ING Direct 2013 Annual Report Download - page 26

ofthis taskforce, which consists of a collaboration between users
and preparers of financial reports, such as global financial
institutions, investors, rating agencies and external auditors. In
addition, ING increasingly conducts company-wide and portfolio-
specific stress tests as a supplementary tool to assess resilience to
adverse market conditions and to act upon if mitigating actions are
deemed necessary. Customer behaviour and demographics have an
important bearing on risk management and are consequently
modelled and incorporated in our risk appetite framework. Given
the continuously changing environment, the underlying
assumptions are regularly reviewed, as are all relevant metrics.
Despite some signs of recovery, the weak macroeconomic
environment persisted through 2013. Against this backdrop, ING’s
risk position continued to hold up well. This position was driven by
active risk management, but also by on-going restructuring and
reform programs in both the banking and the insurance businesses.
Both the Bank and the Insurance operations continued to optimise
and de-risk their balance sheet. The total exposure in the GIIPSC
(Greece, Ireland, Italy, Portugal, Spain and Cyprus) countries
decreased by EUR 5.5 billion to EUR 62.3 billion. In addition, the
Bank continued to transform its debt securities portfolio into a
liquidity book as part of the strategy to optimise the balance sheet.
The weak economic environment continued to contribute to
elevated levels of risk costs in 2013, while the percentage of
non-performing loans increased to 2.8% which represents
EUR15.9 billion lending credit outstanding. The additions to the
provisions for loan losses rose by 8% year-on-year to EUR 2,289
million, resulting in ING Bank’s stock of provisions rising to
EUR 6.2 billion at the end of 2013. ING Bank’s overall provision
coverage ratio defined as the stock of provisions divided by the
non-performing loans, improved from 36.9% at year-end 2012 to
38.6%. Next to additional provisioning, several other mitigating
actions were taken. In 2013, the Bank further included the impact
of the deteriorated market circumstances in the regulatory capital
models by including recent observations in the various portfolios.
Despite these measures the Bank maintains a strong capital
position, with the Bank’s core Tier 1 ratio on a fully loaded Basel III
basis remaining stable at 10.0% at year-end 2013, meeting ING’s
Ambition 2015. Other contributing factors were strong capital
generation, selective de-risking and divestments. The strong capital
position enabled ING Bank not only to repay another tranche to the
Dutch State, but also allowed ING Bank to use capital to further
reduce the Group’s core debt. Further, in 2013 DNB performed an
Asset Quality Review for commercial real estate primarily focusing
on relevant income producing real estate portfolios. Provisions and
Pillar I capital levels for ING Bank for theportfolios in scope were in
line with the results of the Asset Quality Review.
The Bank improved its funding profile and ensured its liquidity
position stayed within regulatory and internal targets. The full-year
2013 long term debt issuance totalled EUR 25.7 billion compared
with EUR 33.1 billion issued in 2012. The issuance volume was
lower due to a combination of an asset growth slowdown and
increasing funds entrusted. As a result, ING Bank’s loan-to-deposit
ratio, excluding securities that are recorded at amortised costs in
loans and advances and excluding the IABF government receivable,
improved in 2013 from 1.13 at 2012 year-end to 1.04%, thereby
already complying with ING’s 2015 Ambition of below 1.10.
Over the year, NN Group strengthened its balance sheet by refining
asset/liability management to optimise risk-reward trade-offs. As a
result, the Insurance business is less susceptible to market
movements and is well positioned for selectively increasing
investment returns. In addition, with the implementation of
Solvency II expected in 2016 – following agreement on
Omnibus II– NN Group has continued preparations to comply
withSolvency II strengthening risk models, risk assessment and
riskgovernance. Non-financial risk issues continuously demand our
attention since they can seriously impact the functioning of our
different businesses. These issues differ for each business activity
and require tailored approaches to counter them. ING, for example,
monitors possible new fraud methods and practices that can
emerge following the introduction of new retail payment methods
and products, and continues to expand anti-fraud programmes in
our insurance and lending acceptance processes. A concrete action
has been the implementation of geo-blocking in the Netherlands,
whereby debit cards are blocked outside the EU unless the
customer requests otherwise. In combination with a new type of
chip integrated into cards this has significantly mitigated the risk of
criminal skimming activities. Furthermore, as a result of lessons
learned from other events, such as the manipulation of financial
benchmarks, ING Bank is strengthening its own methodologies
andprocedures.
The growth of electronic distribution and communication channels
has increased the speed and convenience with which our
customers can conduct their banking business with us. We are
committed to providing this convenience without compromising
security standards. ING has implemented and continues to
implement comprehensive prevention, detection and responsive
measures to defend its customers, its information and its systems
against cyber attacks and reduce the level of any losses. The
Distributed Denial of Service (“DDoS”) attacks on (Dutch) banks in
April 2013 made it clear that the investments ING Bank is making
inthis domain are more necessary than ever and deliver
positiveresults.
By virtue of its function as a financial intermediary ING plays an
important role in society. We are continuously developing our
products according to our customers’ changing demands and
ensure that they comply with our proper values and principles,
through, for example, sales suitability programmes. As part of its
risk culture, ING continued refining the integrated sustainability
objectives in its business strategies and activities and managing the
related social and environmental risks. ING took another step
towards greater transparency in 2013 by publishing its
Environmental and Social Risk (ESR) Framework online, which
includes ESR policies that ING has applied to its business activities
since 2003 and further expanded in 2013. Furthermore, in line with
European Union requirements, risk management plays an
important role in evaluating the performance and determining the
remuneration of senior management, ensuring that remuneration is
properly correlated with our risk profile and the interests of all
stakeholders.
All these changes make the company stronger, simpler and more
sustainable as it focuses on retail banking in Europe, its world-class
commercial banking network, and being a preferred supplier of
protection products for our Bank and Insurance customers. A
comprehensive, more detailed chapter on ING Group’s risk
management practices is contained later in this Annual Report.
24 ING Group Annual Report 2013
Risk management continued