ING Direct 2008 Annual Report Download - page 249

Risk factors
RISKS RELATED TO THE FINANCIAL SERVICES INDUSTRY
Because we are an integrated financial services company conducting business on a global basis, our revenues and earnings
are affected by the volatility and strength of the economic, business and capital markets environments specific to the
geographic regions in which we conduct business. The ongoing turbulence and volatility of such factors have adversely
affected, and may continue to adversely affect the profitability of our insurance, banking and asset management business.
Factors such as interest rates, securities prices, credit (including liquidity) spreads, exchange rates, consumer spending, business
investment, real estate and private equity valuations, government spending, inflation, the volatility and strength of the capital markets,
and terrorism all impact the business and economic environment and, ultimately, the amount and profitability of business we conduct
in a specific geographic region. For example, in an economic downturn, such as the one currently taking place, characterised by higher
unemployment, lower family income, lower corporate earnings, higher corporate and private debt defaults, lower business investment
and consumer spending, the demand for banking and insurance products is adversely affected and our reserves and provisions are likely
to increase, resulting in lower earnings. Securities prices, real estate valuations and private equity valuations may be adversely impacted
and any such losses would be realised through profit and loss and shareholders equity. Some insurance products contain minimum
return or accumulation guarantees. If returns do no meet or exceed the guarantee levels we may need to set up additional reserves
to fund these future guaranteed benefits. In addition, we may experience an elevated incidence of claims and lapses or surrenders of
policies. Our policyholders may choose to defer paying insurance premiums or stop paying insurance premiums altogether.
Similarly, a downturn in the equity markets, such as the one currently taking place, causes a reduction in commission income we earn
from managing portfolios for third parties, income generated from our own proprietary portfolios, asset-based fee income on certain
insurance products, and our capital base. We also offer a number of insurance and financial products that expose us to risks associated
with fluctuations in interest rates, securities prices, corporate and private default rates, the value of real estate assets, exchange rates
and credit spreads.
In case one or more of the factors mentioned above adversely affects the profitability of our business this might also result,
among others, in the following:
the unlocking of deferred acquisition costs impacting earnings; and/or•
reserve inadequacies which could ultimately be realised through profit and loss and shareholders equity; and/or•
the write down of tax assets impacting net results; and or•
impairment expenses related to goodwill and other intangible assets, impacting net results.•
Management believes that if ongoing market volatility adversely impacts the performance of the reporting units Retail Banking -
Central Europe and Insurance Americas - United States, compared with what was assumed in the year-end 2008 goodwill impairment
test, the book value (including goodwill) of these reporting units may exceed the related fair values, which would result in impairments.
See Note 9 ‘Intangible assets’ in the consolidated financial statements.
Shareholders’ equity and net result of ING in 2008 were significantly impacted by the turmoil and the extreme volatility in the worldwide
financial markets. The financial markets and worldwide economies have deteriorated further in the first months of 2009 in several areas,
especially the equity markets. Current levels continuing or a further negative development in financial markets and/or economies in 2009
may have a material adverse impact on shareholders’ equity and net result in future periods, including as a result of the potential
consequences listed above. See ‘Subsequent events’ in the consolidated financial statements.
Adverse capital and credit market conditions may impact our ability to access liquidity and capital, as well as the cost
of credit and capital.
The capital and credit markets have been experiencing extreme volatility and disruption for more than eighteen months. In the second
half of 2008, the volatility and disruption reached unprecedented levels. In some cases, market developments have resulted in restrictions
on the availability of liquidity and credit capacity for certain issuers.
We need liquidity in our day-to-day business activities to pay our operating expenses, interest on our debt and dividends on our capital
stock; maintain our securities lending activities; and replace certain maturing liabilities. The principal sources of our liquidity are insurance
premiums, annuity considerations, deposit funds, cash flow from our investment portfolio and assets, consisting mainly of cash or assets
that are readily convertible into cash. Sources of liquidity in normal markets also include a variety of short- and long-term instruments,
including repurchase agreements, commercial paper, medium- and long-term debt, junior subordinated debt securities, capital securities
and stockholders’ equity.
In the event current resources do not satisfy our needs, we may have to seek additional financing. The availability of additional financing
will depend on a variety of factors such as market conditions, the general availability of credit, the volume of trading activities, the overall
availability of credit to the financial services industry, our credit ratings and credit capacity, as well as the possibility that customers or
lenders could develop a negative perception of our long- or short-term financial prospects. Similarly, our access to funds may be limited
if regulatory authorities or rating agencies take negative actions against us. If our internal sources of liquidity prove to be insufficient,
there is a risk that external funding sources might not be available or available at unfavourable terms.
2.4 Additional information
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ING Group Annual Report 2008