ING Direct 2004 Annual Report Download - page 151

ING Group Annual Report 2004 149
ING Bank applies the Risk Adjusted Return on Capital framework (RAROC). This method consistently measures the performance
of different activities and links to shareholder-value creation. 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. Risk-adjusted pricing tools
are also used as a basis for the pricing of certain transactions and as an important determinant in the credit-approval procedures.
RAROC is calculated as the risk-adjusted return divided by economic capital. The risk-adjusted return is based on similar
valuation principles as applied in the financial accounts, with two important exceptions. The actual credit-risk provisioning is
replaced by expected losses reflecting statistically calculated average credit losses over the entire economic cycle. In addition
the profit and loss account is adjusted for effects that relate to replacing actual book capital by economic capital.
Economic capital is defined as the amount of capital required to bear the economic risks created by the activities employed
and at the company’s desired level of comfort. The Economic capital is based on detailed calculations for credit, transfer,
market, operational and business risk and includes diversification benefit within the bank. ING uses a one-sided confidence
interval of 99.95% – consistent with our target debt rating (AA/Aa2 long term) – and a one year time.
RAROC FOR BANKING OPERATIONS
Economical capital
Raroc (pre-tax) (in billions of euros)
2004 2003 2004 2003
Netherlands 25.5% 28.2% 3.0 2.9
Belgium 22.2% 16.1% 2.5 2.7
Germany -20.7% -3.8% 1.1 1.3
Rest of the World 8.8% 5.0% 2.0 2.5
Other Wholesale -43.6% -45.5% 0.2 0.3
Subtotal Wholesale Banking 13.6% 12.6% 8.8 9.7
Asset Management 39.5% 44.0% 0.8 0.4
Total Wholesale Banking 16.0% 13.9% 9.6 10.1
Netherlands 68.0% 62.2% 1.6 1.5
Belgium 17.8% 18.3% 0.4 0.5
Poland 20.5% 19.5% 0.1 0.1
Other Retail -3.1% 5.4% 0.6 0.4
Total Retail Banking 43.1% 43.4% 2.7 2.5
Total ING Direct 19.9% 12.5% 2.4 1.7
Corporate Line -134.1% -103.0% 0.2 0.2
Total banking operations 19.7% 17.0% 14.9 14.5
Note : 2003 figures revised for inclusions.
In 2004, the RAROC and economic capital have been calculated for ING Bank in total. The total pre-tax RAROC for the banking
operations corresponds to an after-tax RAROC of 14.8% that can be compared with 12.7% for 2003. The Executive Board has set
an overall target of 12% after-tax. The RAROC after-tax of wholesale banking improved to 12.2%, compared to 10.3% last year
and performed just above the target. RAROC after-tax of retail banking was 29.1% and almost equalled the high level of 2003
(29.3%). ING Direct improved further to an after-tax RAROC of 11.3% compared to 6.1% last year.
In addition to RAROC, ING internally uses ‘economic profit growth’ as a key performance indicator to signal where value is
being created or destroyed and to make better strategic choices as a result. The economic profit is calculated by deducting
the weighted average cost of capital from the RAROC and multiply this with the economic capital.
ING Group continues to develop and refine the models supporting the RAROC calculations.
RAROC PERFORMANCE