ING Direct 2008 Annual Report Download - page 42

ING Group Annual Report 2008
1.2 Report of the Executive Board
40
ING Direct
Putting the customer first
Key points
> Two million customers added in 2008,
bringing the total to 22.2 million worldwide
> Positive commercial results; total client retail
balances production up EUR 24.4 billion to
EUR 322.7 billion
> Impairments of EUR 1,891 million on
investment portfolio
> Illiquid Assets Back-up Facility in early 2009
reduces impact of Alt-A RMBS future losses
> Strong brand and customer focus are key
components of strategy
ING Direct continued to show positive commercial results,
despite an increasingly competitive marketplace and
against the backdrop of the continuing crisis in the financial
sector. Results were heavily impacted by impairments on
its investment portfolio due to the financial crisis. Client retail
balances production was up EUR 24.4 billion to EUR 322.7
billion at year-end.
FINANCIAL DEVELOPMENTS
Although commercial performance remained positive, ING Direct
posted an underlying loss before tax of EUR 1,125 million
compared with a profit of EUR 530 million in 2007. The loss was
brought about mainly by the substantial deterioration in the US
housing market. Rising delinquencies, falls in house prices and a
revision to the ultimate loss outlook led to an estimated credit loss
of EUR 384 million, primarily on ING Direct’s Alt-A RMBS portfolio.
This triggered a EUR 1,891 million impairment through the profit
and loss account as IFRS requires a write-down to market value at
reporting date.
The Illiquid Assets Back-up Facility arrangement in early 2009 with
the Dutch State has reduced the uncertainty of the impact of any
future losses on 80% of the Alt-A RMBS portfolio. ING aims to
close this transaction in the first quarter of 2009, but this is
dependent on the approval of various regulators.
Total client retail balances grew by EUR 12.6 billion in 2008, or
EUR 24.4 billion excluding currency effects, to EUR 322.7 billion
at year-end.
Total underlying income declined by 60% in 2008 to EUR 878
million as a result of EUR 1,891 million of impairments, primarily
on the Alt-A RMBS portfolio in the US. In 2007, impairments were
limited to EUR 29 million on asset-backed commercial paper in
Canada. Excluding impairments, underlying income increased
24.4% to EUR 2,769 million driven by higher interest results,
especially in the US. The total interest margin widened to 0.94%
in 2008 from 0.75% in 2007 following rate reductions by central
banks across the globe.
Underlying operating expenses increased 7.6% to EUR 1,719 million
due to higher expenses related in part to customer retention and
win-back campaigns, as well as the inclusion of Interhyp from
August 2008. The number of full-time staff rose from 8,883 in
2007 to 9,980, of whom 479 came from Interhyp. Excluding
impairments, the underlying cost/income ratio improved to 62.1%
from 71.8% in 2007.
The addition to the provision for loan losses increased to EUR 283
million from EUR 68 million in 2007, driven by an increase in the US
reflecting higher delinquencies in the mortgage market and lower
recoveries. The addition in 2008 was 63 basis points of average
credit-risk-weighted assets.
The underlying risk-adjusted return on capital (RAROC) after tax
fell to -18.2% from 14.3% in 2007 due to the impairments of the
investment portfolio. Average Economic Capital rose 24% to EUR
3.4 billion, reflecting the more volatile and higher-risk environment.
Profit and loss account (underlying)
in EUR million 2008 2007 change
Total income 878 2,196 –60.0%
Operating expenses 1,719 1,598 7.6%
Additions to loan loss provisions 283 68 316.2
Underlying result before tax –1,125 530 –312.3%
Total result before tax* –1,155 530 –317.9%
* Total result before tax is defined as underlying result before tax including
divestments and special items.
Key figures
2008 2007
After-tax RAROC –18.2% 14.3%
Economic Capital (EUR billion) 3.4 2.8
Underlying result before tax
in EUR million 2008 2007 change
Canada (1997)* 59 30 96.7%
Spain (1999) 43 55 –21.8%
Australia (1999) 72 84 –14.3%
France (2000) 31 46 –32.6%
United States (2000) 343 78 339.7%
Italy (2001) 34 49 –30.6%
Germany (2002)/Austria (2004) 297 359 –17.3%
United Kingdom (2003) –72 –120 n.a.
Japan** –40 –22 n.a.
Subtotal 766 559 37.0%
Impairments –1,891 –29
Total –1,125 530 –312.3%
* Launch year in brackets
** Early 2009, it was decided not to launch operations in Japan.