,401 | 882,119 |
44 NET CASH FLOW FROM INVESTING ACTIVITIES
Information on the impact of companies acquired or disposed of is presented in Note 26 'Companies acquired and companies disposed'.
45 INTEREST AND DIVIDEND INCLUDED IN NET CASH FLOW
| Interest and dividend received and paid | |||
|---|---|---|---|
| 2011 | 2010 | 2009 | |
| Interest received | 66,855 | 70,816 | 82,231 |
| Interest paid | -52,693 | -56,357 | -68,288 |
| 14,162 | 14,459 | 13,943 | |
| Dividend received | 127 | 187 | 82 |
| Dividend paid | -3,000 | -200 |
46 CASH AND CASH EQUIVALENTS
| Cash and cash equivalents | |||
|---|---|---|---|
| 2011 | 2010 | 2009 | |
| Treasury bills and other eligible bills | 2,611 | 4,442 | 3,181 |
| Amounts due from/to banks | -4,506 | 3,227 | 2,387 |
| Cash and balances with central banks | 28,112 | 9,519 | 12,602 |
| Cash and cash equivalents at end of year | 26,217 | 17,188 | 18,170 |
ING Bank Annual Report 2011 103
Consolidated annual accounts
Notes to the consolidated annual accounts of ING Bank continued
| Treasury bills and other eligible bills included in cash and cash equivalents | |||
|---|---|---|---|
| 2011 | 2010 | 2009 | |
| Treasury bills and other eligible bills included in trading assets | 1,471 | 1,698 | 2,283 |
| Treasury bills and other eligible bills included in available-for-sale investments | 1,140 | 2,744 | 898 |
| 2,611 | 4,442 | 3,181 | |
| Amounts due to/from banks | |||
| 2011 | 2010 | 2009 | |
| Included in cash and cash equivalents | |||
| – amounts due to banks | –19,122 | –12,898 | –12,334 |
| – amounts due from banks | 14,616 | 16,125 | 14,721 |
| –4,506 | 3,227 | 2,387 | |
| Not included in cash and cash equivalents | |||
| – amounts due to banks | –53,111 | –59,954 | –71,901 |
| – amounts due from banks | 30,707 | 35,703 | 28,676 |
| –22,404 | –24,251 | –43,225 | |
| Total as included in balance sheet | |||
| – amounts due to banks | –72,233 | –72,852 | –84,235 |
| – amounts due from banks | 45,323 | 51,828 | 43,397 |
| –26,910 | –21,024 | –40,838 |
Cash and cash equivalents include amounts due to/from banks with a term of less than three months from the date on which they were acquired.
ING Bank's Risk management (including liquidity) is explained in the 'Risk management' section.
ING Bank Annual Report 2011
Consolidated annual accounts
Risk management
amounts in millions of euros, unless stated otherwise
ING BANK RISK MANAGEMENT
Taking measured risks is part of ING Bank's business. As a financial services company active in banking, ING Bank is naturally exposed to a variety of risks. To ensure measured risk-taking throughout the organisation, ING Bank operates through a comprehensive risk management framework. This ensures the identification, measurement and control of risks at all levels of the organisation so that ING Bank's financial strength is safeguarded.
Risk Management assists the Management Board Bank with the formulation of risk appetite, strategies, policies and limits and provides a review, oversight and support function throughout ING Bank on risk-related issues. The main financial risks ING Bank is exposed to are credit risk (including transfer risk), market risk (including interest rate, equity, real estate, implied volatility, and foreign exchange risks), liquidity risk and business risk. In addition, ING Bank is exposed to non-financial risks, e.g. operational and compliance risks.
ING Bank has implemented a risk appetite framework, for which the risk appetite is expressed as the tolerance to allow key capital ratios to deviate from their target levels under adverse scenarios. This framework is discussed in more detail in the risk profile section of this risk management section.
ING Bank needs to prepare for significant changes in the regulatory requirements, being the implementation of Basel III the most important one. Additionally, ING Bank continued its stress testing efforts, with stress testing becoming more important and more embedded in the risk culture.
ING Bank uses risk assessment and measurement to guide decision making. As a result, the quality of risk models is important. The governance process for approval of risk models, methods and parameters ensures compliance with business and regulatory requirements, via a clear assignment of responsibility and accountability.
Nevertheless, users of the information in the risk management section should bear in mind that the analyses provided are forward looking measures that rely on assumptions and estimates of future events, some of which are considered extreme and therefore unlikely to occur. In the normal course of business ING Bank continues to develop, recalibrate and refine the various models that support risk metrics, which may result in changes to the risk metrics as disclosed.
MISSION AND OBJECTIVES
The mission of ING Bank's risk management function is to build a sustainable competitive advantage by fully integrating risk management into daily business activities and strategic planning. This mission is fully embedded in ING Bank's business processes. The following principles support this objective:
- Products and portfolios are structured, underwritten, priced, approved and managed appropriately and compliance with internal and external rules and guidelines is monitored;
- ING Bank's risk profile is transparent, managed to avoid surprises, and is consistent with delegated authorities;
- Delegated authorities are consistent with the overall Bank strategy and risk appetite; and
- Transparent communication to internal and external stakeholders on risk management.
Risk Management benefits ING Bank and its shareholders directly by providing more efficient capitalisation and lower costs of risk and funding. The cost of capital is reduced by working closely with rating agencies and regulators to align capital requirements to risks. Risk Management helps business units to lower funding costs, make use of the latest risk management tools and skills, and lower strategic risk, allowing them to focus on their core expertise with the goal of making ING Bank's businesses more competitive in their markets.
ING BANK RISK GOVERNANCE
ING Bank's risk management framework is based on the 'three lines of defence' concept which ensures that risk is managed in line with the risk appetite as defined by the Management Board Bank (and ratified by the Supervisory Board) and is cascaded throughout ING Bank.
Business line management and the regional and local managers have primary responsibility for the day-to-day management of risk and form the first line of defence.
The risk management function, both at bank and regional/local level, belongs to the second line of defence and has the primary responsibility to align risk taking with strategic planning e.g. in limit setting.
The internal audit function provides an ongoing independent (i.e. outside of the risk organisation) and objective assessment of the effectiveness of internal controls, including financial and operational risk management and forms the third line of defence.
ING Bank Annual Report 2011
Consolidated annual accounts
Risk management continued
Board level risk oversight
ING Bank has a two-tier board structure consisting of the Management Board Bank and the Supervisory Board; both tiers play an important role in managing and monitoring the risk management framework.
- The Supervisory Board is responsible for supervising the policy of the Management Board Bank, the general course of affairs of the Company and its business (including its financial policies and corporate structure). For the risk management purposes the Supervisory Board is assisted by two sub-committees:
- The Audit Committee, which assists the Supervisory Board in reviewing and assessing ING Bank's major risk exposures and the operation of internal risk management and control systems, as well as policies and procedures regarding compliance with applicable laws and regulations; and
- The Risk Committee, which assists the Supervisory Board on matters related to risk governance, risk policies and risk appetite setting.
- The Management Board Bank (MBB) is responsible for managing risks associated with the activities of ING Bank. The MBB's responsibilities include ensuring that internal risk management and control systems are effective and that ING Bank complies with relevant legislation and regulations. On a regular basis, the MBB reports on these issues and discusses the internal risk management and control systems with the Supervisory Board. On a quarterly basis, the MBB reports on the Bank's risk profile versus its risk appetite to the Audit Committee, explaining changes in the risk profile.
The Chief Risk Officer (CRO) ensures that the boards are well informed and understand ING Bank's risk position at all times. Every quarter, the CRO reports to the board committees on ING Bank's risk appetite levels and on ING Bank's risk profile. In addition the CRO briefs the board committees on developments in internal and external risk related issues and ensures the board committees understand specific risk concepts.
ING Bank Annual Report 2011
Consolidated annual accounts
Risk management continued
As part of the integration of risk management into the annual strategic planning process, the MBB issues a Planning Letter which provides the organisation with the corporate strategic direction, and addresses key risk issues. Based on the Planning Letter, the business lines and business units develop their business plans which align with the Bank's strategic direction. The process includes a qualitative and quantitative assessment of the risks involved. As part of the process strategic limits and risk appetite levels are explicitly discussed. Based on the business plans, the Management Board Bank formulates the Strategic Plan which is submitted to the Supervisory Board for approval.
Executive Level
The risk committees described below act within the overall risk policy and delegated authorities granted by the Management Board Bank:
- The Finance and Risk Committee (F&RC) is a platform for the CRO and the Chief Financial Officer (CFO), along with their respective direct reports, to discuss and decide on issues that relate to both the finance and risk domains. The primary responsibility of the F&RC is to co-ordinate, on a high level, the finance and risk decisions that have an impact on internal and/or external reporting;
- ING Bank Credit Committee – Policy (GCC(P)): Discusses and approves policies, methodologies and procedures related to credit, country and reputation risks within ING Bank. The GCC(P) meets on a monthly basis;
- ING Bank Credit Committee – Transaction Approval (GCC(TA)): Discusses and approves transactions which entail taking credit risk (including issuer investment risk). The GCC(TA) meets twice a week;
- Asset and Liability Committee ING Bank (ALCO Bank): Discusses and approves on a monthly basis the overall risk profile of all ING Bank's market risks that occur in its Commercial Banking and Retail & Direct Banking activities. ALCO Bank defines the policy regarding funding, liquidity, interest rate mismatch and solvency for ING Bank; and
- Non Financial Risk Committee Bank (NFRC Bank): Accountable for the design and maintenance of the Risk Management Framework including the ORM, Compliance and Legal policies, minimum standards, procedures and guidelines; the NFRC structure; development of tools, methods and key parameters (incl. major changes) for risk identification, measurement and monitoring/ reporting.
Risk Management Function
The risk management function is embedded in all levels of ING Bank organisation.
The Chief Risk Officer, who is a MBB member, bears primary overall responsibility for the Risk management function. The CRO is responsible for the management and control of risk on a consolidated level to ensure that ING Bank's risk profile is consistent with its financial resources and the risk appetite. The CRO is also responsible for establishing and maintaining a robust organisational basis for the management of risk throughout the organisation.
The organisation chart below illustrates the functional reporting lines within ING Bank risk organisation.
The heads of these departments (Risk General Managers) report to the CRO and bear direct responsibility for risk (mitigating) decisions at the Bank level. The Risk General Managers and the CRO are responsible for the harmonisation and standardisation of risk management practices.
From December 2011, the reporting lines have been changed. As of then the Chief Compliance Officer (CCO) and the General Manager ORM report to the new appointed Head of Non Financial Risk ING Bank who in his turn reports to the Chief Risk Officer.
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Risk management continued
In addition two staff departments report to the CRO:
- Risk Integration and Analytics (RI&A), which is responsible for inter-risk aggregation processes and for providing bank-wide risk information to the CRO and Management Board Bank; and
- Model Validation (MV), which carries out periodic validations of all material risk models used by ING Bank. To ensure independence from the business and other risk departments, the department head reports directly to the CRO.
Risk policies
ING Bank has a framework of risk management policies, procedures and standards in place to create consistency throughout the organisation, and to define minimum requirements that are binding to all business units. The governance framework of the business units aligns with the Bank's level framework and meets local (regulatory) requirements. Senior Management is responsible to ensure policies, procedures and standards are implemented and adhered to. Policies, procedures and standards are regularly reviewed and updated via the relevant risk committees to reflect changes in markets, products and emerging best practices.
ING BANK RISK PROFILE
ING Bank uses risk assessment and risk measurement to guide decision making. As a result, the quality of risk models is important. The governance process for approval of risk models, methods and parameters ensures business and regulatory requirements, via a clear assignment of responsibility and accountability.
Nevertheless, users of the information in the risk management section should bear in mind that the analyses provided are forward looking measures that rely on assumptions and estimates of future events, some of which are considered extreme and therefore unlikely to occur. In the normal course of business ING Bank continues to develop, recalibrate and refine the various models that support risk metrics, which may result in changes to the risk metrics as disclosed.
RISK TYPES
ING Bank measures the following main types of risks that are associated with its business activities:
- Credit risk: the risk of potential loss due to default by ING Bank's debtors (including bond issuers) or trading counterparties;
- Market risk: the risk of potential loss due to adverse movements in market variables. Market risks include interest rate, equity, real estate, implied volatility, credit spread, and foreign exchange risks;
- Liquidity risk: the risk that ING Bank or one of its subsidiaries cannot meet its financial liabilities when they come due, at reasonable cost and in a timely manner. Liquidity risk can materialise both through trading and non-trading positions;
- Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes reputational risk, as well as legal risk;
- Compliance Risk: is the risk of impairment of ING Bank's integrity as a result of failure (or perceived failure) to comply with relevant laws, regulations, ING Bank policies and standards as in ING Bank Business Principles; and
- Business risk: the exposure to value loss due to fluctuations in volumes, margins and costs, as well as client behaviour risk. These fluctuations can occur because of internal, industry, or wider market factors. It is the risk inherent to strategy decisions and internal efficiency, and as such strategic risk is included in business risk.
ING BANK RISK APPETITE FRAMEWORK
ING Bank uses an integrated risk management approach for its banking activities. The MBB uses the risk appetite frameworks to monitor and manage the actual risk profile in relation to the risk appetite, which is derived from ING Bank rating ambition to be in the range of AA rating. It enables the MBB to identify possible risk concentrations and to support strategic decision making. The risk appetite level is reported to the MBB on a quarterly basis and is subsequently presented to the Risk Committee.
The overall risk appetite is translated into specific limits which are cascaded down into the organisation, e.g.
- Credit risk limits;
- ALM/Value at Risk limits; and
- Liquidity risk limits.
ING Bank's 'three lines of defence' governance framework ensures that risk is managed in line with the risk appetite as defined by the MBB and cascaded throughout the Bank, thereby safeguarding controlled risk taking. The role of the business lines is to maximise the value within established risk boundaries. Each quarter, the MBB monitors that the financial and non-financial risks are within the boundaries of the risk appetite as set in the strategic planning process.
ING Bank is engaged in selling a broad range of products, from which financial risks arise managed by the Credit and Market Risk departments. Operational (non-financial) risks are managed by the Operational Risk department.
Financial Risks
For financial risks, ING Bank expresses its risk appetite as the tolerance to allow key capital ratios to deviate from their target levels. Therefore the risk appetite is closely aligned to Capital Management activities and policies.
ING Bank has expressed tolerances for its risk weighted solvency metrics (core tier 1 ratio), for non-risk weighted solvency metrics (leverage ratio) and for more value based metrics (economic capital).
ING Bank Annual Report 2011
Consolidated annual accounts
Risk management continued
The metrics that are presented in the following sections relate to each of these metrics and present earnings sensitivity, economic and regulatory capital.
Due to the way the risk departments are organised, these metrics are presented at a higher aggregation level than the identified segments in Note 42 'Operating Segments':
- Retail Banking Benelux contains Retail Netherlands, Retail Belgium (including Retail Luxemburg);
- Retail Banking Direct & International contains Retail Central Europe, Retail Asia and ING Direct;
- Commercial Banking corresponds to Commercial Banking (including ING Real Estate); and
- Bank Corporate Line coincides with the Corporate Line.
Non-Financial Risks
Policy implementation
To ensure robust non-financial risk management, ING Bank monitors the implementation of ING Bank's Risk Policies and Minimum Standards. Business units have to demonstrate that the appropriate steps have been taken to control their operational and compliance and legal risks. ING Bank applies scorecards to measure the quality of the internal controls within a business unit. Scoring is based on the ability to demonstrate that the required risk management processes are in place and effective within the business units.
Non-financial Risk Dashboard
The Non-Financial Risk Dashboard (NFRD) is a report that is a fixed item on the agenda for the meetings of the MBB and the Risk Committee. NFRD provides management at all organisational levels with information on their key operational, compliance and legal Risks. NFRD is based on their risk tolerance within their business and a clear description of the risks and responses enabling management to prioritise and to manage operational, compliance and legal risks.
ING BANK STRESS TESTING
ING Bank complements its regular standardised risk reporting process with (ad hoc) stress tests. A stress test is an instrument to check whether a financial institution can withstand specific negative events or economic changes. More specific, stress testing examines the effect of exceptional but plausible events on the capital and liquidity position of the financial institution and provides insight in which business lines and portfolios are vulnerable to which type of scenarios.
ING Bank participated in the stress test conducted by the EBA, which included a baseline scenario, adverse scenario and an additional sovereign shock for 2011 and 2012 scenario. This stress test demonstrated ING Bank's resilience in adverse scenarios. The strong underlying commercial performance resulting from ING Bank's franchises helps to offset the impact of higher loan loss provisions, additional impairments across the securities portfolios and increased risk-weighted assets.
ING BANK ECONOMIC CAPITAL
Model Disclosure
This model disclosure section explains the methodologies and models used to determine Economic Capital (EC) the disclosed metrics. The risk models for the EC calculations are reviewed on a periodic basis and validated by the internal Model Validation department. The Economic Capital calculation is also used as part of the Basel II Pillar 2 Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP) that is performed regularly by the Dutch Central Bank.
Economic Capital is defined as the amount of capital that a transaction or business unit requires in order to support the economic risks it takes. In general EC is measured as the unexpected loss above the expected loss at a given confidence level. This Economic Capital definition is in line with the net market value (or surplus) definition. The process of EC modelling enables ING Bank to allocate Economic Capital to the business units and support risk-adjusted performance measurement (RAROC). The use of RAROC increases focus on risks versus rewards in the decision making process, and consequently stimulates the use of scarce capital in the most efficient way.
The following fundamental principles and definitions have been established for the model:
- ING Bank uses a one-sided confidence level of 99.95% - consistent with ING's target debt rating (AA) - and a one-year time horizon to calculate EC;
- It is assumed that all currently known measurable sources of risk are included;
- The best estimate risk assumptions are as objective as possible and based on proper analysis of statistical data. There is one set of best-estimate assumptions for each risk type to be used at ING Bank;
- The EC calculation is based on fair value principles. Where complete and efficient markets exist, fair value is equal to market value;
- The EC calculations reflect known embedded options and the influence of client behaviour in banking products;
- The EC calculations are on a pre-tax basis and do not consider the effect of regulatory accounting and solvency requirements on capital levels; and
- The framework does not include any franchise value of the business, discretionary management intervention or future business volumes and margins.
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Risk management continued
Specific measurement by risk type is described in greater detail in the separate risk type sections.
Aggregation model
The main processes executed in ING Bank Economic Capital aggregation model are depicted in the flowchart below. The white boxes show the processes performed by the model while the shaded box indicates inputs from other risk departments.
Correlation factors between risk types used for diversification are based on best estimate assumptions supported by statistical analysis of historical data, ING Bank risk expert judgement, external benchmark studies and common logic. As shown in the flow-chart, the correlation factors are stressed upwards where necessary to account for potential measurement inaccuracy in extreme events due to limited historic data observations. Expert opinion is used for aggregating business and operational risk.
The Economic Capital for ING Bank involves the aggregation of the underlying EC of five risk types, namely credit, transfer, market, operational and business risks. Model disclosures are given in the respective risk sections. These risk types are aggregated to provide a total diversified ING Bank Economic Capital by applying the variance-covariance approach with a 5 x 5 inter-risk correlation matrix.
For allocation of Economic Capital to units and products, diversification factors are calculated for each risk type. These factors are applied consistently throughout ING Bank. The level of diversification benefit is dependent on both the inter-risk correlations as well as the relative size of the undiversified EC exposure for each risk type.
Reporting Framework
For each business unit and product line, the gross Economic Capital for each risk type is delivered. The net Economic Capital figures are calculated by taking the product of the gross EC and one minus the diversification factor. Total Economic Capital is calculated as the sum of the net EC for each risk type at all reporting levels.
ING Bank Economic Capital and Regulatory Capital
Main risk management tools for ING Bank are Economic Capital (EC) and Regulatory Capital (RC). Both of these Capital metrics are used to determine the amount of capital that a transaction or business unit requires to support the economic risks it faces. RC is driven by methodologies prescribed by regulators whereas EC is driven by internally developed models (all of which are approved by the Dutch Central Bank).
Economic capital is a non accounting measure which is inherently subject to dynamic changes and updates as a result of ING Bank's portfolio mix and general market developments. ING Bank has been and will continue recalibrating the underlying assumptions to its economic capital models, which may have a material impact on the economic capital values going forward.
The tables below provide ING Bank's Economic Capital and Regulatory Capital by risk type and business line. The EC figures shown reflect all diversification effects within ING Bank, including risk reduction between the risk categories; while for RC no diversification is taken into account. In 2010, Credit Risk Regulatory Capital still included Transfer Risk for an amount of EUR 202 million. Economic Capital is including Transfer Risk both in 2011 and 2010.
ING Bank Annual Report 2011
Consolidated annual accounts
Risk management continued
Economic and Regulatory Capital (Bank diversified only) by risk type
| Economic Capital | Regulatory Capital | |||
|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | |
| Credit risk | 14,365 | 15,245 | 22,474 | 22,452 |
| Market risk | 8,262 | 7,233 | 1,124 | 364 |
| Business Risk | 2,448 | 2,435 | ||
| Operational Risk | 1,683 | 1,619 | 2,836 | 2,872 |
| Total banking operations | 26,758 | 26,532 | 26,434 | 25,688 |
Economic Capital (Bank diversified only) by business line combination
| Economic Capital | Regulatory Capital | |||
|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | |
| Commercial Banking | 9,726 | 10,695 | 11,615 | 11,395 |
| Retail Banking Benelux | 4,445 | 4,613 | 5,552 | 5,498 |
| Retail Banking Direct & International | 9,475 | 8,881 | 8,783 | 8,587 |
| Corporate Line Bank (1) | 3,112 | 2,343 | 484 | 208 |
| Total banking operations | 26,758 | 26,532 | 26,434 | 25,688 |
(1) Corporate Line includes funding activities at ING Bank level, internal transactions between business units and the Corporate Line, and is managed by Capital Management.
Differences between RC and EC are mainly due to:
- The credit risk EC is lower than RC. Economic Capital (EC) is defined as ING's own methodology for credit risk. It is the amount of capital that is needed at a minimum to cover for Unexpected Losses within a certain confidence level and a certain time horizon;
- The market risk Economic Capital is higher than the Regulatory Capital primarily due to the inclusion of the interest rate risk banking books in Economic Capital. The market risk RC includes a stressed VaR charge, while EC does not; the EC figures take the diversification across risk types into account;
- The EC figures include Business risk, while RC does not; and
- A 99.95% confidence level is used for EC, while the confidence level is 99.9% for RC. Correcting for the difference in confidence level will lead to an EC figure that is lower than the RC figure.
Excluding ING Direct USA, the total EC would be EUR 25 billion and the total RC would be EUR 24.2 billion.
The above risk metrics and risk appetite framework do not cover liquidity risk: the risk that ING Bank or one of its subsidiaries cannot meet its financial liabilities, at reasonable cost and in a timely manner, when they come due. ING Bank has a separate liquidity management framework in place to manage this risk, which is described in the Liquidity Risk section of ING Bank. In 2011 the funding and liquidity risk statements have been updated.
ONGOING CHANGES IN THE REGULATORY ENVIRONMENT
After the turmoil in the financial markets over the last couple of years and the need for governments to provide aid to financial institutions, financial institutions have been under more scrutiny from the public, supervisors and regulators. The resulting revised regulations are intended to ensure that a crisis in the financial system can be avoided in the future. To accomplish this, regulations focus primarily at the following issues:
- More stringently aligning risk taking with the capital position of financial institutions (Basel III proposal). The Basel III proposal narrows the definition of core Tier 1 and Tier 1 capital, and introduces a new definition for a leverage ratio that should become part of Pillar 1 of the Basel framework. The Basel Committee has also issued a proposal for new liquidity requirements.
- Apart from the above mentioned proposals, another aim is to reduce 'pro-cyclicality', to avoid that banks would be required to increase their capital in difficult financial times when it is most scarce. Lastly, there is a proposal to introduce additional capital requirements for counterparty credit risk.
- In addition, the Basel Committee and Financial Stability Board (FSB) are currently considering measures that may have the effect of requiring higher loss absorbency capacity, liquidity surcharges, exposure limits and special resolution regimes for "systemically important financial institutions" (SIFIs) and so-called "Global" SIFIs (G-SIFI).
- The deadlines for implementation of specific item are set for the timeframe 2013 to 2018.
- Separate from but in line with the Basel III proposal, on a country level local regulators are becoming more stringent on the maximum credit risk bank subsidiaries and branches are allowed to have on their holding companies. In the absence of a supranational harmonisation this leads to so-called trapped pools of liquidity, i.e. excess liquidity in a country that can not merely be transferred (unsecured) to a central treasury in another country.
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Risk management continued
CREDIT RISK
CREDIT RISK MANAGEMENT
Credit risk is the risk of loss from default by debtors (including bond issuers) or trading counterparties. Credit risks are split into five principal risk categories: a) lending (including guarantees and letters of credit); b) investments; c) pre-settlement (derivatives, securities financing and foreign exchange trades); d) money markets and e) settlement. Additionally a sixth category is determined: country risk, which can include or relate to the earlier mentioned other five risk categories.
Governance
Credit Risk Management (CRM) is responsible for the measurement and management of credit risk incurred by all ING Bank entities, including country-related risks. CRM is organised along the business lines of ING Bank. The CRM General Manager is functionally responsible for the global network of credit risk staff and the heads of the credit risk management functions for the business lines report directly to him.
Credit risk management is supported by dedicated credit risk information systems and internal credit risk measurement methodologies for debtors, issuers and counterparties. CRM creates consistency throughout the credit risk organisation by providing common credit risk policies, methodologies, manuals and tools across the Bank.
ING Bank's credit policy is to maintain an internationally diversified loan and bond portfolio, while avoiding large risk concentrations. The emphasis is on managing business developments within the business lines by means of top-down concentration limits for countries, individual borrowers and borrower groups. The aim within the banking sector is to expand relationship-banking activities, while maintaining stringent internal risk/return guidelines and controls.
Credit analysis is risk/reward-oriented in that the level of credit analysis is a function of the risk amount, tenor, structure (e.g. covers received) of the facility, and the risks entered into. For credit risk management purposes, financial obligations are classified into lending, investments, pre-settlement, money market and settlement. Sophisticated RAROC-based tools are used internally to ensure a proper balance of risk and reward within the portfolio and concentration parameters. ING Bank's credit analysts make use of publicly available information in combination with in-house analysis based on information provided by the customer, peer group comparisons, industry comparisons and other quantitative techniques.
Credit Risk Measurement and Reporting
Figures associated with Money Market and Lending activities are generally the nominal amounts, while amounts associated with Investment activities are based on the original amount invested less repayments. Off-Balance Sheet exposures include the letters of credits and guarantees, which are associated with the Lending Risk Category. Additionally, Off-Balance Sheet exposures include a portion of the unused limits, associated with the statistically expected use of the unused portion of the limit between the moment of measurement and the theoretical moment of statistical default. Collectively, these amounts are called 'credit risk outstandings'.
Exposures associated with Securitisations (Asset Backed Financing, Commercial/Residential Mortgage Backed Securities and Covered Bonds) are shown separately. These amounts also relate to the amount invested prior to any impairment activity or mark-to-market adjustments. This amount is also considered to be 'outstandings'.
For the banking operations, ING Bank uses various market pricing and measurement techniques to determine the amount of credit risk on pre-settlement activities. These techniques estimate ING Bank's potential future exposure on individual and portfolios of trades. Master agreements and collateral agreements are frequently entered into to reduce these credit risks.
MODEL DISCLOSURE: ECONOMIC CAPITAL FOR CREDIT AND TRANSFER RISK
Economic Capital for credit risk and for transfer risk is the portion of Economic Capital held to withstand unexpected losses inherent in the credit portfolios related to (unexpected) changes in the underlying creditworthiness of debtors or the recovery value of underlying collateral (if any). Credit risk and transfer risk capital are calculated on all portfolios which contain credit or transfer risk, including investment portfolios.
Economic Capital for credit risk and for transfer risk are calculated using internally developed models with a 99.95% confidence level and a time horizon of one year, which represents ING's desired credit rating. ING Bank uses a series of credit risk models that can be grouped into three principal categories: Probability of Default (PD) models, which measure the standalone creditworthiness of individual debtors; Exposure at Default models (EAD) which estimate the size of the financial obligation at the moment of default in the future; and Loss Given Default Models (LGD), which estimate the recovery value of the underlying collateral or guarantees received (if any) and the unsecured part. Collectively, ING Bank uses over 100 models for credit risk. The various models can be grouped into three categories: statistical, expert and hybrid.
The Economic Capital formula for credit and transfer risks relies on seven different risk drivers. In addition to the PD, EAD, and LGD models mentioned above, the formula also considers the industry and the country of the debtor as well as the remaining term of the respective underlying transactions. Lastly, the formula considers correlation of different asset class types.
ING Bank Annual Report 2011
Consolidated annual accounts
Risk management continued
The underlying formulas and models that are used for determining Economic Capital for credit and transfer risk are similar to those used for determining the level of regulatory capital that is required under Basel II (Pillar 1). Despite the fact that the same underlying formulas are used, (internal) Economic Capital and regulatory capital are not the same, due to various specific rules imposed by Basel II, such as regulatory caps and floors, and the use of the standardised approach for certain portions of ING Bank's portfolio. These differences are permitted under the Basel II guidelines.
The table below summarises different capital measures used for different purposes and shows the difference in key elements and purposes.
| Credit Risk Capital Measurements | Methodology | Location | Confidence level | Inputs | Purpose |
|---|---|---|---|---|---|
| Regulatory Capital | Basel II Formula | Vortex Basel Engine ('VBE') in the Central Risk Database | 99.90% | Basel II model outputs | RWA |
| Economic Capital | Risk Adjusted Capital (RAC) Closed Algebraic Formula | Vortex Risk Engine ('VRE') in the Central Risk Database | 99.95% | Basel II model outputs excluding Basel II caps and floors, maturity, repayment schedules, correlation factors, migration matrix. | Pricing, Economic Capital for credit at transactional level and above |
Economic Capital levels for credit and transfer risk are calculated regularly for most of the Commercial Bank, ING Retail Benelux, and the Retail Direct & International banking operations. On a quarterly basis, the Economic Capital for credit risk and transfer risk figures are consolidated with the corresponding Economic Capital components from other disciplines.
| Economic and Regulatory Capital (Bank diversified only) by risk type | ||||
|---|---|---|---|---|
| Economic Capital | Regulatory Capital | |||
| 2011 | 2010 | 2011 | 2010 | |
| Credit risk | 14,365 | 15,245 | 22,473 | 22,452 |
Governance of Economic Capital for Credit and Transfer Risk
All PD, EAD and LGD models are approved by the Credit Risk Committee (CRC) after thorough review of documentation by the Model Development Committee (MDC) and Model Validation (MV). In addition, each model is validated on an annual basis by MV. Each model has both a credit risk and a front office co-sponsor. Both the MDC and the CRC have participation from both credit risk officers as well as the front office to ensure maximum acceptance by the organisation.
RISK CATEGORIES FOR CREDIT RISK
Lending risk
Lending risk arises when ING Bank grants a loan to a customer, or issues guarantees on behalf of a customer. This is the most common risk category, and includes term loans, mortgages, revolving credits, overdrafts, guarantees, letters of credit, etc. The risk is measured at the notional amount of the financial obligation that the customer has to repay to ING Bank, excluding any accrued and unpaid interest, discount/premium amortisations or impairments.
Investment risk
Investment risk is the credit default and risk rating migration risk that is associated with ING Bank's investments in bonds, commercial paper, securitisations, and other similar publicly traded securities. Investment risk arises when ING Bank purchases a (synthetic) bond with the intent to hold the bond for a longer period of time (generally through maturity). Bonds that are purchased with the intent to re-sell in a short period of time are considered to be trading risks, which are measured and monitored by the Market Risk Management department. For credit risk purposes, Investment risk is measured at original cost (purchase price) less any prepayments or amortisations and excluding any accrued and unpaid interest or the effects of any impairment.
ING Bank Annual Report 2011
Consolidated annual accounts
Risk management continued
Money market risk
Money market risk arises when ING Bank places short-term deposits with a counterparty in order to manage excess liquidity, as such, money market deposits tend to be short-term in nature (1–7 days is common). In the event of a counterparty default, ING Bank may lose the deposit placed. Money market risk is therefore measured simply as the notional value of the deposit, excluding any accrued and unpaid interest or the effect of any impairment.
Pre-settlement risk
Pre-settlement risk arises when a counterparty defaults on a transaction before settlement and ING Bank has to replace the contract by a trade with another counterparty at the then prevailing (possibly unfavourable) market price. The pre-settlement risk (potential or expected risk) is the cost of ING Bank replacing a trade in the market. This credit risk category is associated with dealing room products such as options, swaps, and securities financing transactions. Where there is a mutual exchange of value, the amount of credit risk outstanding is generally based on the replacement value (mark-to-market) plus a potential future volatility concept, using a 3-7 year historical time horizon and a 97.5% (1.96 standard deviations) confidence level.
Settlement risk
Settlement risk arises when there is an exchange of value (funds, instruments or commodities) for the same or different value dates and receipt is not verified or expected until ING Bank has paid or delivered its side of the trade. The risk is that ING Bank delivers, but does not receive delivery from the counterparty. Settlement risk can most commonly be contained and reduced by entering into transactions with delivery-versus-payment (DVP) settlement methods, as is common with most clearing houses, or settlement netting agreements.
For those transactions where DVP settlement is not possible, ING Bank establishes settlement limits through the credit approval process. Settlement risk is then monitored and managed by the credit risk management units. Risk is further mitigated by operational procedures requiring trade confirmations to counterparties with all transaction details, and by entering into internationally accepted documentation, such as International Swaps and Derivatives Association (ISDA) Master Agreements for derivative transactions. Additionally, ING Bank regularly participates in projects with other financial institutions to improve and develop new clearing systems and clearing mechanisms to further reduce the level of settlement risk. Due to the very short-term nature of settlement exposure (daily or intra-day), settlement risks do not attract economic or regulatory capital and are excluded from risk reporting disclosures.
Country risk
Country risk is the risk specifically attributable to events in a specific country (or group of countries). It can occur within each of the five above described risk categories. All transactions and trading positions generated by ING Bank include country risk which is further divided into economic and transfer risk. Economic risk is the concentration risk relating to any event in the risk country which may affect transactions and any other exposure in that country, regardless of the currency. Transfer risk is the risk incurred through the inability of ING Bank or its counterparties to meet their respective foreign currency obligations due to a specific country event.
In countries where ING Bank is active, the relevant country's risk profile is regularly evaluated, resulting in a country rating. Country limits are based on this rating and ING Bank's risk appetite. Exposures derived from lending, investment pre-settlement and money market activities are then measured and reported against these country limits on a daily basis. Country risk limits are assigned for transfer risk mainly for emerging markets.
Credit Risk Mitigation
As with all financial institutions and banks in particular, ING Bank is in the business of taking credit risks in an informed and measured fashion. As such, the creditworthiness of our customers, trading partners and investments is continually evaluated for their ability to meet their financial obligations to ING Bank. ING Bank uses different credit risk mitigation techniques, of which entering into Master Agreements, Collateral Agreements and CDS contracts are the main techniques used.
Compensation and master agreements
ING Bank uses various market pricing and measurement techniques to determine the amount of credit risk on pre-settlement activities. These techniques estimate ING Bank's potential future exposure on individual and portfolios of trades. Master agreements and collateral agreements are frequently entered into to reduce these credit risks.
ING Bank matches trades with similar characteristics to determine their eligibility for offsetting. This offsetting effect is called 'compensation'. Subsequently, ING Bank reduces the amount by any legal netting that may be permitted under various types of Master Agreements, such as ISDAs, GMRAs, GMSLAs, etc. Lastly, the amount is further reduced by any collateral that is held by ING Bank under CSAs or other similar agreements.
ING Bank Annual Report 2011
Consolidated annual accounts
Risk management continued
Collateral policies
During the assessment process of creating new loans, trading limits, or making investments, as well as reviewing existing loans trading positions and investments, ING Bank determines the amount and type of collateral, if any, that a customer may be required to pledge to ING Bank. Generally, the lower the perceived creditworthiness of a borrower or financial counterparty, the more collateral the customer or counterparty will have to provide. Within counterparty trading activities, ING Bank actively enters into various legal arrangements whereby ING Bank and/or counterparties may have to post collateral to one another to cover market fluctuations of their relative positions. Laws in various jurisdictions also affect the type and amount of collateral that ING Bank can receive or pledge. The type of collateral which is held as security is determined by the structure of the loan or position. Consequently, since ING Bank's portfolio is diversified, the profile of collateral it receives is also diversified in nature and does not reflect any particular collateral type more than others.
As part of its securities financing business, ING Bank entities actively enter into agreements to sell and buy back marketable securities. These transactions can take many legal forms. Repurchase and reverse repurchase agreements, buy/sellback and sell/buyback agreements, and securities borrowing and lending agreements are the most common. The amount of marketable securities that ING Bank held as collateral under these types of agreements was EUR 74.0 billion at 31 December 2011 and EUR 92.0 billion at 31 December 2010. The decrease is commensurate with the overall decrease in open securities financing trades at year end 2011 compared to year end 2010. These amounts exclude the cash leg of the respective transactions, as well as any pledges of securities under Tri-Party agreements (as the underlying is not directly pledged to or owned by ING Bank). As a general rule, the marketable securities that have been received under these transactions are eligible to be resold or repledged in other (similar) transactions. ING Bank is obliged to return equivalent securities in such cases.
Repossession policy
It is ING Bank's general policy not to take possession of assets of defaulted debtors. Rather, ING Bank attempts to sell the assets from within the legal entity that has pledged these assets to ING Bank, in accordance with the respective collateral or pledge agreements signed with the obligors. In those cases where ING Bank does take possession of the collateral, ING Bank generally attempts to sell the assets as quickly as possible to prospective buyers. Based on internal assessments to determine the highest and quickest return for ING Bank, the sale of repossessed assets could be the sale of the obligor's business as a whole (or at least all of its assets), or the assets could be sold piecemeal. With regard to the various mortgage portfolios, ING Bank often has to take possession of the underlying collateral but also tries to reduce the amount of time until resale.
ING BANK CREDIT RISK PROFILE
ING Bank's credit exposure is mainly related to traditional lending to individuals and businesses followed by investments in bonds and other securitised assets. Loans to individuals are mainly mortgage loans secured by residential property. Loans (including guarantees issued) to businesses are often collateralised, but can be unsecured based on internal analysis of the borrowers' creditworthiness. Bonds in the investment portfolio are generally unsecured. Securitised assets such as Mortgage Backed Securities and Asset Backed Securities are secured by the pro rata portion of the underlying diversified pool of assets (commercial or residential mortgages, car loans and/or other assets) held by the security's issuer. The last major credit risk source involves pre-settlement exposures which arise from trading activities, including derivatives, repurchase transactions and securities lending/borrowing and foreign exchange transactions.
| Credit quality: ING Bank portfolio, outstandings | ||
|---|---|---|
| 2011 | 2010 | |
| Neither past due nor impaired | 849,283 | 822,445 |
| Past due but not impaired (1-90 days) (1) | 6,649 | 5,638 |
| Impaired (2) | 13,382 | 13,779 |
| Total | 869,314 | 841,862 |
(1) Based on lending (consumer loans and residential mortgages only).
(2) Based on credit risk measurement contained in lending and investment activities.
Risk developments in 2011
During 2011, ING Bank continued to actively deleverage and de-risk its balance sheet. Cash and balances with central banks and total Loan and Advances to Customers increased, while Amounts due to and from banks and Investments decreased.
ING Bank's bond portfolio decreased from EUR 172 billion at year-end 2010 to EUR 131.1 billion at end of 2011, excluding ING Direct USA. The size of the ING Direct USA bond portfolio is EUR 23.0 billion. The change is mainly caused by decreases in government, financial institutions and ABS debt securities. The debt securities revaluation reserve after tax excluding ING Direct USA was EUR -446 million in 2011, compared to EUR 19 million in 2010, due to interest rates developments and the spread widening that took place during 2011 as a result of the debt crisis in Europe. More details on the Investments can be found in Note 4 'Investments' of the Annual Accounts.
ING Bank Annual Report 2011
Consolidated annual accounts
Risk management continued
ABS portfolio
The RMBS and ABS portfolio changed from EUR 36.7 billion at year-end 2010 to EUR 16.5 billion per end 2011, excluding ING Direct USA. The RMBS and ABS exposure of ING Direct USA is EUR 15.1 billion. ING Bank continued to manage its asset-backed securities (ABS) portfolio downwards in 2011 and reduced the exposure on the ABS portfolio.
In 2011, ING Bank has implemented an Investment Risk policy restricting reinvestment of maturing ABS as much as possible, with reinvestments made mainly in government guaranteed paper. With the sale of ING Direct USA, ING Bank's exposure to ABS will be drastically reduced and going forward we expect not to report them as pressurised assets in our financial reporting. The revaluation reserve slightly improved but is still negative. ING Bank still recognised impairments of EUR 108 million, on the ABS portfolio, though for a smaller amount, than in the previous year (2010: EUR 133 million). Further details are included in Note 4 'Investments' of the Annual Accounts.
Greece, Italy, Ireland, Portugal and Spain
In the first half of 2010 concerns arose regarding the creditworthiness of several southern European countries, which later spread to a few other European countries. As a result of these concerns the fair value of sovereign debt decreased and those exposures were being monitored more closely. With regard to troubled European countries, ING's main focus is on Greece, Italy, Ireland, Portugal and Spain as these countries have either applied for support from the European Financial Stability Facility ('EFSF') or receive support from the ECB via government bond purchases in the secondary market. Within these countries, ING's main focus is on exposure to Government bonds and Unsecured Financial institutions' bonds. Further details are included in Note 4 'Investments'.
The table below provides information on ING's risk exposure with regard to Greece, Italy, Ireland, Portugal and Spain. Unless otherwise indicated, the amounts represent risk exposure values and exposures are included based on the country of residence. CDS exposures in all countries are mostly to financial institutions.
| Greece, Italy, Ireland, Portugal and Spain – Total risk exposures^{(1)(2)(3)} | ||||||
|---|---|---|---|---|---|---|
| 2011 | Greece | Italy | Ireland | Portugal | Spain | Total |
| Residential mortgages and other consumer lending | 2 | 7,027 | 4 | 3 | 9,157 | 16,193 |
| Corporate Lending | 307 | 9,011 | 422 | 996 | 7,092 | 17,828 |
| Financial Institutions Lending | 1 | 853 | 57 | 139 | 1,691 | 2,741 |
| Government Lending | 195 | 55 | 250 | |||
| Total Lending | 310 | 17,086 | 483 | 1,138 | 17,995 | 37,012 |
| RMBS | 96 | 862 | 1,016 | 226 | 3,721 | 5,921 |
| CMBS | 310 | 310 | ||||
| Other ABS | 334 | 212 | 78 | 624 | ||
| Corporate Bonds | 75 | 15 | 42 | 103 | 235 | |
| Covered Bonds | 218 | 335 | 16,160 | 16,713 | ||
| Financial institutions Bonds (unsecured) | 714 | 208 | 231 | 188 | 1,341 | |
| Government Bonds | 151 | 1,131 | 632 | 524 | 2,438 | |
| Total Debt Securities | 247 | 3,334 | 2,096 | 1,131 | 20,774 | 27,582 |
| Trading^{(3)} | -5 | 519 | 40 | 11 | 316 | 881 |
| Real Estate^{(4)} | 169 | 91 | 205 | 465 | ||
| Undrawn committed facilities (Off balance) | 411 | 1,229 | 523 | 140 | 2,302 | 4,605 |
| Credit protection (CDS) | ||||||
| Credit protection bought (notional) | 112 | 640 | 131 | 43 | 479 | 1,405 |
| Credit protection sold (notional) | 107 | 617 | 136 | 43 | 530 | 1,433 |
| Net CDS positions | 5 | 23 | -5 | 0 | -51 | -28 |
(1) The exposures reported are credit, market and real estate exposures based on source systems and measurement criteria that can differ from those of similar exposures reported in Note 4 'Investments' of the Annual Accounts.
(2) More information on the risk management definitions and practices can be found in the remainder of this section.
(3) Trading exposure also includes netted CDS exposure, of which details are provided at the bottom of this table.
(4) Real Estate includes Real Estate Development, Real Estate Investments and Property in Own Use; it does not include (indirect) exposure through Real Estate Finance, which is reflected in Total Lending and Total Debt Securities.
(5) Greek Government exposure is netted for impairments.
ING Bank Annual Report 2011
Consolidated annual accounts
Risk management continued
Derivatives
In these countries, ING Bank has limited derivative exposure and largely enters derivative transactions to help clients reduce exposure to interest and currency movements. Many of these transactions are covered either via CSA agreements or as part of the collateral of the underlying financing. The key credit risk ING Bank faces in these derivative transactions is movements in markets creating an uncollateralised exposure to a counterparty or that the collateral is not sufficient. ING monitors these marked to market movements on a daily basis. At 31 December 2011 ING Bank had no material, uncollateralised exposure to counterparties in these countries.
Monitoring exposures and Current developments
The problems in the Eurozone have been a top priority for risk management throughout 2011, and will continue to be a top priority in 2012. ING closely monitors the exposures in debt securities, lending and credit derivatives in the involved countries, and regularly assesses whether the positions still fit with its risk appetite. This assessment is supported by internal stress tests.
Throughout 2011 ING has reduced its positions in especially government bonds for some of the weaker countries as a result of these risk analyses.
Several European countries have been downgraded but there have also been some positive developments related to the Eurozone crisis. Financial markets rallied due to amongst others the Long Term Refinancing Operations from the ECB and better than expected economic data. Credit spreads for some of the involved countries tightened significantly. Furthermore, a new Greek bail-out plan was approved in February 2012.
Nevertheless, despite these positive signs the Eurozone is not yet out of the doldrums, as many of the fundamental problems still remain. There is no guarantee that the weaker countries will succeed in making their economies more competitive, which is a prerequisite for long term debt sustainability. Risks and concerns about the debt crisis in Europe, as well as the possible exit from the Eurozone of one or more European states and/or the replacement of the Euro by one or more successor currencies, could have a detrimental impact on the global economic recovery, sovereign and non-sovereign debt in these European countries and the financial condition of European financial institutions, including ING.
On 21 February 2012 a new common understanding on key terms of a voluntary exchange of privately held Greek government bonds was reached. The programme is expected to be implemented in March 2012 and did not have an impact on the 2011 results.
Risk classes
Risk classes are defined based upon the quality of the exposures in terms of creditworthiness, varying from investment grade to problem grade expressed in S&P equivalents.
Risk classes ING Bank portfolio, as % of total outstandings (1)
| Commercial Banking | Retail Banking Benelux | Retail Banking Direct & International (2) | Total ING Bank | ||||||
|---|---|---|---|---|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||
| 1 | (AAA) | 3.0% | 3.0% | 9.6% | 14.4% | 4.5% | 6.3% | ||
| 2-4 | (AA) | 19.4% | 14.3% | 4.2% | 4.0% | 16.0% | 12.1% | 13.8% | 10.6% |
| 5-7 | (A) | 20.2% | 24.0% | 5.1% | 5.3% | 17.8% | 18.8% | 15.0% | 16.8% |
| 8-10 | (BBB) | 23.7% | 22.9% | 42.8% | 42.0% | 29.3% | 28.9% | 31.3% | 30.4% |
| 11-13 | (BB) | 21.9% | 22.8% | 37.3% | 37.7% | 15.9% | 15.5% | 24.1% | 24.4% |
| 14-16 | (B) | 8.1% | 8.8% | 5.4% | 6.2% | 8.0% | 7.2% | 7.3% | 7.5% |
| 17-22 | (CCC & Problem Grade) | 3.7% | 4.2% | 5.2% | 4.8% | 3.4% | 3.1% | 4.0% | 4.0% |
| 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% |
(1) Based on credit risk measurement contained in lending, pre-settlement, money market and investment activities.
The ratings reflect probabilities of default and do not take collateral into consideration.
(2) Covered bonds are presented on the basis of the external credit rating of the issuer in question. Covered bond issues generally possess a better external credit rating than the issuer standalone, given structural features of such covered bonds.
Within the Lending portfolio, there was an upward shift from the highest end investment grade in 2011 as a result of increased outstandings to local German governments. In the Investment portfolio we saw a reversed trend, from AAA to AA, mainly the result of downgraded exposures linked to sovereigns and also driven by the US dollar appreciation. The investment grade counterparty risks (pre-settlement) did not materially change. Related to these counterparties risks are increasing applications of collateral and netting agreements with these counterparties. Where such agreements are in place, the credit risks are lowered due to the benefit of collateral and netting agreements. The increase in the AA bucket for Money Market is directly related to deposits given to central banks.
ING Bank Annual Report 2011
Consolidated annual accounts
Risk management continued
Risk classes ING Bank portfolio per credit risk type, as % of total outstandings (1)
| Lending | Investment | Money Market | Pre-settlement | Total ING Bank | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||
| 1 | (AAA) | 1.6% | 0.8% | 18.9% | 30.8% | 1.4% | 1.2% | 2.9% | 3.5% | 4.5% | 6.3% |
| 2-4 | (AA) | 5.2% | 6.0% | 38.3% | 25.0% | 71.6% | 22.0% | 17.0% | 18.2% | 13.8% | 10.6% |
| 5-7 | (A) | 9.4% | 9.5% | 23.9% | 27.1% | 19.3% | 62.3% | 50.9% | 50.8% | 15.0% | 16.8% |
| 8-10 | (BBB) | 37.8% | 36.9% | 13.3% | 12.5% | 2.7% | 6.8% | 18.5% | 17.2% | 31.3% | 30.4% |
| 11-13 | (BB) | 31.5% | 32.0% | 2.2% | 2.0% | 4.9% | 7.4% | 8.2% | 7.3% | 24.1% | 24.4% |
| 14-16 | (B) | 9.7% | 9.9% | 0.4% | 0.6% | 0.1% | 0.1% | 1.7% | 1.8% | 7.3% | 7.5% |
| 17-22 | (CCC & Problem Grade) | 4.8% | 4.9% | 3.0% | 2.0% | 0.2% | 0.8% | 1.2% | 4.0% | 4.0% | |
| 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% |
(1) Based on credit risk measurement contained in lending, pre-settlement, money market and investment activities.
The ratings reflect probabilities of default and do not take collateral into consideration.
Risk concentration
As part of the focus on core clients, ING Bank further reduced its relative exposure to governments and the financial sector while growing the private individual and corporate portfolios. The industry Central Banks was above the threshold of 2.0% in 2011, as a result of the deposits given to various central banks.
Risk concentration: ING Bank portfolio, by economic sector (1)(2)
| Commercial Banking | Retail Banking Benelux | Retail Banking Direct & International | Total ING Bank | |||||
|---|---|---|---|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |
| Private Individuals | 0.1% | 75.3% | 74.8% | 55.1% | 51.6% | 41.3% | 40.0% | |
| Commercial Banks | 16.2% | 17.9% | 0.2% | 0.3% | 11.1% | 13.2% | 9.8% | 11.2% |
| Non-Bank Financial Institutions | 10.7% | 13.3% | 1.1% | 1.2% | 14.5% | 16.8% | 9.4% | 11.1% |
| Central Governments | 10.7% | 11.7% | 0.9% | 1.0% | 6.6% | 8.0% | 6.5% | 7.3% |
| Real Estate | 13.0% | 13.6% | 4.5% | 4.5% | 0.9% | 0.9% | 6.2% | 6.4% |
| Central Banks | 9.6% | 4.0% | 0.1% | 0.1% | 3.3% | 1.2% | 4.6% | 1.8% |
| Natural Resources | 10.9% | 10.3% | 0.4% | 0.4% | 0.4% | 0.4% | 4.1% | 3.9% |
| Transportation & Logistics | 5.9% | 5.7% | 1.3% | 1.4% | 0.2% | 0.2% | 2.5% | 2.5% |
| Services | 3.3% | 3.3% | 3.3% | 3.3% | 0.3% | 0.3% | 2.2% | 2.2% |
| Lower Public Administration | 0.4% | 0.5% | 1.4% | 1.3% | 4.4% | 4.3% | 2.1% | 2.1% |
| Other | 19.3% | 19.6% | 11.5% | 11.7% | 3.2% | 3.1% | 11.3% | 11.5% |
| 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% |
(1) Based on the total amount of credit risk in the respective column using ING Bank's internal credit risk measurement methodologies.
(2) Economic sectors below 2% are not shown separately but grouped in Other.
ING Bank Lending portfolio
The largest relative geographic area of growth was Belgium, especially in the residential mortgage portfolio. The Americas was the second region in terms of growth which corresponds with the region's economic recovery in 2011. Exchange rate effects had further impact on the regional division.
In line with ING Bank's de-risking strategy, the portfolio developments in most countries mirrored the developments in the portfolio as a whole. The depreciated Euro versus the Australian, Canadian and the US dollar had an upward effect of the exposure to the Americas and Asia/Pacific and therewith also to the Retail Banking Direct and International and Commercial Banking portfolios. Excluding ING Direct USA, Retail Banking Direct and International showed a marginal increase, mainly as the result of currency effects.
Largest economic exposures: ING Bank lending portfolio, by geographic area (1)
| Commercial Banking | Retail Banking Benelux | Retail Banking Direct & International | Total ING Bank | |||||
|---|---|---|---|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |
| Netherlands | 21.3% | 20.7% | 73.8% | 74.8% | 3.5% | 4.8% | 30.7% | 31.2% |
| Belgium | 8.0% | 7.7% | 24.3% | 23.2% | 0.3% | 0.2% | 10.2% | 9.6% |
| Rest of Europe | 44.1% | 45.2% | 1.2% | 1.3% | 53.3% | 53.3% | 34.4% | 35.0% |
| Americas | 14.9% | 14.8% | 0.2% | 0.2% | 27.6% | 26.4% | 15.1% | 14.6% |
| Asia/Pacific | 11.2% | 11.2% | 0.1% | 0.1% | 15.3% | 15.3% | 9.3% | 9.4% |
| Rest of World | 0.5% | 0.4% | 0.4% | 0.4% | 0.0% | 0.0% | 0.3% | 0.2% |
| Total | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% |
(1) Geographic areas are based on the country of residence of the obligor.
ING Bank Annual Report 2011
Consolidated annual accounts
Risk management continued
Credit Covers
At ING Bank, cover is a term which is defined as any security, lien, mortgage, or collateral interest in an asset or guarantee, indemnification or undertaking received (either by contract and/or by law) that is intended to reduce the losses incurred subsequent to an event of default on an obligation (usually financial in nature) a customer may have towards ING Bank. Within ING Bank, covers are subdivided into two distinct groups, called collateral and promises. Reference is made to Credit risk management classification as included in the accounting policies for the consolidated annual accounts for a reconciliation between credit risk outstandings categories and financial assets.
Collateral
Collateral is a security interest in assets. If the customer defaults on its promised performance, the asset is given as collateral or security for that obligation is liquidated, such that the proceeds can be applied towards full or partial compensation of the pledgor's (financial) obligation to ING Bank. Assets have monetary value and are generally owned by the person or organisation, which gives them as collateral to ING Bank. An asset may be tangible, like plant & machinery, buildings, bonds, receivables etc. or intangible like patents, copyrights and trademarks.
In the table below the residential mortgage portfolio and the mortgage collateral amount are shown. Please note that the figures shown are based on credit collateral amounts, meaning the market values of these properties after haircuts.
Promises
Promises are defined as a legally binding declaration by persons or organisations that give ING Bank the right to expect and claim from those persons or organisations if ING Bank's customer fails on its obligations to ING Bank. Common examples are guarantees received and letters of credit.
The following tables show the credit risk outstandings and cover values per line of business: Retail Banking (comprising both Benelux, Direct & International) and Commercial Banking. Outstandings for Retail Banking are reported for the most relevant retail product being Residential Mortgages while the remaining outstandings are classified as Other Lending.
Outstandings for Commercial Banking are reported for the most relevant categories being Financial Institutions, Corporates and Governments, while the remaining outstandings are classified as Other. Credit risk outstandings are inclusive of both on balance and off balance sheet outstandings, and of all risk categories.
For each product or category, the cover amounts are then reported for the most relevant collateral categories being Mortgages and Cash, and for the most relevant Promises category being Guarantees. The remaining collaterals and promises are included in the category Other.
| Performing Assets – Cover values* including guarantees received | ||||||
|---|---|---|---|---|---|---|
| Outstandings* | Mortgages*** | Cash | Guarantees** | Other | 31 December 2011 | |
| Total Credit Covers *** | ||||||
| Retail | ||||||
| Residential Mortgages | 336,876 | 538,692 | 538,692 | |||
| Other Lending | 13,529 | 3,104 | 3,104 | |||
| Total Retail | 350,405 | 541,796 | 541,796 | |||
| Commercial | ||||||
| Financial Institutions | 162,590 | 3,421 | 1,331 | 9,982 | 3,281 | 18,015 |
| Corporates | 225,848 | 73,916 | 4,819 | 21,642 | 54,161 | 154,538 |
| Governments | 75,762 | 89 | 12 | 3,365 | 1,373 | 4,839 |
| Other | 41,327 | 4,274 | 61 | 63 | 242 | 4,640 |
| Total Commercial | 505,527 | 81,700 | 6,223 | 35,052 | 59,057 | 182,032 |
| Total | 855,932 | 623,496 | 6,223 | 35,052 | 59,057 | 723,828 |
ING Bank Annual Report 2011 119
Consolidated annual accounts
Risk management continued
| Performing Assets – Cover values* including guarantees received | ||||||
|---|---|---|---|---|---|---|
| Outstandings* | Mortgages*** | Cash | Guarantees** | Other | 31 December 2010 | |
| Total Credit Covers | ||||||
| *** | ||||||
| Retail | ||||||
| Residential Mortgages | 315,226 | 523,195 | 523,195 | |||
| Other Lending | 12,439 | 2,787 | 2,787 | |||
| Total Retail | 327,665 | 525,982 | 525,982 | |||
| Commercial | ||||||
| Financial Institutions | 157,834 | 4,199 | 1,119 | 8,174 | 3,962 | 17,454 |
| Corporates | 218,554 | 67,796 | 4,106 | 26,490 | 45,094 | 143,486 |
| Governments | 80,087 | 62 | 2 | 3,401 | 1,571 | 5,036 |
| Other | 43,943 | 3,310 | 65 | 102 | 497 | 3,974 |
| Total Commercial | 500,418 | 75,367 | 5,292 | 38,167 | 51,124 | 169,950 |
| Total | 828,083 | 601,349 | 5,292 | 38,167 | 51,124 | 695,932 |
- Excluding intercompany positions
** Guarantees received can be additional to pledges and not necessarily replace covers
*** The used valuations methods for the underlying covers may vary per cover
*** Credit covers are the sum of all existing covers. Excess cover amounts on specific loans cannot be put in place for loans without covers. Therefore, the figures shown in the table should not be used for netting calculation purposes
The cover tables show a break down of ING Bank's retail and commercial portfolios. The Residential Mortgages portfolio relates to private individuals. The growth in this portfolio was mainly driven by United Kingdom, Germany and Belgium. The Financial Institutions portfolio is comprised of commercial banks, central banks and non-bank financial institutions. The increase in this portfolio was mainly driven by The Netherlands. Corporates range from large enterprises to small and medium sized companies. Governments consist of all governmental layers, from local to national.
Loan-to-Value (LTV)
The LTV ratio relates the total loan amount to the market value of the collateral. The market value is the registered value as adopted from the valuation report of a qualified appraiser or valuer. ING Bank has a team of specialists for the valuation of real estate, which is supplemented with external and desk top valuation. In some countries residential mortgages are covered by governmental or commercial insurers. For example the Nationale Hypotheek Garantie (NHG) in The Netherlands, which guarantees the repayment of a loan in case of a forced property sale. The LTV in The Netherlands is relatively high, but is partially compensated by the NHG guaranteed portfolio and other secondary covers, such as life insurance policies, savings and investment products. The average LTV in the Netherlands is 81% (2010: 80%). When available, indexation is applied to revaluate the collateral to the present value. In the LTV calculation the following property covers are included: residential and industrial/commercial properties, land and applicable other fixed assets. All other covers are excluded. The ING Bank's total residential mortgage portfolio amounts to EUR 341 billion, making up 39% of the ING Bank's total credit risk outstandings. The average Loan to Value (LTV) of the total residential mortgage portfolio amounts to 75% (2010: 74%).
Problem loans
Past-due obligations
ING Bank continually measures its portfolio in terms of payment arrears. Particularly the retail portfolios are closely monitored on a monthly basis to determine if there are any significant changes in the level of arrears. Generally, an obligation is considered 'past-due' if a payment of interest or principal is more than one day late. In practice, the first 5-7 days after an obligation becomes past due are considered to be operational in nature for retail loans and small businesses portfolios. After this period, letters are sent to the obligor reminding the obligor of its (past due) payment obligations. If the arrear still exists after 90 days, the obligation is transferred to one of the 'problem loan' units. In order to reduce the number of arrears, ING banking units encourage their obligors to set up automatic debits from their (current) accounts to ensure timely payments.
ING Bank Annual Report 2011
Consolidated annual accounts
Risk management continued
| Aging analysis (past due but not impaired): ING Bank portfolio, outstandings (1)(2) | ||
|---|---|---|
| 2011 | 2010 | |
| Past due for 1-30 days | 5,455 | 4,565 |
| Past due for 31-60 days | 1,111 | 973 |
| Past due for 61-90 days | 83 | 100 |
| Total | 6,649 | 5,638 |
(1) Based on lending (consumer loans and residential mortgages only).
(2) The amount of past due but not impaired financial assets in respect of non-lending activities was not material.
Impaired loans and provisions
The credit portfolio is under constant review. Generally, all loans with past due financial obligations of more than 90 days are automatically reclassified as impaired. For the wholesale lending portfolios and securities obligations, there are generally reasons for declaring a loan impaired prior to being 90 days past due. These include, but are not limited to, ING Bank's assessment of the customer's perceived inability to meet its financial obligations, or the customer filing for bankruptcy or bankruptcy protection. In some cases, a material breach of financial covenants will also trigger a reclassification of a loan to the impaired category. ING Bank identifies as impaired loans those loans for which it is probable, based on current information and events that the principal and interest amounts contractually due will not be collected in accordance with the contractual terms of the loan agreements.
A formal analysis takes place quarterly to determine the provisions for possible bad debts, using a bottom-up approach. Conclusions are discussed by the ING Provisioning Committee (IPC) Bank, which advises the MBB on specific provisioning levels.
The table below represents the economic sector breakdown of credit risk outstandings (including impaired amounts) for loans and positions that have been classified as problem loans and for which provisions have been made.
| Impaired Loans: ING Bank portfolio, outstandings by economic sector (3) | ||
|---|---|---|
| 2011 | 2010 | |
| Private Individuals | 4,790 | 4,838 |
| Real Estate | 2,671 | 2,777 |
| General Industries | 819 | 858 |
| Transportation & Logistics | 797 | 818 |
| Food, Beverages & Personal Care | 784 | 837 |
| Builders & Contractors | 774 | 792 |
| Services | 718 | 582 |
| Non-Bank Financial Institutions | 368 | 527 |
| Other | 1,661 | 1,750 |
| Total | 13,382 | 13,779 |
(1) Economic sectors below EUR 500 million in both years are not shown separately but grouped in Other.
ING Bank holds specific and collective provisions of EUR 3,040 million and EUR 1,133 million, respectively (2010: EUR 2,697 million and EUR 1,404 million respectively), representing the difference between the amortised cost of the portfolio and the estimated recoverable amount discounted at the effective rate of interest. In addition, there is EUR 777 million (2010: EUR 1,094 million) in provisions against the performing portfolio. The 2010 figures are including ING Direct USA.
| Provisions: ING Bank portfolio | ||||||||
|---|---|---|---|---|---|---|---|---|
| Commercial Banking | Retail Banking Benelux | Retail Banking Direct & International | Total ING Bank | |||||
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |
| Opening balance | 1,855 | 1,628 | 1,641 | 1,290 | 1,699 | 1,481 | 5,195 | 4,399 |
| Changes in the composition of the group | -3 | -3 | ||||||
| Write-offs | -373 | -337 | -494 | -454 | -437 | -375 | -1,304 | -1,166 |
| Recoveries | 66 | 36 | 37 | 58 | 9 | 11 | 112 | 105 |
| Increase/(decrease) in loan loss provision | 479 | 497 | 603 | 721 | 588 | 533 | 1,670 | 1,751 |
| Exchange differences | 15 | 65 | 8 | -98 | 82 | -83 | 155 | |
| Other changes | -34 | -36 | 18 | -601 | -33 | -637 | -49 | |
| Closing balance | 2,039 | 1,855 | 1,751 | 1,641 | 1,160 | 1,699 | 4,950 | 5,195 |
(1) The 2011 figures are excluding ING Direct USA.
ING Bank Annual Report 2011 121
Consolidated annual accounts
Risk management continued
The risk costs development in the first half of 2011 was relatively favourable, however, since mid 2011, the economic climate deteriorated. On balance, risk costs for the full year 2011 were in line with 2010 risk costs levels.
Credit Covers Problem Assets
The table hereunder shows the cover values per credit risk category classified based on Retail and Commercial Banking products. In the ING Bank master scale which ranges from 1 being the best rating to 22 being the worst rating, Problem Assets are the Assets with ratings in the range 18-22. All other are called Performing Assets and are shown in the tables above.
| Problem Assets – Cover values* including guarantees received | ||||||
|---|---|---|---|---|---|---|
| Outstandings* | Mortgages*** | Cash | Guarantees** | Other | 31 December 2011 | |
| Total Credit Covers | ||||||
| *** | ||||||
| Retail | ||||||
| Residential Mortgages | 4,070 | 4,987 | 4,987 | |||
| Other Lending | 569 | 145 | 145 | |||
| Total Retail | 4,639 | 5,132 | 5,132 | |||
| Commercial | ||||||
| Financial Institutions | 457 | 63 | 1 | 51 | 22 | 137 |
| Corporates | 8,090 | 2,913 | 334 | 242 | 1,063 | 4,553 |
| Governments | 9 | 0 | 0 | 0 | ||
| Other | 187 | 105 | 0 | 1 | 2 | 108 |
| Total Commercial | 8,743 | 3,081 | 335 | 294 | 1,087 | 4,798 |
| Total | 13,382 | 8,213 | 336 | 294 | 1,087 | 9,930 |
| Problem Assets – Cover values* including guarantees received | ||||||
| --- | --- | --- | --- | --- | --- | --- |
| Outstandings* | Mortgages*** | Cash | Guarantees** | Other | 31 December 2010 | |
| Total Credit Covers | ||||||
| *** | ||||||
| Retail | ||||||
| Residential Mortgages | 4,026 | 4,975 | 4,975 | |||
| Other Lending | 671 | 154 | 154 | |||
| Total Retail | 4,697 | 5,129 | 5,129 | |||
| Commercial | ||||||
| Financial Institutions | 366 | 4 | 0 | 56 | 23 | 83 |
| Corporates | 8,542 | 2,761 | 23 | 343 | 882 | 4,009 |
| Governments | 1 | 0 | 0 | |||
| Other | 173 | 59 | 0 | 2 | 5 | 66 |
| Total Commercial | 9,082 | 2,824 | 23 | 401 | 910 | 4,158 |
| Total | 13,779 | 7,953 | 23 | 401 | 910 | 9,287 |
- Excluding intercompany positions
** Guarantees received can be additional to pledges and not necessarily replace collaterals
*** The used valuations methods for the underlying collaterals may vary per collateral
*** Credit covers are the sum of all existing covers. Excess cover amounts on specific loans cannot be put in place for loans without covers. Therefore, the figures shown in the table should not be used for netting calculation purposes
MARKET RISK
MARKET RISK MANAGEMENT
Market risk is the risk that movements in market variables, such as interest rates, equity prices, foreign exchange rates, credit spreads and real estate prices, negatively impact the bank's earnings, market value or liquidity position. Market risk either arises through positions in trading books or through the banking book positions. The trading positions are held for the purpose of benefiting from short-term price movements, while the banking book positions are intended to be held in the long term (or until maturity) or for the purpose of hedging other banking book positions.
ING Bank Annual Report 2011
Consolidated annual accounts
Risk management continued
Governance
Within ING Bank, market risk (including liquidity risk) falls under the supervision of the ALCO function with ALCO Bank as the highest approval authority. ALCO Bank determines the overall risk appetite for market risk. The ALCO function is regionally organised with the exception of ING Direct, which has a separate ALCO. The business lines Retail Banking and Commercial Banking are represented within the respective regional and local ALCO's. The ALCO structure within ING Bank facilitates top-down risk management, limit setting and the monitoring and control of market risk. This ensures a correct implementation of the ING Bank risk appetite.
The Market Risk Management department (MRM) is the designated independent department that is responsible for the design and execution of the bank's market risk management functions in support of the ALCO function. The MRM structure recognises that risk taking and risk management to a large extent occurs at the regional/local level. Bottom-up reporting allows each management level to fully assess the market risk relevant at the respective levels.
MRM is responsible for determining adequate policies and procedures for managing market risk and for monitoring the compliance with these guidelines. An important element of the market risk management function is the assessment of market risk in new products and businesses. Furthermore MRM maintains an adequate limit framework in line with ING Bank's risk appetite. The businesses are responsible for adhering to the limits that ultimately are approved by ALCO Bank. Limit breaches are reported to senior management on a timely basis and the business is required to take the appropriate actions to reduce the risk position.
MODEL DISCLOSURE: ECONOMIC CAPITAL FOR MARKET RISK
Economic Capital for market risk is the Economic Capital necessary to withstand unexpected value movements due to changes in market variables. Economic Capital for market risk is calculated for exposures both in trading portfolios and non-trading portfolios and includes real estate risk, foreign exchange rate risk, equity price risk, interest rate risk and model risks. Economic capital for market risk is calculated using internally developed methodologies with a 99.95% confidence interval and a horizon of one year, which represents extreme events and ING's target rating.
For the trading and most of the non-trading portfolios (including equity investments), the actual VaR (measured at a 99% confidence interval, a one day holding period and under the assumption of an expected value of zero) is taken as a starting point for the Economic Capital calculations for market risk. To arrive at the Economic Capital for market risk, a simulation based model is used which includes scaling to the required confidence interval and holding period. In determining this scaling factor, several other factors are also taken into account like the occurrence of large market movements (events) and management interventions.
Economic Capital for market risk for the mortgage portfolios within ING Retail Banking (Benelux, Direct and International Banking) and ING Commercial Banking is calculated for embedded option risk (e.g. the prepayment option and offered rate option in mortgages). The embedded options are hedged using a delta-hedging methodology, leaving the mortgage portfolio exposed to convexity and volatility risk.
Real estate price risk includes the market risks in both the investment portfolio and the development portfolio of ING Real Estate. The real estate price risk for the investment portfolio is calculated by stressing the underlying market variables. The stress scenarios at a portfolio level take into account all diversification effects across regions and real estate sectors. Also, the leverage of participations in the real estate investment funds is taken into account. For the Real Estate development process, in addition to market sale price risk, the risk drivers of market rent, investor yield and construction delays are taken into account. Furthermore the risk model differs for each development phase (i.e. research, development and construction) to appropriately reflect the risk taken in each phase. Using correlations, all risk drivers, and stages are used to calculate a possible market value loss representing the Economic Capital for market risk for the development portfolio.
While aggregating the different Economic Capital market risk figures for the different portfolios, diversification benefits (based on stressed correlations) are taken into account as it is not expected that all extreme market movements will appear at the same moment.
The nature of market risk Economic Capital, evaluating the impact of extreme stress with a 99.95% confidence level, can sometimes be difficult to evidence in a statistical sound manner with the available historical data. The Economic Capital figures disclosed by ING Bank are a best effort estimate based on available data and expert opinions.
| Economic and Regulatory Capital (Bank diversified only) by risk type | ||||
|---|---|---|---|---|
| Economic Capital^{(1)} | Regulatory Capital | |||
| 2011 | 2010 | 2011 | 2010 | |
| Market risk | 8,262 | 7,233 | 1,124 | 364 |
(1) This includes model risk
ING Bank Annual Report 2011 123
Consolidated annual accounts
Risk management continued
The market risk Economic Capital is higher than the Regulatory Capital primarily due to the inclusion of the interest rate risk banking books in Economic Capital. The market risk Regulatory Capital includes a stressed VaR charge, while Economic Capital does not. The main drivers for the increase in market risk Economic Capital are methodology updates. The increase in market risk Regulatory Capital is due to the new market risk framework Basel 2.5 containing an additional capital charge for Stressed VaR and Incremental Risk.
MARKET RISK IN TRADING BOOKS
Governance
Within the trading portfolios, positions are maintained in the professional financial markets for the purpose of benefiting from short term price movements. Market risk arises in the trading portfolios through the exposure to various market risk factors, including interest rates, equity prices, foreign exchange rates and credit spreads.
The Financial Markets Risk Committee (FMRC) is the market risk committee that, within the risk appetite set by ALCO Bank, sets market risk limits both on an aggregated level and on a desk level, and approves new products. MRM advises both the FMRC and ALCO Bank on the market risk appetite of trading activities.
With respect to the trading portfolios, MRM focuses on the management of market risks of Commercial Banking (mainly Financial Markets) as this is the only business line where trading activities take place. Trading activities include facilitation of client business, market making and proprietary position taking in cash and derivatives markets. MRM is responsible for the development and implementation of trading risk policies and risk measurement methodologies, the reporting and monitoring of risk exposures against approved trading limits and the validation of pricing models. MRM also reviews trading mandates and limits, and performs the gatekeeper role in the product review process. The management of trading market risk is performed at various organisational levels, from MRM overall down to specific business areas and trading offices.
Model Disclosure
Value at Risk
MRM uses the historical simulation Value at Risk (VaR) methodology as its primary risk measure. The VaR for market risk quantifies, with a one-sided confidence level of 99%, the maximum overnight loss that could occur due to changes in risk factors (e.g. interest rates, equity prices, foreign exchange rates, credit spreads, implied volatilities) if positions remain unchanged for a time period of one day. Next to general market movements in these risk factors, VaR also takes into account market data movements for specific moves in e.g. the underlying issuer of securities. The impact of historical market movements on today's portfolio is estimated, based on equally weighted observed market movements of the previous year. ING Bank uses VaR with a 1-day horizon for internal risk measurement, control and back testing, and VaR with a 10-day horizon for determining regulatory capital.
Limitations
VaR as a risk measure has some limitations. VaR uses historical data to forecast future price behaviour. Future price behaviour could differ substantially from past behaviour. Moreover, the use of a one-day holding period (or ten days for regulatory capital calculations) assumes that all positions in the portfolio can be liquidated or hedged in one day. In periods of illiquidity or market events, this assumption may not hold true. Also, the use of 99% confidence level means that VaR does not take into account any losses that occur beyond this confidence level. Parts of these limitations are mitigated by the Basel 2.5 regulation (Stressed VaR and Incremental Risk Charges).
Back testing
Back testing is a technique for the ongoing monitoring of the plausibility of the VaR model in use. Although VaR models estimate potential future results, estimates are based on historical market data. In a back test, the actual daily result is compared with the 1-day VaR. In addition to using actual results for back testing, ING Bank also uses hypothetical results, which measure results excluding the effect of intraday trading, fees and commissions. When the actual or hypothetical loss exceeds the VaR an 'outlier' occurs. Based on ING Bank's one-sided confidence level of 99% an outlier is expected once in every 100 business days. In 2011, like in 2010, there was no occurrence where a daily trading loss exceeded the daily consolidated VaR of ING Commercial Banking. ING Bank reports the results of this back testing to DNB on a quarterly basis.
ING Bank Annual Report 2011
Consolidated annual accounts
Risk management continued
Stress testing
Stress tests are used for the monitoring of market risks under extreme market conditions. Since VaR in general does not produce an estimate of the potential losses that can occur as a result of extreme market movements, ING Bank uses structured stress tests for monitoring the market risk under these extreme conditions. Stress scenarios are based on historical as well as hypothetical extreme events. The result of the stress testing is an event risk number, which is an estimate of the profit and loss account effect caused by a potential event and its world-wide impact for ING Commercial Banking. The event risk number for the ING Commercial Banking trading activity is generated on a weekly basis. Like VaR, event risk is limited by ALCO Bank. ING Bank's event risk policy basically consists of defined stress parameters per country and per market (fixed income, equity, foreign exchange, credit and related derivative markets). The scenarios and stress parameters are evaluated against extreme actual market movements. If and when necessary, ING Bank evaluates specific stress scenarios, as an addition to its structural stress tests. These specific scenarios relate to current concerns, like political instability in certain regions, terrorist attacks or extreme movements, e.g. in credit spreads. Furthermore, ING participates in bank-wide stress testing as well as in ad hoc stress testing exercises as requested by the DNB or EBA.
Other trading controls
VaR and event risk limits are the most important limits to control the trading portfolios. Furthermore, ING Bank uses a variety of other limits to supplement VaR and event risk. Position and sensitivity limits are used to prevent large concentrations in specific issuers, sectors or countries. In addition to this, other risk limits are set with respect to the activities in complex derivatives trading. The market risk of these products is controlled by product specific limits and constraints.
Basel 2.5 / CRD 3
The Basel Committee has proposed to supplement the current VaR regulatory capital framework for trading exposures with Incremental Risk Charge and Stressed VaR to cover for the shortcomings of the existing regulatory risk framework. The Basel requirements on the Incremental Risk Charge and stressed VaR have come into force in European legislation (CRD 3) as of 31 December 2011 and are included in the regulatory capital as of Q4 2011.
Stressed VaR
The Stressed VaR (SVaR) is intended to replicate a VaR calculation that would be generated on the bank's current portfolio with inputs calibrated to the historical data from a continuous 12-month period of significant financial stress relevant to the bank's portfolio. To calculate SVaR, ING Bank uses the same model that is used for VaR (historical simulation). The historical data period used includes the height of the credit crisis around the fall of Lehman brothers, and is reviewed regularly.
Incremental Risk Charge
With the Incremental Risk Charge (IRC) ING Bank calculates an estimate of default and migration risk for unsecuritised credit products in the trading book over a one-year capital horizon at a 99.9% confidence level. For the calculation of IRC ING Bank performs a Monte Carlo simulation based on a Gaussian copula model. For all issuers the rating is simulated over the different liquidity horizons (time required to liquidate the position or hedge all material risks) within one year. The financial impact is then determined based on the migration to default (based on LGD), or migration to a different rating category (based on credit spread changes).
The liquidity horizon has been set to the regulatory minimum of three months for all positions in scope. Given the types of products in ING Bank's trading portfolio ING considers this horizon to be conservative. We have demonstrated that ING Bank could still actively trade its positions that are significant for IRC under stressed market circumstances, allowing ING Bank to fully redeem its positions within three months.
Risk Profile
The following chart shows the development of the overnight VaR under a 99% confidence interval and a 1-day horizon. The overnight VaR is presented for the ING Commercial Banking trading portfolio for 2010 and 2011. Several banking books are internally governed by the trading risk process and are therefore excluded from the non-trading risk table and included in the below trading risk graph and table.
ING Bank Annual Report 2011 125
Consolidated annual accounts
Risk management continued
During 2011 the overnight VaR for the ING Commercial Banking trading portfolio ranged from EUR 12 million to EUR 29 million.
More details on the VaR of the ING Commercial Banking trading portfolio for 2011 and 2010 are provided in the table below.
Consolidated VaR trading books: ING Commercial Bank
| Minimum | Maximum | Average | Year end | |||||
|---|---|---|---|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |
| Interest rate (1) | 9 | 18 | 21 | 29 | 15 | 22 | 12 | 20 |
| Equity | 1 | 1 | 18 | 9 | 7 | 4 | 7 | 3 |
| Foreign exchange | 1 | 1 | 4 | 9 | 2 | 2 | 2 | 4 |
| Credit spread (1) | 6 | n/a | 8 | n/a | 7 | n/a | 6 | n/a |
| Diversification (2) | -12 | -6 | -12 | -8 | ||||
| Total VaR | 12 | 17 | 29 | 30 | 19 | 22 | 15 | 19 |
(1) Credit spreads are introduced as a separate risk category as of Q4 2011. Minimum, maximum and average values for the risk category Credit spread are calculated on Q4 only. The 2010 credit spreads are consolidated in the interest rate risk category.
(2) The total VaR for the columns Minimum and Maximum can not be calculated by taking the sum of the individual components since the observations for both the individual markets as well as total VaR may occur on different dates.
The VaR figures in the table above relate to all books under trading governance. In general, the level of the trading VaR was lower in the first half of 2011, continuing the decreasing trend of 2010. Halfway the year, VaR levels increased due to increased market volatility. The equity VaR increased due to the integration of implied correlation and dividend risk, new risk measures added to the VaR framework. The average consolidated VaR over 2011 was lower than over 2010 (average VaR 2011: EUR 19 million and average VaR 2010: EUR 22 million).
The risk figures in the table below only relate to the CAD2 trading books for which the internal model approach is applied.
Risk measures for Internal Model Approach Portfolios
| 2011 | Year end | ||||
|---|---|---|---|---|---|
| Minimum | Maximum | Average | 2011 | 2010 | |
| Interest rate VaR (1) | 8 | 22 | 14 | 11 | 18 |
| Equity VaR | 1 | 18 | 7 | 7 | 3 |
| Foreign exchange VaR | 1 | 4 | 2 | 2 | 4 |
| Credit Spread VaR (1) | 6 | 8 | 7 | 6 | n/a |
| Diversification effect (2) | -12 | -11 | -8 | ||
| Total VaR Internal Model Approach (1-day, 99%) | 11 | 28 | 18 | 15 | 17 |
| Stressed VaR (10-day, 99%) (3) | 104 | 182 | 139 | 117 | n/a |
| Incremental Risk Charge (1-year, 99.9%) (3) | 363 | 545 | 445 | 368 | n/a |
(1) Credit spreads are introduced as a separate risk category as of Q4 2011. Minimum, maximum and average values for the risk category Credit spread are calculated on Q4 only. The 2010 credit spreads are consolidated in the interest rate risk category.
(2) The total VaR for the columns Minimum and Maximum can not be calculated by taking the sum of the individual components since the observations for both the individual markets as well as total VaR may occur on different dates.
(3) Note: Stressed VaR and Incremental Risk Charge figures are based on Q4 2011
Regulatory Capital
According to the Dutch regulation, regulatory capital for trading portfolios can be calculated using the standardised approach or an internal model approach. ING Bank received approval from the DNB to use an internal Value-at-Risk (VAR) model to determine the regulatory capital for the market risk in most trading books of ING Bank. Market risk capital of CAD2 trading books is calculated according to the internal VaR model, where diversification is taken into account. On the other hand, market risk capital of CAD1 books is calculated using standardised fixed risk weights. In 2011, capital on all trading books is performed under the Internal Model Approach. Mismatches in FX risk from the banking books are incorporated under the Standardised Approach. Market risk regulatory capital is calculated under the new market risk framework Basel 2.5 containing a capital charge for Stressed VaR and Incremental Risk, as approved by DNB.
ING Bank Annual Report 2011
Consolidated annual accounts
Risk management continued
Regulatory Capital
| 2011 | 2010(1) | |||
|---|---|---|---|---|
| SVaR | VaR | Total | Total | |
| Interest rate / Credit spread | 327 | 157 | 484 | 172 |
| Equity | 80 | 62 | 142 | 40 |
| Foreign exchange | 15 | 12 | 27 | 15 |
| Incremental Risk Charge | 437 | n/a | ||
| Total Internal Model Approach | 1,090 | 227 | ||
| Standardised model | 34 | 137 | ||
| Total | 1,124 | 364 |
(1) 2010 capital figures do not include Stressed VaR
Sensitivities
The following tables show the largest trading foreign exchange positions and interest rate and credit spread sensitivities. The credit spread sensitivities are furthermore split in different risk classes and sectors.
Most important foreign exchange positions (year-end 2011)
| 2011 | 2010 | ||
|---|---|---|---|
| Foreign exchange | Foreign exchange | ||
| Chinese yuan | 356 | US dollar | -457 |
| US dollar | -283 | Taiwan dollar | 155 |
| Czech koruna | -154 | Chinese yuan | 83 |
| Taiwan dollar | -44 | South Korean won | 68 |
| Bulgarian lev | -43 | Bulgarian lev | -57 |
Most important interest rate and credit spread sensitivities (year-end 2011)
| amounts in thousands of euros | 2011 | 2010 | |
|---|---|---|---|
| Interest Rate (BPV (1)) | Interest Rate (BPV (1)) | ||
| United States | 331 | Eurozone | -377 |
| UK | -163 | United States | 167 |
| Mexico | -120 | Mexico | -147 |
| Russia | -96 | Japan | 141 |
| Japan | -86 | Russia | -73 |
| Credit Spread (BPV (1)) | Credit Spread (BPV (1)) | ||
| Eurozone | -287 | Eurozone | -596 |
| UK | -50 | Sweden | -67 |
| United States | -31 | Hong Kong | -47 |
| Mexico | -31 | UK | -47 |
| Norway | -25 | United Stated | -42 |
(1) Basis Point Value (BPV) measures the impact on value of a 1 basis point increase in interest rates or credit spreads.
Credit spread sensitivities per risk class and sector (year-end 2011)
| amounts in thousands of eurosCredit Spread (BPV (1)) | 2011 | 2010 | |||
|---|---|---|---|---|---|
| Corporate | Financial Institutions | Corporate | Financial Institutions | ||
| Risk classes | |||||
| 1 | (AAA) | -5 | -16 | -8 | -211 |
| 2-4 | (AA) | -12 | -49 | -25 | -212 |
| 5-7 | (A) | 15 | -256 | -32 | -257 |
| 8-10 | (BBB) | -49 | -42 | -77 | -102 |
| 11-13 | (BB) | -14 | -24 | -11 | -47 |
| 14-16 | (B) | -18 | -8 | -30 | -8 |
| 17-22 | (CCC and Problem Grade) | 2 | -21 | -24 | -33 |
| Not rated | -1 | ||||
| Total | -82 | -416 | -207 | -870 |
(1) Basis Point Value (BPV) measures the impact on value of a 1 basis point increase in interest rates or credit spreads.
ING Bank Annual Report 2011
Consolidated annual accounts
Risk management continued
MARKET RISK IN BANKING BOOKS
ING Bank makes a distinction between trading and banking (non-trading) books. Positions in trading books can change swiftly, whereas positions in banking books are intended to be held until maturity, or at least for the long term. Books that contain positions to hedge exposures resulting from commercial activities are also classified as banking books.
Interest Rate Risk in Banking Book
Interest rate risk in the banking books is defined as the potential negative impact that changing interest rates may have on earnings or market value.
Governance: ALM framework
The management of interest rate risk follows the Asset & Liability Management (ALM) framework as approved by ALCO Bank. Main goal of this framework is to transfer interest rate risks out of commercial books in order to manage it centrally. This allows for a clear demarcation between commercial business results and results on unhedged interest rate positions.
ING Bank distinguishes three types of activities: investment of own capital (by Capital Management), commercial business (ING Direct, Retail Banking and Commercial Bank) and the strategic interest rate position (Financial Markets ALM). The scheme below presents the ALM framework:
Below, the three activities are described in more detail.
Capital Management is responsible for managing the investment of own funds (core capital), more information can be found in the Capital Management section. Capital is invested for longer periods, targeting to maximize return, while keeping it stable at the same time.
Commercial activities lead to interest rate risk, as repricing tenors of assets differ from those of liabilities. Linear interest rate risk is transferred out of the commercial business into the risk center (FM ALM), leaving convexity risk and model risk with the commercial business. The convexity risk is a result of hedging products that contain embedded options, like mortgages, by using linear hedge instruments. Model risk reflects the potential imperfect modelling of client behaviour. The risk transfer process takes place on a monthly basis, but more often if deemed necessary, for instance in volatile markets.
In the risk transfer process, client behavioural characteristics play an important role. The behaviour in relation to mortgages, loans, savings and demand deposits is modelled by MRM, following extensive research. Models and parameters are back-tested regularly and updated when deemed necessary. In the modelling of savings and current accounts different elements play a role: pricing strategies, outstanding and expected volumes and the level and shape of the yield curve. The analyses results in an investment rule for the various portfolios. With respect to mortgages and loans, prepayment behaviour and the interest sensitivity of the embedded offered rate options are modelled.
In line with other commercial businesses, ING Direct transfers interest rate risk out of their commercial books to a large extent. The difference being that the risks are transferred directly to the external market, instead of to the risk center (FM ALM).
Within ING Commercial Banking, FM ALM contains the strategic interest rate position. The main objective is to maximise the economic value of the book and to generate adequate and stable yearly earnings within the risk appetite boundaries set by ALCO Bank.
ING Bank Annual Report 2011
Consolidated annual accounts
Risk management continued
In the following sections, the interest rate risks in the banking books are presented. ING Bank uses risk measures based on both an earnings and a value perspective. Earnings Sensitivity (ES) is used to provide the earnings perspective and the Net Present Value (NPV)-at-Risk and Basis Point Value (BPV) figures provide the value perspective. Several small banking books are governed by the trading risk process and are therefore excluded from the following banking book risk tables. These are included in the trading risk graph and table in the section 'Market Risk in Trading Books'.
Risk Profile
Earnings Sensitivity (ES)
ES measures the impact of changing interest rates on (pre tax) IFRS-EU earnings. The ES figures in the table below reflect an instantaneous shock up of 1% and a time horizon of one year. Management interventions are not incorporated in these calculations but balance sheet dynamics (e.g. new business) are significant.
The ES is mainly influenced by the sensitivity of savings to interest rate movements. The investment of own funds only impacts the ES marginally, as only a relative small part has to be (re)invested within the 1-year horizon.
| Earnings Sensitivity banking books (1% instantaneous upward shock to interest rates) | ||
|---|---|---|
| 2011 | 2010 | |
| By currency | ||
| Euro | 32 | -237 |
| US dollar | -76 | -114 |
| Pound sterling | -10 | -15 |
| Other | 10 | 50 |
| Total | -44 | -316 |
Excluding ING Direct USA earnings sensitivity is approximately 0. In 2011 short-term interest rates remained at low levels in both the Eurozone and the US. Earnings sensitivity for an upward shock decreased to a small negative figure. This indicates that when rates go up the increase in interest paid on liabilities only slightly exceeds the increase in interest received on assets. Earnings are therefore relatively insensitive to rate changes.
Net Present Value (NPV) at Risk
NPV-at-Risk measures the impact of changing interest rates on value. As a full valuation approach is applied, the risk figures include convexity risk that results from embedded optionalities like mortgage prepayment options. Like for ES calculations, an instantaneous shock up of 1% is applied.
The full value impact cannot be directly linked to the balance sheet or profit and loss account, as fair value movements in banking books are generally not reported through the profit and loss account or through equity. The largest part, namely the value mutations of the amortised cost balances, is neither recognised in the balance sheet nor directly in the profit and loss account. The value mutations are expected to materialise over time in the profit and loss account, if interest rates develop according to forward rates throughout the remaining maturity of the portfolio.
The NPV at Risk is dominated by the interest rate sensitive long term investments of own funds. The value of these investments is impacted significantly if interest rates move up by 1%. Convexity risk in retail portfolios as well as the strategic interest position in FM ALM also contributes significantly to the overall NPV at Risk.
| NPV-at-Risk banking books (1% instantaneous upward shock to interest rates) | ||
|---|---|---|
| 2011 | 2010 | |
| By currency | ||
| Euro | -1,828 | -2,446 |
| US dollar | 376 | -205 |
| Pound sterling | -25 | -19 |
| Other | 52 | 48 |
| Total | -1,425 | -2,622 |
NPV-at-risk in 2011 excluding ING Direct USA is -EUR 1,914 million. In the course of 2011 NPV-at-Risk decreased substantially. This was mainly due to more expected prepayments of mortgages as a consequence of the low interest rate environment. This decreased the expected duration of mortgages and subsequently the value sensitivity to a rate increase. Furthermore investments were shortened, leading to a lower duration of assets. Finally the outright position in the strategic interest rate portfolio was reduced. This also contributed to the decrease of the NPV sensitivity.
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Risk management continued
Basis Point Value (BPV)
BPV measures the impact of a 1 basis point increase in interest rates on value. To a large extent the BPV and NPV at Risk reflect the same risk – the difference being that BPV does not reflect convexity risk, given the small shift in interest rates.
In line with NPV at Risk, the bank's overall BPV position is dominated by the long term investment of capital, as the present value of this position is significantly impacted if interest rates move up by 1 basis point.
| BPV per currency banking books | ||
|---|---|---|
| amounts in thousands of euros | 2011 | 2010 |
| By currency | ||
| Euro | -15,545 | -21,760 |
| US dollar | 4,551 | -548 |
| Pound sterling | -136 | -284 |
| Other | 879 | 175 |
| Total | -10,251 | -22,417 |
The total BPV in 2011 excluding ING Direct USA is –EUR 16 million. The total BPV decreased substantially mainly on the back of a lower expected duration of mortgages leading as more prepayments are expected due to the low interest rate environment in the US and the Eurozone. Next to that the bank's strategic interest rate position turned to more neutral.
Foreign exchange (FX) risk in banking books
FX exposures in banking books result from core banking business activities (business units doing business in other currencies than their base currency), foreign currency investments in subsidiaries (including realised net profit and loss) and strategic equity stakes in foreign currencies. The policy regarding these exposures is briefly explained below.
Governance - Core banking business
Every business unit hedges the FX risk resulting from core banking business activities into its base currency. Consequently, assets and liabilities are matched in terms of currency.
Governance - FX Translation result
ING Bank's strategy is to protect the target core Tier 1 ratio against FX rate fluctuations, whilst limiting the volatility in the profit and loss account. Protecting the core Tier 1 ratio is achieved by deliberately taking foreign currency positions equal to certain target positions, such that the target core Tier 1 capital and risk-weighted assets are equally sensitive in relative terms to changing FX rates.
Risk profile - FX Translation result
The following table presents the currency exposures in the banking books for the most important currencies:
| Foreign Investments | Hedges | Net Exposure | ||||
|---|---|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |
| US dollar | 7,641 | 7,275 | -2,677 | -606 | 4,964 | 6,669 |
| Pound sterling | -997 | -993 | 1,048 | 1,144 | 51 | 151 |
| Polish zloty | 1,404 | 1,371 | -628 | -643 | 776 | 728 |
| Australian dollar | 3,165 | 2,908 | -2,459 | -2,056 | 706 | 852 |
| Turkish lira | 1,830 | 1,891 | -425 | -444 | 1,405 | 1,447 |
| Other currency | 6,934 | 7,160 | -4,172 | -4,028 | 2,762 | 3,132 |
| Total | 19,977 | 19,612 | -9,313 | -6,633 | 10,664 | 12,979 |
The US dollar Net Exposure decreased significantly in 2011. Anticipating on the announced sale of ING Direct USA, the risk-weighted assets will decrease and therefore, a lower Net Exposure is required. This is then achieved by increasing the hedge. The decreased Net exposure in the category 'Other currency' is mainly caused by changed share prices of strategic equity stakes. For example, the share price of the bank's equity stake in Bank of Beijing decreased around 20%, decreasing the Chinese renmimbi currency exposure.
ING Bank Annual Report 2011
Consolidated annual accounts
Risk management continued
In order to measure the remaining sensitivity of the target core Tier 1 ratio against FX rate fluctuations, the core Tier 1 ratio at Risk (cTaR) measure is used. It measures the drop in the core Tier 1 ratio from the target when stressing a certain FX rate. The stress scenarios for the FX rates that are used for calculating the cTaR, are presented in the last two columns. Only the scenarios that negatively impact the target core Tier 1 ratio are presented: depending on whether the actual foreign currency position is above or below the target position, the worst case scenario is either a negative or positive movement. A positive stress scenario means that the foreign currency appreciates against the Euro. For the US dollar this means that at the end of 2011 the target core Tier 1 ratio would only decrease by 0.12% in absolute terms (e.g. from 9.12% to 9.00%) if the US dollar appreciates by 15%. The US dollar cTaR excluding ING Direct USA (not shown in the table below) is significantly lower at 0.01%, which shows that the core Tier 1 ratio excluding ING Direct USA is well protected. Back testing shows that the strategy was effective in 2011; the core Tier 1 ratio was hardly affected by changing FX rates.
Core Tier 1 ratio sensitivity ING Bank
| cTaR | Stress Scenario | |||
|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | |
| Currency | ||||
| US dollar | 0.12% | 15% | 15% | |
| Pound sterling | 0.04% | 0.02% | 15% | 15% |
| Polish zloty | 0.01% | 0.01% | -15% | -15% |
| Australian dollar | 0.01% | 20% | -20% | |
| Turkish lira | 25% | 25% |
Equity price risk in banking books
Equity price risk arises from the possibility that equity security prices will fluctuate, affecting the value of equity securities and other instruments whose value reacts similarly to a particular security, a defined basket of securities, or a securities index. ING Bank maintains a strategic portfolio with substantial equity exposure in its banking books. This equity exposure mainly consists of the investments in associates of EUR 827 million (2010: EUR 1,494 million) and equity securities held in the available-for-sale (AFS) portfolio of EUR 2,466 million (2010: EUR 2,741 million). The value of equity securities held in the available-for-sale portfolio is directly linked to equity security prices with increases/decreases being recognised (except in the case of impairment) in the revaluation reserve. During the year ended 31 December 2011 the revaluation reserve relating to equity securities held in the Available-for-Sale portfolio fluctuated between a month-end low amount of EUR 1,226 million (2010: EUR 1,723 million) and a high amount of EUR 1,706 million (2010: EUR 2,370 million). Investments in associates are measured in accordance with the equity method of accounting and the balance sheet value and therefore not directly linked to equity security prices.
Equities Unrealised Gains and Losses in the AFS portfolio
| 2011 | 2010 | |
|---|---|---|
| Gross unrealised gains | 1,292 | 1,728 |
| Gross unrealised losses | 45 | -1 |
| Total | 1,247 | 1,727 |
Total capital requirement for equity price risk under the Simple Risk Weight Approach at 31 December 2011 results in EUR 207 million (2010: EUR 310 million).
Real Estate price risk in banking books
Real estate price risk arises from the possibility that real estate prices fluctuate. This affects both the value of real estate assets and earnings related to real estate activities.
ING Bank has three main different categories of real estate exposure on its banking books. First, ING Bank owns buildings it occupies. Second, ING Bank has a Real Estate Development company for which results are dependent on the overall real estate market. The general policy is to mitigate this risk by pre-sale agreements where possible. Third, ING Bank has co-invested seed capital and bridge capital to support the launch of various real estate funds included in the Real Estate Investment Portfolio (REIM). A decrease in real estate prices will cause the value of this seed and bridge capital to decrease and will lower the level of third party assets under management, which in turn will reduce the fee income from this activity. For the third category mentioned above, real estate price shocks will have a direct impact on reported net profit and loss. Please note that exposures mentioned in this paragraph are shown from a risk perspective, which excludes interests of third parties.
ING Bank's real estate exposure (i.e. including leverage) is EUR 4.0 billion of which EUR 0.9 billion is recorded as fair value through profit and loss. The remaining EUR 3.1 billion is booked at cost or is revalued through equity (with impairments going through profit and loss).
ING Bank Annual Report 2011 131
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Risk management continued
In total, Real Estate exposure decreased by EUR 1.1 billion mainly as a result of divestments in REIM (EUR –0.7 billion) and Real Estate Development (EUR –0.2 billion). Other important changes are: negative fair value changes and impairments (EUR –0.2 billion)
ING Bank's real estate exposure revaluing through profit and loss decreased significantly mainly caused by sales of American and Australian funds (EUR –0.7 billion) and assets being revalued through equity instead (EUR –0.4 billion); the latter is a result of the fact that ING REIM is not the manager of the real estate funds anymore.
For risk management purposes, the total real estate exposure amounts to EUR 4.0 billion since property from foreclosures and third party interests is excluded. A split up on the real estate exposures per continent and sector is seen below.
| Real Estate Exposure banking books recorded as fair value through profit and loss (by geographic area and sector type) | |||||
|---|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | ||
| Continent | Sector | ||||
| Europe | 462 | 662 | Residential | 70 | 207 |
| Americas | 28 | 812 | Office | 150 | 385 |
| Australia | 20 | 189 | Retail | 511 | 620 |
| Asia | 380 | 349 | Industrial | 113 | 516 |
| Other | 14 | Other | 46 | 298 | |
| Total | 890 | 2,026 | Total | 890 | 2,026 |
ING Bank's real estate exposure not revaluing through profit and loss has not been affected much. This is because divestments and impairments in Real Estate Development (EUR –450 million) were compensated by the inclusion of assets in the REIM portfolio previously revalued through profit and loss.
| Real Estate Exposure banking books not revalued through profit and loss (by geographic area and sector type) | |||||
|---|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | ||
| Continent | Sector | ||||
| Europe | 2,456 | 2,772 | Residential | 512 | 614 |
| Americas | 306 | 70 | Office | 1,350 | 1,456 |
| Australia | 176 | 204 | Retail | 896 | 874 |
| Asia | Industrial | 44 | 43 | ||
| Other | 147 | 99 | Other | 283 | 158 |
| Total | 3,085 | 3,145 | Total | 3,085 | 3,145 |
LIQUIDITY RISK
Liquidity risk is the risk that ING Bank or one of its subsidiaries cannot meet its financial liabilities when they come due, at reasonable cost and in a timely manner. Liquidity risk can materialise both through trading and non-trading positions.
Liquidity Risk Management
MRM is responsible for determining adequate policies and procedures for managing liquidity risk and for monitoring the compliance with these guidelines. In addition it is also responsible for performing liquidity risk stress testing. In accordance with Dutch Central Bank guidelines, ING Bank's liquidity positions are stress tested on a monthly basis under a scenario that is a mix between a market event and an ING Bank specific event. Additional stress testing exercises are undertaken on consolidated and local level on a periodic and ad-hoc basis.
Governance
As with other bank market risks, liquidity risk falls under the supervision of the ALCO function within ING Bank, with ALCO Bank as the highest approval authority. ALCO Bank determines the liquidity risk (limit) framework and appetite after which this is cascaded down in the organisation under the responsibility of the regional and local ALCOs. The main objective of ING Bank's liquidity risk framework is to ascertain – by means of proper risk appetite limits – that sufficient liquidity is maintained in order to ensure safe and sound operations under a variety of circumstances.
For this purpose liquidity risk is measured, managed and controlled from three different angles, namely a structural, a tactical and a contingency point of view.
Risk profile
Structural liquidity risk
Structural liquidity risk is the risk that the structural, long term balance sheet cannot be financed timely or at a reasonable cost. For the purpose of managing structural liquidity risk, a specific advisory committee to ALCO Bank has been established.
This committee which consists of key representatives from MRM, Capital Management and Financial Markets focuses on all liquidity risk aspects from a going concern perspective. The main objective of the committee is to maintain a sound liquidity profile through:
ING Bank Annual Report 2011
Consolidated annual accounts
Risk management continued
- Maintaining a well diversified mix of funding sources in terms of instrument types (e.g. unsecured deposits, commercial paper, long term bonds or repurchase agreements), fund providers (e.g. professional money market players, wholesale and retail clients), geographic markets and currencies;
- Actively managing access to the capital markets by regularly issuing public debt in all material markets and the maintenance of investor relations;
- Holding a broad portfolio of eligible assets that can be utilised to obtain secured funding, e.g. from the repo market or (E)CB; in this respect the total marketable/(E)CB eligible collateral position before any haircut amounts to EUR 194 billion (MtM);
- Management of liquidity gaps, taking into account the asset mix and both the secured and unsecured funding opportunities of ING Bank; and
- Maintaining a funds transfer pricing mechanism in which ING Bank's cost of liquidity is adequately reflected both under a going concern and a contingency perspective.
With respect to funding sources, ING Bank aims to fund its own originated assets (loans) by an equal amount of own originated liabilities (deposits), translated into an LtD target of below 1.2. Ultimo 2011 the LtD ratio (excluding securities at amortised costs and IABF receivable) equals 1.14. In 2011, uncertainty with regard to economic developments in both Europe and USA, led to US MM Funds being more restrictive in funding European counterparties. As ING Bank manages its balance sheet prudently, whereby short term funding is primarily utilised for short term assets, a decrease of these type of funding sources is manageable. The table below shows the funding mix.
| ING Bank Funding Mix | ||
|---|---|---|
| 2011 | 2010 | |
| Funding type | ||
| Retail deposits | 42% | 46% |
| Corporate & other deposits | 20% | 19% |
| Interbank (incl. central bank) | 9% | 8% |
| Lending / repurchase agreement | 7% | 7% |
| Public debt | 19% | 17% |
| Subordinated debt | 3% | 3% |
| Total | 100% | 100% |
The funding mix remained well diversified and according to targets set. Deposits accounted for 63% of the total funding mix.
Tactical liquidity risk
Liquidity risk which is resulting from short term cash and collateral positions is managed in the risk framework from a tactical liquidity risk perspective. The day-to-day management of the overall short term liquidity risk of ING Bank is delegated to Financial Markets Amsterdam, while regional and local Financial Markets departments manage liquidity in their respective regions and locations. Within Financial Markets, the focus is on the daily and intraday cash and collateral positions and the policy is to manage and sufficiently spread day-to-day funding requirements.
Contingency liquidity risk
Contingency liquidity risk specifically relates to the organisation and planning for liquidity management in time of stress. Within ING Bank, for contingency purposes, a specific crisis team - consisting of key Board Members, representatives from Staff Departments (e.g. Risk and Capital Management) and Treasuries - is responsible for liquidity management in times of crisis. Throughout the organisation adequate and up-to-date contingency funding plans are in place to enable senior management to act effectively and efficiently in times of crisis.
Contingency funding plans address both temporary and long-term liquidity disruptions, triggered by either a general market event or an ING Bank specific event.
Risk developments in 2011
Under the volatile market circumstances in 2011, funding and liquidity risk remains an important topic on the agenda of senior management and Asset and Liability Committee (ALCO), that requires continuous monitoring and management. External market and regulatory developments and internal financial developments are closely monitored. Regular stress testing and measurement of early warning indicators are, among others, used to provide additional management information. In 2011 the funding and liquidity risk appetite were updated. The appetite statement is set and allocated throughout ING Bank. In addition, funding and liquidity usage is steered by means of funds transfer pricing thus embedding funding and liquidity risk management in the total organisation. ING Bank continued to maintain its liquidity position within conservative internal targets.
ING Bank Annual Report 2011 133
Consolidated annual accounts
Risk management continued
All financial institutions have been confronted with a large number of new regulatory requirements. In 2011 ING Bank developed new frameworks for the funding and liquidity risk management as well as the organisational Assets and Liability Management (ALM) that reflects the evolved importance of funding and liquidity risk. Both of these frameworks will be implemented in 2012. The updated framework for funding and liquidity risk management provides for an integral approach of liquidity risk management and complies with the changed regulatory rules (CRDII, ILAAP). The framework contains, among others, the annual setting of a funding and liquidity risk appetite related to the ING Bank strategy, a continuous cycle of identification, assessment, control, monitoring and reporting of funding and liquidity risk, a policy covering all legal and regulatory rules, crisis planning and stress testing.
ING BANK BUSINESS RISK
Business Risk for ING Bank has been defined as the exposure to value loss due to fluctuations in volumes, margins and costs, as well as client behaviour risk. It is the risk inherent to strategy decisions and internal efficiency. The calculation of Business Risk Capital is done by calculation of two components,
(i) Expense risk relates to the (in)flexibility to adjust expenses, when that is needed.
(ii) Client behaviour risk relates to clients behaving differently than expected and the effect that this behaviour can have on customer deposits and mortgage pre-payments. The client behaviour risk is calculated by stressing the underlying assumptions in the models for behavioural assets and liabilities.
Each of these components is calculated separately, and combined to one business risk figure via the variance-covariance methodology.
OPERATIONAL RISK
Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes the related risk of reputation loss, as well as legal risk whereas strategic risks are not included. Effective operational risk management leads to more stable business processes (including IT systems) and lower costs. Generic mandatory controls are described in the ORM policy house.
Clear and accessible policies and minimum standards are embedded in ING Bank business processes in all business lines. An infrastructure is in place to enable management to track incidents and operational risk issues. A comprehensive system of internal controls creates an environment of continuous improvement in managing operational risk. ING Bank uses this knowledge (including lessons learned from incidents) to improve the control of key risks.
GOVERNANCE
At all levels in the organisation Non Financial Risk Committees (NFRC's) are established that identify, measure and monitor the operational, compliance and legal risks of the region or business unit with appropriate quality of coverage (granularity) and to ensure that appropriate management action is taken by the responsible line managers at the appropriate level of granularity. NFRC's, chaired by the CEO of the entity, steer the risk management activities of the first and second line of defence in their entities.
The General Manager Operational Risk Management (ORM) is responsible for monitoring operational risks and developing and establishing the Operational Risk Framework within ING Bank. The General Manager ORM also establishes and approves the policies and minimum standards, supports the business line ORM staff, monitors the quality of operational risk management and assists and supports the Management Board Bank in managing ING Bank's operational risks. The NFRC is the primary approval and oversight committee. The Non-Financial Risk dashboard (NFRD) enables management to focus on the ten operational risk areas through the quarterly report on regional, divisional and Bank level.
The ORM function consists of functional departments for Operational risks (including policies, systems, SOX testing, capital allocation and reporting), for Information (Technology) risks and for Security & Investigations.
ORM uses a layered functional approach within business lines to ensure systematic and consistent implementation of the group-wide ORM framework, policies and minimum standards. To avoid potential conflicts of interests, it is imperative that the ORM officer is impartial and objective when advising business management on operational risk matters in their business unit or business line. To facilitate this, a strong functional reporting line to the next higher level ORM officer is in place. The functional reporting line has clear accountabilities with regard to objective setting, remuneration, performance management and appointment of new ORM staff.
Operational risk framework
ING Bank has developed a comprehensive framework supporting and governing the process of identifying, mitigating, measuring and monitoring operational risks thus reflecting the stages described in the Enterprise Risk Management model of COSO (Committee of Sponsoring Organisations of the Treadway Commission).
The operational risk appetite within ING Bank is defined as the acceptable and authorised maximum level of risk, in each of the operational risk areas that must be adhered to in order for ING Bank to achieve its business plan within approved budgets. This risk appetite is quarterly monitored through the Non-Financial Risk Dashboard which reports the key non financial risk exposures.
ING Bank Annual Report 2011
Consolidated annual accounts
Risk management continued
Processes are in place to identify key threats, vulnerabilities and the associated risks which might cause adverse events. Event identification is performed proactively and precedes a risk assessment. Different techniques for event identification exist within ING Bank, e.g. risk & control self assessments, scenario analysis, external events inventories, internal incident analysis (e.g. lessons learned based on information from incident reporting), key risk indicator events and threat scans.
At least once a year business units and departments perform an integrated risk assessment with involvement of the business and their Operational Risk, Compliance, Legal and Finance departments.
Based on the results of the risk assessment, response measures must be determined for the identified risks beyond the risk appetite. Risk response actions balance the expected cost for implementing these measures with the expected benefits regarding the risk reduction. Risk response can be achieved through several combinations of mitigation strategies, for example reducing likelihood of occurrence, reducing impact, risk avoidance, risk acceptance or through the transfer of risk. Tracking takes place through ING Bank's central risk management system.
The yearly objective setting process for both business management and ORM professionals aims to keep improving the management of operational risk throughout ING Bank to ensure that ING stays in control of its current and future operational risks. ING Bank's ORM Framework is further maturing towards an integrated controls framework according to pre-agreed requirements and development stages in the individual business units. This development is measured through the scorecard process.
MODEL DISCLOSURE
The Operational Risk Capital model of ING Bank is based on a Loss Distribution Approach (LDA). The Loss Distribution is based on both external and internal loss data exceeding EUR 1 million. The model is adjusted for the specific measured quality of control in a business line and the occurrence of large incidents ('bonus/malus'). This provides an incentive to local (operational risk) management to better manage operational risk.
Loss Distribution approach
The main objective of the LDA approach is to derive an objective Operational Risk capital amount based on the risk profile of a bank and its business units. This approach estimates the distribution of operational risk losses for each combination of business line and loss event type.
RISK PROFILE
The AMA capital for the fourth quarter of 2011 amounts EUR 2,836 million. This is slightly below the capital estimate of previous year. This is explained by a capital reduction resulting from the divestments of ING Car Lease and REIM Fee Business, which is partially offset by a capital increase resulting from the regular external incident data update.
Economic and Regulatory Capital (Bank diversified only) by risk type
| Economic Capital | Regulatory Capital | |||
|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | |
| Operational Risk | 1,683 | 1,619 | 2,836 | 2,872 |
MAIN DEVELOPMENTS IN 2011
The AMA (Advance Measurement Approach) 2.0 program will elevate operational risk management to best practice levels by 2012. The AMA 2.0 program will enable the business to influence its capital charge through sound Operational Risk management:
- Business managers as the clear owners of their operational risks and their capital charge;
- More accurate and relevant risk data and insights available for operational risk management;
- Capital model more reflective of ING Bank risk profile to incentivise business to keep operational risks under control;
- More weighting to internal data sources in the capital model, which includes a set of business driven scenarios, risk assessments, audit data and internal loss information; and
- Major business decisions supported by accurate capital numbers that align to the Non Financial Risk Dashboard (NFRD).
AMA 2.0 program delivers an ambitious set of improvements in the management of operational risk:
- Comprehensive, transparent and effective Non Financial Risk Committee (NFRC) hierarchy at top-of-the-house;
- Risk appetite statements for regions and divisions as anchor point for operational risk management;
- Key risk indicators for top risks at bank and Regional/ Function level to monitor the ING Bank risk profile;
- Set of key risk scenarios as capital model input and to prioritise risk management activities;
- Key Control Testing to justify capital levels and set a cost incentive to improve controls; and
- Capture of all material internal losses and share main lessons learned to avoid repetition inside the group.
The NFR Awareness Program is designed with the objective that all ING Bank employees are aware of the relevant risks, the potential impact, the appropriate mitigating measures and their personal role in applying those measures. The new approach significantly improves risk awareness by putting ING Bank's businesses in the lead, working closely with risk professionals. A tailored approach per target group, embedded activities in regular business planning and target
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Risk management continued
setting and focus on desired behaviours and realistic ways of apply rules are the basic elements of the new approach. It also gives an overall structure to the many risk awareness activities carried out by ORM, Compliance and Legal and ensures that ING Bank's risk awareness activities are better focused on the key risks we face as a business.
ING Bank has further improved its IT risk profile through IT security control implementations and IT process improvements. Specific focus in 2011 was given to further improvements around IT security monitoring, IT platform security and IT user access while specific anti-cybercrime measures were also effectuated.
COMPLIANCE RISK
Compliance Risk is defined as the risk of impairment of ING Bank's integrity as a result of failure (or perceived failure) to comply with relevant laws, regulations, ING Bank policies and standards and the ING Bank Business Principles. In addition to reputational damage, failure to effectively manage Compliance Risk could expose ING Bank to fines, civil and criminal penalties, and payment of damages, court orders and suspension or revocation of licenses, which would adversely impact customers, staff and shareholders of ING.
ING Bank believes that fully embedded Compliance Risk Management Controls preserves and enhances the trust of its customers, staff and shareholders. Being trusted is essential to building sustainable businesses. ING Bank's Business Principles set the foundation for the high ethical standards ING Bank expects of all our business activities. ING Bank's Business Principles require all staff at every level to conduct themselves, not only in compliance with laws and regulations, but also by acting with integrity, being open and clear, respectful, and responsible.
Clear and practical policies and procedures are embedded in ING Bank business processes in all Business Lines. Systems are in place to enable management to track current and emerging Compliance Risk issues, to communicate these to internal and external stakeholders, and to drive continuous improvement. ING Bank understands that good Compliance Risk Management involves understanding and delivering on the expectations of customers and other stakeholders, thereby strengthening the quality of key relationships.
GOVERNANCE
The Compliance Risk Management function
The Chief Compliance Officer (CCO) is the General Manager of Compliance Risk Management and is responsible for developing and establishing the Bank-wide Compliance Risk Management Charter & Framework, establishes the Minimum Standards for managing Compliance Risks and assists and supports the Management Board Bank in managing ING Bank's Compliance Risks.
ING Bank uses a functional approach Lines to ensure systematic and consistent implementation of the Bank-wide Charter & Framework, policies, Minimum Standards and related procedures. The Local Compliance Officer has the responsibility to assist local management in managing Compliance Risk within that business unit. The Regional or Universal Bank Compliance Officer has a management and supervisory role over all functional activities of the Compliance Officers in the respective region or Universal Bank. The CCO and the Bank Compliance Risk Management team provide overall direction to the Regional or Universal Bank Compliance Officers.
To avoid potential conflicts of interest, it is imperative that the Compliance Officers are impartial and objective when advising business management on Compliance Risk in their business unit, region, country or entity. To facilitate this, a strong functional reporting line to the next higher level Compliance Officer is in place. The functional reporting line has clear accountabilities relating to objective setting, remuneration, performance management and the appointment of new Compliance Risk Management staff as well as obligations to veto and escalate.
Scope
The Compliance Risk Management function focuses on managing the risks arising from laws, regulations and standards which are specific to the financial services industry. The Compliance Risk Management function actively educates and supports the business in managing compliance risks including anti-money laundering, preventing terrorist financing, conflicts of interest, proper sales and trading conduct and protection of customer interest.
ING Bank separates Compliance Risk into four conduct-related integrity risk areas: client conduct, personal conduct, organisational conduct as well as financial conduct. ING Bank has a Whistleblower procedure which encourages staff to speak up if they know of or suspect a breach of external regulations or internal policies or Business Principles.
ING Bank Annual Report 2011
Consolidated annual accounts
Risk management continued
Compliance Risk Management Framework
The Framework consists of three key components:
1. The Compliance Risk Management process
The process has five key activities carried out in accordance with the requirements of the Framework:
A. Identification of Compliance Risk Obligations;
B. Risk Assessment;
C. Compliance Risk Mitigation (includes Training and Education);
D. Compliance Risk Monitoring (includes Action Tracking); and
E. Compliance Risk Reporting (includes Internal Events Reporting and Response).
2. Advisory
Compliance Officers proactively advise their CEO, Management, local boards and committees, the next higher level Compliance Officer, and employees on Compliance Risk, responsibilities, obligations and concerns.
3. Scorecard
The Compliance Risk Management function works with the Operational Risk Management Scorecard process to evaluate how well the Compliance Risk Management Framework is embedded in each business. Scoring is based on the ability of the business unit to demonstrate that the required policies and procedures are implemented.
EXTRA-TERRITORIAL REGULATIONS
Financial institutions continue to be closely scrutinised by regulatory authorities, governmental bodies, shareholders, rating agencies, customers and others to ensure they comply with the relevant laws, regulations, standards and expectations. Bank regulators and other supervisory authorities in Europe, the US and elsewhere continue to oversee the activities of financial institutions to ensure that they operate with integrity and conduct business in an efficient, orderly and transparent manner. ING Bank seeks to meet the standards and expectations of regulatory authorities and other interested parties through a number of initiatives and activities, including scrutinizing account holder information, payment processing and other transactions to support compliance with regulations governing money laundering, economic and trade sanctions, bribery and other corrupt practices. The failure or alleged failure by ING Bank to meet applicable standards in these areas could result in, among other things, suspension or revocation of ING Bank's licenses, cease and desist orders, fines, civil or criminal penalties and other disciplinary action which could materially damage ING Bank's reputation and financial condition, and accordingly ING Bank's primary focus is to support good business practice through its Business Principles and policies.
ING's continued actions to mature its compliance risk management programme will ensure that ING continues to comply appropriately with international standards and laws. ING has an on-going objective to continuously strengthen the Financial Economic Crime (FEC) controls related to:
- Managing Anti-Money Laundering (AML);
- Combat Terrorist Financing (CTF); and
- Export Trade and Sanction risks.
As a result of our frequent evaluation of all businesses from economic, strategic and risk perspectives ING Bank continues to believe that for business reasons doing business involving certain specified countries should be discontinued, which includes that ING Bank has a policy not to enter into new relationships with clients from these countries and processes remain in place to discontinue existing relationships involving these countries. At present these countries include Myanmar, North Korea, Sudan, Syria, Iran and Cuba. Each of these countries is subject to a variety of EU, US and other sanctions regimes. Cuba, Iran, Sudan, and Syria are identified by the US as state sponsors of terrorism and are subject to US economic sanctions and export controls.
REGULATORY MEASURES AND LAW ENFORCEMENT AGENCIES INVESTIGATIONS
ING Bank N.V. has continued discussions with its Dutch bank regulator De Nederlandsche Bank (DNB) related to transactions involving persons in countries subject to sanctions by the EU, the US and other authorities and its earlier review of transactions involving sanctioned parties. ING Bank completed the global implementation of enhanced compliance and risk management procedures, and continues working to further strengthen the Financial Economic Crime controls as agreed with DNB.
ING Bank remains in discussions with authorities in the US concerning these matters, including ING Bank's compliance with Office of Foreign Asset Control requirements. ING Bank has received requests for information from US Government agencies including the US Department of Justice and the New York County District Attorney's Office. ING Bank is cooperating fully with the ongoing investigations and is engaged in discussions to resolve these matters with the US authorities; however, it is not yet possible to reliably estimate the timing or amount of any potential settlement, which could be significant.
ING Bank Annual Report 2011 137
Consolidated annual accounts
Risk management continued
MAIN DEVELOPMENTS IN 2011
- Regulator relationships - Bank Compliance Risk Management continued to invest in pro-active relationships with regulators in the jurisdictions where ING Bank operates, striving for an open approach and cooperation in identifying and mitigating compliance risks for ING Bank.
- Promoting Integrity Programme - Bank Compliance Risk Management, together with Human Resources and Corporate Communications & Affairs, continued with the roll-out of the Promoting Integrity Programme (PIP), a global employee education programme focusing on ING Bank's values (including the ING Bank Business Principles) and the role they play in the business and workplace. Short e-modules were developed on Customer Trust and Anti-Fraud and were followed by manager-led dialogue sessions, where employees discussed what integrity means for them and how the Business Principles and ING Bank Policies and standards can be applied in their daily work.
- Ongoing enhancement of Financial Economic Crime controls – ING Bank continued its strong commitment to preventing any involvement in criminal activity. Existing activities were further strengthened by increased monitoring and internal audits as well as awareness and training programmes and an internal annual sign-off process for senior management concerning implementation of policies and procedures relating to Financial Economic Crime including business with sanctioned parties.
- Gifts, Entertainment and Anti-Bribery Policy – ING Bank issued a revised Gifts, Entertainment and Anti-Bribery Policy to align with the changing regulatory landscape in respect of anti-bribery which provides for severe penalties in case of bribery offences and with new extra-territorial anti-bribery legislation, such as the UK Bribery Act.
- Learning – Continuous global education and awareness training was provided through face-to-face training sessions and learning tools on topics such as Ultra High Risk Countries & Export Trade, Financial Economic Crime, and Gifts, Entertainment and Anti-Bribery. Compliance Risk Management also continued its mandatory global Compliance Officer Training programme for all compliance officers new to ING Bank.
ING Bank Annual Report 2011
Consolidated annual accounts
Capital management
amounts in millions of euros, unless stated otherwise
OBJECTIVES
ING Group Capital Management (Capital Management) is responsible for the sufficient capitalisation of ING Group entities at all times in order to manage the risk associated with ING's business activities. This involves the management, planning and allocation of capital within ING Group. ING's Corporate Treasury is part of Capital Management. It executes the necessary capital market transactions, term (capital) funding and risk management transactions. Capital Management monitors and plans capital adequacy on a consolidated basis at three levels: ING Group, ING Insurance and ING Bank. Capital Management takes into account the metrics and requirements of regulators (Insurance Group Directive (IGD) Solvency I, Tier 1 and BIS ratios and limits for hybrid capital), rating agencies (leverage ratios, Adjusted Equity) and internal models such as the economic capital and market value balance sheet approach for parts of ING Insurance including Available Financial Resources (AFR).
ING applies the following main capital definitions for ING Bank:
- Core Tier 1 capital, Tier 1 capital and total BIS capital (ING Bank) – Tier 1 capital is defined as shareholders' equity including core Tier 1 securities plus hybrid capital less certain prudential filters and deductible items. Tier 1 and BIS capital divided by risk-weighted assets equal the Tier 1 and BIS ratio respectively. Core Tier 1 capital is equal to Tier 1 capital excluding hybrid capital.
In 2011 ING Bank issued a total of EUR 23 billion long-term funding against EUR 10.7 billion of ING Bank's (including subsidiaries) long-term debt maturing.
DEVELOPMENTS
In 2011 Capital Management's main focus remained to strengthen the capital position of ING Group, ING Bank and ING Insurance. ING's capital positions are well placed to deal with the uncertain financial environment, increasing regulatory requirements and the ambition to repurchase the remaining outstanding Core Tier 1 securities.
In May ING repurchased EUR 2 billion of the Core Tier 1 securities issued in November 2008 at a 50% premium. Nevertheless ING maintained a strong capital position, driven mainly by strong capital generation at ING Bank. ING Bank met the additional capital requirements proposed by the EBA and agreed by the EU Council on 26 October 2011. In December 2011, ING successfully completed a liability management transaction with an average participation of 60%. The net impact of this transaction on ING Group's consolidated balance sheet was a reduction of EUR 2 billion in hybrid capital and a capital gain of EUR 0.7 billion. As part of this initiative, EUR 1.6 billion subordinated intercompany debt from ING Bank N.V. to ING Groep N.V. was repaid and ING Bank issued two new subordinated bonds with a nominal value of GBP 0.4 billion and EUR 0.4 billion respectively.
POLICIES
The activities of Capital Management are executed on the basis of established policies, guidelines and procedures. The main documents that serve as guidelines for capital planning are the Capital Letter (comprising the approved targets and limits for capital), the Capital Planning Policy, the Dividend Policy and the Capital Request Policy. For the Corporate Treasury there are additional policies and limits that guide the management of the balance sheets and the execution of capital market transactions.
The above capital definitions and policies have been approved by the ING Group Executive Board or delegated authorities.
PROCESSES FOR MANAGING CAPITAL
In addition to measuring capital adequacy, Capital Management also ensures that sufficient capital is available through setting targets and limits relevant to the above mentioned metrics for ING Group, ING Bank, and ING Insurance and ensuring adherence to the set limits and targets through planning and executing capital management transactions. The process is supplemented by stress testing and scenario analysis. The ongoing assessment and monitoring of capital adequacy is embedded in Capital Management's capital planning process and results in a quarterly capital update report which is presented to both the ING Group Finance and Risk Committee and the ING Group Executive and Supervisory Boards. The main objective of the assessment is to ensure that ING Group as a whole has sufficient capital relative to its risk profile both in the short and the medium-term.
A key priority of Capital Management is to make sure that strong stand-alone companies are created for banking and insurance in preparation of the separation. All operating entities need to stay adequately capitalised based on local regulatory and rating agency requirements and interdependencies should be reduced to a minimum. The entities should also be able to access capital markets independently.
CAPITAL ADEQUACY ASSESSMENT
During 2011, ING Bank was adequately capitalised in relation to their risk profile and strategic objectives.
ING Bank Annual Report 2011 139
Consolidated annual accounts
Capital Management continued
REGULATORY REQUIREMENTS
ING BANK
Capital adequacy and the use of regulatory required capital are based on the guidelines developed by the Basel Committee on Banking Supervision (The Basel Committee) and the European Union Directives, as implemented by the Dutch Central Bank (DNB) for supervisory purposes. The minimum Tier 1 ratio is 4% and the minimum total capital ratio (known as the BIS ratio) is 8% of all risk-weighted assets.
Basel II
As of 2008 ING Bank publishes risk-weighted assets (RWA), Tier 1 and BIS capital and the accompanying capital ratios based on Basel II data only. In addition, ING publishes the minimum required capital level according to Basel II and according to the Basel I floor. As of 2009 the Basel I floor is based on 80% of Basel I RWA. The minimum requirements according to Basel II and Basel I are both compared to total BIS available capital according to Basel II.
EBA capital exercise
An additional capital exercise was proposed by the EBA and agreed by the Council on 26 October 2011. This exercise required banks to strengthen their capital positions by building up a temporary capital buffer against sovereign debt exposures to reflect current market prices. In addition, it required them to establish a buffer such that the Core Tier 1 capital ratio reaches a level of 9% by the end of June 2012. ING Bank already meets the 9% Core Tier 1 ratio after the removal of the prudential filters on sovereign assets in the Available-for-Sale portfolio and prudent valuation of sovereign debt in the Held-to-Maturity and Loans and receivables portfolios, reflecting current market prices.
| Capital position of ING Bank | ||
|---|---|---|
| 2011 | 2010 | |
| Shareholders' equity (parent) | 34,367 | 34,452 |
| Minority interests (1) | 817 | 748 |
| Subordinated loans qualifying as Tier 1 capital (2) | 6,850 | 8,438 |
| Goodwill and intangibles deductible from Tier 1 (1) | -1,390 | -1,645 |
| Deductions Tier 1 | -1,014 | -1,069 |
| Revaluation reserve (3) | -1,008 | -1,592 |
| Available capital – Tier 1 | 38,622 | 39,332 |
| Supplementary capital – Tier 2 (4) | 9,516 | 10,882 |
| Available Tier 3 funds | ||
| Deductions | -1,014 | -1,069 |
| BIS capital | 47,124 | 49,145 |
| Risk-weighted assets | 330,421 | 321,103 |
| Core Tier 1 ratio | 9.62% | 9.62% |
| Tier 1 ratio | 11.69% | 12.25% |
| BIS ratio | 14.26% | 15.30% |
| Required capital based on Basel I floor (5) | 31,107 | 29,860 |
| BIS ratio based on Basel I floor (5) | 12.12% | 13.17% |
(1) According to the regulatory definition
(2) Subordinated loans qualifying as Tier 1 capital have been placed by ING Groep N.V. with ING Bank N.V.
(3) Includes revaluation debt securities, revaluation reserve cash flow hedge and revaluation reserves equity and real estate (see ING's Capital base table, footnote 3).
(4) Includes eligible lower Tier 2 loans and revaluation reserves equity and real estate revaluations removed from Tier 1 capital.
(5) Using 80% of Basel I Risk-Weighted Assets.
ING Bank Annual Report 2011
Consolidated annual accounts
Capital management continued
Capital adequacy and ratios
Quantitative disclosures on capital measurement and ratios
| Bank | ||
|---|---|---|
| 2011 | 2010 | |
| Tier 1 ratio (Bank) | ||
| Year-end actual Tier 1 ratio | 11.69% | 12.25% |
| Regulatory minimum Tier 1 ratio | 4.00% | 4.00% |
| Target minimum Tier 1 ratio | 10.00% | 10.00% |
| BIS ratio (Bank) | ||
| Year-end actual BIS ratio | 14.26% | 15.30% |
| Regulatory minimum BIS ratio | 8.00% | 8.00% |
| Target minimum BIS ratio | 10.00% | 10.00% |
The Tier 1 ratio and the BIS ratio are regulatory requirements. Internally ING manages on the Core Tier 1 ratio, for which the target was raised from 8.0% to 8.5% in 2011. The actual ratios were 9.62% at the end of 2010 and also 9.62% at the end of 2011. ING expects the BIS ratio to lose its meaning.
Main credit ratings of ING at 31 December 2011
| Standard & Poor's | Moody's | Fitch | |||||
|---|---|---|---|---|---|---|---|
| Rating | Outlook | Rating | Outlook | Rating | Outlook | ||
| ING Groep N.V. | |||||||
| - long term | A | stable | A1 | stable | A | stable | |
| ING Bank N.V. | |||||||
| - short term | A-1 | P-1 | F1+ | ||||
| - long term | A+ | stable | Aa3 | stable | A+ | stable | |
| - financial strength | C+ | ||||||
| ING Verzekeringen N.V. | |||||||
| - short term | A-2 | P-2 | F2 | ||||
| - long term | A- | negative | Baa2 | developing | A- | negative |
ING's key credit ratings and outlook are shown in the table above. Each of these ratings reflects only the view of the applicable rating agency at the time the rating was issued, and any explanation of the significance of a rating may be obtained only from the rating agency.
A security rating is not a recommendation to buy, sell or hold securities and each rating should be evaluated independently of any other rating. There is no assurance that any credit rating will remain in effect for any given period of time or that a rating will not be lowered, suspended or withdrawn entirely by the rating agency if, in the rating agency's judgment, circumstances so warrant. ING accepts no responsibility for the accuracy or reliability of the ratings.
ING Bank Annual Report 2011
Consolidated annual accounts
AUTHORISATION OF ANNUAL ACCOUNTS
Amsterdam, 12 March 2012
THE SUPERVISORY BOARD
Jeroen van der Veer, chairman
Peter A.F.W. Elverding, vice-chairman
J.P. (Tineke) Bahlmann
Henk W. Breukink
Sjoerd van Keulen
Piet C. Klaver
Joost Ch.L. Kuiper
Aman Mehta
Luc A.C.P. Vandewalle
Lodewijk J. de Waal
THE MANAGEMENT BOARD
Jan H.M. Hommen, chairman
J.V. (Koos) Timmermans, vice-chairman
Patrick G. Flynn, CFO
Wilfred F. Nagel, CRO
William L. Connelly, CEO Commercial Banking
C.P.A.J. (Eli) Leenaars, CEO Retail Banking Direct and International
Hans van der Noordaa, CEO Retail Banking Benelux
ING Bank Annual Report 2011
Parent company annual accounts
Parent company balance sheet of ING Bank
as at 31 December before appropriation of result
| amounts in millions of euros | 2011 | 2010 |
|---|---|---|
| ASSETS | ||
| Cash and balances with central banks 1 | 20,097 | 2,791 |
| Short-dated government paper 2 | 1,932 | 1,809 |
| Amounts due from banks 3 | 67,424 | 80,837 |
| Loans and advances to customers 4 | 331,633 | 327,253 |
| Debt securities 5 | ||
| - available-for-sale | 14,383 | 16,106 |
| - trading | 13,923 | 21,970 |
| Equity securities 6 | ||
| - available-for-sale | 1,862 | 2,297 |
| - trading | 2,474 | 1,799 |
| Investments in group companies 7 | 29,153 | 28,252 |
| Investments in associates 8 | 503 | 561 |
| Intangible assets 9 | 1,096 | 1,375 |
| Equipment 10 | 531 | 597 |
| Other assets 11 | 74,375 | 60,648 |
| Total assets | 559,386 | 546,295 |
| LIABILITIES | ||
| Amounts due to banks 12 | 101,807 | 96,291 |
| Customer deposits and other funds on deposit 13 | 207,761 | 213,556 |
| Debt securities in issue | 110,077 | 98,571 |
| Other liabilities 14 | 85,551 | 80,983 |
| General provisions 15 | 968 | 1,029 |
| Subordinated loans 16 | 18,855 | 21,413 |
| Total liabilities | 525,019 | 511,843 |
| EQUITY | ||
| Share capital | 525 | 525 |
| Share premium | 16,542 | 16,542 |
| Legal reserves (1) | 1,116 | 2,015 |
| Other reserves | 12,266 | 11,075 |
| Unappropriated result | 3,918 | 4,295 |
| Total equity 17 | 34,367 | 34,452 |
| Total liabilities and equity | 559,386 | 546,295 |
(1) Legal reserves includes Share of associates reserve of EUR 339 million (2010:EUR 26 million), Currency translation reserve of EUR 209 million (2010:EUR 500 million) and Revaluation reserve of EUR 568 million (2010: EUR 1,489 million).
References relate to the notes starting on page 147. These form an integral part of the parent annual accounts.
ING Bank Annual Report 2011
Parent company annual accounts
Parent company profit and loss account of ING Bank
for the years ended 31 December
| amounts in millions of euros | 2011 | 2010 |
|---|---|---|
| Result of group companies after taxation | 2,617 | 2,432 |
| Other results after taxation | 1,388 | 2,063 |
| Net result | 4,005 | 4,495 |
ING Bank Annual Report 2011
Parent company annual accounts
Parent company statement of changes in equity of ING Bank
for the years ended 31 December
| amounts in millions of euros | Share capital | Share premium | Share of associates reserve | Currency translation reserve | Revaluation reserve | Other reserves | Total |
|---|---|---|---|---|---|---|---|
| Balance as at 1 January 2010 | 525 | 16,542 | -241 | 2,488 | 10,908 | 30,222 | |
| Unrealised revaluations after taxation | -348 | -539 | -887 | ||||
| Realised gains/losses transferred to profit and loss | -293 | -293 | |||||
| Changes in cash flow hedge reserve | -167 | -167 | |||||
| Exchange rate differences | 1,089 | 1,089 | |||||
| Other | 26 | 114 | 140 | ||||
| Total amount recognised directly in equity | 26 | 741 | -999 | 114 | -118 | ||
| Net result | 4,495 | 4,495 | |||||
| 26 | 741 | -999 | 4,609 | 4,377 | |||
| Employee stock options and | 53 | 53 | |||||
| Dividend | -200 | -200 | |||||
| Balance as at 31 December 2010 | 525 | 16,542 | 26 | 500 | 1,489 | 15,370 | 34,452 |
| Unrealised revaluations after taxation | 186 | -1,145 | -959 | ||||
| Realised gains/losses transferred to profit and loss | 406 | 406 | |||||
| Changes in cash flow hedge reserve | -182 | -182 | |||||
| Exchange rate differences | -477 | -477 | |||||
| Other | 313 | -310 | 3 | ||||
| Total amount recognised directly in equity | 313 | -291 | -921 | -310 | -1,209 | ||
| Net result | 4,005 | 4,005 | |||||
| 313 | -291 | -921 | 3,695 | 2,796 | |||
| Employee stock options and share plans | 119 | 119 | |||||
| Dividend | -3,000 | -3,000 | |||||
| Balance as at 31 December 2011 | 525 | 16,542 | 339 | 209 | 568 | 16,184 | 34,367 |
Other reserves include Retained earnings and Unappropriated result.
ING Bank Annual Report 2011 145
5
Parent company annual accounts
Accounting policies for the parent company annual accounts of ING Bank
BASIS OF PRESENTATION
The parent company accounts of ING Bank are prepared in accordance with the financial reporting requirements included in Part 9 of Book 2, of the Dutch Civil Code. The accounting policies applicable to presentation and disclosures are in accordance with the financial reporting requirements included in Part 9 of Book 2, of the Dutch Civil Code. The principles of valuation and determination of results stated in connection with the consolidated balance sheet and profit and loss account are also applicable to the parent company balance sheet and profit and loss account. Investments in group companies and investments in associates are recognised at net asset value with goodwill, if any, recorded under intangible assets.
The profit and loss account is drawn up in accordance with Section 402, Book 2, of the Dutch Civil Code.
A list containing the information referred to in Section 379 (1), Book 2, of the Dutch Civil Code has been filed with the Commercial Register of Amsterdam, in accordance with Section 379 (5), Book 2, of the Dutch Civil Code.
Changes in balance sheet values due to changes in the Revaluation reserve of the associates are reflected in the Share of associates reserve, which forms part of Shareholders' equity. Changes in balance sheet values due to the results of these associates, accounted for in accordance with ING Bank accounting policies, are included in the profit and loss account. Other changes in the balance sheet value of these associates, other than those due to changes in share capital, are included in Other reserves, which forms part of Shareholders' equity.
A legal reserve is carried at an amount equal to the share in the results of associates since their first inclusion at net asset value less the amount of profit distributions to which rights have accrued in the interim. Profit distributions which can be repatriated to the Netherlands without restriction are likewise deducted from the Share of associates reserve.
146 ING Bank Annual Report 2011
Parent company annual accounts
5
Notes to the parent company annual accounts of ING Bank
amounts in millions of euros, unless stated otherwise
ASSETS
1 CASH AND BALANCES WITH CENTRAL BANKS
Amounts held at central banks amount to EUR 19,358 million (2010: EUR 2,214 million).
2 SHORT-DATED GOVERNMENT PAPER
Short-dated government paper includes international government paper amounting to EUR 1,831 million (2010: EUR 1,686 million) for the company.
3 AMOUNTS DUE FROM BANKS
| Amounts due from banks | ||
|---|---|---|
| 2011 | 2010 | |
| Non-subordinated receivables from | ||
| Group companies | 19,694 | 30,445 |
| Third parties | 45,518 | 47,789 |
| 65,212 | 78,234 | |
| Subordinated receivables from | ||
| Group companies | 2,057 | 2,350 |
| Third parties | 155 | 253 |
| 67,424 | 80,837 |
As at 31 December 2011, amounts due from banks included receivables with regard to securities, which have been acquired in reverse repurchase transactions amounting to EUR 24,843 million (2010: EUR 24,445 million).
4 LOANS AND ADVANCES TO CUSTOMERS
| Loans and advances to customers – subordinated and non-subordinated | ||
|---|---|---|
| 2011 | 2010 | |
| Non-subordinated receivables from | ||
| ING Groep N.V. | 2,250 | 500 |
| Group companies | 88,268 | 88,182 |
| Third parties | 239,270 | 238,571 |
| 329,788 | 327,253 | |
| Subordinated receivables from | ||
| Group companies | 1,845 | |
| 331,633 | 327,253 |
As at 31 December 2011, assets held under finance lease contracts amounted to EUR 33 million (2010: EUR 50 million).
As at 31 December 2011, the receivables included in Loans and advances to customers that are part of the trading portfolio amounted to EUR 12,952 million (2010: EUR 14,355 million).
Loans and advances to customers includes receivables with regard to securities which have been acquired in reverse repurchase transactions amounting to EUR 12,868 million (2010: EUR 15,043 million) for the company.
5 DEBT SECURITIES
| Debt securities by issuer | ||
|---|---|---|
| 2011 | 2010 | |
| Public sector | 22,084 | 29,047 |
| Other | 6,222 | 9,029 |
| 28,306 | 38,076 |
ING Bank Annual Report 2011
147
6 Parent company annual accounts
Notes to the parent company annual accounts of ING Bank continued
| Debt securities analysed by listing | ||
|---|---|---|
| 2011 | 2010 | |
| Listed | 26,436 | 36,598 |
| Unlisted | 1,870 | 1,478 |
| 28,306 | 38,076 | |
| Debt securities – subordinated and non-subordinated | ||
| --- | --- | --- |
| 2011 | 2010 | |
| Non-subordinated debt securities issued by | ||
| Associates | 721 | 164 |
| Third parties | 27,585 | 37,835 |
| 28,306 | 37,999 | |
| Subordinated debt securities issued by | ||
| Associates | 77 | |
| 28,306 | 38,076 | |
| Changes in debt securities (available-for-sale) | ||
| --- | --- | --- |
| 2011 | 2010 | |
| Opening balance | 16,106 | 15,232 |
| Additions | 12,630 | 7,470 |
| Amortisation | 4 | |
| Changes in the composition of the group | -282 | |
| Gains/(losses) from change in fair value | -75 | 112 |
| Provision for impairment | 23 | |
| Disposals and redemptions | -14,031 | -6,918 |
| Exchange rate differences | 12 | 205 |
| Other changes | 1 | |
| Closing balance | 14,383 | 16,106 |
As at 31 December 2011, the cost of the trading debt securities amounted to EUR 13,923 million (2010: EUR 21,970 million).
As at 31 December 2011, an amount of EUR 9,394 million (2010: EUR 13,840 million) was expected to be settled after more than one year from the balance sheet date.
Debt securities temporarily sold in repurchase transactions amounts to EUR 10,845 million as at 31 December 2011 (2010: EUR 11,077 million).
Borrowed debt securities are not recognised in the balance sheet and amount to nil (2010: nil) as at 31 December 2011.
6 EQUITY SECURITIES
| Equity securities analysed by listing | ||
|---|---|---|
| 2011 | 2010 | |
| Listed | 4,138 | 3,878 |
| Unlisted | 198 | 218 |
| 4,336 | 4,096 | |
| Changes in equity securities (available-for-sale) | ||
| --- | --- | --- |
| 2011 | 2010 | |
| Opening balance | 2,297 | 3,319 |
| Additions | 42 | |
| Gains/(losses) from change in fair value | -451 | -274 |
| Provision for impairments | -14 | -6 |
| Disposals | -12 | -794 |
| Exchange rate differences | 52 | |
| Closing balance | 1,862 | 2,297 |
148 ING Bank Annual Report 2011
Parent company annual accounts
5
Notes to the parent company annual accounts of ING Bank continued
The cost or purchase price of the shares in the trading portfolio approximates their fair value. As at 31 December 2011 the cost or purchase price of shares in the available-for-sale portfolio was EUR 1,175 million lower (2010: EUR 1,598 million lower) than the carrying amount.
7 INVESTMENTS IN GROUP COMPANIES
| Investments in group companies | ||||
|---|---|---|---|---|
| Interest held (%) | Balance sheet value | Interest held (%) | Balance sheet value | |
| 2011 | 2010 | |||
| ING België N.V. | 100 | 9,848 | 100 | 10,130 |
| ING Direct N.V. | 100 | 7,935 | 100 | 7,086 |
| ING Financial Holdings Corporation | 100 | 1,469 | 100 | 1,249 |
| ING Vastgoed Management Holding B.V. | 100 | 1,350 | 100 | 1,208 |
| ING Lease Holding N.V. | 100 | 1,191 | 100 | 1,270 |
| ING Bank A.S. | 100 | 1,110 | 100 | 1,032 |
| WestlandUtrecht Bank N.V. | 100 | 1,089 | 100 | 993 |
| ING Bank Slaski S.A. | 75 | 1,064 | 75 | 1,042 |
| ING Corporate Investments B.V. | 100 | 446 | 100 | 463 |
| Other (including financing companies) | 3,651 | 3,779 | ||
| 29,153 | 28,252 |
As at 31 December 2011, Investments in group companies included credit institutions of EUR 22,210 million (2010: EUR 21,594 million). As at 31 December 2011 listed investments in group companies amounted to EUR 1,064 million (2010: EUR 1,042 million).
| Changes in investments in group companies | ||
|---|---|---|
| 2011 | 2010 | |
| Opening balance | 28,252 | 26,478 |
| Additions | 532 | |
| Repayment of capital injection | -297 | |
| Revaluations | -280 | 86 |
| Results from group companies | 2,617 | 2,432 |
| Dividends received | -1,430 | -1,157 |
| Capital contribution | 574 | 415 |
| Disposals | -15 | -1,082 |
| Mergers and liquidations | -279 | -56 |
| Exchange rate differences | -340 | 839 |
| Other changes | 54 | 62 |
| Closing balance | 29,153 | 28,252 |
8 INVESTMENTS IN ASSOCIATES
| Investments in associates | ||||
|---|---|---|---|---|
| Interest held (%) | Balance sheet value | Interest held (%) | Balance sheet value | |
| 2011 | 2010 | |||
| TMB Public Company Limited | 25 | 485 | 25 | 474 |
| Other | 18 | 87 | ||
| 503 | 561 | |||
| Changes in investments in associates | ||||
| --- | --- | --- | ||
| 2011 | 2010 | |||
| Opening balance | 561 | 455 | ||
| Additions | 2 | 19 | ||
| Share of results | 45 | 16 | ||
| Disposals | -98 | -2 | ||
| Exchange rate differences | -8 | 74 | ||
| Other changes | 1 | -1 | ||
| Closing balance | 503 | 561 |
ING Bank Annual Report 2011 149
6
Parent company annual accounts
Notes to the parent company annual accounts of ING Bank continued
9 INTANGIBLE ASSETS
Changes in intangible assets
| Goodwill | Software | Other | Total | |||||
|---|---|---|---|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |
| Opening balance | 890 | 853 | 391 | 498 | 94 | 116 | 1,375 | 1,467 |
| Additions | 138 | 134 | 138 | 134 | ||||
| Changes in the composition of the group | 7 | 7 | ||||||
| Depreciation | -249 | -228 | -24 | -28 | -273 | -256 | ||
| Impairments | -21 | -21 | ||||||
| Disposals | -1 | -1 | ||||||
| Exchange rate differences | -132 | 36 | -13 | 6 | -145 | 42 | ||
| Other changes | 1 | 1 | 2 | 1 | 3 | |||
| Closing balance | 758 | 890 | 281 | 391 | 57 | 94 | 1,096 | 1,375 |
10 EQUIPMENT
Changes in equipment
| 2011 | 2010 | |
|---|---|---|
| Opening balance | 597 | 557 |
| Additions | 98 | 122 |
| Changes in the composition of the group | -2 | |
| Depreciation | -139 | -151 |
| Disposals | -12 | -2 |
| Exchange rate differences | 2 | |
| Other changes | -11 | 69 |
| Closing balance | 531 | 597 |
| Gross carrying amount as at 31 December | 1,605 | 1,600 |
| Accumulated depreciation as at 31 December | -1,074 | -1,003 |
| Net carrying value | 531 | 597 |
11 OTHER ASSETS
Other assets by type
| 2011 | 2010 | |
|---|---|---|
| Derivatives | 61,334 | 44,953 |
| Deferred tax assets | 126 | 354 |
| Income tax receivable | 63 | 64 |
| Accrued interests and rents | 8,829 | 10,546 |
| Other accrued assets | 165 | 164 |
| Pension asset | 443 | 2,264 |
| Other receivables | 3,415 | 2,303 |
| 74,375 | 60,648 |
As at 31 December 2011, an amount of EUR 367 million (2010: EUR 2,255 million) was expected to be settled after more than one year from the balance sheet date.
150 ING Bank Annual Report 2011
Parent company annual accounts
5
Notes to the parent company annual accounts of ING Bank continued
LIABILITIES AND EQUITY
12 AMOUNTS DUE TO BANKS
| Amounts due to banks by group companies and third parties | ||
|---|---|---|
| 2011 | 2010 | |
| Group companies | 36,402 | 28,683 |
| Third parties | 65,405 | 67,608 |
| 101,807 | 96,291 |
13 CUSTOMER DEPOSITS AND OTHER FUNDS ON DEPOSIT
| Customer deposits and other funds on deposit by group companies and third parties | ||
|---|---|---|
| 2011 | 2010 | |
| Group companies | 32,232 | 35,925 |
| Third parties | 175,529 | 177,631 |
| 207,761 | 213,556 | |
| Customer deposits and other funds on deposit by type | ||
| --- | --- | --- |
| 2011 | 2010 | |
| Savings accounts | 61,656 | 59,302 |
| Credit balances on customer accounts | 55,437 | 60,090 |
| Corporate deposits | 77,404 | 68,461 |
| Other | 13,264 | 25,703 |
| 207,761 | 213,556 |
14 OTHER LIABILITIES
| Other liabilities | ||
|---|---|---|
| 2011 | 2010 | |
| Derivatives | 60,512 | 46,942 |
| Trading liabilities | 10,002 | 17,689 |
| Accrued interest | 9,794 | 10,980 |
| Costs payable | 425 | 550 |
| Income tax payable | 345 | 699 |
| Other taxation and social security contribution | 14 | 51 |
| Other amounts payable | 4,459 | 4,072 |
| 85,551 | 80,983 |
As at 31 December 2011, an amount of EUR 1,181 million (2010: EUR 1,768 million) was expected to be settled after more than one year from the balance sheet date.
As at 31 December 2011, Other liabilities includes an amount of EUR 7.91 (2010: EUR 7.91) for seven preference shares with a par value of EUR 1.13 each.
15 GENERAL PROVISIONS
| General provisions | ||
|---|---|---|
| 2011 | 2010 | |
| Deferred tax payable | 221 | 26 |
| Pension liabilities and other staff-related liabilities | 11 | 419 |
| Reorganisations and relocations | 363 | 220 |
| Other | 373 | 364 |
| 968 | 1,029 |
As at 31 December 2011, an amount of EUR 862 million (2010: EUR 446 million) was expected to be settled after more than one year from the balance sheet date.
ING Bank Annual Report 2011 151
Parent company annual accounts
Notes to the parent company annual accounts of ING Bank continued
16 SUBORDINATED LOANS
| Subordinated loans by group companies and third parties | ||
|---|---|---|
| 2011 | 2010 | |
| Group companies | 7,065 | 8,438 |
| Third parties | 11,790 | 12,975 |
| 18,855 | 21,413 | |
| Subordinated loans by type | ||
| --- | --- | --- |
| 2011 | 2010 | |
| Capital debentures | 10,669 | 12,592 |
| Private loans | 8,186 | 8,821 |
| 18,855 | 21,413 |
The subordinated loans rank subordinated to the other liabilities in a winding-up of ING.
17 EQUITY
| Capital and reserves | ||
|---|---|---|
| 2011 | 2010 | |
| Share capital | 525 | 525 |
| Share premium | 16,542 | 16,542 |
| Share of associates reserve | 339 | 26 |
| Currency translation reserve | 209 | 500 |
| Revaluation reserve | 568 | 1,489 |
| Other reserves | 12,266 | 11,075 |
| Unappropriated result | 3,918 | 4,295 |
| 34,367 | 34,452 |
Other reserves includes Retained earnings of EUR 11,210 million (2010: EUR 10,334 million). Other reserves include non-distributable reserves of EUR 836 million (2010: EUR 741 million) related to the former Stichting Regio Bank and the former Stichting Vakbondsspaarbank SPN and EUR 220 million related to legal reserves that cannot be freely distributed.
| Share capital | ||||
|---|---|---|---|---|
| Ordinary shares (par value EUR 1.13) | ||||
| Number x1,000 | Amount | Number x1,000 | Amount | |
| 2011 | 2010 | |||
| Authorised share capital | 1,600,000 | 1,808 | 1,600,000 | 1,808 |
| Unissued share capital | 1,134,965 | 1,283 | 1,134,965 | 1,283 |
| Issued share capital | 465,035 | 525 | 465,035 | 525 |
No shares have been issued during 2011 and 2010.
| Changes in revaluation reserve | |||||
|---|---|---|---|---|---|
| 2011 | Available-for-sale reserve | Cash flow hedge reserve | Property in own use reserve | Real estate investments reserve | Total |
| Opening balance | 1,746 | -639 | 350 | 32 | 1,489 |
| Unrealised revaluations after taxation | -1,117 | -14 | -14 | -1,145 | |
| Realised gains/losses transferred to profit and loss | 406 | 406 | |||
| Changes in cash flow hedge reserve | -182 | -182 | |||
| Closing balance | 1,035 | -821 | 336 | 18 | 568 |
ING Bank Annual Report 2011
Parent company annual accounts
5
Notes to the parent company annual accounts of ING Bank continued
Changes in revaluation reserve
| 2010 | Available-for-sale reserve | Cash flow hedge reserve | Property in own use reserve | Real estate investments reserve | Total |
|---|---|---|---|---|---|
| Opening balance | 2,414 | -472 | 387 | 159 | 2,488 |
| Unrealised revaluations after taxation | -375 | -37 | -127 | -539 | |
| Realised gains/losses transferred to profit and loss | -293 | -293 | |||
| Changes in cash flow hedge reserve | -167 | -167 | |||
| Closing balance | 1,746 | -639 | 350 | 32 | 1,489 |
Retained earnings and Unappropriated result
| Retained earnings | Unappropriated result | Total | ||||
|---|---|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |
| Opening balance | 10,334 | 9,579 | 4,295 | 684 | 14,629 | 10,263 |
| Transfer to retained earnings | 4,295 | 684 | -4,295 | -684 | ||
| Employee stock options and share plans | 119 | 53 | 119 | 53 | ||
| Other changes | -538 | 18 | -538 | 18 | ||
| Result for the period | 3,918 | 4,495 | 3,918 | 4,495 | ||
| Dividend | -3,000 | -200 | -3,000 | -200 | ||
| Closing balance | 11,210 | 10,334 | 3,918 | 4,295 | 15,128 | 14,629 |
Positive components of the Revaluation reserve, the Share of associates reserve and Currency translation reserve cannot be freely distributed. The reserve for cash flow hedges is included in the revaluation reserve on a net basis. Retained earnings can be freely distributed except for an amount equal to the negative balance in the Currency translation reserve and the Revaluation reserve. Unrealised gains and losses on derivatives, other than cash flow hedges, are presented in the profit and loss account and are therefore part of Retained earnings.
In consolidated annual accounts the revaluations on real estate investments are included in the profit and loss account. For the parent company accounts however, Dutch law requires these revaluations to be included in a Revaluation reserve.
The total amount of non-distributable reserves is EUR 2,172 million (2010: EUR 2,756 million).
ING Bank Annual Report 2011 153
Parent company annual accounts
Notes to the parent company annual accounts of ING Bank continued
ADDITIONAL INFORMATION
18 MATURITY OF CERTAIN ASSETS AND LIABILITIES
| Analysis of certain assets and liabilities by maturity | |||||||
|---|---|---|---|---|---|---|---|
| 2011 | Less than 1 month | 1–3 months | 3–12 months | 1–5 years | Over 5 years | Maturity not applicable | Total |
| Assets | |||||||
| Amounts due from banks | 15,283 | 4,008 | 4,914 | 7,397 | 6,464 | 29,358 | 67,424 |
| Loans and advances to customers | 39,924 | 11,511 | 22,734 | 73,295 | 171,217 | 12,952 | 331,633 |
| Liabilities | |||||||
| Amounts due to banks | 42,890 | 11,042 | 7,372 | 6,907 | 15,043 | 18,553 | 101,807 |
| Customer deposits and other funds on deposit | 146,366 | 16,346 | 15,558 | 9,075 | 11,356 | 9,060 | 207,761 |
| Debt securities in issue | 19,719 | 20,676 | 9,739 | 31,333 | 18,591 | 10,019 | 110,077 |
| Subordinated loans | 1,634 | 23 | 3,605 | 12,115 | 1,478 | 18,855 | |
| Analysis of certain assets and liabilities by maturity | |||||||
| --- | --- | --- | --- | --- | --- | --- | --- |
| 2010 | Less than 1 month | 1–3 months | 3–12 months | 1–5 years | Over 5 years | Maturity not applicable | Total |
| Assets | |||||||
| Amounts due from banks | 12,229 | 3,322 | 6,294 | 12,146 | 18,208 | 28,638 | 80,837 |
| Loans and advances to customers | 39,986 | 15,394 | 29,664 | 67,924 | 159,482 | 14,803 | 327,253 |
| Liabilities | |||||||
| Amounts due to banks | 26,323 | 9,649 | 7,556 | 13,924 | 18,011 | 20,828 | 96,291 |
| Customer deposits and other funds on deposit | 153,833 | 16,599 | 9,215 | 9,394 | 12,593 | 11,922 | 213,556 |
| Debt securities in issue | 14,143 | 26,872 | 14,694 | 25,461 | 10,541 | 6,860 | 98,571 |
| Subordinated loans | 240 | 1,150 | 3,376 | 15,242 | 1,405 | 21,413 |
19 ASSETS NOT FREELY DISPOSABLE
| Assets not freely disposable | ||
|---|---|---|
| 2011 | 2010 | |
| Investments | 3 | 312 |
| Lending | 7,704 | 5,974 |
| Banks | 7,573 | 8,016 |
| Other assets | 917 | 443 |
| 16,197 | 14,745 |
20 CONTINGENT LIABILITIES
| Contingent liabilities by type | ||
|---|---|---|
| 2011 | 2010 | |
| Discounted bills | 1 | 1 |
| Guarantees | 38,254 | 33,122 |
| Irrevocable letters of credit | 6,282 | 6,764 |
| Other | 381 | 271 |
| Contingent debts | 44,918 | 40,158 |
| Irrevocable facilities | 35,612 | 39,601 |
| 80,530 | 79,759 | |
| Contingent debts | ||
| --- | --- | --- |
| 2011 | 2010 | |
| Group companies | 22,770 | 19,794 |
| Third parties | 22,148 | 20,364 |
| 44,918 | 40,158 |
ING Bank Annual Report 2011
Parent company annual accounts
5
Notes to the parent company annual accounts of ING Bank continued
| Irrevocable facilities | ||
|---|---|---|
| 2011 | 2010 | |
| Group companies | 66 | 40 |
| Third parties | 35,546 | 39,561 |
| 35,612 | 39,601 |
21 OTHER
Guarantees
ING Bank N.V. has issued statements of liabilities in connection with Section 403 Book 2 of the Dutch Civil Code and other guarantees for a number of group companies.
Fiscal unity
ING Bank N.V. forms a fiscal unity with ING Groep N.V. and several Dutch banking entities for corporation tax purposes. ING Bank N.V. and ING Groep N.V. and its banking subsidiaries that form part of the fiscal unity are jointly and severally liable for taxation payable by the fiscal unity.
ING Bank Annual Report 2011
155
Parent company annual accounts
REMUNERATION OF SENIOR MANAGEMENT, MANAGEMENT BOARD AND SUPERVISORY BOARD
See Note 29 'Related parties' to the Consolidated annual accounts.
AUTHORISATION OF PARENT COMPANY ANNUAL ACCOUNTS
Amsterdam, 12 March 2012
THE SUPERVISORY BOARD
Jeroen van der Veer, chairman
Peter A.F.W. Elverding, vice-chairman
J.P. (Tineke) Bahlmann
Henk W. Breukink
Sjoerd van Keulen
Piet C. Klaver
Joost Ch.L. Kuiper
Aman Mehta
Luc A.C.P. Vandewalle
Lodewijk J. de Waal
THE MANAGEMENT BOARD
Jan H.M. Hommen, chairman
J.V. (Koos) Timmermans, vice-chairman
Patrick G. Flynn, CFO
Wilfred F. Nagel, CRO
William L. Connelly, CEO Commercial Banking
C.P.A.J. (Eli) Leenaars, CEO Retail Banking Direct and International
Hans van der Noordaa, CEO Retail Banking Benelux
ING Bank Annual Report 2011
Other information
6
Independent auditor's report
To: the Shareholders, Supervisory Board and the Management Board of ING Bank N.V.
REPORT ON THE ANNUAL ACCOUNTS
We have audited the accompanying annual accounts 2011 of ING Bank N.V., Amsterdam (as set out on pages 16 to 156). The annual accounts include the consolidated annual accounts and the parent company annual accounts. The consolidated annual accounts comprise the consolidated balance sheet as at 31 December 2011, the profit and loss account, statement of comprehensive income, statement of cash flows and statement of changes in equity for the year then ended, and a summary of significant accounting policies and other explanatory notes. The parent company annual accounts comprise the parent company balance sheet as at 31 December 2011, the parent company profit and loss account for the year then ended and the notes, comprising a summary of significant accounting policies and other explanatory notes.
Management's responsibility
Management is responsible for the preparation and fair presentation of these annual accounts in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code, and for the preparation of the report of the Management Board in accordance with Part 9 of Book 2 of the Dutch Civil Code. Furthermore management is responsible for such internal control as it determines is necessary to enable the preparation of the annual accounts that are free from material misstatement, whether due to fraud or error.
Auditor's responsibility
Our responsibility is to express an opinion on these annual accounts based on our audit. We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing. This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether about the annual accounts are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the annual accounts. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the annual accounts, whether due to fraud or error.
In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the annual accounts in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the annual accounts.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion with respect to the consolidated annual accounts
In our opinion, the consolidated annual accounts give a true and fair view of the financial position of ING Bank N.V. as at 31 December 2011 and of its result and its cash flow for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code.
Opinion with respect to the parent company annual accounts
In our opinion, the parent company annual accounts give a true and fair view of the financial position of ING Bank N.V. as at 31 December 2011 and of its result for the year then ended in accordance with Part 9 of Book 2 of the Dutch Civil Code.
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS
Pursuant to the legal requirement under Section 2:393 sub 5 at e and f of the Dutch Civil Code, we have no deficiencies to report as a result of our examination whether the report of the Management Board, to the extent we can assess, has been prepared in accordance with Part 9 of Book 2 of this Code, and whether the information as required under Section 2:392 sub 1 at b-h has been annexed. Further we report that the report of the Management Board, to the extent we can assess, is consistent with the annual accounts as required by Section 2:391 sub 4 of the Dutch Civil Code.
Amsterdam, 12 March 2012
Ernst & Young Accountants LLP
signed by C.B. Boogaart
ING Bank Annual Report 2011 157
6
Other information
Proposed appropriation of result
amounts in millions of euros, unless stated otherwise
PROPOSED APPROPRIATION OF RESULT
The result is appropriated pursuant to Article 24 of the Articles of Association of ING Bank N.V., the relevant stipulations of which state that the result shall firstly be appropriated to the Stichting Regio Bank Reserve, respectively the Reserve Stichting Vakbondsspaarbank SPN or charged to that reserves in proportion to the ratio between the Stichting Regio Bank Reserve, respectively the Reserve Stichting Vakbondsspaarbank SPN and the company's equity at the end of the relevant financial year and that the remainder shall be at the disposal of the General Meeting.
For 2011, it is proposed to appropriate the result, insofar at the disposal of the General Meeting, to the Other Reserves, so that no final dividend will be paid.
In May 2011 a dividend was paid of EUR 3 billion from Other reserves.
Proposed appropriation of result
| Net result | 4,005 |
|---|---|
| Interim dividend paid | 0 |
| Addition to reserves pursuant to Article 24 of the Articles of Association | –87 |
| Proposed to be added to the Other Reserves pursuant to Article 24 of the Articles of Association | 3,918 |
158 ING Bank Annual Report 2011
Other information
7
Additional Pillar 3 information
amounts in millions of euros euros, unless stated otherwise
INTRODUCTION
This Pillar 3 section includes information that Basel II requires to be made publicly available (unless it has already been provided in the risk management section). The information relates to ING Bank N.V. and all of its subsidiaries. The information contained in this section has not been audited by ING Bank's external auditors.
NEW CAPITAL ADEQUACY RULES – BASEL II ACCORD
The rules on capital adequacy, also referred to as Regulatory Capital (RECAP), express the regulators' and legislators' opinions of how much capital a bank and other regulated credit institutions must retain in relation to the size and the type of risk taking expressed in the form of risk-weighted assets. The most important part of the capital base is the shareholders' equity. In addition to equity, the institution may issue certain liabilities such as subordinated loans to be included in the capital base. The legal minimum requirement stipulates that the capital base must correspond to at least 8% of the Risk-Weighted Assets (RWA).
The Dutch government adopted the Capital Requirements Directive (CRD), the European reflection of the Basel II capital accord in December 2006. Since the new regulations adopt a 'risk-based approach' to determine the required capital base, there is a significant difference in the measurement of capital compared to the former rules. Therefore, the Dutch government adopted legislation to implement the new rules in stages.
This section relates to Pillar 3, market discipline, and as such provides information on several topics. Some of the required information has already been given elsewhere in the annual report, e.g. in the risk management section and in the capital management section. This section provides additional information, as well as references to the relevant sections.
The Pillar 3 information mostly relates to credit risk, but also to securitisations and Other Non-Credit Obligation Assets (ONCOA). The requirements are mainly for underlying exposure, risk weighted assets and regulatory capital. As such it relates primarily to the first Basel II pillar, the minimum capital requirement. These regulatory requirements are provided in the next section, including those for market risk and operational risk. The second pillar concerns the banks internally used Economic Capital, and the supervisors review of that capital and the underlying models. Economic Capital, and consequently Pillar 2, is disclosed extensively in the risk management section. As such, the text of this Pillar 3 section should be read in conjunction with statements made in the risk management section and capital management section of the annual accounts, where there is a comprehensive discussion of risk management and capital management.
Approaches applied by ING Bank
On 1 January 2008, ING Bank adopted the Advanced Internal Ratings Based (AIRB) approach for the majority of its significant portfolios that contain credit risk in accordance with the approvals granted by DNB (Dutch Central Bank), and various local regulators, as required. However, there remains a small portion of the portfolio that is subject to the Standardised Approach (SA). Individually, these portfolios are relatively small, very specialised, or are related to new acquisitions in companies that themselves did not yet follow the AIRB Approach. In some cases, the Standardised Approach is mandated in conjunction with transition restrictions imposed by local regulators. The AIRB and SA approach are explained in more detail in their separate sections, provided below.
During 2011 ING Bank decreased its SA Portfolio by 18% in terms of credit risk exposures. ING Bank continues to work towards reducing the portion of its portfolio which falls under the Standardised Approach.
ING Bank uses the AIRB and the Internal Assessment Approach (IAA) for liquidity lines provided to Asset Backed Commercial Paper programs. For a number of portfolios that are either on an exit strategy or immaterial in terms of size and risk profile, the Standardised Approach is used.
ING Bank Annual Report 2011 159
7
Additional information
Additional Pillar 3 information continued
REGULATORY CAPITAL REQUIREMENTS
| Regulatory capital requirements | ||
|---|---|---|
| 2011 | 2010 | |
| Credit risk | ||
| Portfolios subject to standardised approach | 2,455 | 2,812 |
| Portfolios subject to advanced IRB approach | ||
| – Central governments and central banks | 234 | 107 |
| – Institutions | 1,277 | 1,412 |
| – Corporate | 8,664 | 8,823 |
| – Residential mortgages | 4,798 | 4,799 |
| – Other retail | 1,303 | 1,235 |
| Total portfolios subject to advanced IRB approach | 16,276 | 16,376 |
| Securitisation exposures | 1,489 | 1,227 |
| Equity portfolios in the banking book under the simple risk weight approach | 207 | 310 |
| Other Non-Credit Obligation Assets (ONCOA)* | 2,046 | 1,727 |
| Total credit risk | 22,473 | 22,452 |
| Market risk | ||
| Standardised approach | 34 | 137 |
| Internal models approach - trading book | 1,090 | 227 |
| Total market risk | 1,125 | 364 |
| Operational risk | ||
| Advanced measurement approach | 2,836 | 2,872 |
| Total Basel II required Regulatory Capital | 26,434 | 25,688 |
| Basel I floor** | 31,107 | 29,870 |
| Additional capital requirement (due to floor) | 4,673 | 4,182 |
- Includes the securitisation benefits of the SA, AIRB and securitisation portfolios, amounting to EUR 22 million for 2011.
** The floor is 80% of Basel I required Regulatory Capital.
In order to prevent large short-term effects on capital requirements, the regulators introduced transition rules (the 'capital floor') for institutions implementing the new capital adequacy reporting. For 2011 and 2010 the capital requirement was not allowed to fall below 80% of the capital requirements calculated under Basel I regulations. The additional capital requirements according to the transition rules are EUR 4,670 million for 2011 (EUR 4,182 million in 2010).
The required regulatory capital shown in this section should be compared to the available regulatory capital for which details can be found in the Capital Management section under the heading 'Regulatory Capital'.
CREDIT RISK
BASIS OF PRESENTATION FOR CREDIT RISK
For credit risk, data included in these tables is related to ING Bank's core credit risk activities in the areas of: Securities Financing, Derivatives (collectively Pre-Settlement Risk); Money Market activities (including reserve deposits at Central Banks); Lending (both on and off balance sheet); and Investment risks.
The amounts presented in this section relate to amounts used for credit risk management purposes, which follow ING Bank's interpretation of the definitions as prescribed under the Basel II accords. Therefore, the numbers are different than the accounting numbers as reported in the annual accounts under IFRS-EU. Figures for Derivatives and Securities Financing are based on 'risk weighted amounts', which generally is equal to the mark-to-market value of the underlying trades plus a (regulatory defined) 'add-on' which represents estimated potential future exposure. The amounts are then further modified by an adjustment that is related to the underlying collateral (market) values (after a haircut is applied) and any legal netting or compensation that may be permitted under various master agreement arrangements, such as ISDAs, CSAs, GMLAs, etc.
160 ING Bank Annual Report 2011
Additional information
7
Additional Pillar 3 information continued
Figures associated with Money Market activities are generally the nominal amounts, while amounts associated with Investment and Lending activities are based on the original amount invested less repayments. Off-Balance Sheet exposures include the letters of credits and guarantees, which are associated with the Lending Risk Category. Additionally, Off-Balance Sheet exposures include a portion of the unused limits, associated with the statistically expected use of the unused portion of the limit between the moment of measurement and the theoretical moment of statistical default. Collectively, these amounts are called 'credit risk outstandings'.
Exposures associated with Securitisations (Asset Backed Financing, Commercial/Residential Mortgage Backed Securities and Covered Bonds) are shown separately. These amounts also relate to the amount invested prior to any impairment activity or mark-to-market adjustments. This amount is also considered to be 'credit risk outstandings'.
Unless otherwise stated, the tables included in this Section focus on the measurement of Exposure at Default (EAD) and Risk Weighted Assets (RWA) under the Basel II definitions. EAD is generally the sum of the on-balance and off-balance sheet lending, investment and money market activities plus an estimated portion of the unused credit facilities extended to the obligor. Additionally, the risk weighting amounts (plus add-ons) are included. Multiplying RWA by 8% will result in the level of Regulatory Capital (RECAP) that is required to be held against these portfolios (for the credit risk portion of the activities).
PILLAR 3 CREDIT RISK IN PRACTICE
The Basel II Accord not only changes the way ING Bank reports its credit risk for regulatory purposes; it also affects the daily operations and practices of all types of risk management at all levels within ING Bank.
One of the key elements of the Basel II Accord is the 'Use Test', which requires ING Bank to use Basel concepts in its day-to-day activities. The diagram below illustrates where ING Bank has incorporated the Basel II concepts into its daily activities, both globally and locally:
RISK MEASUREMENT AND REPORTING
ING Bank distinguishes three separate information requirements from senior management related to the Advanced IRB (AIRB) approach for credit risk:
- Reporting on (minimum) regulatory capital requirements;
- Model monitoring reports; and
- Stress testing reports.
The acceptance, maintenance, measurement, management and reporting of credit risks at all levels of ING Bank is accomplished through promotion of single, common credit risk data standards and the integration into common credit risk tools that support standardised and transparent credit risk practices.
ING Bank Annual Report 2011 161
7
Additional information
Additional Pillar 3 information continued
Exposure Classes
The Basel II Accord has developed the concept of 'Exposure Classes'. These are essentially groupings of credit risks associated with a common obligor type or product type. For the AIRB Approach, most of the exposure classes have subcategories. ING Bank has applied the following definitions to determine Exposure Classes:
- Governments include Sovereign Government entities, Central Banks and Basel II recognised Local / Regional Authorities as well as Supranational Organisations;
- Institutions include all Commercial Banks, non-Bank Financial Institutions, such as Leasing Companies, Funds and Fund Managers, and Insurance Companies, as well as local and regional government entities not classified as governments;
- Corporates includes all legal entities, that are not considered to be Governments, Institutions or Retail Other;
- Residential Mortgages include all mortgage loans for residential properties that are not part of a securitisation; and
- Retail Other includes all other credit obligations related to Retail SMEs, such as partnerships, one-man businesses and private individuals, such as consumer loans, car loans and credit cards.
Under these exposure class definitions, it is possible for a private individual to be included under both Residential Mortgages and Retail Other. For other types of counterparties or issuers, there is no potential overlap.
Gross credit risk exposures (EAD) by exposure class
| Central governments and central banks | Institutions | Corporate | Residential mortgages | Other retail | Total | Total | |
|---|---|---|---|---|---|---|---|
| 2011 | 2010 | ||||||
| Standardised Approach | 3,505 | 1,915 | 14,184 | 11,627 | 11,696 | 42,927 | 52,229 |
| Advanced IRB Approach | 107,640 | 100,507 | 272,415 | 339,266 | 37,474 | 857,302 | 815,408 |
| Total | 111,145 | 102,422 | 286,599 | 350,893 | 49,170 | 900,229 | 867,637 |
- Includes both AIRB and SA portfolios; Excludes securitisations, equities and ONCOA.
The figures presented in the table below are EAD based on the country of the residence of the obligor. As such, these figures do not represent the risk associated with a country transfer risk event, such as a restriction on the convertibility of local currency into internationally tradable currencies. Nor do these figures represent the economic exposure that is present in a given country. Figures associated with ING Bank's transfer risk positions and economic country risk exposure can be found in risk management section, including their corresponding definitions.
Gross credit risk exposures (EAD) by geographic area
| Central governments and central banks | Institutions | Corporate | Residential mortgages | Other retail | Total | Total | |
|---|---|---|---|---|---|---|---|
| 2011 | 2010 | ||||||
| Netherlands | 36,922 | 2,857 | 74,631 | 147,158 | 18,375 | 279,943 | 262,701 |
| Belgium | 13,589 | 5,930 | 32,228 | 27,794 | 10,257 | 89,798 | 81,296 |
| Other Europe | 44,321 | 63,877 | 105,205 | 85,707 | 18,743 | 317,853 | 316,932 |
| Americas | 10,429 | 10,149 | 45,859 | 54,257 | 1,023 | 121,717 | 116,255 |
| Asia / Pacific | 5,540 | 19,024 | 27,659 | 35,019 | 752 | 87,994 | 87,700 |
| ROW | 344 | 585 | 1,017 | 958 | 20 | 2,924 | 2,753 |
| Total | 111,145 | 102,422 | 286,599 | 350,893 | 49,170 | 900,229 | 867,637 |
- Includes both AIRB and SA portfolios; Excludes securitisations, equities and ONCOA.
The figures presented below are based on the Basel II defined EAD, and differ from the industry distribution figures that are presented in the annual accounts. Note that all other sectors have exposures that are less than EUR 15.0 billion.
ING Bank uses a common industry classification methodology based on the NAICS system (North American Industry Classification System). This methodology has over 1,500 detailed industry descriptions, which are aggregated into 22 industry classes at the highest level. Certain countries require ING Bank to report locally based on other industry classification methodologies, which are generally derived from the NAICS classifications presented here. Residential mortgages are generally only extended to private individuals.
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Gross credit risk exposures (EAD) by economic sector
| Central governments and central banks | Institutions | Corporate | Residential mortgages | Other retail | Total | Total | |
|---|---|---|---|---|---|---|---|
| 2011 | 2010 | ||||||
| Private Individuals | 4 | 366 | 350,893 | 18,567 | 369,830 | 348,401 | |
| Commercial Banks | 2,189 | 80,135 | 1,514 | 30 | 83,868 | 89,434 | |
| Central Governments | 56,292 | 8 | 926 | 57,226 | 62,716 | ||
| Real Estate | 75 | 53,913 | 3,148 | 57,136 | 58,807 | ||
| Non-Bank Financial Institutions | 10,846 | 44,980 | 844 | 56,670 | 65,861 | ||
| Central Banks | 42,638 | 1 | 42,639 | 19,558 | |||
| Natural Resources | 40,951 | 698 | 41,649 | 37,115 | |||
| Services | 22 | 17,166 | 6,066 | 23,254 | 22,550 | ||
| Transportation & Logistics | 23,770 | 1,645 | 25,415 | 23,075 | |||
| General Industries | 17,029 | 3,277 | 20,306 | 18,871 | |||
| Lower Public Administration | 9,996 | 10,281 | 9 | 105 | 20,391 | 22,828 | |
| Food, Beverages & Personal Care | 17,349 | 3,133 | 20,482 | 19,704 | |||
| Builders & Contractors | 14,042 | 3,193 | 17,235 | 16,496 | |||
| Chemicals, Health & Pharmaceuticals | 197 | 13,645 | 1,457 | 15,299 | 15,101 | ||
| Other | 30 | 854 | 41,865 | 6,080 | 48,829 | 47,117 | |
| Total | 111,145 | 102,422 | 286,599 | 350,893 | 49,170 | 900,229 | 867,634 |
- Includes both AIRB and SA portfolios; Excludes securitisations, equities and ONCOA.
Basel II does not include a cash flow methodology that would look at future portfolio runoff. The table below, therefore, presents figures that are based on credit risk outstandings, and not EAD. Credit Risk outstandings include amounts associated with both on and off balance sheet products, but exclude amounts related to unused limits. For derivatives and securities financing, the mark-to-market plus add-on methodology is applied, but the add-ons are generally less conservative than the add-ons applied under the Basel II definitions.
Outstandings by Tenor Bucket (based on credit risk outstandings)
| Central governments and central banks | Institutions | Corporate | Residential mortgages | Other retail | Total | Total | |
|---|---|---|---|---|---|---|---|
| 2011 | 2010 | ||||||
| Current Outstandings | 108,176 | 102,111 | 243,461 | 338,171 | 36,650 | 828,569 | 793,230 |
| 1 month | 105,034 | 101,350 | 239,136 | 337,763 | 36,074 | 819,358 | 779,117 |
| 3 month | 78,032 | 87,499 | 226,594 | 337,577 | 35,821 | 765,521 | 726,881 |
| 6 month | 57,886 | 72,221 | 211,026 | 335,982 | 34,263 | 711,378 | 704,255 |
| 1 year | 49,736 | 65,983 | 175,297 | 332,056 | 24,973 | 648,046 | 645,977 |
| 2 years | 44,236 | 54,281 | 144,051 | 325,936 | 22,183 | 590,686 | 585,740 |
| 3 years | 41,187 | 46,108 | 116,301 | 317,741 | 19,079 | 540,416 | 537,145 |
| 5 years | 33,933 | 34,478 | 75,578 | 292,371 | 14,018 | 450,378 | 442,294 |
| 7 years | 28,667 | 26,075 | 53,736 | 280,705 | 10,787 | 399,969 | 387,148 |
| 10 years | 9,395 | 13,731 | 42,375 | 250,232 | 8,112 | 323,845 | 305,657 |
- Includes both AIRB and SA portfolios; Excludes securitisations, equities and ONCOA.
- Problem Loans (rating 20-22) are excluded in the figures above.
The figures above assume that loans, money market and investments in fixed income securities are fully repaid at their maturity dates and that limits are reduced in conjunction with repayment schedules contained in the associated loan documentation, without regard for potential renewal or extension, or portfolio sales or acquisitions. Pre-Settlement risks are assumed to reduce over the legal maturity of the underlying transactions. However, under mark-to-market plus add-on methodology, it is possible for exposures to increase in time, rather than decrease. This is a function of ING Bank's estimates of future interest rates and foreign exchange rates, as well as potential changes in future obligations that may be triggered by such events. Generally, credit risk outstandings are lower than EAD.
Further, all figures assume that no new credit risks are introduced into the portfolio and that there are no delays in repayments associated with problem loans, nor are there write offs associated with provisions. The portfolio runoff is implied by the difference in the figures between two periods.
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LOAN LOSS PROVISIONS
There are three types of provisions that have to be made and accounted for:
- Individually Significant Financial Asset (ISFA) Provisions: for those loans where specific, individualised provisions are still required. These are generally loans that exceed the threshold amount. The threshold amount varies per business unit, but generally is nil in the international units, and EUR 1 million in the 'home markets'. These provisions are made using an estimated future recovery methodology and then applying a net present value concept. The future cash flows are based on the restructuring officers' best estimate of when/if recoveries will occur. Recoveries can be from any source, such as the sale of collateral, ongoing cash flows, sale of a business/subsidiary, etc. ISFA provisions are all calculated using a common tool across ING Bank.
- Incurred But Not Recognised (IBNR) Provisions: are made for the 'performing' loan portfolio as an estimate or proxy for the losses/defaults that may have already occurred in the portfolio, but which ING Bank has not yet determined or recognised. These provisions are based on a modified expected loss methodology. The primary modification is that the PD time horizon (12 months) is shortened to periods of 3, 6, or 9 months, depending on the type of obligor. Generally, the larger the obligor, the shorter the PD time horizon. IBNR provisions are calculated centrally using a common tool across ING Bank.
- Individually Not Significant Financial Asset (INSFA) Provisions: are made for acknowledged problem loans (ratings 20-22) that are below the threshold amount. Due to their small size, the IFRS-EU rules permit a statistical approach to measuring these provisions. Therefore, the calculation is based on the same statistical formula that is used to determine IBNR Provisions and is also calculated centrally using a common tool across ING Bank.
Economic sectors not shown in below table have cumulative provisions of less than EUR 50 million, and are grouped under Other.
Cumulative Provisions by economic sector
| Central governments and central banks | Institutions | Corporate | Residential mortgages | Other retail | Total | Total | |
|---|---|---|---|---|---|---|---|
| 2011 | 2010 | ||||||
| Private Individuals | 3 | 1,238 | 364 | 1,605 | 1,549 | ||
| Real Estate | 729 | 35 | 764 | 571 | |||
| General Industries | 399 | 60 | 459 | 464 | |||
| Transportation & Logistics | 398 | 44 | 442 | 316 | |||
| Food, Beverages & Personal | 336 | 88 | 424 | 397 | |||
| Builders & Contractors | 310 | 84 | 394 | 394 | |||
| Services | 274 | 92 | 366 | 340 | |||
| Non-Bank Financial Institutions | 7 | 220 | 16 | 243 | 283 | ||
| Retail | 124 | 59 | 183 | 185 | |||
| Natural Resources | 143 | 9 | 152 | 167 | |||
| Automotive | 104 | 21 | 125 | 123 | |||
| Chemicals, Health & Pharmaceuticals | 102 | 14 | 116 | 104 | |||
| Telecom | 85 | 2 | 87 | 49 | |||
| Media | 55 | 19 | 74 | 125 | |||
| Other | 4 | 31 | 28 | 36 | 99 | 128 | |
| Total | 4 | 38 | 3,310 | 1,238 | 943 | 5,533 | 5,195 |
- Includes both AIRB and SA portfolios; Excludes securitisations, equities and ONCOA.
- Excludes revaluations made directly through the equity account.
Below presentation of the cumulative provisions is based on the country of residence of the obligor.
Cumulative Provisions by geographic area
| Central governments and central banks | Institutions | Corporate | Residential mortgages | Other retail | Total | Total | |
|---|---|---|---|---|---|---|---|
| 2011 | 2010 | ||||||
| Netherlands | 1 | 1,003 | 172 | 333 | 1,509 | 1,324 | |
| Belgium | 323 | 48 | 187 | 558 | 479 | ||
| Other Europe | 1 | 19 | 1,287 | 401 | 364 | 2,072 | 2,063 |
| Americas | 4 | 353 | 579 | 4 | 940 | 961 | |
| Asia / Pacific | 1 | 14 | 343 | 36 | 54 | 448 | 362 |
| Rest of World | 1 | 1 | 1 | 2 | 1 | 6 | 6 |
| Total | 4 | 38 | 3,310 | 1,238 | 943 | 5,533 | 5,195 |
- Includes both AIRB and SA portfolios; Excludes securitisations, equities and ONCOA.
- Excludes revaluations made directly through the equity account.
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The tables above should be read in conjunction with the corresponding tables below related to Past due loans by geographic area and Past due loans by economic sector as well as information and statements in the annual accounts.
Economic sectors not shown in below table have past due loans of less than EUR 150 million, and are grouped under Other.
Past due loans by economic sector (based on outstandings)
| Residential mortgages | Other Retail | Total | Total | |
|---|---|---|---|---|
| 2011 | 2010 | |||
| Private Individuals | 6,098 | 270 | 6,368 | 5,371 |
| Other | 281 | 281 | 267 | |
| Total | 6,098 | 551 | 6,649 | 5,638 |
- Includes both AIRB and SA portfolios; Excludes securitisations, equities and ONCOA.
- Excludes revaluations made directly through the equity account.
Below presentation of the past due loans is based on the country of residence of the obligor.
Past due loans by geographic area (based on outstandings)
| Residential mortgages | Other Retail | Total | Total | |
|---|---|---|---|---|
| 2011 | 2010 | |||
| Netherlands | 2,054 | 1 | 2,055 | 1,795 |
| Belgium | 1,238 | 262 | 1,500 | 1,227 |
| Other Europe | 435 | 241 | 676 | 685 |
| Americas | 464 | 1 | 465 | 510 |
| Asia / Pacific | 1,884 | 46 | 1,930 | 1,407 |
| Rest of World | 23 | 0 | 23 | 14 |
| Total | 6,098 | 551 | 6,649 | 5,638 |
- Includes both AIRB and SA portfolios; Excludes securitisations, equities and ONCOA.
- Excludes revaluations made directly through the equity account.
ING Bank considers past due loans to be those loans where any payment of interest or principal is more than one day past due. The methodology is principally extended to loans to private individuals, such as residential mortgage loans, car loans, and other consumer loans. For business loans (governments, institutions, corporates), ING Bank has adopted a policy to classify the obligor as a problem loan as quickly as possible upon the occurrence of a payment default. Therefore, the concept of past due loans does not exist for these types of obligors (and hence the reason why certain exposure classes show no figures).
The figures above are based on credit risk outstandings, and not EAD. Credit Risk outstandings include amounts associated with both on and off balance sheet products, but exclude amounts related to unused limits. For derivatives and securities financing, the mark-to-market plus add-on methodology is applied, but the add-ons are generally less conservative than the add-ons applied under the Basel II definitions.
Loan Loss Provision Shortfall
The Loan Loss Provision Shortfall is the difference between the EL and loan loss provisions for AIRB exposures. This difference is caused by the different PD time horizons that exist for IAS 39 Loan Provisioning (3, 6, and 9 months) and the 12 month time horizon used for EL and regulatory capital calculation. Basel II requires that the shortfall is deducted from the regulatory capital, 50% from Tier 1 and 50% from Tier 2 capital.
At 31 December 2011, the loan loss provision shortfall (before tax) was: EUR 1,436 million. The relative level of loan loss shortfall compared to actual provisioning levels will generally increase in periods where loan loss provisions are decreasing and will decrease in periods where loan loss provisions are increasing.
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PORTFOLIOS UNDER THE STANDARDISED APPROACH
The Standardised Approach
Unlike the AIRB approach, the standardised approach applies a fixed risk weight to each asset as dictated by the Financial Supervisory Authorities, and is based on the exposure class to which the exposure is assigned. As such, the Standardised Approach is the least sophisticated of the Basel II methodologies and is not as sensitive as the risk-based approach. Where external rating agency ratings are available, they may be used as a substitute to using the fixed risk weightings assigned by the Financial Supervisory Authorities. Because the underlying obligors are relatively small, the underlying obligors tend not to have external ratings.
| Exposures (EAD) before and after risk mitigation | ||||
|---|---|---|---|---|
| Exposure before risk mitigation | Exposure after risk mitigation | Exposure before risk mitigation | Exposure after risk mitigation | |
| 2011 | 2010 | |||
| Risk buckets used: | ||||
| 0% | 497 | 497 | 6,281 | 6,281 |
| 10% | ||||
| 20% | 148 | 148 | 7,628 | 7,628 |
| 35% | 11,090 | 11,090 | 7,565 | 7,565 |
| 50% | 6,370 | 6,369 | 9,312 | 9,312 |
| 75% | 16,608 | 16,390 | 17,961 | 17,357 |
| 100% | 23,672 | 23,502 | 33,930 | 33,686 |
| 150% | 565 | 565 | 704 | 704 |
| 200% | ||||
| 1250% |
- Includes only the SA portfolios; excludes securitisations, equities and ONCOA.
- Excludes revaluations made directly through the equity account.
Under the standardised approach there are two principal methods for reducing or mitigating credit risk:
a) Reduction of credit risk through the acceptance of pledged financial assets as collateral, such as marketable securities or cash; or
b) Mitigation or shifting of credit risks to a lower risk weighting group by accepting guarantees from unrelated third parties.
PORTFOLIOS UNDER THE AIRB APPROACH
The IRB Method in short
There are four elements which drive the Basel II 'risk-based approach' to the determination of the capital base. For each of these elements, ING Bank has developed a series of statistical, expert and hybrid models based on ING Bank's historical experience and other market observations.
- Probability of Default (PD): The first is the borrower's, counterparty's, or issuer's (collectively referred to as the 'obligor') probability of default, which measures an obligor's creditworthiness in terms of likelihood to go into default. The result of this calculation attempts to measure the senior, unsecured standalone creditworthiness of an organisation without consideration of structural elements of the underlying transactions, such as collateral, pricing, or maturity.
- Exposure at Default (EAD): The second element is the obligor's exposure at default. These models are intended to estimate the outstanding amount or obligation at the moment of default in the future. Since the fact that an obligor will go into default is not known, and the level of outstandings that may occur on that date is also not known, ING Bank uses a combination of statistical, expert and hybrid models to estimate the Exposure at Default. With the exception of guarantees and letters of credit, the EAD is always equal to or higher than the associated credit risk outstandings, under the assumption that obligors tend to absorb liquidity from available credit resources before financial problems become apparent to the obligor's creditors.
- Loss Given Default (LGD): The third element is the loss given default. These models are intended to estimate the amount ING Bank will lose when liquidating collateral pledged in association with a given loan or financial obligation, or alternatively, liquidating the company as a whole, as part of a workout process. LGD models are based on cover types, estimated recovery rates given orderly liquidation, and (in)direct cost of liquidation.
- Maturity (M): The fourth element is the time to the maturity of the underlying financial obligation. Basel II caps the maturity element at five years, despite the fact that many obligations extend longer than five years.
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- Expected Loss (EL): The expected loss provides a measure of the value of the credit losses that ING Bank may reasonably expect to incur on its portfolio. ING Bank must hold a reserve (as part of its capital base) to cover the expected losses in its credit portfolio. In its basic form, the expected loss can be represented as:
$$
E L = P D ^ {} E A D ^ {} L G D
$$
Unexpected Loss (UL): Additionally, ING Bank must also maintain a capital buffer against unexpected losses in order to protect itself against credit losses associated with unusual market events outside of the statistical norms.
Basel II uses these same components (expected loss and unexpected loss) conceptually in the determination of the Risk Weighted Assets (RWA). Like EL, RWA takes PD, EAD, and LGD into account, but also includes variables associated with the type of obligor and its size.
The PD, EAD and LGD models that are used in the calculation of Basel II regulatory capital are the same models that ING Bank uses in the determination of its internally based economic capital models. Additionally, these models are used for loan pricing and customer profitability calculations, as well as forming the foundation for loan loss provisioning calculations.
Credit Risk Models
ING Bank considers a well-balanced and controlled set of rules around model development, maintenance and validation to be an essential component for professional risk measurement and risk management. ING Bank uses a Credit Risk Model Governance framework, which consists of a set of extensive guidelines and requirements to which all stakeholders must adhere when developing, implementing and maintaining PD, LGD and EAD models.
Types of Credit Risk Modelling
Within ING Bank, there are three types of modelling which form the foundation of the PD, EAD and LGD models used throughout the bank.
- Statistical models are created where a large set of default or detailed loss data is available. They are characterised by a sufficient number of data points which facilitate meaningful statistical estimation of the model parameters. The model parameters are estimated with statistical techniques based on the data set available.
- Expert models are based on the knowledge of experts from both Risk Management and Front Office staff and literature from rating agencies, supervisors and academics. These models are especially appropriate for 'Low Default Portfolios', where limited historical defaults exist; thereby reducing the reliability of a statistical model.
- Hybrid models contain characteristics of both expert and statistical models.
Next to the model choice, the definition of default is an important starting point for model building. ING Bank uses a framework that integrates elements of the regulatory definition of 'Default' and the loan loss provisioning indicators under IAS 39. The rationale is that several indicators are very close to the indications of an obligor's 'unlikelihood to pay' under Basel II and similar regulations. Integration of both frameworks makes it possible to use the regulatory risk components PD, LGD and EAD in the collective provisioning process under IAS 39, further enhancing ING Bank's compliance with the Basel II 'use test'.
Independent Model Validation is one of the cornerstones of this framework. It consists of the process of determining that a model is appropriate for its intended use. It is an ongoing process whereby the reliability of the model is verified at different stages during its lifecycle: at conception, before approval, periodically after implementation, and when significant changes are made to the model. The validation process contains a mix of developmental evidence, process verification and outcome analysis.
RISK RATING PROCESS
In principle all Risk Ratings are based on a Risk Rating (PD) Model that complies with the minimum requirements detailed in the CRD, the DNB Supervisory Rules and CEBS guidelines. This concerns all Obligor Types and Segments, including Countries.
ING Bank's Probability of Default (PD) rating models are based on a 1-22 scale, which roughly corresponds to the same rating grades that are assigned by external rating agencies, such as Standard & Poor's and Fitch. For example, an ING Bank rating of 1 would correspond to an S&P/Fitch rating of AAA; an ING Bank rating of 2 would correspond to an S&P/Fitch rating of AA+, and so on.
Risk Ratings (PD) for performing loans (1-19) are calculated in ING Bank IT systems with internally developed models based on data either manually or automatically fed. Under certain conditions, the outcome of a manually-fed model can be challenged through the relevant Rating Appeal Process. Risk Ratings for non-performing loans (20-22) are set on the basis of an approved subjective methodology by the Global or Regional Restructuring unit. For securitisation portfolios, the external ratings of the tranche in which ING Bank has invested are leading.
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Risk ratings assigned to customers are regularly reviewed, and the performance of the underlying models regularly monitored.
The figures presented below are the EAD-weighted average PD per asset class per rating class.
EAD-weighted average PD by PD grade under the advanced IRB approach
| Central governments and central banks | Institutions | Corporate | Residential mortgages | Other retail | Total | Total | |
|---|---|---|---|---|---|---|---|
| 2011 | 2010 | ||||||
| AAA | 0.01% | 0.04% | 0.04% | 0.03% | 0.03% | 0.02% | 0.02% |
| AA | 0.02% | 0.04% | 0.04% | 0.03% | 0.03% | 0.03% | 0.05% |
| A | 0.06% | 0.07% | 0.08% | 0.07% | 0.09% | 0.07% | 0.07% |
| BBB | 0.30% | 0.24% | 0.30% | 0.25% | 0.36% | 0.27% | 0.27% |
| BB | 0.76% | 0.83% | 1.19% | 0.90% | 1.43% | 1.05% | 1.10% |
| B | 4.24% | 5.16% | 5.17% | 5.72% | 6.98% | 5.51% | 5.50% |
| CCC & Problem Grade | 24.93% | 84.03% | 61.44% | 54.59% | 59.66% | 59.28% | 62.54% |
| Total | 0.09% | 1.00% | 4.51% | 2.62% | 6.76% | 2.89% | 3.02% |
- Includes only AIRB portfolios; Excludes securitisations, equities and ONCOA.
- Excludes revaluations made directly through the equity account.
The figures presented below are based on EAD and as such differ from those presented in the annual accounts due to different measurement methodology.
Exposures (EAD) by PD grade under the advanced IRB approach
| Central governments and central banks | Institutions | Corporate | Residential mortgages | Other retail | Total | Total | |
|---|---|---|---|---|---|---|---|
| 2011 | 2010 | ||||||
| AAA | 22,202 | 3,662 | 670 | 4,982 | 1,143 | 32,659 | 23,276 |
| AA | 71,594 | 16,718 | 13,673 | 4,991 | 440 | 107,416 | 95,019 |
| A | 10,022 | 49,540 | 39,415 | 36,655 | 2,608 | 138,240 | 136,827 |
| BBB | 1,866 | 22,931 | 91,940 | 157,203 | 12,710 | 286,650 | 277,112 |
| BB | 1,496 | 6,091 | 81,956 | 99,713 | 13,435 | 202,691 | 195,124 |
| B | 284 | 575 | 29,349 | 24,433 | 3,733 | 58,374 | 58,175 |
| CCC & Problem Grade | 176 | 990 | 15,412 | 11,289 | 3,405 | 31,272 | 29,875 |
| Total | 107,640 | 100,507 | 272,415 | 339,266 | 37,474 | 857,302 | 815,408 |
- Includes only the AIRB portfolios; Excludes securitisations, equities and ONCOA.
- Excludes revaluations made directly through the equity account.
Over 95% of ING Bank's credit risks have been rated using one of the in-house developed PD rating models. Within the AIRB Portfolio, the level of Basel II ratings exceeds 99% coverage by exposure. Bankwide, ING Bank has implemented more than 100 rating models, including various submodels that may be applicable. Some of these models are universal in nature, such as models for Large Corporates, Commercial Banks, Insurance Companies, Central Governments, Local Governments, Funds, Fund Managers, Project Finance, and Leveraged Companies. While other models are more regional or country specific, such as PD models for SME companies in Central Europe, the Netherlands, Belgium, Luxembourg, and the United Kingdom, as well as residential mortgage and consumer loan models in the various retail markets.
Rating Models for retail obligors are predominantly statistically driven and automated, such that they can be updated on a monthly or bi-monthly basis. Models for SME companies, and larger corporates, institutions and banks are manually updated, and are individually monitored on at least an annual basis.
Under Basel II rules, the nominal exposures are weighted to determine the RWA (and regulatory capital) of a portfolio, under a 'risk-based approach'. This approach dictates that less capital is required for credit risks which are well-rated, while progressively more capital is required as an obligor's risk (rating) deteriorates. This effect can cause RWA to increase or decrease together with risk rating migration without a significant change in the size of the underlying financial assets, in terms of financial accounting. As such, rating migrations are closely monitored within ING Bank. The table below shows the RWA per asset class per rating class.
ING Bank Annual Report 2011
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RWA by PD grade under the advanced IRB approach
| Central governments and central banks | Institutions | Corporate | Residential mortgages | Other retail | Total | Total | |
|---|---|---|---|---|---|---|---|
| 2011 | 2010 | ||||||
| AAA | 211 | 249 | 39 | 117 | 96 | 712 | 664 |
| AA | 41 | 1,576 | 1,703 | 95 | 37 | 3,452 | 4,093 |
| A | 782 | 5,464 | 8,351 | 1,143 | 287 | 16,027 | 14,057 |
| BBB | 462 | 4,240 | 28,246 | 12,022 | 2,800 | 47,770 | 46,135 |
| BB | 973 | 3,258 | 36,856 | 17,836 | 6,140 | 65,063 | 63,198 |
| B | 49 | 690 | 18,358 | 17,024 | 2,804 | 38,925 | 41,767 |
| CCC & Problem Grade | 406 | 489 | 14,745 | 11,732 | 4,123 | 31,495 | 34,783 |
| Total | 2,924 | 15,966 | 108,298 | 59,969 | 16,287 | 203,444 | 204,699 |
- Includes only the AIRB portfolios; Excludes securitisations, equities and ONCOA.
- Excludes revaluations made directly through the equity account.
The table below represents the weighted average LGD for each of the represented combination of PD Grade and Exposure Class. For example, the weighted average LGD for an AAA rated Corporate is 22%, while the weighted average LGD for a BBB rated Corporate is 26%. LGD percentages are influenced by the transactional structure of the financial obligation, the related collateral or covers provided, and the country in which the collateral (if any) would have to be recovered.
Average LGD by PD Grade under the advanced IRB approach
| Central governments and central banks | Institutions | Corporate | Residential mortgages | Other retail | Total | Total | |
|---|---|---|---|---|---|---|---|
| 2011 | 2010 | ||||||
| AAA | 21% | 15% | 22% | 24% | 80% | 23% | 22% |
| AA | 20% | 20% | 29% | 19% | 76% | 21% | 22% |
| A | 20% | 19% | 32% | 17% | 56% | 23% | 23% |
| BBB | 22% | 17% | 26% | 16% | 41% | 20% | 21% |
| BB | 47% | 31% | 20% | 15% | 40% | 19% | 19% |
| B | 4% | 39% | 17% | 19% | 45% | 20% | 22% |
| CCC & Problem Grade | 39% | 10% | 23% | 21% | 41% | 24% | 25% |
| Total | 21% | 19% | 24% | 16% | 44% | 21% | 21% |
- Includes only the AIRB portfolios; Excludes securitisations, equities and ONCOA.
- Excludes revaluations made directly through the equity account.
In certain cases, the portfolio size is relatively small, which can also have an effect on the weighted average LGD in a given PD Grade and Exposure Class. Therefore, this table should be read in conjunction with the previous table (Exposures (EAD) by PD grade).
These figures below represent the potential exposure that may be drawn by ING Bank's obligors under committed facilities. In most cases, the obligors have the right to make use of these facilities unless an event of default has occurred, or another defined event within the associated credit risk agreement has occurred. In most cases, the obligor pays a commitment fee to ING Bank on the unused portion of these facilities. Pre-Settlement, Money Market and Investment limits are generally not committed.
If all of the unused commitments were called upon at the same time, ING Bank's credit risks (in terms of outstandings) would increase by 11%. As part of its Exposure at Default (EAD) models, ING Bank makes an estimate of how much of these unused commitments would be drawn under normal circumstances. The effect is included in the calculation of RWA, together with a similar effect applied to uncommitted facilities, albeit at a lower rate.
ING Bank Annual Report 2011
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Undrawn Commitments
| Central governments and central banks | Institutions | Corporate | Residential mortgages | Other retail | Total | Total | |
|---|---|---|---|---|---|---|---|
| 2011 | 2010 | ||||||
| Standardised Approach | 2 | 92 | 812 | 620 | 5,899 | 7,425 | 8,414 |
| Advanced IRB Approach | 273 | 1,804 | 58,489 | 10,807 | 12,141 | 83,514 | 78,157 |
| Total | 275 | 1,897 | 59,301 | 11,427 | 18,040 | 90,939 | 86,571 |
- Includes both AIRB and SA portfolios; Excludes securitisations, equities and ONCOA.
- Excludes revaluations made directly through the equity account.
From time to time, ING Bank extends loans for which it receives a specific financial guarantee from a non-related counterparty or obligor. The figures in the table below represent the EAD that has been guaranteed by these non-related parties. It does not include non-guaranteed amounts. For example, if a given credit risk is only partially guaranteed by a third party then only the portion of the amount which is guaranteed is included in the figures below. These figures exclude any guarantees which are received from a party related to the obligor, such as a parent or sister company. The figures also exclude any guarantees that may be implied as a result of credit default swap activities. Additionally, amounts that have been guaranteed as part of a government-sponsored mortgage program are also excluded. The figures below do include amounts that are guaranteed through an unfunded risk participation construction.
Exposures secured by third party guarantees received
| Central governments and central banks | Institutions | Corporate | Residential mortgages | Other retail | Total | Total | |
|---|---|---|---|---|---|---|---|
| 2011 | 2010 | ||||||
| Standardised Approach | 1,156 | 6 | 1,162 | 1,488 | |||
| Advanced IRB Approach | 2,726 | 9,082 | 29,481 | 503 | 4,013 | 45,805 | 40,919 |
| Total | 2,726 | 9,082 | 30,637 | 503 | 4,019 | 46,967 | 42,407 |
- Includes both AIRB and SA portfolios; Excludes securitisations, equities and ONCOA.
- Excludes revaluations made directly through the equity account.
The following four tables are calculated using the mark-to-market plus (Regulatory) add-on methodology used for calculating Basel II RWA for determining the gross exposures. This methodology allows ING Bank to classify virtually all of its derivatives exposures under the AIRB approach.
As part of its normal securities financing and derivatives trading activities, ING Bank enters into master agreements such as ISDAs, GMRAs, etc. Under the terms contained in sections related to Minimum Threshold Amounts and Minimum Transfer Amounts of Collateral Support Annexes (CSAa) or other similar clauses, both ING Bank and it counterparties may agree to pledge additional collateral to each other in the event that either party is downgraded by one of the established rating agencies. ING Bank has determined that under prevailing market conditions, a one notch downgrade would only have a limited effect on the amount of additional collateral that ING Bank would be required to pledge under these agreements. However, the actual amount that ING Bank may be required to pledge in the future may vary based on ING Bank's portfolio composition of both derivatives and securities pledged in securities financing transactions, market circumstances, the number of downgrade notches as well as the terms and conditions of future CSAs or other similar agreements entered into.
In order to determine the amount of credit risk applicable, ING Bank first matches the trades with similar characteristics to determine their eligibility for offsetting. This offsetting effect is called 'compensation'. Subsequently, ING Bank reduces the amount by any legal netting that may be permitted under various types of Master Agreements, such as ISDAs, GMRAs, GMSLAs, etc. Lastly, the amount is further reduced by any collateral that is held by ING Bank under CSAs or other similar agreements.
170 ING Bank Annual Report 2011
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Counterparty credit risk outstandings from derivatives (SA and AIRB)
| Central governments and central banks | Institutions | Corporate | Residential mortgages | Other retail | Total | Total | |
|---|---|---|---|---|---|---|---|
| 2011 | 2010 | ||||||
| Credit Derivatives | 21 | 444 | 336 | 801 | 1,290 | ||
| Derivatives | 89 | 151 | 240 | 68 | |||
| Equity Derivatives | 853 | 1,331 | 13 | 2,197 | 2,463 | ||
| Foreign Exchange Derivatives | 308 | 2,454 | 2,387 | 6 | 5,155 | 4,140 | |
| Interest Rate Derivatives | 917 | 14,824 | 9,228 | 55 | 25,024 | 21,429 | |
| Commodity derivative | 79 | 192 | 1 | 272 | 92 | ||
| Exchange Traded Products | 2,852 | 2,852 | 9,338 | ||||
| Total | 1,246 | 18,743 | 16,477 | 75 | 36,541 | 38,820 |
- Includes both AIRB and SA portfolios; Excludes securitisations, equities and ONCOA.
- Excludes revaluations made directly through the equity account.
Counterparty credit risk outstandings from derivatives (SA and AIRB)
| Central governments and central banks | Institutions | Corporate | Residential mortgages | Other retail | Total | Total | |
|---|---|---|---|---|---|---|---|
| 2011 | 2010 | ||||||
| Gross positive MTM before netting and collateral | 4,315 | 66,984 | 52,113 | 75 | 123,487 | 101,156 | |
| Mark to market (MTM) after netting | 1,246 | 18,743 | 16,477 | 75 | 36,541 | 38,820 | |
| MTM after netting and collateral | 1,225 | 13,451 | 15,178 | 75 | 29,929 | 34,546 |
- Includes both AIRB and SA portfolios; Excludes securitisations, equities and ONCOA.
- Excludes revaluations made directly through the equity account.
Counterparty credit risk outstandings from securities financing (SA and AIRB)
| Central governments and central banks | Institutions | Corporate | Residential mortgages | Other retail | Total | Total | |
|---|---|---|---|---|---|---|---|
| 2011 | 2010 | ||||||
| Bond Financing Given | 1,253 | 3,083 | 1,840 | 6,176 | 4,008 | ||
| Equity Financing Given | 1,654 | 3,212 | 4,866 | 4,753 | |||
| Bond Financing Taken | 134 | 219 | 1,794 | 2,147 | 2,070 | ||
| Equity Financing Taken | 638 | 972 | 1,610 | 2,312 | |||
| Total | 1,387 | 5,594 | 7,818 | 14,799 | 13,143 |
- Includes both AIRB and SA portfolios; Excludes securitisations, equities and ONCOA.
- Excludes revaluations made directly through the equity account.
Counterparty credit risk outstandings from securities financing (SA and AIRB)
| Central governments and central banks | Institutions | Corporate | Residential mortgages | Other retail | Total | Total | |
|---|---|---|---|---|---|---|---|
| 2011 | 2010 | ||||||
| Gross positive MTM before netting and collateral | 2,315 | 14,671 | 20,707 | 37,693 | 32,775 | ||
| Mark to market (MTM) after netting | 1,387 | 5,594 | 7,818 | 14,799 | 13,143 | ||
| MTM after netting and collateral | 1,387 | 2,434 | 5,416 | 9,237 | 8,970 |
- Includes both AIRB and SA portfolios; Excludes securitisations, equities and ONCOA.
- Excludes revaluations made directly through the equity account.
ING Bank Annual Report 2011 171
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CREDIT RISK MITIGATION
ING Bank actively participates in the credit risk derivative (CDS) trading market, as a net purchaser of credit risk protection from other counterparties. ING Bank has purchased a small amount of credit risk protection for hedging purposes, usually in order to reduce concentration on certain 'legal one obligor groups' without having to reduce ING Bank's relationship banking activities. ING Bank does not actively sell credit default swaps for hedging or investment purposes. Although Basel II rules permit a reduction of credit risk capital under certain circumstances where ING Bank has purchased CDS protection, ING Bank does not currently make use of this provision in determining its Basel II capital base.
The figures below represent the notional amount of credit risk default swaps that ING Bank has entered into for the represented purpose. The credit risk on the counterparties associated with credit default swap protection bought is included in the pre-settlement risk calculations for the given counterparty, and not in the figures below. For credit default protection sold, ING Bank incurs synthetic issuer risk, on which capital is calculated, depending on its purpose, either hedging or trading.
| Credit default swaps | ||
|---|---|---|
| 2011 | 2010 | |
| Credit derivatives used for hedging purposes | ||
| - credit protection bought | 897 | 849 |
| - credit protection sold | ||
| Credit derivatives used for trading activities | ||
| - credit protection bought | 23,729 | 29,389 |
| - credit protection sold | 24,338 | 27,944 |
- Includes both AIRB and SA portfolios; Excludes securitisations, equities and ONCOA.
- Excludes revaluations made directly through the equity account.
LOAN TO VALUE RESIDENTIAL MORTGAGES
| Loan-to-Value Residential Mortgages per country | ||
|---|---|---|
| 2011 | 2010 | |
| Netherlands | 81% | 80% |
| Germany | 71% | 70% |
| Australia | 67% | 65% |
| Belgium, Luxembourg | 75% | 75% |
| United States of America | 75% | 74% |
| Canada | 73% | 75% |
| Spain | 61% | 58% |
| Italy | 52% | 51% |
| United Kingdom | 60% | 58% |
| Poland | 69% | 68% |
| Turkey | 48% | 50% |
| Romania | 55% | 55% |
| India | 67% | 67% |
| Total | 75% | 74% |
- Netherlands includes Domestic Bank NL and Westland Utrecht.
- Based on foreclosure values, LTV in the Netherlands would be 92% in 2011 and 91% in 2010.
- Includes both AIRB and SA portfolios.
The table above shows the weighted average Loan to Value (LTV) ratio of the ING Bank residential mortgage portfolio per country. This ratio relates the total loan amount to the market value of the collateral. The market value is the registered value as adopted from the valuation report of a qualified appraiser or valuer. ING Bank has a team of specialists for the valuation of real estate, which is supplemented with external and desk top valuation. In some countries residential mortgages are covered by governmental or commercial insurers. For example the Nationale Hypotheek Garantie (NHG) in The Netherlands guarantees the repayment of a loan in case of a forced property sale. The LTV in The Netherlands is relatively high, but is partially compensated by the NHG guaranteed portfolio and other secondary covers, such as life insurance policies, savings and investment products.
When available, indexation is applied to revaluate the collateral to the present value. In the LTV calculation the following property covers are included: residential and industrial/commercial properties, land and applicable other fixed assets. All other covers are excluded.
ING Bank's residential mortgage portfolio outstandings amount to EUR 341 billion, making up 39% of the total ING Bank credit risk outstandings. The average LTV of the total residential mortgage portfolio amounts to 75% (2010: 74%).
172 ING Bank Annual Report 2011
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SECURITISATIONS
Scope
The following information is prepared taking into account the 'Industry Good Practice Guidelines on Pillar 3 disclosure requirements for securitisations' (the Guidelines) issued by the European Banking Federation and other industry associations on 31 January 2010. It includes qualitative and quantitative disclosures addressing both the exposure securitised as well as securitisations positions held. While quantitative disclosures are limited to those securitisations that are used for the purpose of calculating the regulatory capital requirements under the CRD, qualitative information have a broader scope and give a view on ING Bank's entire securitisation activity.
Depending on ING Bank's role as investor, originator, or sponsor the objectives, the involvement and the rules applied may be different. ING Bank is primarily engaged in securitisation transactions in the role of investor (in securitisations arranged by others). To a lesser extent, ING Bank is also an originator or sponsor of securitisations that are usually traded in the public markets.
Valuation and accounting policies
ING Bank's activities regarding securitisations are described in Note 24 'Special Purpose Entities and Securitisation' in the annual accounts. The applicable accounting policies are included in the section 'Accounting policies for the consolidated annual accounts of ING Bank' in the annual accounts. The most relevant accounting policies for ING Bank's own originated securitisation programmes are 'Derecognition of financial assets' and 'Consolidation'. Where ING Bank acts as investor in securitisation positions, the most relevant accounting policy is 'Classification of financial instruments'.
Regulatory capital method used and Rating Agencies
ING Bank has implemented the AIRB approach for credit risk. As a consequence, ING Bank uses the Rating Based Approach (RBA) for investments in tranches of asset-backed securities (ABS) and mortgage-backed securities (MBS) which have been rated by external rating agencies. Rating agencies which are used by ING Bank under the RBA include: Standard & Poor's, Fitch, Moody's and DBRS.
Under the RBA, the risk-weighted assets (RWA) are determined by multiplying the amount of the exposure by the appropriate regulatory risk weights, which depend on:
- The external rating or an available inferred rating;
- The seniority of the position; and
- The granularity of the position.
ING Bank uses the Internal Assessment Approach (IAA) for the support facilities it provides to Asset Backed Commercial Paper (ABCP) conduit Mont Blanc Capital Corp., based on externally published rating agency methodologies.
ING Bank as Investor
ING Direct has been the primary investor in securitisation transactions within ING Bank.
ING Direct's core strategy is gathering customer deposits and providing lending products to its retail customers. The savings product is typically the first product to be launched in a country followed by mortgages and other retail products (current accounts, unsecured loans, credit cards etc). The difference between retail liabilities and own originated retail assets is invested in high quality bonds and when appropriate in certain internal assets originated by other ING Bank entities. The execution of this business model in a cost-efficient manner is ING Direct's competitive advantage. Given ING Direct's business model as a liability driven operation with a focus on cost efficiency, ING Direct invests with a view to minimise credit risk, while ensuring sufficient liquidity. Hence, ING Direct accumulates highly rated debt securities with minimal credit risk thereby capitalising on its economies of scale.
At ING Direct, the investment policies define eligible product types, minimum ratings, maximum tenors and exposure caps, both at issuer level as well as for portfolios. Under Basel III most Securitisations no longer qualify as high quality liquid assets for the liquidity buffer and are hence no longer eligible assets under the investment policies. The ING Direct units no longer invest in Securitisations and have not been investing in Securitisations during 2011. The dominant product classes in the existing investment portfolio are Government Bonds, Covered Bonds, Agency RMBS, RMBS and Senior Unsecured Debt. Prior to purchase, each investment proposal from a Treasury Centre is analysed by Credit Risk Management and decided upon by authorised mandate holders pursuant to the signatory approval process in place at ING Bank. In 2011, ING Direct did not purchase any new ABS or MBS, other than Agency MBS.
Current Securitisation Exposures
The following table gives the break down of current exposures by weight bands. The amount of securitisation positions purchased from third parties are based on the regulatory exposure values calculated according to the CRD after consideration of credit conversion factors (CCFs) where applicable as used for the purpose of Pillar 1, but prior to the application of credit risk mitigants on securitisation positions.
ING Bank Annual Report 2011 173
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Current exposures per risk weight band (ING as Investor)
| 2011 | 2010 | |
|---|---|---|
| Risk weight band 1 <= 10% | 11,888 | 19,607 |
| Risk weight band 2 >10% and <= 18% | 16,680 | 13,761 |
| Risk weight band 3 >18% and <= 35% | 2,053 | 1,029 |
| Risk weight band 4 >35% and <= 75% | 143 | 343 |
| Risk weight band 5 >75% and <1250% | 2,408 | 2,371 |
| Risk weight 1250% | 547 | 353 |
| Total | 33,719 | 37,464 |
ING Bank as Originator
ING Bank originates own securitisation transactions for economic and regulatory capital purposes, as well as liquidity and funding purposes.
- Economic and Regulatory Capital - Seven synthetic securitisations of mortgages, small and medium enterprise (SME) and corporate exposures have been issued since ING Bank began actively undertaking the securitisation of its own assets in 2003. Upon the closer alignment of transfer and regulatory capital solvency rules at year end 2007, the most senior tranches of ING Bank's own securitisations have been called and are now retained by ING Bank. Except for Memphis 2005, ING Bank has also hedged the first loss tranches in 2009. The mezzanine tranches are still transferred to third parties.
The first transactions (Moon and Memphis 2003) were repaid in 2008 with no loss for the investors. Mars 2004 repaid in 2009 with no loss to investors either. As of 31 December 2011, four transactions totalling approximately EUR 11.7 billion (Mars 2006 and BEL SME 2006 on SME exposures, Memphis 2005 and Memphis 2006 on residential mortgages) remain outstanding, as further detailed below. Memphis 2006 transfers risk on high Loan to Value (LTV) Dutch mortgages.
- Liquidity/Funding - Although the most senior tranches in securitisations are no longer efficient to release regulatory capital under Basel II, they are used to obtain funding and improve liquidity. To be eligible as collateral for central banks securitised exposures must be sold to an Special Purpose Vehicle (SPV) which, in turn, issues securitisation notes ('traditional securitisations') in two tranches, one subordinated tranche and one senior tranche, rated AAA by a rating agency. The AAA tranche can then be used by ING Bank as collateral in the money market for secured borrowings.
ING Bank has created a number of these securitisations with a 31 December 2011 position of approximately EUR 101.4 billion of AAA rated notes and unrated subordinated notes. The underlying exposures are residential mortgages in the Netherlands, Germany, Belgium, Spain, Italy and Australia.
As long as the securitisation exposures created are not transferred to third parties, the regulatory capital remains unchanged. These are not detailed hereunder. Apart from the structuring and administration costs of these securitisations these securitisations are profit / loss neutral.
Exposures securitised as originator - All securitisations reported in this section are synthetic securitisations used to transfer risk to third parties. Transactions for liquidity/funding purpose are not included.
The determination of impairments and losses occurs at least every quarter at the cut-off date applicable to each specific transaction. Figures as of 31 December are used whenever available.
Exposures securitised
| Cut-off Date | Initial Pool | Outstandings | Credit Events | Past due Assets | Losses | |
|---|---|---|---|---|---|---|
| 2011 | ||||||
| Residential Mortgages | ||||||
| Memphis 2005 | 31-Oct-11 | 3,000 | 2,403 | 2 | 50 | 1 |
| Memphis 2006 | 31-Oct-11 | 4,000 | 3,904 | 12 | 196 | 7 |
| 7,000 | 6,307 | |||||
| SME | ||||||
| Mars 2006 | 30-Sep-11 | 4,500 | 4,354 | 25 | 301 | 13 |
| BEL SME 2006 | 30-Nov-11 | 2,500 | 1,043 | 15 | 5 | 3 |
| Total | 7,000 | 5,397 |
ING Bank Annual Report 2011
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Exposures securitised
| 2010 | Cut-off Date | Initial Pool | Outstandings | Credit Events | Past due Assets | Losses |
|---|---|---|---|---|---|---|
| Residential Mortgages | ||||||
| Memphis 2005 | 31-Oct-10 | 3,000 | 2,584 | 1 | 43 | <1 |
| Memphis 2006 | 31-Oct-10 | 4,000 | 3,892 | 7 | 162 | 1 |
| 7,000 | 6,476 | |||||
| SME | ||||||
| Mars 2006 | 30-Sep-10 | 4,500 | 3,818 | 47 | 9 | 8 |
| BEL SME 2006 | 30-Nov-10 | 2,500 | 1,455 | 29 | 37 | 4 |
| Total | 7,000 | 5,273 |
Notes:
Cut-Off Date
Most recent date in respect of which determination and allocation of losses have been made pursuant to the legal documentation of the transaction. Information on the performance of ING's securitised exposures is published regularly.
Outstandings
EAD on 31 December of assets that were performing on the Cut-off date.
Credit Events
Aggregate outstandings of assets subject to a credit event reported in the 12 months period ending on the Cut-off date.
Past Due Assets
Outstandings on the Cut-off date of assets that are past due, but not in credit event on that date, as more fully detailed in the quarterly reports. Past due for residential mortgage transactions means 'more than 1 monthly payment in arrears'. Past due for SME deals means 'reference entities that are rated 20-22'.
Losses
Aggregate losses on securitised assets; reported in the 12 months period ending on the Cut-off date.
Retained Securitisation Exposures
Retained exposures on securitisation of ING Bank's own assets include the most senior tranches and the equity piece (first loss) of Memphis 2005. Economically, on a total of about EUR 11.7 billion underlying exposures in the four transactions mentioned above, ING Bank has retained approximately EUR 7.4 million of first loss exposure and has transferred approximately EUR 1.1 billion of mezzanine and equity tranches (first and second loss) to third parties.
Securitisations originated by a company may only be considered for balance sheet derecognition when the requirements for significant credit risk transfer have been fulfilled. However, for a securitisation transaction to be recognised as for RWA reduction, risk transfer alone may be insufficient due to the increasing impact of the maturity mismatch formula. As a consequence, The RWA of the retained tranches for one of the transactions in the table above would be higher than the total RWA of the underlying pool before securitisation, and therefore that transaction is treated for RWA purposes as if it was not securitised.
ING Bank as Sponsor
In the normal course of business, ING Bank structures financing transactions for its clients by assisting them in obtaining sources of liquidity by selling the clients' receivables or other financial assets to an SPV. The transactions are funded by the ING Bank administered multi seller Asset Backed Commercial Paper (ABCP) conduit Mont Blanc Capital Corp. (rated A-1/P-1). Despite the conditions in the international money markets Mont Blanc Capital Corp. continues to fund itself externally in the ABCP markets.
In its role as administrative agent, ING Bank facilitates these transactions by providing structuring, accounting, funding and operations services. ING Bank also provides support facilities (liquidity and program wide enhancement) backing the transactions funded by the conduit.
The types of asset currently in the Mont Blanc Conduit include trade receivables, consumer finance receivables, credit card receivables, auto loans and RMBS.
Exposures Securitised as Sponsor
The total liquidity facilities, including programme wide enhancements, provided to the Mont Blanc conduit are EUR 3,607 million. The total drawn liquidity amount as of 31 December 2011 is EUR 327 million.
Securitisation in the trading book
Per 31 December 2011 there are no securitisation exposures in the trading portfolio.
ING Bank Annual Report 2011 175
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OTHER NON-CREDIT OBLIGATION ASSETS
Other Non-Credit Obligation Assets (ONCOA) represent assets of non credit obligation character that are not included in the SA or AIRB calculations. Capital requirement for ONCOA as of 31 December 2011 is EUR 2,064 million (2010: EUR 1,727 million).
DISCLAIMER
Certain of the statements contained in this Annual Report are not historical facts, including, without limitation, certain statements made of future expectations and other forward-looking statements that are based on management's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation: (1) changes in general economic conditions, in particular economic conditions in ING Bank's core markets, (2) changes in performance of financial markets, including developing markets, (3) consequences of a potential (partial) break-up of the euro, (4) the implementation of ING's restructuring plan to separate banking and insurance operations, (5) changes in the availability of, and costs associated with, sources of liquidity such as interbank funding, as well as conditions in the credit markets generally, including changes in borrower and counterparty creditworthiness, (6) the frequency and severity of insured loss events, (7) changes affecting mortality and
morbidity levels and trends, (8) changes affecting persistency levels, (9) changes affecting interest rate levels, (10) changes affecting currency exchange rates, (11) changes in investor, customer and policyholder behaviour, (12) changes in general competitive factors, (13) changes in laws and regulations, (14) changes in the policies of governments and/or regulatory authorities, (15) conclusions with regard to purchase accounting assumptions and methodologies, (16) changes in ownership that could affect the future availability to us of net operating loss, net capital and built-in loss carry forwards, and (17) changes in credit ratings, (18) ING's ability to achieve projected operational synergies and (19) the other risk factors and uncertainties detailed in the risk factors section contained in the most recent annual report of ING Groep N.V.
Any forward-looking statements made by or on behalf of ING speak only as of the date they are made, and, ING assumes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or for any other reason.
ING Bank Annual Report 2011
ING Bank N.V.
Bijlmerplein 888
1102 MG Amsterdam-Zuidoost
P.O. Box 810, 1000 AV Amsterdam
The Netherlands
Telephone: +31 20 5639111
Fax: +31 20 5760950
Internet: www.ing.com
Commercial Register of Amsterdam, no. 33031431
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