ING Direct 2008 Annual Report Download - page 24

ING Group Annual Report 2008
1.2 Report of the Executive Board
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On average, the ING Direct Alt-A RMBS portfolio is near prime
and of high quality with a loan-to-value ratio of 72% and an
average FICO score of 723. The negative pre-tax revaluation at
31 December 2008 was EUR 6,155 million for ING Direct (and
EUR 7,474 million for ING as a whole).
ING’s Alt-A RMBS portfolio continues to benefit from the high
level of ‘attachment points’ (the point at which credit losses are
incurred), which provide structural protection equal to the
overcollateralisation plus the subordinated tranches in the RMBS.
Losses from underlying mortgage pools are first absorbed by the
overcollateralisation and the subordinated RMBS tranches. A credit
loss occurs when the underlying losses breach, or are expected to
breach, the lower threshold. An estimated credit loss triggers an
impairment of the specific RMBS tranche. IFRS requires that the
impairment reflects a full write-down to market value. As the
current Alt-A RMBS prices are hampered by illiquid markets, an
impairment is significantly higher than the expected credit loss
of the RMBS tranche.
In the second half of 2008 ING Direct impaired Alt-A RMBS bonds
for the first time; 99 of the 734 Alt-A RMBS bonds in the portfolio
were impaired. ING Direct recorded EUR 1,776 million of pre-tax
impairments on the Alt-A RMBS portfolio in 2008 (and EUR 2,064
million for ING as a whole). The impairments are driven by a
relatively small credit loss. ING continues to review its RMBS
portfolio, and performs structural monitoring activities at the level
of the individual security.
As mentioned above, ING took steps in January 2009 to reduce
the risk on its Alt-A RMBS portfolio by entering into an agreement
with the Dutch State, whereby the Dutch State absorbs 80% of the
risk and returns of ING’s Alt-A RMBS portfolio and ING’s risk is
limited to the remaining 20%.
CDOs and CLOs
ING uses a conservative definition for CDOs/CLOs. ING includes
derivatives on corporate indices and credits as synthetic CDOs in
its CDO/CLO exposure. The vast majority of the CDOs/CLOs have
investment grade corporate credit as underlying assets, only
EUR 1 million has US subprime mortgages as underlying assets.
At year-end the Group’s net exposure to CDOs and CLOs was
EUR 3.5 billion, or 0.3% of assets. Net impairments and trading
losses combined taken on CDOs/CLOs totalled EUR 394 million.
At the end of the year the portfolio was valued at 85% of cost,
with a negative pre-tax revaluation of EUR 352 million.
Equity securities (available-for-sale)
Another component of the available-for-sale investment portfolio
is equity securities. At 31 December ING had in this caption direct
equity exposure of EUR 5.8 billion (public) and EUR 0.4 billion
(private). This 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 is partially
hedged against further market losses. In addition a temporary
hedging programme was put in place to reduce earnings volatility
from potential negative DAC unlocking. ING generally decides to
impair a listed equity security based on two broad guidelines:
when the market value is below 75% of the cost price or when the
market price of the security is below the cost price for longer than
six months. EUR 1,707 million of pre-tax impairments on the above
mentioned direct public equity exposures were recorded in 2008.
Real estate
ING has EUR 15.5 billion of real estate exposure of which EUR 9.8
billion is subject to revaluation through the profit and loss account.
In 2008, ING recorded EUR 1,184 million pre-tax negative
revaluations and impairments. ING’s real estate portfolio has high
occupancy rates and is diversified over sectors and regions, but is
clearly affected by the negative real estate markets throughout
the world.
LIQUIDITY RISK MANAGEMENT AT ING
In the volatile markets of 2008 liquidity management was a key
issue. A number of liquidity problems have appeared in the market
due to US subprime concerns, including challenges rolling over
short-term asset-backed commercial paper in the secondary
market, increased credit spreads and shorter terms. ING’s approach
to liquidity management requires a surplus of liquid assets, liquidity
contingency plans and close monitoring of market conditions. ING
enjoys a favourable funding base with customer deposits providing
61% of total funding. Retail and corporate deposits are relatively
stable sources of funding.
Since the start of the credit crisis ING’s Liquidity Crisis Committee,
chaired by the chief risk officer, has met regularly to discuss ING’s
liquidity and funding profile. The liquidity position and market
conditions were monitored daily. Large buffers of liquidity were
retained throughout 2008, and as a result, contingency funding
plans, in place at all levels, were not required to be executed as
ING’s liquidity position remained sound.
CONTINUING UNCERTAINTIES
As the financial crisis has not yet run its course, ING still faces a
number of uncertainties. It is expected that economic conditions
will weaken further. Some of the main uncertainties are:
The development of the global real estate market: •
As mentioned above, the S&P Case-Shiller Index showed a
18.6% decline in US housing prices over 2008. The global real
estate market is expected to further deteriorate into 2009
and is expected to negatively affect ING’s Real Estate portfolio.
Equity markets: •
As mentioned above, global stock markets fell significantly over
2008, impacting the value of ING’s investment portfolio. As the
outlook for the stock markets remains uncertain, and can further
reduce the value of the portfolio, ING is both actively reducing
its exposure and hedging equity positions.
Impact of credit migration: •
Loan loss provisions and impairments will stay at elevated levels.
A marked deterioration in the mortgage market outlook is
reflected in default curves which are predicted to be higher for
an extended period of time. In the current market, ING
anticipates additional downgrades in securities as well as internal
ratings on corporate customers, leading to further increases in
credit risk weighted assets. The deteriorating global economy
is expected to keep loan loss provisions going forward at
elevated levels.
Risk management (continued)