Earnings Transcript for ING - Q3 Fiscal Year 2023

Operator: Welcome to the ING Third Quarter 2023 Media Call. I'm happy to give the floor to Steven van Rijswijk, CEO of ING.

Steven van Rijswijk: Thank you, operator. Welcome, and thank you for joining us on the call. On the call with me are Tanate Phutrakul, our CFO; and Ljiljana Cortan, our CRO. We will give you a short update on the developments in the third quarter, and then we'll open the call for questions.

In the third quarter, we recorded another strong set of results with our net profit more than doubling compared to a year ago. We gained 181,000 primary customers to a total of 15.1 million. And this growth occurred across almost all of our retail markets, our 10 retail markets, especially in Germany, Australia and Turkey. In many markets, we now onboard most of our new retail customers fully digitally, for instance, 75% in the Netherlands and 72% in Australia. And 62% of our active customers only do business with us through their mobile, which is 5 percent points more than a year ago. :

Financially, we achieved good results in both Retail and Wholesale Banking, despite the cooling economy and polarizing geopolitical developments that impacted business and consumer confidence. Interest income benefited from the positive rate environment and fee income increase, especially in Retail Banking, driven by daily banking and investment products. :

Wholesale Banking showed solid income growth as continuous rate increases resulted in improved margins for Payments & Cash Management, and Financial Markets benefited from strong trading results. Expenses remained under control with a year-over-year growth below 5%. Risk costs were again low, which is a testament to the quality of our loan book and our prudent credit risk management. But we remain vigilant, given global economic growth is slowing down. :

Looking ahead, it appears that there is at least a pause in the cycle of rate hikes from central banks that has helped the recovery of our profitability after a prolonged period of negative rates. Depending on developments in the competitive landscape, our liability margins may reduce somewhat from current levels. However, our overall income will be supported by a strong and diversified businesses, especially when loan demand recovers. :

As you know, sustainability is a strategic pillar for us. Last month, we published our climate report setting out our progress on the path to net zero, including how we engage with clients. One of the key challenges we face is balancing the world's need for urgent action with helping drive economic progress and supporting the transition. We are proud of how we're using our financing to help our clients in this, but we can't do it alone. And therefore, we have included in our reports specific calls to action on governments and regulators to guide the transition more firmly. :

In short, we had a good quarter with sustained customer growth, a high interest income, expenses under control and low risk costs. These are uncertain times, and it's hard to predict the impact of geopolitical conflicts. But I'm confident that we will -- we are well positioned to withstand adverse challenges and continue to make a difference. And with that, we're happy to take your questions. :

Operator: [Operator Instructions] The first question comes from the line of Rutger Betlem from Dutch Financial Daily.

Rutger Betlem: First question is about the interest rates. You already mentioned the pause in rate hikes. What do you expect in the target of the next year? If I look at the ABN AMRO Economic Bureau, our research set a target of for like 25%. So what are your targets for next year?

Steven van Rijswijk: I'm sorry, can you repeat the question? That the ABN AMRO said what?

Rutger Betlem: Yes. The target could be -- well, to get like the interest rate -- well, they expect the interest rates to go down to 2.25% for somewhere next year. We're now currently at 4%, of course. That might have a big impact on, of course, NII. So I was wondering how you see the developments on like interest levels and everything.

Steven van Rijswijk: Okay. I get the question now. I can't comment on the ABN AMRO report, so I'll leave that to ABN, of course. But look, I think that's what you see the ECB doing now is that at least, they pause further interest rate hikes. And their target was to bring inflation levels back to around 2%. And the reason why they paused is that you now also see expectation of inflation coming down. And in the end, if the expectation of inflation is coming down, at some point, the belief is that, that will then become a self-fulfilling prophecy.

Now whether that happens or not will be an input factor for the ECB to then adjust our interest rates. For now, we believe that interest rates will be higher for longer. And based on the developments of what the real inflation is doing, which has come down a little bit, but not yet to the 2%, then we expect inflation. Currently, it's expected that inflation will come down to around 2% in the Eurozone in 2025. That depending on how that inflation expectation progresses, ECB would take actions. But for now, we see the ECB in a holding pattern. :

Rutger Betlem: Okay. So no big changes expected in the coming year?

Steven van Rijswijk: Based on where we are, that is what we see. And depending on developments, then ECB may react but we don't see that as yet.

Rutger Betlem: Okay. Another question is about the outflow of deposits. In previous presentations, see that -- well, we don't see many outflow. In the analyst call, well, you mentioned now that, well, you see like more competition in this market. You see new parties entering in the market. How do you look upon the increased competition in the market of deposits?

Steven van Rijswijk: It really depends. First of all, a couple of things. First of all, we saw some seasonality impact. So in the third quarter, what we see is that people spend more also because of the holiday season and that, in some markets, had an impact on deposits. We do see an increase in our book in assets under management. So people moved deposits from -- moved some of their deposits to their investment accounts.

And then you see particular effects in markets. So in Germany, for example, we had a marketing period that started in the second quarter. That is ending for us, but now you see other banks starting with marketing actions. In Belgium, you saw a bond issued by the government that had its impact on deposits in that market. But we also saw deposits in, for example, Australia and Spain increasing. So it really depends on the market, what is happening. :

And so in some markets, we had deposit inflows. And in some markets, we had deposit outflows. And what we always do and that depends on market circumstances, we look at how we have financed our balance sheet in certain markets, what the competition does and what the demand is for deposits versus loans. :

And currently, we have a very strong deposit base. We have over EUR 600 billion deposits. We have close to EUR 500 billion in deposits in the Eurozone liabilities. So we have a very strong deposit base, but we will look at that market by market. :

Rutger Betlem: Okay. But if you look at the third quarter from last year and then you can factor out the seasonality, you have an outflow in the Netherlands of EUR 16.6 billion. I thought it was quite a lot actually.

Steven van Rijswijk: Yes. I saw that you wrote it, by the way. But that's -- there, you have to separate from our liabilities on the treasury side. So also on the treasury side, we actually -- we attract deposits from the money markets sometimes, for our funding purposes, more and sometimes less. So when you talk about deposits and what is really happening to deposits, you have to look at core customer deposits. And they, compared to last year, still went up.

Rutger Betlem: I have to look at the numbers again, I guess.

Steven van Rijswijk: Maybe you want to talk to -- yes, I guess so too. And maybe you want to talk to [ Raymond ] a little bit.

Rutger Betlem: Yes, sure. Sure. We will. All right. Cheers.

Operator: The next question comes from the line of Wouter van Bergen from Telegraaf.

Wouter van Bergen: My question is what do you think of the investigation that the ACM will be performing to the competition in the Dutch banking market?

Steven van Rijswijk: Yes. I think that is -- look, I think that is good. So if there are questions about whether there's enough competition in the Netherlands on different markets or in this case, on deposit markets, then it's only good that an independent authority like the ACM are going to investigate that. And then they can come with a conclusion. So I think that's good.

Wouter van Bergen: Because they think there are clues that competition is not working properly between the big banks. Do you understand that [ investigation ]?

Steven van Rijswijk: From what I have seen so far is that they will start an investigation to assess whether there is sufficient competition. That is typically what a competition authority will do. And then they have to come up with a conclusion, and I haven't seen a conclusion so far. So we'll wait for that.

Wouter van Bergen: Okay. Okay. Something very different. You also mentioned in your report that there is a subdued demand for loans on the wholesale part. What does that tell you about the current environment?

Steven van Rijswijk: Well, we've seen that subdued demand in Wholesale Banking already for a couple of quarters. Typically, when you look over a longer period of time, let's say the last 10 years, then loan demands grows with 3% to 4% per annum. We don't have a particular goal on that.

But what we do see this year is that loan demand is much lower, and that is a sign of lower economic activity and that companies are careful to invest. It can also have to do with the fact that after corona, companies worked strongly on having stronger working capital and on their stocks. And that could then also have an impact on the lay of investments. :

But clearly, companies are careful. In this particular quarter, there are also some seasonality effect because in the third quarter of the year, when there is a bit less economic activity or when people go on holiday, there's simply also a bit less of an investment. And you also see that in our capital markets income, which is also a bit lower than we typically see. So it's hard to make your final assessment on one quarter. But given the fact that loan demand has already been subdued in Wholesale Banking for a number of quarters, that is clearly a sign of lower economic activity and lower GDP forecast. :

Operator: Your next question comes from the line of Ruben Eg from NOS.

Ruben Eg: A few questions more about the economic environment. You said you see Wholesale Banking for some quarters having less demand. What is your global judgment about what we have seen so far over the last year with the attempts of the European Central Bank to cool down the economy? Do you also see it at smaller businesses and consumers?

Steven van Rijswijk: Well, in the end, what the ECB wants to do is to bring inflation back to lower levels because in the end, in the long run, that is good for the economy. But higher interest rates typically also have a slowing down effect on the economy. You see that, in part, because you also do see that the GDP forecast for the Eurozone and the U.S., as 2 of the biggest economies in the world, are coming down with growth forecasts of between 0% and 1% for the next year.

You also have to look at a little bit in terms of what does it do per market. You see Germany is very dependent on heavy industry, chemical industries, automotive industry, where energy and inflation play and supply chains play a big role. Netherlands is more high-tech focused, so that has also sucked economic activity up. And in the U.S., there has been a big push from the government in corona by giving corona support directly to consumers. And consumers are spending that, which still then gives the economy an elevated level. So you have to look through it a little bit. :

But clearly, economic activity is coming down. The good news is while initially, it was forecasted that it would come down potentially with recession in mind and negative growth rates, that is not the case. So that's the positive. And what we also see is that employment levels are high and continue to be forecasted to be high, and that will have a dampening effect on the slowdown of the economy. :

Ruben Eg: Could it also be a risk? I mean that the ECB -- you said, you expect interest rates to be high for long term. Do you expect another hike then? Or hoping that this will be it for a longer time?

Steven van Rijswijk: It's always -- I mean, I think what the ECB now did and as the Fed has now done as well, for the first time in a long time, is say, look, we now see the initial effects of actual inflation coming down but also the expectation of inflation coming down as well. And in the end, if there is an expectation of inflation coming down, then the actors in the market will also react on that lower expectation. And we believe that they currently will see what will happen with this, how the economy will react in reality.

And based on what they then see, they can then make further movement. So I think that for now a day, we now see them in a holding pattern. That's also what you see in the market rates. They basically confirm that it would be higher for longer. But again, if there is new economic factors coming in, that's when the ECB will react again. But for now, we believe that they have paused at this point in time. :

Ruben Eg: Yes. About those new effects, we have seen, of course, war in the Ukraine and now also a lot of trouble in the Middle East, to say it a bit soft. Not to ask about forward-looking statements, but do you see at ING worldwide different effects on that current situation? Europe versus the U.S., Australia?

Steven van Rijswijk: Clearly, the war in Ukraine has had a stronger impact on Europe than on the U.S. also because Europe has been much more dependent on oil and gas from Russia than that was the case -- than is the case for the U.S. In the meantime, Europe has made itself a lot less dependent. But as you also know, there are clearly challenges with the energy transition. So the dependency is still higher than that in the U.S.

When it comes to the conflict in the Middle East, which is, of course, terrible from a human perspective, our activities and activities of Europe and the U.S. with both the Gaza territories or the Palestinian territories in Israel are limited. So no direct significant economic impact. :

If, however, this would mean that the conflict would enlarge itself and as a result of which, I may give you an example, that would lead to further sanctions, that could then have an impact on oil and gas prices. And if there was an impact on oil and gas prices moving up, that in of itself could then also have an impact on the economies as well. :

Ruben Eg: Yes. Do you have already made impairments for that, for example, on the wholesale bank?

Steven van Rijswijk: Sorry. Do we already have making...

Ruben Eg: Impairments for that? Possibilities?

Steven van Rijswijk: No. Our activities -- well, our activities, we don't have people on the ground in Israel and the Palestinian territories, so very limited in the region overall. And also, our activities that we do with companies in that region are very small. So the impact for us, to date, has been limited, but we will watch it with a careful eye.

Operator: We currently have no questions in the queue. [Operator Instructions] We have no further questions in the queue. So I will now turn the call back over to your host for some closing remarks.

Steven van Rijswijk: Thank you very much. To wrap up the call, we gained 181,000 primary customers to a total of 15.1 million. Interest income benefited from the positive rate environment, and fee income increased especially in Retail Banking. Wholesale Banking showed solid income growth with improved margins in Payments & Cash Management, and Financial Markets benefited from strong trading results. Expenses remained under control and risk costs were again low. All in all, a set of strong results.

And with that, we'll leave you for now. If you have any further questions, you know how to contact our media team, especially on deposits, I guess, for [ Raymond ]. Thank you very much, everybody, and have a great day. And watch out for the storm. :

Operator: Thank you for joining today's call. You may now disconnect your lines.