ING Direct 2013 Annual Report Download - page 244

Risk management continued ING Group
Ireland
Total exposure to Ireland increased by EUR 458 million in 2013 mainly due to an increase of the lending book of EUR 273 million and
undrawn committed facilities of EUR 367 million. The increase was partially offset by a reduction in debt securities of EUR 226 million.
The increase in the lending book and the undrawn committed facilities is driven by additional outstandings and facilities to existing
customers.
Portugal
Total exposure to Portugal declined by EUR 249 million in 2013 mainly in debt securities by EUR 271 million. The decrease was mainly in
the government bonds of EUR 142 million.
Spain
ING’s total exposure to Spain was reduced by EUR 4,147 million in 2013 to EUR 32,537 million. The debt securities portfolio decreased by
EUR 2,654 million mainly due to covered bonds maturing by EUR 2,567 million and a decrease in RMBS by EUR 428 million.
The lending book declined by EUR 463 million to EUR 15,611 million. This decrease was driven by a EUR 648 million reduction in corporate
lending, partly offset by a EUR 242 million increase in residential mortgages and other consumer lending.
Cyprus
Total exposure to Cyprus decreased by EUR 398 million in 2013 mainly due to a decrease in corporate lending of EUR 258 million. The
reduction is driven by the repayment of loans.
Derivatives
In these countries, ING Bank has limited derivative exposure and largely enters derivative transactions to help clients reduce exposure to
interest and currency movements. Many of these transactions are covered either via CSA agreements or as part of the collateral of the
underlying financing. The key credit risk ING Bank faces in these derivative transactions is movements in markets creating an
uncollateralised exposure to a counterparty or that the collateral is not sufficient. ING monitors these mark to market movements on a
daily basis.
Impact of low interest rate environment
Interest rates in the Eurozone but also in the other main home countries decreased from already low levels to unprecedented low levels.
Central bank rates are still at very low levels as well, thereby negatively impacting the short term money market rates, and also long term
rates decreased to very low levels in 2013. The on-going Eurozone crisis in combination with uncertainty on the growth potential of the
world economy were the main reasons for this development.
Impact for ING Bank
The typical interest rate position for ING Bank implies that the duration of the assets is somewhat higher than the duration of the liabilities.
Given this mismatch, decreasing interest rates are initially favourable for ING Bank’s income: liabilities re-price quicker than assets, and
therefore the average coupon of liabilities adapts quicker to lower interest rates. This should support ING Bank’s interest rate margin and
subsequently our interest income.
However, the current situation of low interest rates levels is caused by the eruption of the financial crisis. Therefore interest rates are on a
low level for more than 4 years now. A sustained low interest rate environment can put ING Bank’s interest income under pressure. New
client assets are produced at lower rates, which impacts the average yield in the credit portfolio, but also implies lower prepayment rates
and thus lengthening of the portfolio duration. This results in lower yielding assets that reprice more slowly. On the other side of the
balance sheet savings coupons do not reflect the low interest rate environment fully. Due to high liquidity spreads as a consequence of the
crisis and strong competition in the savings market savings coupons only marginally track lower interest rates. On balance these factors
may put ING Bank’s interest rate margin under pressure. This situation will endure until structural economic recovery, which will lead to an
environment with interest rate increases. As there is much uncertainty when this period of recovery will emerge, ING Bank closely monitors
markets in order to be positioned adequately in anticipation of either a prolonged period of a low interest rates or a potential increase of
short term and long term interest rates.
Impact NN Group
Since on the insurance side ING is mainly a life insurance company with long-term commitments to its clients, it is exposed to risk from
low(er) interest rates. Other risks, such as longevity risk, will further increase this risk.
The NN Group entities have an asset liability management (ALM) process in place where investments are bought that largely match the
duration profile of the liabilities. The remaining interest rate exposure is mitigated through derivative portfolios. In several currencies, asset
durations matching the liabilities are not available. In these cases ING runs non-hedgeable interest rate risks. Options embedded in the
products, which are difficult to hedge, expose ING to further risks.
242 ING Group Annual Report 2013