ING Direct 2008 Annual Report Download - page 36

ING Group Annual Report 2008
1.2 Report of the Executive Board
34
Wholesale Banking
Commercial momentum in difficult times
Profit and loss account* (underlying)
in EUR million 2008 2007 change
Total income 4,107 4,801 –14.5%
Operating expenses 2,902 2,884 0.6%
Additions to loan loss provisions 596 –142 n.a.
Underlying result before tax 609 2,059 –70.4%
Total result before tax** 609 1,965 –69.0%
** These numbers include the result from ING Real Estate which reports to
Wholesale Banking. ING Real Estate is discussed in detail in the section on
asset management together with ING Investment Management.
** Total result before tax is defined as underlying result before tax including
divestments and special items.
Key figures (underlying)
2008 2007
After-tax RAROC 4.9% 19.8%
Economic Capital (in EUR billion) 9.3 6.9
Key points
> Solid commercial performance with
income growth in General Lending
and Structured Finance
> Result before tax down due to market
turmoil, negative revaluations in
Real Estate and Financial Markets
> Improved market penetration, lead bank
position and landmark deals in home markets
> Expenses down and under control, but risk
costs rising
Wholesale Banking achieved a solid commercial performance
in what was an extremely challenging year for the industry.
Income remained fairly resilient, with good income growth
in many businesses. However, overall results were negatively
affected by the global financial crisis, especially in the
second half of 2008 due to the unprecedented market
turmoil. Wholesale Banking therefore increased its focus
on reducing expenses, improving capital efficiency and
controlling risk. ING’s commitment to being a full-service
bank supported its market penetration, lead bank standing,
and landmark deal participation in its home markets.
FINANCIAL DEVELOPMENTS
Wholesale Banking results were severely affected by the deepening
global recession. Underlying result before tax declined 70.4%
to EUR 609 million, driven by impairments, negative fair value
changes and higher risk costs. With the exception of Financial
Markets, all product groups recorded lower results. Underlying
result before tax from Financial Markets increased 18.3% to
EUR 355 million thanks to the strong performance in the first half
of the year, offsetting the effect of impairments and credit-related
markdowns in the second half. The results of General Lending &
Payments and Cash Management (PCM) and Structured Finance
declined by 39.9% and 18.2% respectively, entirely because of
higher risk costs. Excluding risk costs, results were up by 53.9%
and 50.8% respectively, driven by volume growth and higher
margins. Leasing & Factoring profit declined 22.2% to EUR 119
million, while ING Real Estate and Other Wholesale Products
recorded losses in 2008.
Total underlying income fell 14.5% to EUR 4,107 million driven
by ING Real Estate and Other Wholesale Products, while income
from General Lending & PCM and Structured Finance increased
by 24.5% and 30.2% respectively. Underlying operating expenses
remained under control, rising 0.6% to EUR 2,902 million.
The underlying cost/income ratio increased to 70.7% from 60.1%
in 2007.
Risk costs increased significantly to EUR 596 million compared with
a net release of EUR 142 million in 2007. The risk costs in 2008
included provisions triggered by the collapse of three Icelandic
banks as well as relatively high risk costs in Structured Finance,
ING Real Estate and the General Lease activities due to worsening
economic conditions.
The underlying risk-adjusted return on capital (RAROC) after tax
declined to 4.9% from 19.8% in 2007. Average Economic Capital
increased 34.1% to EUR 9.3 billion mainly because of the
implementation of Basel II and increased market volatility.
ING Real Estate recorded an underlying loss before tax of EUR 297
million compared with a profit of EUR 664 million in 2007 due
mainly to negative revaluations caused by declining property
values. Compared with 2007, ING Real Estate’s total portfolio
declined marginally, by 0.7%, to EUR 106.4 billion as growth in
the Finance loan portfolio during the first nine months of the year
helped to offset declines in assets under management. Higher
results before tax were recorded in the Finance and Development
activities, while Investment Management reported a decline of
48.7%. The Investment Portfolio posted a loss before tax of
EUR 695 million due to negative revaluations on real estate
Breakdown underlying income
in EUR million
General Lending & PCM 26% 1,083
Structured Finance 23% 957
Leasing & Factoring 10% 406
Financial Markets 26% 1,064
Other 5% 172
ING Real Estate 10% 425
Total 100% 4,107