ING Direct 2008 Annual Report Download - page 23

ING Group Annual Report 2008
21
liquidity dried up, which had an impact on ING’s results and equity
far in excess of estimated credit losses. Under the terms of the
facility, ING will transfer 80% of each security in the Alt-A RMBS
portfolios to the Dutch State. The Dutch State will absorb 80% of
the risks and returns on the Alt-A RMBS portfolios. ING will remain
exposed to 20% of the result of the Alt-A RMBS portfolios and
will remain the legal owner of 100% of the securities. As such the
transaction will significantly reduce the uncertainty regarding the
impact on ING of any future losses in the portfolio. In addition,
as a result of the facility, 80% of the Alt-A RMBS portfolios will
be derecognised from ING’s balance sheet under IFRS. Therefore,
80% of the negative revaluation reserve on the securities will be
reversed, resulting in an increase of EUR 4.6 billion in Shareholders’
equity. Another benefit of the facility is that it will reduce
the amount of ING’s risk weighted assets approximately
EUR 13 billion, subject to discussions withe regulators.
As condition to the Facility ING committed to support the growth
of the Dutch lending business for an amount of EUR 25 billion at
market-conform conditions.
ING is careful in mortgage underwriting and does not originate
subprime mortgages. Moreover, ING has generally not been in the
business of manufacturing subprime RMBS or Collateralised Debt
Obligations (CDOs) nor has it purchased a material amount of
CDOs backed by US subprime mortgages.
Reduction of equity exposure (available-for-sale)
Direct public equity exposure was reduced from EUR 15.8 billion at
the end of 2007 to EUR 5.8 billion at year-end 2008. The portfolio
contains EUR 1.9 billion strategic banking stakes, mainly in Bank
of Beijing and Kookmin Bank. ING Insurance has the remaining
EUR 3.9 billion balance sheet exposure which was partially hedged
against further market losses. In addition, a temporary hedging
programme was put in place to reduce earnings volatility as a
result of deferred acquisition cost (DAC) unlocking.
Reduction of interest rate risk
ING sold ING Life Taiwan which resulted in a reduction of its
interest rate risk exposure. This divestment was in line with the
strategy to allocate capital to those businesses that generate the
highest return. In addition, ING lengthened its asset duration in
order to hedge the impact of declining interest rates, herewith
further reducing its interest rate risk exposure.
IMPACT ON ING’S ASSET BASE
ING primarily collects retail savings around the world and invests
them in the economy. As one of the world’s largest savings banks,
ING built up a substantial and high-quality balance sheet of
EUR 1,332 billion at the end of 2008. There are three major blocks
of assets in ING’s core loan book. There is EUR 620 billion
consisting of well-rated or collateralised corporate loans and
mortgages. Another EUR 258 billion is in investments, 97% of
which is invested in debt securities and 3% in equity securities.
Finally, ING has EUR 281 billion in financial assets at fair value.
The core loan book
ING’s core loan book consists mainly of corporate loans and
mortgages. The core loan book continues to perform well despite
a continuous increase in risk cost over the year. Total net additions
to loan loss provisions were EUR 1,280 million. This translates to
(annualised) 48 basis points of average credit risk-weighted assets.
Especially in the second half of 2008 risk costs increased due to
higher additions to loan loss provisions in Wholesale Banking and
ING Direct US.
Debt securities
Some EUR 73 billion of the investment portfolio concerns Asset
Backed Securities (ABS) which include US subprime RMBS, US
Alt-A RMBS, US CDOs and US Collateralised Loan Obligations
(CLOs). The ABS portfolio comprises mainly AAA (85%) and
AA-rated securities (9%) and is well-diversified due to limits,
investment policies and mandates for every portfolio. The Illiquid
Assets Back-up Facility reduces the ABS portfolio by EUR 15 billion
to EUR 58 billion.
Financial assets at fair value
As a result of the ongoing and unprecedented volatility in global
financial markets, ING incurred negative revaluations and write-
downs on its investment portfolio. The table on the first page of
this section shows the negative revaluations and losses taken on
the pressurised asset classes during 2008. Unrealised gains(/losses)
relate to the available for sale (fixed income) securities and are
taken into account in the revaluation reserve in Shareholders’
equity. Impairments, fair value changes and trading losses are
directly charged to the profit and loss account.
US subprime mortgages
ING has a very limited exposure to US subprime RMBS and does
not originate subprime mortgages. Exposure to US subprime
RMBS was EUR 1.8 billion at 31 December 2008, representing
0.1% of total assets and was valued at 58% of its cost. The
exposure is of relatively high quality; at year-end 77% of the
portfolio was rated AA or higher. The negative pre-tax revaluation
on US subprime RMBS at 31 December 2008 was EUR 1,146
million. Net impairments and trading losses combined amounted
to EUR 120 million.
Alt-A RMBS portfolio
Alt-A mortgage loans are regular residential mortgage loans in
the US market which are frequently packaged into a RMBS.
Notwithstanding the widespread existence of Alt-A RMBS a single
standardised definition does not exist. As such ING uses a broader
definition than some other financial institutions.
Under the ‘broad’ definition of Alt-A RMBS, the applicable
RMBS contains at least one of the following three characteristics:
•onaveragealoan-to-valueratiobetween70-100%;or
•aso-calledFICOcreditscorebetween640-730;or
•lowqualityornodocumentation(referringtoreduced
requirements regarding personal income and/or asset verification)
of 50% of the debt holders in the portfolio or more.
At year-end, ING’s exposure under the broad definition was
EUR 18.8 billion representing 1.4% of total assets. About 65% of
the portfolio is rated AAA. ING Direct has the largest part of the
Alt-A RMBS exposure, which was EUR 16.3 billion at year-end.
Under the ‘narrow’ definition a security qualifies as Alt-A RMBS if
it meets all three criteria simultaneously (i.e. change ‘or’ to ‘and’).
Under the narrow definition ING Direct’s exposure amounted to
EUR 6.2 billion at 31 December 2008.