ING Groep NV

AEX:INGA

Earnings Call Transcript 2018-Q3

[Operator]

Good morning. This is the operator, welcome you to ING's Third Quarter 2018 Conference Call. Before handing this conference call over to Ralph Hamers, Chief Executive Officer of ING Group, let me first say that today's comments may include forward-looking statements, such as statements regarding future developments in our business, expectations for our future financial performance and any statement not involving historical fact. Actual results may differ materially from those projected in any forward-looking statement. A discussion of factors that may cause actual results to differ from those in any forward-looking statements is contained in our public filings, including our most recent annual report on Form 20-F filed with the United States Securities and Exchange Commission, and our earnings press release as posted on our website today. Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities. Good morning, Ralph, over to you.

[Ralph A. J. G. Hamers, Chairman of the Executive Board & CEO]

Good morning, thank you, operator. Welcome, everyone to the third quarter 2018 results call. As always, I'll take you through today's presentation. Both our CFO, Koos Timmermans; and our CRO, Steven Rijswijk, are here with me. The key points for today. Our net profit was lower at EUR 776 million this quarter, and that's because the EUR 775 million settlement agreement that we had with the Dutch authorities in early September. We clearly and sincerely regret that the outcome of the investigations identified serious shortcomings in the execution of our policies to prevent financial economic crime at ING in the Netherlands. We take this very seriously and accept full responsibility for it. Today we'll walk you through some of the initiatives that we have in place to strengthen the management of compliances as well. Now commercially things have actually progressed very well this quarter. The underlying pretax result, which excludes the settlement impacts to that just over EUR 2.1 billion, primary customers continue to increase as well this quarter by 200,000 to 12.2 million and we have a #1 Net Promoter Score position in 7 out of 13 retail countries. The 4 quarter rolling underlying return on equity improved to 10.7% in the third quarter, and that's on the back of continued lending growth at resilient margins, continued strong fee income, despite seasonality and a focus of strict cost discipline across the bank. Group CET1 ratio ended this quarter at a solid 14%. Now turning to Slide 2. I'd like to emphasize that we are committed to conducting our business with integrity. We want to conduct it in compliance with the applicable laws, regulations and standards in each of the markets and jurisdictions in which we're active. Therefore, already at the beginning of 2017, we initiated a bank-wide know-your-client program -- know-your-customer program supervised by the Dutch Central Bank. The program includes activities to improve the accuracy of our client files, transaction monitoring in the Netherlands, which includes redefine the drivers which trigger an event and not capping the number of daily triggers, monitoring clients at customer level. We also developed -- we're also developing bank-wide processes and tuning to support improve client activity monitoring. Our KYC program is just one of the many initiatives that we started within the bank. In addition, we have initiated to improve employee awareness around compliance, such as behavioral risk assessments, strengthen the internal compliance culture, strengthen the mindset and a risk management function is truly a client integrity risk policy, which takes compliance-driven decisions on the client on- and off-boarding. With a further focus on the uniform execution of policies and procedures through more rigorous testing prior to implementation and also centralizing our operational KYC activities for ING in the Netherlands. We've also substantially increased the number of compliance-related staff for ING in the Netherlands from 150 early 2010 to 450 today, and lastly, we partnered with third parties to better control -- to better combat money laundering. Now many of these initiatives, we already started some time ago. So the cost of these, as they are being -- as we run them currently, cost of these are in the plans. Compliance regulation is, however, continuously evolving, and we will, of course, invest when and where needed in order to ensure that the compliance risk and nonfinancial risk in general, becomes one of those categories of risk that bankers have to deal with like market risk and credit risk, it's going to be become part of our DNA. Turning to Slide 4. This illustrates that we remain on track with regards to the execution of our Think Forward strategy. Primary customers went up 200,000 in the quarter to 12.2 million, that's for us the target of 14 million by the end of 2020. So basically, we are progressing nicely towards that 14 million. In the first 9 months of the year, it's -- basically all of our countries contributing to the growth in -- on the primary customer growth side. And as you can see in the slide, Australia is doing really well, Germany is doing really well, but also countries like Romania and Poland and Spain are doing quite well. Again, this quarter, net core lending growth outpaced the net customer deposit growth, which helps us in this low rate environment, defending the NIM, the net interest margin. For year-to-date, we have already exceeded our 3% to 4% loan growth ambition. However, particularly in Wholesale Banking, we see more stiff competition in certain regions. So we have put in place strict risk parameters in certain sectors, particularly in Real Estate Finance and leveraged finance. In the third quarter, as you can see also in this slide, we ranked #1 in 7 out of our 13 retail markets in terms of Net Promoter Score, and you know that Net Promoter Score is compass for us and is certainly a leading indicator of more primary customers and more customers to come, so it's a real important indicator for us. And in another 3 markets, we're actually #2. And moving to the next slide. The integration of Belgium and the Netherlands, given the importance of these 2 retail markets to ING, I thought that it would be helpful to briefly recap, why we're integrating these and what's the progress that we have made so far. A part of this slide that you see here actually a copy of what we presented during the Investor Day in 2016, where we presented the business case for embarking on this unite transformation program. Well, clearly, we have started it because we see that the mobile and digital banking trends in Belgium continues to accelerate. And at the same time, our main IT components in Belgium are reaching end of life cycle, so we needed to invest. That is the -- that is what we concluded at that moment. Furthermore, there was scope to integrate our 2 brands in Belgium, Record Bank and ING brand, and optimize the combined branch footprint, which was successfully completed in the second quarter of this year. But we reached the most important milestone today, basically the legal integration of the 2 banks and with that also the migration of almost 600,000 Record Bank customers to ING in Belgium. At the same time, we have been reducing the physical footprint in terms of the reduction of branches in 1 quarter from 1,250 to 650, and over the periods that we have been working on this transformation program, so the last 2 years now, the number of internal FTEs in Retail Banking in Belgium have gone down by 1,150. At the same time, we are preparing the target platform for the next step in migration of customers from Belgium onto this target platform, which we are running in the Netherlands. We are preparing this platform by introducing instant payments, 365 days a year that replaces the batch-based payments architecture with a real-time solution. Also, the app that we have in Holland is very highly rated. So basically, you can see why that is the target platform to move to because it is really state of the art. The major next step will be to prepare the omni-channel Deutsche Bank platform further, also from a language perspective, to agree on the standardization of basic customer propositions across the 2 countries to manage expectations. And then, we'll migrate to these customers. We are convinced that we can deliver this large scale transformation as we have extensive experience. For example, by integrating Postbank and ING Bank in the Netherlands, but now clearly also we are extending that experience into our Belgium labor force because they have done a major migration of the Record Bank lines onto their own systems as well. So all of that is -- looks to be going quite well. Then turning to how we continue to innovate and improve the customer experience. As you know, the core of our strategy is to deliver differentiated customer experience so when customers get in touch with us, their experience should be simple, should be smooth, across different channels, it should be almost the same. So to this end, ING has built a common contact center platform for use in retail countries, providing customers with access to the same services. Basically, this means that if you are chatting with the customer online and you want to continue the same conversation over the phone, it's just one -- it's one button to push. And so that you can actually continue to service across all the different channels. That's what we're building, and that's what we're introducing in 12 of the 13 retail countries. On top of that, we'll have to continue to be opportune with these collaboration. If we look at other initiatives, our investment in the international payments platform TransferMate is one of those examples that provides our customers and corporate clients with faster, cheaper, easier international payment solutions. It's a real good example of that. We've also extended our existing partnership with TradeIX and that's a world-first open platform for trade finance based on -- and that's entirely based on blockchain. And with komgo, that's the other example that we have here, we take the earlier pilots of, that we called Easy Trading Connect. Remember that I updated you on how we basically digitalized the total trade flow, trade and commodity flow with a couple of clients, traders and as well as shipping companies. That is actually now growing into a company. Komgo was one of those companies. In this company, we are agreeing to this as the standards, while we partner with the industry players like Gunvor, like Mercuria, like Shell, but also with banks because One Bank concept standard, so you have to agree on that standard. So ABN AMRO, BNP, Citi, Societe are also on this. So here you see actually disruption in the making from a pilot into a business. With that, I actually do think that the whole -- the global trade flow in the end will be on DLT, distributed ledger technology, so faster, safer and more efficient as well. Turning to Slide 7. As a bank, ING makes the most climate impact through our financing, as you know. I mean, the footprint of banks direct -- the direct footprint of banks is generally managed well. It is also the -- it's also not big. We can actually make the best income through -- well, impact through the management of the indirect footprint, which is through our customers and the money that we lend for our -- to our customers. We have a loan book of EUR 600 billion across many sectors, and we will now be considering this towards meeting the Paris agreement's 2-degree goal. Now we're able to do -- to start doing this by creating an innovative accurate way to measure the climate impact of our portfolio and that we call Terra. This approach is being co-created by the 2 Degree Investment -- Investing Initiative, it's a leading global think tank. And Terra looks at the technology shift that is needed to cross certain sectors to keep the risk of global temperatures to well below the 2 degrees Celsius. For example, in the automotive sector, it's not enough to lower the emissions by making fewer petrol powered cars, but it's -- you really need to produce more electric cars, all right? Terra then measures the need shifted in technology, against the actual technology clients are using today and planning on using it in the future. That's where our financing comes in, and that's where we can have a major impact by having that conversation with our clients. I think it works basically on 1 -- on 2 sides. On 1 side, clearly, we are then together working on how we will comply with a 2-degree ambition that we have. On the other side, from a risk management perspective, it gives you control over mitigating the risk of ending up with stranded assets. So it works on both sides. It's important thing to do but from both the bank's perspective as well as the society's perspective. Now we clearly realize that we can't do this alone. We've made this Terra approach now open source. Many banks have indicated their interest, and I hope they will come and join us on this one. Clearly, if new technologies will come around and better methodologies are developed, we will move towards that as well. But we didn't want to wait for a global standard and everybody to agree it because it took already too long, so we launched our own, in order to start, really having an impact on climate with this. Now let me turn over to the third quarter results now. On Slide 9 -- if you look at Slide 9, you see the underlying pretax result just over EUR 2.1 billion in the third quarter, which marks one of the highest quarterly pretax results we've seen in the history of the bank. Quarter's pretax profit is largely a reflection of the 5.4% improvement in the underlying income that you see in the right-hand side and that's as a result of the loan growth. The fact that we are doing this and continue to do this at resilient lending margins, but also higher Bank Treasury-related items. Solid net fee and commission income, as you will see later, and the annual dividend from Bank of Beijing that is always in the third quarter, but it was also remarkably higher. Furthermore, the third quarter's strong result was supported by tight cost control and relatively low-risk cost, albeit, risk costs were up versus both comparable quarters as we will touch upon later in the presentation. Sequentially, the underlying result before tax rose 5%. Now if we zoom in to NII, NII excluding financial markets -- I'm on Slide 10 now for those who are following me on the slide presentation. NII excluding financial markets and the impact from having some of the hedge relationships increased 5.4% year-on-year, and that's mainly explained by a higher interest result in the Retail Challengers and growth markets, industry lending and general lending and transaction services. Year-on-year, net interest income on customer lending improved as we continue to lend at slightly higher overall lending margins. NII was further supported by slight improvement in the interest result on savings due to the higher client balances and a broadly stable margin, whereas, current accounts continued to be a drag. So this was one of those quarters in which we were still able to manage some of the effect on the saving side, and that is what you see here. Now the mix of these 2 effects actually led to a 1 basis point improvement on our net interest margin to 152 basis points, which is nicely aligned with the guidance that we have given before that we expected this at the high 140s, low 150s guidance. Turning to lending growth. In the third quarter, we recorded net core lending growth of EUR 6.8 billion, as you can see here. It is more normalized base when compared to the first half of the -- of 2018. Retail Banking growth outpaced Wholesale Banking this quarter. Retail Netherlands saw a good growth in mortgages, even including the run-off book. Retail Belgium saw a drop. This is more the net effect because it is fully caused by lower overdraft usage by a major client. If we exclude this impact, there was a growth in net core lending almost fully in mortgages. Retail Challengers in growth markets continues to grow on its strong growth -- continues on a strong trajectory with the majority in mortgages this quarter. And also, bank net core lending growth was EUR 2.8 billion, predominantly recorded in general lending in the third quarter. Our focus on return on appropriate risk may lead to lower growth going forward, given some increasing competition and also some looser credit standards in the market, you know we can also cover that during the Q&A. Turning to fees. If we adjust for a rebooking of capital markets, we adjust fees from other income to fee income, which is kind of the 27 that you see there in the bar, but if you -- even if you correct that, net fee and commission income came in at a strong EUR 693 million, which is up 7.8% year-on-year. And you see this nicely and increasingly diversified across the different segments. The year-on-year fee improvement was driven by increase in most retail countries, but particularly in the Netherlands and Germany, despite seasonality in areas like investment products. The third quarter saw also higher fees in Wholesale Banking, and that's particularly due to an improvement in Financial Markets. Despite this, if we then look at the financial markets performance, financial markets had a more difficult quarter, impacted by the challenging market conditions, reduced client activity and low interest rates in Europe. We don't see, on the rate side, too much volatility as a consequence of interest, not a lot of hedging demand. And if there's not a lot of hedging demand, you don't see that's coming through on the rates side. If we look at the total Financial Markets result and then we would include the business that we do for SME and the corporate customers, the return on equity on our Financial Markets business would actually improve meaningfully. Nevertheless, we are looking at how we can kind of improve the performance of Financial Markets going forward. Turning to cost now. If you look at the expenses, excluding regulatory costs, which are just like the second quarter lower in the third quarter, the regulatory cost, our expenses were down EUR 33 million or 1.5% versus the second quarter. And this reduction is mostly visible in Retail Belgium due to a continued reduction in FTEs, which I mentioned earlier already, but also, visible in the Wholesale Banking side and the corporate line. On the 4-quarter rolling average basis cost-to-income ratio improved to 55.5%. In the quarter itself, the cost-to-income was actually 49.7%. So you can conclude that we're committed to tight cost management here. The reductions in some areas are used to selectively invest in growth return areas. Combined, this is leading to a continued decrease of our cost-to-income ratio, and we remained committed to the 50% to 52% cost-to-income ratio ambition that we have given to be delivered by 2020. Turning to risk cost at Slide 14. Risk cost in the third quarter came in at EUR 250 million, that's 27 basis points over average risk-weighted assets, which is a more normalized level, especially when compared to very low level of risk cost recorded in both comparable quarters. As you can see in the graph from the left-hand side, Retail Netherlands recorded another release of EUR 21 million, and that's particularly in the mortgages. Risk costs in Retail Belgium are mostly related to business lending, while in Retail Challengers and Growth Markets, this is combination of business in consumer lending. Wholesale Banking risk costs were EUR 108 million in the quarter and that's mainly caused by some larger Stage 3 files in the Americas and Belgium regions. It's also across sectors, so there's no specific trend here to be detected. Nonperforming loans for ING, as measured by Stage 3 ratio under IFRS 9 remained at 1.6%, as you can see on the right-hand side of the slide. Now for the next quarter, we would expect risk costs to stay well below the through-the-cycle average of 40 to 45 basis points over risk-weighted assets. Zooming in, on Turkey now, given the macroeconomic events in Turkey in the third quarter it is worthwhile that we spend some time here, and I'm sure some of you will have some questions around it anyway. But we have composed this slide so that you have kind of a good summary in front of you. Just to start, the Turkish loan book is just 2% of ING's total loan book and it's still performing well. The NPL ratio is 2.3%, as you can see in the third quarter. Overall, the portfolio remains in good shape, but clearly we expect some of our clients to be affected by the macroeconomic situation. You take comfort from the fact that all of our exposure to private individuals is in local currency, while we only provide foreign exchange loans to companies that have proven foreign exchange revenues. For larger corporates, we can make an exception, if there is a parent guarantee or if there is an export credit agency insurance covering it. Furthermore, I think it's good to mention that our Turkish book has generally a short remaining maturity, you can see that in the slide as well. On the right-hand side, you see that our remaining maturity of the lending credit -- the credit outstandings that we have in Turkish Lira is just shorter than the year. Therefore, currency is around 2 years the short-term books. And what we're basically doing now to focus in Turkey and our team is working really hard on this is to manage the risk in our portfolio by derisking where possible, particularly, by not rolling over foreign exchange loans. The aim is to reduce intra-group funding, since the start of the year we already reduced by EUR 700 million. That said, I can only compliment a team on the ground in Turkey, which is doing an excellent job to control a risk and running the business during challenging times. Turning to the capital side, Slide 16. CET1 ratio remains strong. In this quarter, it's 14%, down 10 basis points quarter-over-quarter, but still well above the SREP requirement of 11.8%. This is despite the fact that we had to add the full net profit of the quarter to its dividend reserve following the impact of settlement agreement. CET1 capital was further impacted by foreign exchange, a lower equity securities reserve, which were only partly offset by lower risk-weighted assets there. We remain confident that we will meet future capital requirements, including the potential impact from Basel and TRIM. We have a large set of potential management actions at our disposal to mitigate these inflationary risk-weighted assets impacts. And that includes asset distribution, data enrichment to avoid punitive risk rates and lending mix optimization going forward as well. Maybe, as an example, one of the management actions that we have taken in the third quarter to test the readiness of the market as well as the organization here as we successfully closed a synthetic capital relief transaction on German mortgages. So there are things that one can do. Now finally, looking at the slide, which show our ambitions, both the CET1 and leverage ratios remain ahead of minimum regulatory requirements. We continue to broadly -- to be broadly on schedule with our large digital transformation programs, which will help us to bring down the cost-to-income ratio to our target range of 50% to 52% by 2020 compared to the previous 4-quarter rolling average. We have already improved our cost-to-income ratio now by 0.6% in the third quarter. Finally, the 4-quarter rolling -- on a 4-quarter rolling basis, the underlying group return on equity increased to 10.7%, as we keep growing the franchise, are able to command higher margins in most segments actually. We focus on cost control across the different businesses and still have relatively low-risk cost. While at the same time, facing continuous pressures from the low-rate environment. Maybe to wrap it up. Clearly, the third quarter in ING and reputation-wise was overshadowed by the settlement that we agreed on the back of serious shortcomings in the compliance -- on the compliance side. Therefore, I can assure you that enhancing our compliance on nonfinancial risk practices will have the highest priorities within this group. But if you look at the underlying performance, you can actually also conclude that in the third quarter that we keep executing well all our Think Forward strategy, whether it's on primary customers, whether it's on net promoter score, whether it's on lending or fee growth. And that combined with our focus on managing cost, optimizing operational excellence and executing our digital strategy makes us confident that we will continue to improve on the financials side.Now lastly, I'm pleased to announce that we will hold an Investor Day on the 25th of March in 2019. And that we can actually take more time to take you through some of the examples, some of the milestones, if you -- more updates as to where we are in the transformation but clearly also on compliance. But the day will focus on giving you deeper insights in our capabilities and digital leadership.With that long introduction, I give the floor and open it for questions.

[Operator]

[Operator Instructions] Our first question is from Mr. Robin van den Broek, Mediobanca.

[Robin van den Broek, Research Analyst]

My first question is on cost of risk. If you take your guidance of 40 to 45 basis points on RWA and you translate that to the loan book, on a loan book basis, you're between 20 and 25 basis points. And some could argue that, that is a fair level for a more mortgage-bank-driven focus. I was just wondering your other retail lending exposures between EUR 100 billion and EUR 150 billion at the moment, I was wondering, if you could give a little bit more color on what's the underlying cost of risk you assume for that book? And what level of collateral is in place for that part of the book? Then secondly, your dollar lending exposure is roughly somewhere towards EUR 100 billion I think. I was just wondering to what extent are you reliant on commercial paper and the swapping of euro deposits to dollars in order to fund that dollar lending book. And also if you could describe the dynamics you see at the moment versus your back book whether there are negatives coming through or positives? Those are my questions.

[Steven J. A. van Rijswijk]

Thanks, Robin, this is Steven. Regarding the cost of risk, yes, I mean, the cost of risk for the last 4 quarters on average was 18 basis points. This quarter is a bit higher, up to 27 basis points. There are a number of files in wholesale banking amongst France and Belgium and U.S. that have caused that, those were individual files. They do not bear a particular relationship. But if you look at the bank as a whole, we are approximately EUR 600 billion in lending, approximately half of that come from mortgages, so that makes -- we're not only a mortgage bank, we just were significant and larger mortgages. There is a relationship between how we weigh a risk costs. On average, we see that over a longer period up to 40 to 45 basis points. But actually currently, if you see, is that risk costs are relatively lower across the board, and that's also in retail and wholesale banking. So yes, the risk in -- if you look at tenders and coverage in mid-corps -- I mean, wholesale banking, typically, are a bit higher than in retail. That also causes higher RWA. But across the boards, the risk cost as a percentage of RWA are currently low.

[Robin van den Broek, Research Analyst]

I appreciate that answer, but my question is more a little bit about the other retail lending, because if I look at the guidance of other banks on a loan book basis, I can basically make a fair estimates for mortgages and for your wholesale banking exposures. But for other retail lending, which is still a sizable part of the book, it's a little more difficult. So could you perhaps give a little bit more color on what your assumption is on that part of the book?

[Steven J. A. van Rijswijk]

Yes. I mean, we did not disclose particularly -- a particular risk cost on particular segment of the book. But I can tell you that also for those segments the risk was relatively benign.

[J. V. Timmermans, CFO & Member of Executive Board]

Yes, may be -- Robin, it's Koos. So on the dollar book, you are right that we have dollar book and that is in total we have roughly EUR 40 billion shorter term and EUR 70 billion longer term. Now what we normally do is that shorter term is funded with CP issuance and the longer term is funded by a number of sources, which is equity, a Tier 1 dollar-denominated long-term debt and also part of the MREL. So our long-term assets are funded long term. If you then particularly ask about back book cost, then I think you have the cost on -- is now rolling over CP more expensive over this automotive into short-term assets. We had seen that last year as well showed the LT mode that was already completely covered. So that is not an issue.

[Robin van den Broek, Research Analyst]

Okay. That's very clear. And perhaps, I presume you match maturities in your fundings, so there is no immediate impact if express moves, for example, on that perspective?

[J. V. Timmermans, CFO & Member of Executive Board]

That's correct.

[Operator]

Our next question is from Mr. Nick Davey, Redburn.

[Nick Davey, Research Analyst]

I'll stick to 2 questions then, please. The first one on cost. It's obviously been a volatile year on the cost line. You settled in the last couple of quarters towards about 1% growth excluding regulatory expense. Is that a fair run rate from here? I feel like we've had a year of kind of confusion and understanding this interplay between expenses and underlying savings. Do you think this kind of underlying run rate of 1% cost growth is representative? Second question. I'll go with then wholesale growth. It does seem like there's a slight change in language here today. You've talked about bringing closer control, I think you said on real estate finance. So could you just talk about, is this a shift in strategy or is it based on risk that you're seeing? Is it based on competition? I think you mentioned not getting adequate returns. Is it driven by a desire to build more capital? Could you just talk a little bit around if I'm right in picking up a change in language? And if there is, what's driving it?

[Ralph A. J. G. Hamers, Chairman of the Executive Board & CEO]

Yes, thank you, Nick. So on cost -- well, on cost -- the run rate, we haven't guided on the run rate. We have guided on cost income. And I think that's also the way we run it, actually, in ING. So when we launched the strategy, we had like 3 recipes for 3 different activities. So the market leader's activity is expected to really decrease its cost base, like really decrease its cost base. These are mature markets. We're investing heavily in digital, and efficiency is leading there, and that's where you can expect the cost to go down. In the C&G, the Challengers & Growth markets, if we see the -- there's profitable growth, and we can keep the commercial momentum by running these digital banks. We don't mind to invest selectively, and therefore, even have a cost growth that is higher than the 1% that you're mentioning because it is the cost-to-income ratio that we look at that. And then on the wholesale banking side, from the beginning we have said that within the sphere of wholesale, we feel that over a period of time that the efficiency gains can be used to decentralize the opportunity to grow the front office in order to produce -- to be more commercially active. That's a little bit how we run it. Now on any given quarter, this may be a little bit up or a little bit down because you see that sometimes we invest a little bit more in ATS in a given quarter and then some of the savings come through a little bit faster, like we see this quarter. Then in another quarter, there may be a little bit the other way around. Certainly in 2017 and 2018, we have indicated that those are 2 years of real investment in the acts under Think Forward. So that more towards next year, towards the end of next year, you should really see the effects. Now we see some of the effects already, which is what we're very happy with. It doesn't kind of give us room now to suddenly start growing the cost or the investment. That's not how we run it. We have a program to invest, and we look at its effectiveness. And overall, we look at the development of the cost-to-income ratio. On wholesale banking growth, there is a change of language. Now there were areas where we see a little bit more competition that specifically grow on U.S. side. We see a little bit more competition, at least, we see pricing that in our strict pricing doesn't help us to do more business there, but there are many sectors where there is quite some business that does well, and that's how we look at things. So if you look at how we price our business, we keep the same discipline. Obviously, in this quarter, we saw the margins on the front book in the industry lending being kind of in some areas, a little bit under pressure, but overall stable-ish. Credit quality was actually better in the front book, but we have become a little bit more selective, if it comes to, for example, there are main 3 areas: we said, finance, which we have kept; leverage finance, where we actually see structures coming through; and leverage rates just coming through that we don't feel good with. And as you know, we will never compromise on structure. That's a golden rule here. On the general lending side, also in wholesale, we see actually margins coming up a little bit. So we have different areas, different sectors, different geographies, but we keep our pricing disciplined, and sometimes we grow a little bit faster than others from a risk perspective. The 2 areas as indicated: real estate finance capped and leverage finance capped as well.

[Nick Davey, Research Analyst]

Can I ask just a couple of follow-ups on the cost and just ask to focus on a couple of units. So you mentioned about really trying to get absolute cost down in the -- particularly the Benelux retails. So this quarter, we're now at declining cost year-on-year in Belgium. Do you think we've got past the worst that you think, sort of, we're into a period now where we can start to see those savings materializing? Is this a kind of tipping point quarter? And then sorry to ask the inevitable, the financial markets business, which is now loss making, and I know it's a quiet quarter, but this does tend to happen in the second halves of the year. Have you done enough on cost there? I understand your point about efficiencies and planning them into the front office, but it just doesn't seem to be bearing fruit. So is it acceptable to you to be losing money in the financial markets business in a quiet quarter?

[Ralph A. J. G. Hamers, Chairman of the Executive Board & CEO]

So good questions, Nick. So on market leaders, I mean, this is an area of major transformation where still some investments are being made. I wouldn't call the worst is behind us. I -- it's not the terminology that we use. We are investing in order to improve our client experience in order to continue to deliver to our clients in an efficient way. So over time, you have to expect those costs to come down, absolutely. That's the recipe. Whether on quarter-by-quarter, you can actually now start predicting the cost to come down, I can't tell you that because there's investments going on there as well. On financial markets, I can see your question. As you know, we just finished a major transformation in financial markets also to decrease the cost further by centralizing our activities from 3 locations: Belgium, Netherlands, London on to the London platform. So we are reducing the cost there by these kind of movements. Clearly, you know the current situation is not something that is sustainable, and we will continue to look at how we can improve either in the revenue or volume side or in the cost side, absolutely.

[Operator]

Next question is from Mr. Farquhar Murray, Autonomous.

[Farquhar Charles Murray, Partner, Insurance and Banks]

Just 2 questions, if I may. Firstly, on the slower growth in wholesale banking, how will that impact on the group growth aspiration? Should we think of it as pass the trade-off within the kind of 3% to 4% growth aspiration for the group? Or is that aspiration actually potentially coming down a little bit? Then secondly, just coming back a little on the money laundering issue. The DNB is kind of made clear that in future intends to publish all sanction decisions barring exceptional circumstances? Could you give us a sense of how often we might have historically seen those kind of sanction decisions against ING? That would have been, like, 1 a year, 2 a year, just to get there a sense of frequency. And how do you see that kind of publication system developing?

[Steven J. A. van Rijswijk]

With regards to the loan growth in wholesale banking, I mean, first of all, we're not solely depend on wholesale banking to grow. So as Ralph said, it's correct sometimes we grow a bit faster in wholesale banking. And we're in wholesale banking and sometimes more in structured financing, sometimes in general lending. And then we grow more in mid-corporate, and then we grow more in mortgages. Second of all, the lowered ambition is 3% to 4%, but it's an ambition, not a target. In the end, that is a -- in the end, we want to make our returns, and we have clear return hurdles in our company. We have clear risk structures that we adhere to, and if we cannot make the returns on the capital that we provide to our clients, then we will not lend to them. We will keep it to either grow our capital or pay the dividend, and that's the way that we manage that side of capital on the balance sheet. Regarding the sanction disclosures, there are, in the past, what DNB would do, they could give directives or instructions to banks, and those are published in the local state prize newspaper, as you will, the Dutch [ Stantskulaant ] that is called -- that has happened to a number of banks, including ING. I do not know the number by heart, but I think those directions or instructions have been given a couple of times over the past 5 to 10 years.

[Farquhar Charles Murray, Partner, Insurance and Banks]

Okay. Just a question -- follow-up question. I mean would you -- given the kind of current pricing environment, would you see any difficulties, kind of, any opportunities you see across the business? Would there be any issues trying to meet the 3% to 4% ambition?

[Ralph A. J. G. Hamers, Chairman of the Executive Board & CEO]

Well, honestly, if you look at the current quarter, where we actually see margins across the board a little bit higher -- this is Ralph, whether it is in the retail Netherlands, on the mortgages, we see a bit higher margins. Belgium mortgages have a bit higher margins. Germany mortgages a bit higher margins. On the business lending side, the Netherlands and Belgium, we see stable margins. On the wholesale banking side, as I indicated, we see some pressure in some regions if it comes to industry lending. But in general, lending and transaction services, we see improved margins. In C&G, Challengers & Growth, except for Germany, we see also improved margins. So we see margins. Okay with that. Therefore, with our strict pricing policy we can still get the volumes in. This quarter, at 6.8% is just over 1% for a quarter, which is more than 4% if annualized, even this quarter. I mean it's lower than last quarter, but it is still annualized more than 4% this quarter. But honestly, on the other side, if -- with our selective pricing, and as you know, given the fact that we will have to kind of hold more and more capital because of Basel, therefore, the returns and the way we price will give higher NIMs as well going forward. That kind of decreases the volume growth, but you do it at good margins, also okay. Because in the end, again here, it is a cost-to-income play.

[Operator]

Next question is from Stefan Nedialkov, Citi.

[Stefan Rosenov Nedialkov, Director]

Stefan from Citi. A couple of questions on my end as well. First of all, on Turkey, could you elaborate a bit more on your funding strategy there? Are you basically trying to pay down the entire intergroup funding over time and delever as much as possible? Or a business strategy more in terms of replacing the intergroup funding with syndicated lending down the line given the successful syndicated rollovers we've seen from some of the Turkish banks recently? Secondly, if you could give us the delta in the number of compliance officers since the end of 2016 to today? I think you were saying 300 people delta from 2010 versus wondering what that number is from year-end 2016. And related to that, whether you've had any communication from the regulator, the 450 FTE number needs to go up and by how much? Lastly, if I may, on loan growth, from what I remember at the Investor Day back in 2016, your ambition was to grow by around 5% in wholesale. Is that still the ambition given the current trade outlook through 2020?

[Ralph A. J. G. Hamers, Chairman of the Executive Board & CEO]

So Steven will take Turkey and also compliance staff. Yes?

[Steven J. A. van Rijswijk]

Yes. So I'll take the first 4 questions, and -- so with regards to Turkey, I mean you have seen that our intercompany funding has come down from EUR 4.1 billion by the end of last year to EUR 3.4 billion as part of the third quarter. We have a balanced strategy here. So gradually, we want to decrease the intercompany funding from ING to ING in Turkey. So if there is excess funding or excess capital from Turkey, then we will ask that to be repaid, but again, we do that in a balanced way. We have a franchise in Turkey, also with international companies being in Turkey and Turkish companies working across the network. And again, with due care for our 4 currency structures, we clearly will bring that funding down. And it also means that we increasingly get more local funding, too, including stratification or syndicated loans or deposits or other public means of funding. And then -- and that we will then balance with intercompany funding. That's on Turkey. Then the delta in compliance staff, yes. It -- maybe I could rephrase it, this is not only the compliance staff, but also people who work to make ING and keep ING compliant from an AML, anti-money laundering, perspective and the legislation that we have in that regard. And so indeed, in the Netherlands, the number of people working on that increased from 150 to 450. If you look at this on a global basis, then the staff working on these parts of the bank grew from 600 to 1,800 over the past 6 or 7 years. So basically that is ongoing, it is not the case that we have received a message from the regulator that the number has to be a certain number or whether it has to be more or not. That is not the case.

[Ralph A. J. G. Hamers, Chairman of the Executive Board & CEO]

Good. And Stefan, on your 5% loan growth ambition in wholesale banking, I don't kind of remember that we had a specific wholesale banking loan growth ambition. The 3% to 4% was the ambition. At the same time, we have the ambition, and we still have the ambition to change the assets composition of our balance sheet away from mortgages and towards higher margin lending, which is also wholesale banking as a consequence, maybe that is where you derived from. The only 5% number, I remember, is the one that the fee should grow with a minimum of 5%, and we are beating that. So...

[Stefan Rosenov Nedialkov, Director]

Okay. So just to follow up on the compliance question. So what was the number at the end of 2016, in terms of AML compliance or global compliance?

[Steven J. A. van Rijswijk]

We do not disclose that directly, but you can safely assume that we are have been regularly moving those numbers up over the past number of years.

[Operator]

Our next question is from Mr. Maxence Le Gouvello du Timat from Jefferies International.

[Maxence Patrick Patrick Laurent Le Gouvello du Timat, Equity Analyst]

Two questions. The first one would be on deposit. We saw an inflection point in Q3. Is it a seasonal impact? Or is it a change of policy on your side? And the second would be on Germany. You launched a lot of investment and you moved to Agile banking. What is the dynamic we should expect in the coming quarter?

[J. V. Timmermans, CFO & Member of Executive Board]

Maybe Maxence, the reference you make on, it's close here, on deposit inflection point. What is it precisely that you're referring to?

[Maxence Patrick Patrick Laurent Le Gouvello du Timat, Equity Analyst]

Lower growth. And you mentioned also some outflows in France and Spain?

[J. V. Timmermans, CFO & Member of Executive Board]

Okay. No, I think what you see is the following. Overall, we are -- well, more approaching an inflection point because one of the things what you see is growth on the lending side with -- that enhances your margin more than attracting additional savings; at the same time, are we at the point that, that is exchanging. Well, that has all to do with the whole interest rate policy going forward. But overall, we are quite happy that, yes, we do attract a fair bit of the deposits. If you then look at the deposits overall on this quarter, I mean there you talk more about seasonality because normally what you find is, the quarters -- quarter 2 particularly, people they cash in their holiday allowances, so they get rich and they spend it in their holidays in Q3 and then they have a little bit less money.

[Ralph A. J. G. Hamers, Chairman of the Executive Board & CEO]

Maxence, could you -- this is Ralph here. Could you repeat your second question?

[Maxence Patrick Patrick Laurent Le Gouvello du Timat, Equity Analyst]

Yes, on Germany you made some lot of investments and you made the announcement that they moved to Agile banking on this quarter. Should we see an acceleration of the top line in terms of fee generation, because I believe, you're going to be more active on that part? Or are you going to take a little bit more time? Is it a story of 1 or 2 quarter? Or is it more for next year?

[Ralph A. J. G. Hamers, Chairman of the Executive Board & CEO]

Well, so the additional investments are happening. As you indicate, the Agile way of working is currently being introduced. The -- what it will bring along is more efficiency, for sure. A platform in Germany that is more scalable than it currently is. So it will help over time the cost-to-income ratio. I don't think it will be an accelerated effect that you can expect from that perspective. Now on the income side, clearly, this is still a business that is dependent on interest income. However, we are introducing several fees by moving towards a primary digital universal bank. Also, in Germany, we get more and more primary customers as you have seen in my report. With that, some more fees come long, like behavioral fees, that you introduce in order to ensure that clients are incentivized to behave if they withdraw money or how often they call and stuff like that. So you will see some of that happening. This is not going to be a very 1, 2 quarter acceleration and that is the next level. But over time, you can expect a more diverse income picture in Germany as well with the introduction of more and more new products, which also generate fees.

[Operator]

Our next question is from Mr. Benoit Petrarque from Kepler Cheuvreux.

[Benoit Petrarque, Head of Benelux Equity Research]

Just 2 questions on my side, first one was on the cost. Could you update us on the timing of the cost cutting, for the EUR 900 million cost cutting expected? And you were expecting originally EUR 300 million by innovating and EUR 550 million by end of '19. So I was just wondering here, where you are and what you expect for next year? And the second question was just on the mortgages. And then I know you've been gaining market share. So could you recall us what your market share is currently? And I've the impression that your front book margin is maybe slightly below your back book margins on the mortgages and net allowances. Just wanted to confirm that statement?

[Ralph A. J. G. Hamers, Chairman of the Executive Board & CEO]

Thank you, Benoit. Now on cost -- and so the timing. You will not see those costs necessarily to go really down there, from an ING overall perspective because as I said, we don't mind to selectively invest in initiatives. In C&G, for example, and how the franchise supports the growth. But we do measure internally the effect of the transformation and the investments in the transformation. We have a very rigid process around approving business cases as well as benefit management. So we do make sure that the investments make their return, but you can't necessarily rely on seeing that in cost numbers going down overall in ING because that's not how we work, as I just explained. On mortgages, Steven will work on that.

[Steven J. A. van Rijswijk]

Yes. Thank you. So on mortgages, our market share in The Netherlands was approximately 15%. If you look at the margin, I mean, the front book is actually better than the back book, and that has gone up mostly in the quarter, but it also includes the impact of a combination of on the one hand, refinancing of bullets, and the other hand, new-to-bank production, which is more annuity than in the past, and therefore, there is a composition of the front book. But if you look at it product for product the front book is better than the back book.

[Benoit Petrarque, Head of Benelux Equity Research]

Can we assume that by the end of '18 you will kind of realize a kind of 300 million level of cost cutting out of the 900 so kind of 1/3 is achieved so far? Or are you --

[J. V. Timmermans, CFO & Member of Executive Board]

No, I think what we do is the following. We have overall, this year, indicated that we will work within cost income at around the 55% and that might be slightly below. And we are on our path of doing that, but I find it very difficult to do that precisely because part of the work, look at this quarter, Benoit, do we think that we have to spend money on accelerating forward. But that differs by EUR 20 million, EUR 30 million per quarter and that is just a kind of nonstandard activity, which is happening that is why this exact guidance is difficult. At the same time, what you do see is that, overall, we expect for this year to have the cost within that guidance or what we have given. And overall, for 2019 onwards, we will make the next steps towards the 50%, 52%.

[Operator]

Next question is from Mr. Bruce Hamilton, Morgan Stanley.

[Bruce Allan Hamilton, Equity Analyst]

Most of them have been asked already, but I guess, a couple on capital. In terms of the cost of the NL case as you guys absorbed in the quarter. But am I right to understand that the operational risk charge is probably still to come? And do you expect that to be sort of Q4 or later? And then secondly on the capital optimization. Obviously, you talked about sort of the originate-to-distribute model. Do you think that sort of using that to drive some capital relief will be the majority of your current mitigation efforts? Or do you so even need to sort of reconsider some of the global, sort of, footprint? Are there any areas that you are thinking that might not be noncore? Or thinking disposals or really you think you can mitigate just through the areas you discussed on Slide 16?

[Ralph A. J. G. Hamers, Chairman of the Executive Board & CEO]

Thanks, Bruce. So with regards to the operational risk-related assets and sort of capital, so we have to define we've taken as a cost in the third quarter. But the impact on capital, on our operational risk-weighted assets, will likely come, may be updated more over next year, but that will be a limited effect.

[Operator]

Our next question is from Mr. Pawel Dziedzic.

[Ralph A. J. G. Hamers, Chairman of the Executive Board & CEO]

Sorry, we just have one more answer to give on the capital part. If you look at the capital optimization, there is more things what do we do. So we don't only rely on the originate to distribute. Things we can still do and after work on is if you take our lending to specific corporates or conglomerates to optimize the converts which you have will help because it gives you different capital numbers. The other things what we will do is, we will work on the data to make sure that earn rate at corporates get a rating, so that will be few capital relief. But the other thing and that's maybe the most important is to make sure that what we started in 2013 onwards or so is to look at the pricing. So just to make sure that you adapt your pricing regime to the new reality, and I think those things, if you take that together, that will help you to optimize on the capital side.

[Operator]

Following question is from Mr. Pawel Dziedzic of Goldman Sachs.

[Pawel Dziedzic, Equity Analyst]

So I will start up with a follow up on your answer right now on management actions on risk-weighted asset mitigation. Can you give us a sense what is the timing of those measures? I think you say that 80% of them could be implemented ahead of 2022, but should we see any impact in, let's say, next 1 or 2 years? That would be useful. And the second is just also a follow up on the cost remark that you made about your market leaders and especially in Belgium, you mentioned that you expect cost decline, but obviously, you cannot guide quarter-to-quarter, it can be volatile. Can you walk us through what are the next stage of and pending of timing immigrations? What we expect to see operationally in 2019? And should we see a cost reduction in parallel to that?

[Ralph A. J. G. Hamers, Chairman of the Executive Board & CEO]

On cost, I'll take to one on the cost. Koos will come back on the management actions regarding capital. Now the market leaders' business as I updated you during the presentation. I think a lot of the groundwork and preparation is being done as we speak. More advancement needs to be made on the target platform in order to receive those Belgian customers and that will continue for some more quarters. So the -- although, on one side, you can expect that the further FTE reduction, just by virtue of efficiencies that are already being realized that you can see some of that. But we will still need to continue to invest these -- the first couple of quarters of 2019 and because the planning of the migration of the first batch of clients is probably towards the end of 2019. Only when all clients have been migrated onto the target platform, you can really start to switch off systems, decommission stuff as well. So the real cost decrease is always going to be back ended in the whole program. Now what you can see -- expect in 2019, though, already as a cost side -- cost decrease in Belgium, is the decommissioning of the Record Bank systems. That is for sure. They have now migrated. So slowly, but surely, we will be able to kind of decommission and switch legacy systems off there. Capital?

[J. V. Timmermans, CFO & Member of Executive Board]

Yes. Maybe on the capital side, the -- and the management actions we stated. So if I go through them, rating unrated corporate is something which we will do as soon as we have the data and that will be quick. But at the same time, it's not easy to see because we will get our frequent model updates and TRIMs, but for sure, this is one part we will do as quick as we can.If you look at cover reallocation, it's a similar point on that. If you look at the originate to distribute, it will be a bit more visible because over the next 3 years, yes we like to do that. So the expectation to do 500 million or 1 billion trades in a quarter on this type of activity, if markets allows, that would be something which would be interesting for us. But then at the same time, there is various things which play a role in making that happen. If you look at the pricing side, indeed, while where we were already looking at longer-dated pricing against a higher core Tier 1 ratio, we will right now start to focus also on the shorter-term rating because as you know, 80% of the increase of the Basel requirement is caused by the input floors, and they have an earlier date. So that means that is the ones where we have to make sure that we focus a bit more on the short-term lending repricing and that is something which will happen very soon.

[Pawel Dziedzic, Equity Analyst]

That's very helpful. May I just ask one follow-up. You mentioned TRIM, do you have any more insights into what the impact could be as of now? Or it's still unclear?

[J. V. Timmermans, CFO & Member of Executive Board]

Yes. So regarding mortgages, Netherlands, the impact is final, so we got the final letter. It was initially an investigation and then you -- there are initial findings and then there is discussion about it. And then you can respond to those findings and that leads to a final letter. And then that also includes any impact on your model. So on this mortgage that is finalized and that the impact was almost negligent. And the next letters were finalization that we are going to have our own mortgages Belgium on as I mean Netherlands and on the trading books that I expect here to come in the fourth quarter or the first quarter. Then the TRIM exercise on the low default portfolios in wholesale banking, only recently started and that will only be in the course of next year that we see any outcomes with regard to it. But the only outcome we ever see so far, the final outcome was on Dutch mortgages and it was negligent.

[Operator]

Our next question is from Mr. Alex Koagne on ODDO BHF.

[Alex Koagne, Analyst]

This is Alex Koagne from ODDO BHF. Two questions from my side as well. The first question is on the operational leverage. I think that if we look back to the last 6 quarters, you see the first time you're able to generate a positive operational leverage. I'm just wondering whether you're more confident on being able to do so in the next quarter. The last time I raised the question, you said that you are expecting that basically on H2 2019. So how comfortable are you on your revenue growth? The second question is on the capital. Excuse me to ask the question sooner, but the 200 basis points in fact from Basel IV, was that a growth or a net number for mitigation? And then also on the capital, the 13.5% target you're looking on the Basel IV, was that for 2020 or more in 2022? And how do you see regarding your dividend policy? Are you still looking to grow your dividend? Or are you looking, going forward, to move more to a less payout ratio and the progress dividend?

[Ralph A. J. G. Hamers, Chairman of the Executive Board & CEO]

So on the operating leverage side, so I think we have achieved in the more quarters but this is certainly a quarter in which it is showing. We're very happy with that. So whether this is going to happen in every quarter going forward from now, I can't guarantee you as I've indicated, but we are managing on the cost/income ratio that gradually but surely will go down over time. And you know the cost/income ratio is distorted because of regulatory cost anyway in some cases. So it's -- but the underlying, if that is what you want to track then you should overtime to certainly see that going down and see that trend picking up as from mid- 2019 for sure. On capital, the 200 basis points and then I'll give the floor to Koos, as well. It's an all-in impact. So basically, the idea is that 200 basis points impact, 1/3 of that is to be managed. That's your mitigation side. So 2/3 is left over there, so there is like a 140 basis points, more or less, is left to be managed in a different way, of which 80% is what you need to solve or what we would need to solve by 2022 because that's the input floor side of things. So that 80% -- that 140 will then go down to 110, which is 35 basis points per annum because that's the remaining period to get there. So that's how it works, but that's also why you feel comfortable to be able to make that with the 13.5% CET1 ambition as a -- it's kind of a -- we've indicated that we want to manage capital around that number. So there may be quarters that we're going to be below that quarter -- that ambition, there may be quarters that we're going to be a little bit above. That also has to deal with our dividend reserving policy because as you know, we want to reserve as much of the dividend in the first 3 quarters and keep it outside of capital. And then on the remaining -- in the fourth quarter, that will actually always up the CET1 numbers. So that's why we are -- we've indicated to manage it around that number. On dividend, Koos?

[J. V. Timmermans, CFO & Member of Executive Board]

Yes. Overall, if you look at this, Alex, we are happy with the level of dividend we are paying. As so in that sense, we see not a reason to change. What we always take into consideration is that in the future Basel will become -- make risk-related assets a little bit more stable. However, IFRS, with stage 2 migration, might things -- might make things more volatile. So we always look at, should we adapt also our capital strategy to that? And no, we haven't concluded, but please be aware that the level what we are paying, no matter what form we are looking, we are quite comfortable with.

[Operator]

Next question is from Mr. José Coll, Santander.

[Josema Coll, Equity Analyst]

Two follow-up questions, please, on Turkey. You guys had a strong quarter in Challenger & Growth markets and industry lending. So I wonder if you could give us some detail regarding what was the contribution of Turkey, including cross-border lending to the strong performance. And my second question is, I mean, I appreciate the progress that you have made in reducing exposure to Turkey. But I wonder, if we have already seen the lion's share of the reduction? Or should we expect much more wind down progress going forward? And I'm also wondering, if you're currently allowed to pay dividends from Turkey to the parent company?

[Ralph A. J. G. Hamers, Chairman of the Executive Board & CEO]

So on Turkey, the contribution of Turkey to the third quarter result, actually it was a good contribution. But it's a combination of the fact that on one side, clearly in that -- there is quite some repricing happening in that market as we speak. But in your side, there's also devaluation on the profit that we make. So I think, the overall contribution is what is normal. So it's not something that is extraordinary and therefore, has caused the OC&G results to go up or down. So that's not what you can -- that's not a conclusion you can derive. So it's really the combination of improved margin. But given the devaluation, in euro terms, and I would it's kind of, yes, stable-ish. The -- in terms of the reduction haven't taken place in Turkey, we have started this program quite some time already. If it comes to the decrease of intercompany funding we will continue to do so. This is clearly the hard currency part of funding as we are working on changing some of our foreign exchange exposure to our clients into local lira exposure. With that, you do free up foreign exchange capacity and with that, you can expect us to continue to decrease the intercompany funding. So that will certainly continue. But again, we are a player in Turkey. We're committed to Turkey as a market and we'll have to do this in a close collaboration with our customers as well.Yes, so we have dividends from Turkey at this moment, it's not there is something we're currently discussing, but is there a specific idea behind your question there?

[Josema Coll, Equity Analyst]

Well, yes. The idea is whether -- if things turn even more sour in Turkey, that you guys can leave CET ratios to the bare bone and start trying to pull money back to the parent company? That's the idea.If worse comes to worse, what can you do about it? And you can anticipate some of it and start, winding down loans, but also getting money back from your subsidiary?

[Ralph A. J. G. Hamers, Chairman of the Executive Board & CEO]

Yes. First of all, our capital there is very limited and you see basically that we are getting repays from our loan source that is basically the way that we are reducing the exposure from ING Groep to Turkey, but there are no capital controls in this regard. So we can freely distribute in terms of what we think we should distribute.

[Operator]

Next question is from Ms. Alicia Chung, Exane.

[Alicia Marianne Chung, Analyst on the Pan]

Just a couple of questions from me. First of all, on the capital, it looks like, for Q3, but also for a number for the last 3 quarters or 4 quarters that there has been quite a powerful tailwind for capital from positive credit risk migration, so it's added about 10 to 15 bps of capital per quarter over the last year. And that's, obviously, quite significant, given that this broadly offsets the 15 bps negative impact from loan growth over the last quarter, for example. So I guess, my question is how long do you expect to benefit from this positive tailwind, from positive credit risk migration? And what is driving, in particular this quarter given that we are starting to see provisions creeping up? That's my first question. And then my second question is just on the financial markets business. You had flagged that you are doing a review into the business and into the structural profitability of the business. Just wanted to get a sense for what kind of -- and do you have any kind of update already this quarter around what kind of actions you would consider taking? You mentioned that you needed to do more in revenues and costs, but also is there more that you can do on RWA? So over the last couple of years, we've seen RWAs and financial markets falling about EUR 6 billion. But that seems to have slowed now. Is there more you can do to optimize this? And how should we see that trajectory?

[J. V. Timmermans, CFO & Member of Executive Board]

Thanks, Alicia. Regarding positive risk migration, yes Alicia we have tailwind, but we still see that coming through and the NPLs are going down, our forbearance are going down. The watch list books are going down. And that all also impacts, let's say, the capital, and we, therefore, see that across the board that if you look at the last 5 to 8 years in that regard which make up the larger composition of the year, the calculation for our models, that's still has an impact on our models. And therefore, you see capital coming down. Now how long will this last is, I think, the one-million-dollar question. Until now, why we still see credit migration in the number of the books. Risk costs are also low. Yes, they are a bit higher than they were over the past couple of quarters. Again, that came from a number of also banking files, which are largely unrelated. At the same point in time, we are -- we do see that the macroeconomic cycle has been positive for a number of years and that's why we also are more careful to some of the books, which are more cyclical in nature, including real estate, finance, including large leverage levels in the leverage finance or acquisition finance space and sometimes in longer dated infra construction projects. There we become a bit more careful to at least cater for a change in the cycle if and when it occurs.

[Ralph A. J. G. Hamers, Chairman of the Executive Board & CEO]

Okay. Then on the financial markets business, just to be sure, so the way we report financial markets is from a Wholesale Banking perspective. If you look at financial markets, including as a means in mid-Corporates business, they're not making the 10% hurdle, but they are making 3% to 4% over the different quarters. The profitability is and our structure is under review. Basically, you can think of any action from that perspective, but because I think if you really want the structural review, you should consider everything imaginable from that perspective. Having said that, we do have a decent business across the different countries and across the different client now. It's just that at this moment, specifically, also in the rates basis, it's a very slow business. As you know from also the other banks, as there is a lot of volatility on the rates. As a consequence, there is not a lot of demand for hedging. On the client side, we have a client-oriented business, not so much a very big trading business. That's also why you've seen our risk-related assets going down and also on the operational side with the further centralization and the cleanup of systems. Also from that perspective, the operational risk-weighted assets have also gone down.I don't think there is a lot of scope to decrease that further, per se. On expenses, I think that also there, if you look at what are our new business models in financial markets also from an innovation and digitalization perspective, there may still be scope there to reduce expenses, either within the activity itself or you basically start something next to your activity. And with that, you build a new activity, which has a completely different kind of expense composition. But as I said, you know and then you can already hear from my elaborate answer on this one, we are reviewing it as we speak. The moment the plan is ready, you know you will probably see some of that coming through.

[Alicia Marianne Chung, Analyst on the Pan]

Maybe just one final question. You obviously -- you've flagged the Investor Day in March, do you have any initial views as to kind of what are some other things that you would like to address?

[Ralph A. J. G. Hamers, Chairman of the Executive Board & CEO]

Well, I think there is a couple of things that we certainly would like to address. We are, at that moment, in the middle of the transformation that we announced late 2016 that we want to give you a real thorough update as to where we stand in terms of the major transforming programs like Unite and Model Bank to give you feel for what we have delivered, where the milestones are, or what you can expect. That's one side. On the other side, we also want you to experience some of the digital initiatives that we have taken. How some of these business are growing? Why we feel that there is a still scope for further digitalization and business causing that site? So that's on one side. And on the other side, I'll also take you through some of the things we're doing on the Wholesale Banking side. So this is kind of the -- this is a little bit of the program. But know we're -- we've announced it now. Clearly, in the next 4, 5 months, we're going to work on it and see what are the deep dives that would be really interesting for you -- to take you through.

[Operator]

The next question is from Mr. Kiri Vijayarajah of HSBC.

[Kirishanthan Vijayarajah, Analyst]

First question. Just really trying to understand the decline in shareholder's equity in the quarter. Obviously, paying the dividend -- the interim dividend is the biggest item. But I just wondered how much of an impact Turkey and the devaluation of the lira have that through the FX line in shareholder's equity? And actually, has there any of that been reversed? May be recovered a bit post quarter-end? And then just going back to the Wholesale Bank and your self-imposed cap on leveraged finance and the real estate books, I just -- really is there a case to be a bit more proactive and actually may be manage down your exposures on those books, if you're really turning a bit more cautious on those. Maybe a bit ahead of the curve rather than -- instead of a cap, actually manage down the risk year bit sort of the portfolio?

[Ralph A. J. G. Hamers, Chairman of the Executive Board & CEO]

Yes, you're right on the shareholders' equity so that has come down. There is a few reasons. First of all, yes, we accrue, or we reserve all the profits, so that is clearly one thing. But the 2 things which played the role is the FX side and on the FX, indeed, you've seen that the Turkish lira, for instance, that was at September 30 at weaker rate around 7, I believe, than where it is right now because right now, it's around 6.32. So FX played a bit of a role there as well. Dollar plays a bit of a role as well. And then the final one is the equity. So the valuation of the stakes played a role. So those are the negatives on the absolute amount of equity.

[J. V. Timmermans, CFO & Member of Executive Board]

Yes. Regarding the self-imposing caps, I mean, if you look at that, caps are only one element of how we manage these books, and so leverage finance. If you look at the final take that we take, those are no bigger than EUR 35 million per entity. These are all, by the way, unrelated sectors. So there is no correlation risk. And in terms of covenants and we look to show the structures that we want to buy, otherwise, we do not take part. In Real Estate Finance, something similar. Now we only look at certain durations. We still only look at certain cash flow and loan-to-value ratios and beyond that levels, we not take part. So the caps are one thing, indeed, but there are more ways that we are steering our portfolios within the risk appetite that we have.

[Operator]

Next question is from Mr. Bart Jooris, Degroof Petercam.

[Bart Jooris, Analyst]

Two questions from my side. First of all, near the end of September, there was an article in the Financial Dagblad stating that you will have to roll back part of the move to London of your dealers. Can you give some information on this? On where you are in the tops with ECB? And which effect this could have on your cost saving? And then a second more short question. Last 2 quarters, you had loan loss provision releases in the Netherlands in mortgages, do you still see room for more of those in the coming quarters?

[Ralph A. J. G. Hamers, Chairman of the Executive Board & CEO]

Yes. Thanks, Bart. On the first one, well we never comment on discussions that we have with regulators. I can just assure you that it clearly -- there is a discussion around how do you organize for your EU 27 business going forward. And how do you make sure that you can cater for your clients on the continent? We think, we can do so and the discussions that we're having will not materially change the business case of having everything centralized in London. So that's what I can tell you. Apart from that, we never comment on the discussion that we have with regulators, but it will not materially impact the business case. On loan loss or provision releases, I'll give the floor to Steven.

[Steven J. A. van Rijswijk]

Yes. Thanks, Bart. The most important factor or an important factor on the driver for loan loss provisions and a decrease in that regard is also the loan to value levels that we have, especially on mortgages. Now you see prices in this country going up. Every quarter they have gone up quite steeply and that, in the end, that also has an impact on our models and also on the stages in which our loan loss also go to from 2 to 1, for example. And that means releases, as long as these prices go up, that then actually means for further decreases in loan losses or releases.

[Operator]

Our next question is from Mr. Marcell Houben, Crédit Suisse.

[Marcell Houben, Research Analyst]

I have 2 left, please. On the net interest margin first, this one's holding up pretty well. I'm just looking at the 2019, 2020 level, is it just replicating portfolio that is pressing down the margins? Or -- because also on the lending side and asset sides, you have been saying margins have been keeping up very well, including Belgium and Germany, which, to me, are a little bit competitive market. So is it just -- can you keep margins stable for 2019, 2020? Or is it other than replicating portfolio pressing those down? That's my first one. And the second one is on capital. The language on capital seems to be a little bit on more bullish, more upside there. What you consider -- what level would you consider having excess capital? Is it above the 13.5%? Or is it above the requirement? So would you consider having paying out extra dividends on top of the progressive at the end of the year if you are below the 13.5%?

[Ralph A. J. G. Hamers, Chairman of the Executive Board & CEO]

On the NIM side, so clearly, you've seen that on the NIM side, we have been able to manage the pressure on the saving side very much by managing the savings rates up to now. And on the other side, we have also managed the NIM by making sure that we have disciplined pricing and next to that disciplined pricing we have changed the kind of the composition of our balance sheet on the asset side of the balance sheet towards higher margin business. That has always been part of the strategy when we announced it 5 years ago that we wanted to be less dependent on the lower margin mortgages from a risk perspective. And that does support the continuation of a higher NIM, which is what you have seen.Now going forward, depending on how the replicating develops itself? And that is all related to how the yield curve develops? Basically, we'll have to manage it with strict and disciplined pricing, which in the end, will have to go up because you will have to keep more capital for it. It would -- if you adjust towards Basel and also the continuation of the changes to composition of the asset side of your balance sheet. So those are 2 levers through which you can still manage your NIM. We don't give guidance all the way into 2020, but certainly, for the next couple of quarters, we expect to continue to manage the NIM in the high 140s in the next couple of quarters, to low 150s. On capital. Koos?

[J. V. Timmermans, CFO & Member of Executive Board]

Yes. So on capital, as we have stated previously, we have an ambition to keep it at 13.5%. Now that's an ambition and what does an ambition mean? It means, basically, that we are at 13.2%, we are not falling off a chair, but it also means at 13.8% that we don't immediately, say, like now it needs to be redistributed. Hey, you look at the number of factors. The factors you look at is, is there anything procyclical like IFRS 9, which warrants that you need to keep it. But the other thing you look at is, are there any interesting lending opportunities and do they give you a return, which satisfies for you? And if the answer is no, nothing procyclical is happening and, no, there is no interesting opportunity, then you consider like should you give it back because then their money has no employ in the company. But before we there, we -- and their first half we see it as for the next 2 years to make sure that we accumulate over the next 2 years towards that Basel standard. But we will close that bridge when we get there.

[Marcell Houben, Research Analyst]

Just a follow-up, Ralph, on your end, some net interest margin. Could you disclose the pressure from the replicating portfolio in the first 9 months of this year, please?

[Ralph A. J. G. Hamers, Chairman of the Executive Board & CEO]

If you look at replicating portfolio, then clearly, what you see is the following. On the short term, so if you roll over your short-term reinvestments, we start actually to make a little bit of money. And why is that, because right now, the 3 years operate actually is higher than what the moving average was over the last 3 years. On the 5 years, it's kind of breakeven because, I mean, you know that's where it is. Where you find that you're still leaking in reinvestment is on the 7- and on the 10-year, because if you look at the 10-years, over the last 10 years, the average was higher than where you currently reinvested. So 1/10 of your portfolio is still rolled over at a lower rate. So you find a bit of a drag, therefore, more on the current accounts because that's invested longer than that you see that on the savings, because that's invested shorter.

[Operator]

Next question is from Mr. Jason Kalamboussis with KBC.

[Jason Kalamboussis, Equity Analyst]

Some follow-up questions. The first one is, coming back to the compliance, the number of compliance people that you have since 2010, can you just confirm, so look at in a different way, can you just confirm that there was no hike in 2016? And we have just a leaner progression of the compliance people you have since 2010? The second thing is on Belgium. Quick one, just on costs you elaborated in 2019 and 2020 and how a lot of things have back ended? But am I right to understand that fourth quarter, we should still see a drop notably due to the fact that you had a lot of people that consultants et cetera that will be leaving? And on Belgium on the impairment side, you gave the reason for the higher retail number. In Wholesale I think you say, they're unrelated files. But -- so should we see that more as a one-off or do you see more pressure, general in the Belgium market? And just finally, just a clarification, you did say that you can -- you see better margins in mortgages in Belgium. Is that correct?

[J. V. Timmermans, CFO & Member of Executive Board]

Yes, so Jason, I'll kind of cover question number 2 and question number 4. Steven will come back on question number 1 and question number 3. So on the cost side, yes, as I said, well the program is back-ended. There is -- we're continuing the reduction of FTEs on one side and on the other side, as we said, there is also some backfilling going on in order to ensure that we can continue to serve our customers. So how that actually plays out in the fourth quarter, I'm not going to guide on that. But structurally over time, the cost will go down. That is something why -- that's the reason why we did the transformation. It's a combination of improving the customer experience and also become more and more efficient.On the Belgium mortgage margins, indeed, over the last quarter, we've seen that we have, at least, been able to produce against the margin in which the new production, the front book, is a little bit better than the back book. Yes, absolutely. Steven?

[Steven J. A. van Rijswijk]

With regards to compliance staff. I mean, we have been building up over a year since, so we also, but the increase, it also on the back of more legislation, a stringent -- more stringent legislation over '11 years has caused the increase to be higher in the years '14, '15, '16 and before. But still we've been building that up and not only the Netherlands, but on a global basis. So on the global basis, we went up from 600 over to 1,800 this year. When you look at the Belgium, the cost of risk, yes, there are a couple of files in Belgium in Wholesale Banking, and there are a number of files in business lending. If you look at the risk also of Belgium over the past number of quarters. Over the past number of years, this is nothing out of the ordinary. And again with wholesale banking, you see -- one quarter you see building up a few files in one country, in the next quarter it is in another country. So this is not particularly a Belgium issue or something like that.

[Operator]

The next question is from Mr. Adrian Cighi, RBC Capital Markets.

[Adrian Cighi, Equity Analyst]

This is Adrian Cighi from RBC. Just one question on fee income and one follow up on Turkey, please. On fee income, you're growing at an adjusted rate of 7.7% year-on-year. But this growth rate includes Payvision contribution. Can you maybe help us quantify the underlying like-for-like growth? And whether you still see the underlying growth, picking up towards the 5% to 7% rate or does the 5% to 7% ambition include the contribution? And then one follow up on Turkey. Do you have any contributions this quarter that you would define as one-off either from hedging or from CPR inventories?

[Steven J. A. van Rijswijk]

From Turkey, no. So there is no specific CPR links or hedging as this influence the result in Turkey. I mean, we stay with our clients where we can. But we also try to reduce the foreign currency book and only focus on foreign currency lending to client that also have foreign currency income except when we have clients, for example, foreign clients, will give guarantees to the Turkey subsidiaries. Then we will step away from it, but there are no particular one-offs in the country, let's say, that are worth mentioning here.

[Ralph A. J. G. Hamers, Chairman of the Executive Board & CEO]

On the -- on your fee question, Adrian, I think it's a good question to get that, fair. Yes, Payvision is included. Even if you correct for Payvision I mean, it's a very small number. I mean, Payvision is growing very fast. If you look at the fee number, it's a small number. It doesn't lead to a different conclusion. So it's -- but you can expect higher fees to come from that in the future for sure. But if you -- to correct it for this number now, it wouldn't come -- you wouldn't come to a different conclusion.

[Operator]

There are no further questions. Sir, please continue.

[Ralph A. J. G. Hamers, Chairman of the Executive Board & CEO]

Okay. Thanks for being with us this morning and thanks for attending this elaborate call. Just to summarize, clearly, the quarter -- the third quarter has been overshadowed by the fine and the settlement that ING had with the prosecutor in The Netherlands on the back of the investigations that identified serious shortcomings in the execution of our policies to prevent financial economic crime. I want to repeat that we take this -- that we regret this, that we take this very seriously, and we take full responsibility for it. And that we have already been working on this announcement program for the last 18 months, and we will continue to do so in order to make sure that we do play our role as a gatekeeper thoroughly going forward.On the other side, we see a quarter with a continued primary customer growth, 200,000 increase in the third quarter. Continued net core lending growth at EUR 6.8 billion. A continued fee income growth at almost 8% from a year ago, and we see strict cost discipline coming through. So on all levers, in terms of what is important to show that our strategy is working from that perspective. I think this is a good quarter. But again, it's all overshadowed also by the settlement itself. Thank you very much, and if you have further questions, you know to reach our Investor Relations guys. Thank you.