ING announced January 26, 2009 that it is taking measures to counter the implications of the persistently challenging economic and market conditions. In order to adapt the organisation to the new business environment, ING is taking several steps to reduce risk and expenses and increase focus on its core savings and investment business.
Based on preliminary and unaudited figures, ING expects to report an underlying net result of approximately EUR -0.4 billion for the full year 2008. The net result of around EUR -1.0 billion for the full year reflects the effects of selling the insurance business in Taiwan and ending the pension operations in Argentina. The Banking underlying net result of EUR 0.5 billion was supported by the retail franchise in our home markets. Insurance is expected to report a full year underlying net result of EUR -0.9 billion as impairments across all asset classes impacted results.
In the fourth quarter market conditions deteriorated sharply, making it the worst quarter for equity and credit markets in over half a century. This led to an underlying net result of EUR -3.3 billion for the fourth quarter, based on preliminary and unaudited figures. Results were impacted by impairments and losses on pressurised assets (subprime RMBS, Alt-A RMBS and CDOs/CLOs) of EUR -2.0 billion, on equity securities of EUR -0.7 billion and on debt securities of EUR -0.3 billion, all on a pre-tax basis. Revaluations on real estate amounted to EUR -0.6 billion and on private equity to EUR -0.3 billion. Other market impact included equity capital gains and equity hedges of EUR -0.2 billion, equity-related DAC (deferred acquisition costs) unlocking of EUR -0.3 billion and the result of FX hedges and other mark-to-market valuations of EUR -0.7 billion. Loan loss provisions increased to EUR -0.6 billion for the quarter as economic conditions worsened.
ING's capital and capital ratios remained strong. Total equity was EUR 28.6 billion at year-end 2008, up from EUR 25.6 billion at the end of the third quarter, including the core Tier-1 securities issued to the Dutch State. ING Bank's Tier-1 ratio was 9.1 percent at year end with a core Tier-1 ratio of 7.1 percent. The capital coverage ratio for ING Insurance was 258 percent while the group debt/equity ratio stood at 12.6 percent at year-end.
Commercial activity kept up well given the inevitable impact of worsening economic conditions. Customer deposits increased in 2008, despite some currency effects and rebalancing in the fourth quarter. Lending growth was strong in 2008 despite a decline which occurred in the fourth quarter except in the Netherlands. Insurance sales declined from the third quarter reflecting lower demand for investment products.
"Naturally, I am disappointed with our results in this extremely tough environment," said Jan Hommen, Chairman and CEO-designate of ING. "With the continuing challenging outlook, we feel it is important to take additional action to decrease our risks and expenses. We sincerely regret the impact that some of the measures we are announcing today will have on our colleagues, but these steps are essential to adapt our organisation to the new business environment."
Illiquid Assets Back-up Facility
ING and the Dutch government have reached an agreement on an Illiquid Assets Back-up Facility covering 80 percent of ING's Alt-A mortgage securities. Market prices for these securities have become depressed as liquidity dried up, which had an impact on ING's results and equity far in excess of reasonably expected credit losses. The transaction will significantly reduce the uncertainty regarding the impact on ING of any future losses in the portfolio.
Under the terms of the Back-up Facility, a full risk transfer to the Dutch State will be realised on 80 percent of ING's EUR 27.7 billion portfolio of Alt-A RMBS at ING Direct USA and ING Insurance Americas. The Dutch State therefore will participate in 80 percent of any results of the portfolio. This risk transfer will take place at a discount of 10 percent of par value. ING will remain the legal owner of 100 percent of the securities and will remain exposed to 20 percent of any results on the portfolio.
As a consequence of the transaction, the Dutch State will be entitled to receive 8 percent of the cash flows of the total portfolio. ING will pay to the Dutch State an annual Guarantee Fee consisting of a fixed amount plus a percentage of the payments received on the securities. The net present value of this fee is EUR -0.6 billion. ING will receive from the Dutch State payments representing a net present value of EUR 0.5 billion. In addition ING will receive from the Dutch State a management fee with a net present value of EUR 0.7 billion. As a consequence of the factors above, the transaction will have a limited impact on ING's first quarter profit and loss.
The effects of the transaction on ING's capital and balance sheet will include a reduction of equity volatility, a positive impact on shareholders' equity of EUR 5 billion through a reduction of the negative revaluation reserve. Risk-weighted assets will be reduced by approximately EUR 15 billion, raising ING Bank's Tier-1 ratio by approximately 40 basis points to 9.5 percent and the core Tier-1 by 32 basis points to 7.4 percent, both on a pro forma basis. The transaction is expected to close in the first quarter of 2009, subject to further documentation and regulatory approval.
ING will earmark part of the capital released by the Back-up Facility to support the growth of the Dutch lending business for an amount of EUR 25 billion at market-conforming conditions. Under the terms of the agreement, ING commits itself to pro-actively use EUR 10 billion of the Credit Guarantee Scheme of the State of the Netherlands to support the scheme.
For the duration of the Back-up Facility, ING will maintain the corporate governance measures agreed upon issuing core Tier-1 securities to the State in November 2008. In addition, the government-nominated members of the ING Supervisory Board will have approval rights on certain executive appointments. The Executive Board of ING has agreed to forego all bonuses until a reviewed remuneration policy will be completed. This policy will include criteria on sustainability for the Executive Board and is expected to be proposed to the annual General Meeting of Shareholders in 2010.
"With this agreement, we take a firm stride to reduce the risks on our balance sheet. We much appreciate the measures the Dutch government is taking in this phase to restore confidence in the financial sector and stimulate the economy and thank them for reaching this agreement," said Jan Hommen.
Reducing Risk and Leverage
ING has also initiated measures to reduce exposure to several major other asset classes. Proprietary equity exposure has been reduced from EUR 15.8 billion at the end of 2007 to EUR 5.8 billion at year-end 2008, which for EUR 1.9 billion consists of strategic banking stakes including in Bank of Beijing and Kookmin. Of the remainder, EUR 3.9 billion is hedged against further market losses. A temporary hedging program was put in place to reduce earnings volatility as a result of DAC unlocking.
ING aims to reduce the bank balance sheet by 10 percent by decreasing the non-lending part by 25 percent. The available for sale portfolio will be reduced over time as proceeds from maturing securities will be used to fund ING-originated loans. Reducing trading activities, deposits at other banks and reverse-repos will make up most of the remaining reduction. At the same time, lending growth will be maintained especially in our core Corporate and Retail business.
ING will cut operating expenses by EUR 1 billion in 2009. The structural expense reduction will lead to annual savings of approximately EUR 1.1 billion from 2010 onwards. Of the cutback, 35 percent will come from a reduction of the workforce by approximately 7,000 full-time positions in 2009. The remainder of the expense reduction comes from decreasing costs for our head office, marketing, the Formula 1 program, consultancy, third-party staff and the renegotiating of certain contracts with IT vendors. Of the total expense reduction, EUR 650 million will be realised in Banking and EUR 350 million in Insurance.
Further details of the expense reduction program will become available in the coming months. The workforce measures will be made in accordance with local regulations and will be discussed with the respective stakeholders. A restructuring provision for severance costs of approximately EUR 450 million after-tax will be booked of which two thirds in the first quarter of 2009 and the remainder in the second quarter.
"Even in the current circumstances, our strategic focus on retail savings and investments is proving to be a solid foundation for our business. Inherent to ING's business model of collecting retail savings and investments are a strong liquidity position and a limited reliance on wholesale funding. These have positioned us relatively well in the current environment and will be a strong advantage when the financial industry emerges from the current crisis," said Jan Hommen.
ING will increase its focus on businesses and regions where it has a strong position in savings and investments that is sustainable for the long term. In this context, ING has reviewed investments in new greenfield operations to preserve capital and has decided not to launch ING Direct operations in Japan. In addition, several business units have been identified for divestment. ING will work towards these disposals in a disciplined way.
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