ING Groep NV

AEX:INGA

Earnings Call Analysis

Managing a Strong 2023 to Navigate 2024

In 2023, the company's expenses rose, yet it still achieved a cost-to-income ratio of 51% thanks to strong income growth. Asset quality remained robust, leading to low provisions for defaults and a benign year for risk costs. The CET1 capital ratio improved to 14.7%, with the bank returning €6.4 billion to shareholders. Guidance for 2024 indicates a managed growth in fees by 5% to 10%, with a focus on cost control and operational efficiency expected to lead to a cost growth of around 3%. The bank is targeting a CET1 ratio move towards 12.5% by end of 2025 and an interest rate margin on liabilities of around 100 basis points long-term. The bank aims for a return on equity of 12%, demonstrating careful planning to maintain financial performance amid the expected changes in interest rates and the banking environment.

Resilience Despite Global Challenges

The world faced increasing geopolitical tensions and conflicts, resulting in a challenging environment for international security and stability. In 2023, central banks raised policy rates to tackle prolonged inflation, which eventually began to subside toward the year's end, setting the stage for potential rate reductions in 2024. Despite these challenges, global economies displayed resilience, and the IMF forecasts slight economic growth for 2024. The year also witnessed surprising political shifts and regulatory uncertainties, including the turmoil caused by the collapses of notable banks. However, the European banking sector demonstrated its robustness in these conditions.

Leveraging the Sustainability Transition

A promising outcome of COP 28 intensified the ongoing transition to a sustainable economy, an area where ING sees a significant opportunity due to its strong ESG focus.

Strengthening Customer Base and Bank Fundamentals

ING achieved notable growth, with 40% of its total customer base holding an active payment account by the end of 2023. The bank's digital investments and customer experience focus spurred its retail bank growth. ING's diversified wholesale banking and expertise in sustainability position it to tap future growth opportunities. These robust fundamentals contributed to a solid return on equity of 14.8% and the distribution of nearly EUR 6.5 billion to shareholders.

Financial Performance Highlights

The bank's average liability margin rose to 119 basis points in a favorable rate environment, with fee income witnessing over a 5% average growth since 2018, nearly doubling in daily banking and retail fees. However, lowered fees in areas such as Germany's mortgage brokering exemplify the mixed results across different categories. Despite reduced trading activity impacting investment product fees, the bank is poised to benefit from a market rebound.

Managing Expenses and Optimizing Operations

While operating expenses excluding regulatory costs grew by 6.8%, mainly due to inflationary pressures, ING maintained a cost-to-income ratio of 51%. The bank's focus on streamlining operations will continue to counter the effects of inflation.

Low Risk Costs and Proactive Risk Management

Wholesale Banking risk costs were favorable, totaling negative EUR 92 million for the year, with the bank's total risk cost standing at a benign EUR 520 million, or 8 basis points of average customer lending. ING remains vigilant and confident in its loan book quality as it navigates the heightened cost of living and doing business.

Strong Capital Position and Shareholder Returns

The bank's CET1 capital ratio improved from 14.5% to 14.7%, driven by capital generation and reduced RWAs, leading to a EUR 6.4 billion return to shareholders. The capital structure provides a foundation for continued attractive shareholder returns.

2024 Financial Outlook

Despite uncertainties in the macroeconomic and geopolitical landscape, ING anticipates a liability margin normalization to around 100 basis points by year-end, potentially reducing liability NII by about EUR 600 million. However, a projected 4% loan growth could increase lending NII by over EUR 200 million. Net interest income (NII) for 2024 is forecasted to be between EUR 15 billion and EUR 15.5 billion, which, while lower than 2023, is significantly above 2022 levels. On the fee income front, the bank projects a growth of 5% to 10% for 2024, as it expects an uptick in trading volumes and mortgage volumes recovery. Strategic pricing and a growing assets under management are anticipated to fuel this growth.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning. This is Saskia, welcoming you to ING's Fourth Quarter 2023 Conference Call. Before handing this conference call over to Steven van Rijswijk, 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 a historical fact.

Actual results may differ materially from those projected in any forward-looking statements. 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, Steven, over to you.

[Steven van Rijswijk, executive]

Thank you very much, Saskia. Good morning, and welcome to our results call for the fourth quarter. I hope you're all well and had a good start of the year. And as usual, I'm joined by our CEO, Ljiljana Cortan; and our CFO, Tanate Phutrakul. In today's presentation, I would like to highlight our exceptional results in 2023, discuss the developments that we saw in the fourth quarter and share our outlook for 2024. And as always, there will be room for questions at the end of the call. First, I will start with explaining how we were impacted by the developments in the world around us on Slide 2.

Most notably, we live in a world with increasing geopolitical tensions and conflicts in many countries, resulting in the loss of many lives. And we're saddened and concerned by the devastating impacts that these conflicts are having and the threat that they pose to international stability and security. And these tensions also have an ongoing effect on the global economy and have led to heightened economic uncertainty and increased pressure on supply chains.

At the same time, inflation remained elevated for most of 2023 and only came down towards the end of the year. To tackle this inflation, central bankers around the world have increased policy rates at an unprecedented speed. And now with inflation at a much lower level, the market expects rates to come down during 2024. Despite all these uncertainties, economies have proven to be resilient and the IMF is forecasting the global economy to grow slightly in 2024.

We've also witnessed political and regulatory uncertainty in 2023. Several government elections have already had a surprising outcome and other important elections are coming up in '24. On the regulatory side, we've seen increased volatility following the collapses of Silicon Valley Bank and Credit Suisse and in the aftermath, the European banking sector has proven its strength.

Lastly, we see a continuous and accelerating transition to a more sustainable economy, also reinforced by a promising outcome of COP 28 and given our strong ESG focus, the transition of significant opportunity for ING, and we look forward to continuing this front-runner role.

Then we go to Slide 3. We have shown exceptional results in this challenging environment. And more importantly, we are well positioned to deliver value through the cycle. Through our continued investments in our digital capabilities and our focus on offering a superior customer experience, we are able to grow our retail bank across our countries. Our well-diversified wholesale bank is highly regarded by our clients who appreciate our global reach, local knowledge and strong sector expertise.

Our pioneering role in sustainability and our ESG focus positions us well to capture growth opportunities. The bank is built on healthy fundamentals with a highly insured retail funding base, a senior well-diversified and mostly collateralized loan portfolio, resulting in the lowest risk cost in our Eurozone peer group. Finally, our capital position is strong with ample buffer to our target ratio, and all this has resulted in an excellent track record of delivering value to all our stakeholders and market-leading returns, and we are confident that we will continue to do so.

And on Slide 4, which is where we highlight ING's outstanding results for '23. We have achieved significant growth in primary customers. At the end of '23, 40% of our total customer base had an active payment account with recurring income and at least one of our product meaning that over 15.3 million customers have chosen us as their primary bank. This growth in primary customers is reflecting the appreciation of our products and services, which is also highlighted by market-leading Net Promoter Scores in both retail and wholesale banking.

On sustainability we are in alignment to our decision-making and business processes, and we're progressing well with introduced to sustainable alternatives for key products in most of our retail banking markets. In Wholesale Banking, the volume mobilized to help our clients position to more sustainable business models grew to EUR 115 billion in '23 or 14% higher compared to '22. Our balance sheet remains strong with over 64% funded by customer deposits. The strong asset quality is reflected in lower risk costs, which came in at only 8 basis points of our customer lending this year, well below our through-the-cycle average of around 25 bps.

Our return on equity was 14.8% despite still operating at a high 14.7% CET1 ratio. Our capital ratio strengthened again, while we distributed almost EUR 6.5 billion to shareholders in 2023. In the next section, starting on Slide 6, I will highlight the major developments driving our results in '23 also in the context of a longer period. Looking closer at a total income in the past 6 years, I would like to emphasize a few developments on Slide 6.

What clearly stands out is that ING benefits from a positive rate environment and that is particularly visible in a strong increase of the liability NII. And this has had a significant impact on total income, which is now roughly 25% higher than in the 2018-2021 period, which was still impacted by negative rates. This increase was somewhat offset by subdued loan demand, which has impacted our lending NII, and we do see first signs of loan demand recovering, which bodes well for future income growth.

Another important development in '23 was the lack of fee growth. And although we grew by 750,000 primary customers and implemented strategic pricing actions, fee income was stable, growing at 0.3%. And this is mainly explained by limited demand for mortgages and lower trading levels in investment products. Mortgages to pick up in 2024, and we are seeing the first signs of that rebound.

On the next slide, we provide some more details on the drivers of net interest income. The impact of the sharp increase of interest rates is evident on Slide 7, especially when looking at the margin we make on liabilities. The average liability margin in '23 was 119 basis points in a positive rate environment. And this was driven by the positive impact from reinvesting part of our replicating portfolio at higher rates, which more than offset the increase of the core rates throughout the year. In the fourth quarter, we paid a core rate of around 120 basis points corresponding to a pass-through of roughly 30%.

We also recorded significant growth in our core deposits, which was driven by particularly strong contributions from Germany, Spain and Poland. In lending, we saw a further decrease of the margin compared to '22, although the margin stabilized over the course of the year at around 130 basis points. Lending NII was noticeably impacted by subdued loan demands, yet we were able to increase our market share in the mortgage market and capture some growth opportunities. The market was expected loan demand to return in '24, and we do see first signs of this in our books as well.

On Slide 8, we show the evolution of our fee and commission income. And although growth has been muted in the last 2 years, fee income has grown at an average rate of over 5% since 2018 and is at a materially higher level than in the past. Looking at the different product categories in detail, there are some differences to notice in the development. Fee from daily banking and retail have nearly doubled since 2018, driven by continued customer growth and pricing actions strategically that we've done in several markets. Going forward, this will have our continued focus.

Fees from lending declined a bit driven by a lower demand for new loans, mostly visible in retail banking. In Germany, for example, the fee income from Interhyp, the largest residential mortgage broker in the country was down 40% year-on-year and decreased by more than 50% compared to 2021, the last year not impacted by rapidly increasing rates. And now we do see some signs of recovery, which should support lending fees going forward.

Lastly, lower trading activity in the last 2 years has impacted fees from investment products. As an example, in Germany, the number of investment product accounts increased by more than 20% compared to '21, while the total number of standard trades decreased by around 35%. So again there, you can see that we're well positioned to benefit from the turnaround.

Then we move to Slide 9. Operating expenses, excluding regulatory costs and incidental items, increased by 6.8%. That increase was mostly driven by the effect of high inflation on staff expenses, reflecting indexation and CLA increases across most of our markets. We also continued investing in our business, which benefits all of our stakeholders, and we will continue to do so. And as we indicated during our Investor Day in '22, regulatory costs have come down from their peak in '21 and were roughly EUR 200 million lower than in 2022, partly driven by lower contributions in the deposit guarantee scheme and the single resolution fund. In '24, regulatory costs will decrease by another EUR 100 million despite additional bank taxes in various countries.

Despite the growth in expenses, we've seen positive jaws resulting in a 51% cost-to-income ratio in 2023. And going forward, we will continue to be impacted by inflationary pressure, which will partly be offset by efficiencies on the back of our continued focus on operational excellence. More on this in the section with the outlook for 2024.

Then we move on to risk cost on the next slide. In '23, our strong asset quality and robust approach to risk management resulted in low provisions for new defaults combined with effective recoveries. In addition, we saw a significant reduction of our Russia exposure, resulting in a release of provisions taken in 2022. Total risk cost in Wholesale Banking amounted to minus EUR 92 million for the full year, and the total risk cost for the bank amounted to only EUR 520 million or 8 basis points of average customer lending. All in all, a very benign year in terms of risk costs.

And we are vigilant as the cost of living and doing business increases for our customers, but we remain confident in the quality of our loan book.

Slide 11 shows the development of our CET1 capital ratio, which strengthened from 14.5% to 14.7%, while we returned EUR 6.4 billion to shareholders. Increase in CET1 ratio was primarily driven by our ability to generate capital. And in addition, RWAs decreased, driven by disciplined capital management and a better overall profile of the loan book. Our fully loaded CET1 SREP requirements decreased year-on-year, driven by an announced 50 basis points reduction of the CC buffer and a lower Pillar 2 requirements. And these increases were only partly offset by higher countercyclical buffers, which increased by 34 basis points. And as a result, the buffer to both our target ratio and the regulatory requirements increased positioning us well to continue providing attractive shareholder return. And more on that on the next slide.

As already mentioned, EUR 4 billion to shareholders in 2023, consisting of almost EUR 3 billion in cash dividends and slightly less than EUR 3.5 billion of completed share buybacks. At the end of '23, EUR 0.5 billion of the latest share buyback still needed to be completed. And the share buybacks have a structural impact on the earnings and dividends per share, and we have already repurchased more than 14% of shares outstanding since our first buyback in 2021. Given our strong capital position and market-leading profitability, we are well positioned to continue providing attractive returns.

Then starting from Slide 14. We show some key developments in the fourth quarter. And as these are mostly in line with the developments for the full year, which I just presented, I will focus on the highlights only. Total income was again strong and increased compared to last year, driven by higher liability NII and other income. Compared to the third quarter, our total income decreased, however, mostly -- mostly due to a negative swing in reserves in financial markets and lower investment income as the previous quarter had included the annual dividend from the bank of Beijing.

The remuneration on the minimum reserve requirement to 0 basis points had an impact of EUR 69 million on NII. The decrease of liability NII was only limited. The higher cost for retail deposits was almost fully compensated by the positive impact from reinvesting of our replicating portfolio at higher rates. And more details on the development of our margins are shown on Slide 15.

Net interest income, and I'm now at Page 15. Excluding the impact of TLTRO increased slightly year-on-year. Liability margins and liability NII were still at much higher levels than last year, and this was partly offset by lower NII from treasury and financial markets, reflecting the impact of accounting asymmetry between NII and other income.

In lending, the margins stabilized after having increased by 1 basis points for three consecutive quarters. This stable margin, combined with higher volumes, resulted in a small increase of our lending NII. Our overall net interest margin for the quarter decreased by 3 basis points to 154 basis points, mostly driven by the lower ECB remuneration.

Slide 16 shows the development of our net core lending. In retail, our mortgage portfolio continued to grow despite challenging market circumstances. Growth was mainly visible in Australia and the Netherlands.

Other lending grew driven by the strong commercial performance of Business Banking in Belgium. In Wholesale Banking, we saw a small increase in net core lending, although demand was still subdued, and we continue to optimize our capital usage. Going forward, we expect loan demand to pick up, although uncertainties remain given the heightened geopolitical and macroeconomic uncertainty that I outlined at the beginning of this presentation. We're confident that our business model and geographic diversification positions us well to capture growth opportunities when they arise.

On to liabilities, we saw core deposits decline by EUR 900 million in the fourth quarter, which was fully driven by Wholesale Banking, reflecting seasonal outflows mainly related to Bank Mendes Gans. Core deposits in our retail bank increased, although we continue to see some shifts from deposits to assets under management, most notably in Germany.

Then Slide 17. In the fourth quarter, operating expenses, excluding regulatory costs and incidental items were up on both comparable quarters, and this increase was mostly due to high inflation, but was also driven by higher marketing expenses and continued investments in our business. Regulatory costs were slightly up year-on-year, mostly including a higher annual Dutch bank tax, which is always fully recorded in the fourth quarter.

And then we go to risk costs on Slide 18. Risk costs were EUR 86 million in this quarter or 5 basis points of average customer lending. In Wholesale Banking risk costs were limited, driven by net releases in Stages 1 and 2, which included the impact of improved macroeconomic forecasts and further active reduction of our Russia exposure, which came down to EUR 1.3 billion at the end of the year. The risk costs in Retail Banking included a previously announced EUR 21 million addition for Swiss franc indexed mortgages in Poland.

Looking at the various stages. Our Stage 3 ratio was stable with limited inflows and significant releases due to repayments and recoveries. Stage 2 was up, driven entirely by the implementation of a new methodology for interest-only mortgages in the Netherlands. And good to note that the mortgage portfolio continues to perform very well with low payment arrears.

As I mentioned in my introduction, I will share our perspective on the outlook for 2024. It's good to highlight again that the world around us continues to be uncertain, which limits the visibility on important operating drivers such as interest rates. The cycle of recent Central Bank rate hikes has paused, and the market expects some rate cuts in 2024. And if this happens, it will have an impact on our liability NII in particular. In the scenario illustrated on this slide, we assume a gradual normalization of liability margins to around 100 basis points at the end of 2024, meaning that the average liability margin would be around 10 basis points lower than last year.

Given our deposit base, customer deposit base of EUR 625 billion, this would lower the liability NII by around EUR 600 million. The decrease in this scenario will be partly offset by a higher lending NII. As indicated, we do see initial signs of recovery of loan demand across the bank. And if this would indeed materialize into loan growth of 4%, our lending NII would increase by over EUR 200 million, assuming stable margins.

As explained on our previous slide, we were remunerated on the ECB minimum reserve requirement until 20 September '23, and that benefit will no longer be there in '24. And in that scenario, [indiscernible] Slide 20, our NII would amount to EUR 15 billion to EUR 15.5 billion in 2024, lower than in '23, but still significantly above the level of 2022.

Then over to fees. That's on Page 21, which we aim to grow by 5% to 10% in 2024. As indicated before, the development of our fee income in '22 and in 2023 was impacted by the lack of loan demand and lower trading volumes in investment products. For 2024, we are confident that fee growth will improve from the stable level seen in the last 2 years. And this is because of a couple of factors on which we'll execute. First of all, in investment products, the trading activity was at a low level in the last 2 years. In Germany, for example, the total number of standard trades decreased by 35% compared to 2021, despite having 20% more accounts now. And given the continuous growth in the number of clients choosing ING for their investment products, we are well positioned to benefit from higher trading activity and generate higher fees.

In addition, we will put more emphasis on growing the assets under management in the affluent and private banking segments. Next, as indicated in the ECB Euro area bank lending survey, the market is expecting mortgage volumes to recover this year. And if that happens, we are well positioned to benefit given our market-leading positions in several geographies and via Interhyp, the largest residential mortgage provider in Germany. Interhyp benefits from higher mortgage volumes. And to illustrate this, the fees we made on mortgages in Germany are almost EUR 60 million lower compared to 2 years ago, reflecting a decrease in mortgage volumes in Germany, which are more down -- which are down more than 30% over the same time period.

Thirdly, our strong primary customer base is the foundation of our leading retail franchise. And here, the implementation of strategic pricing actions to better reflect the cost of having an account have already resulted in the structural growth of daily banking fees. And this is something that we will continue to focus on. And then lastly, loan demand is likely to return in wholesale banking, where our continued focus on capital velocity will guide us in a disciplined profitable growth. And given all these 4 levers, we feel very comfortable that fee growth will pick up from the last 2 years.

Then we go over to the outlook on costs in Slide 22. We expect total cost growth of around 3%, excluding potential incidental cost items driven by a continued delayed effect from the high inflation levels in '22 and '23, and this will again mostly be impacting staff expenses. In addition, the implementation of the Danske ruling on VAT in the Netherlands will have an impact of EUR 100 million on the costs, while regulatory costs are expected to decrease with a similar amount, primarily driven by a lower contribution to the single resolution fund. We will also continue to make investments in the business to facilitate both growth and further increased efficiency. For example, investments in marketing will be made to support customer acquisition and commercial growth in selected markets. We will be making investments in the payment infrastructure and a further enhancing the financial markets business and in line with earlier years, we will also be strengthening the core banking operation in several markets to further improve on delivery of a seamless digital experience for our customers.

A large part of the investments will be offset with structural cost savings. Examples of these cost savings are further branch reductions in several markets and efficiency gains in our KYC processes. ING delivered outstanding financial results in 2023, and Slide 23 shows our achievements and summarizes our perspective on the outlook for 2024. To recap, 2023 was an exceptional year with strong growth of primary customers, income growing 16% and a low-cost income ratio of 51%, a further strengthening of our CET1 ratio despite announcing EUR 4 billion of share buybacks and a very healthy return on equity of 14.8%. For '24, we expect total income also to remain strong as we continue to benefit from a normalized interest rate environment, income may however likely come in somewhat below the level of '23, driven by an expected normalization of the liability margin, given the operating context and the scenarios that I described today, which assumes recoveries on loan demand and trading activities, we reiterate our 5% to 10% growth ambition for fees in 2024.

We maintain our focus on cost control and operational efficiency. In 2024, we expect expenses to reflect the elevated inflation levels that we've seen in 2023. We will continue to make selective investments in the business and together with cost discipline and expected savings from earlier investments, we aim to moderate the growth in total expenses. Our CET1 ratio will continue to converge towards our target of around 12.5%, and we have capacity to continue providing an attractive shareholder return. We will update the market with our next quarterly results, and we aim for a return on equity of 12%.

Going forward, I'm confident that we will continue to deliver robust financial results while successfully executing our strategy. We will take a longer-term view at our Capital Markets Day in June by then a more stable rate outlook should help to provide us all with additional color, and we look forward to discussing this with you in June.

And with that, we now move on to Q&A.

[Operator]

[Operator Instructions] And first up, we have Farquhar Murray from Autonomous.

[Farquhar Murray, analyst]

Just 2 questions, if I may, both kind of digging into the outlook statements on Slide 20, if possible. Firstly, you're indicating that the Eurozone replicating income will increase in 2024. Could I just ask, is that driven by volumes? Because I would have thought the replication yield would actually maybe dip a little bit this year before moving better in '25. And then secondly, just following on from that, what is driving then the convergence of the liability margin towards 100 bps since -- if the replication yield is not coming down, I presume the suggestion is that the deposit rates will be sticky downwards. So kind of which side is pressuring the margin in '24?

[Steven van Rijswijk, executive]

Okay. I'll give this question to Tanate.

[Tanate Phutrakul, executive]

I think if you look at our simulation on Page 20, we don't assume many volume increases, although we have seen volume increases. But for the sake of this simulation, we don't. And in Q4, we also see continued increase in the level of replication income that we have, okay? But a couple of other points to mention, in particular, on Q4 is that we actually increased the deposit for core rate for the Netherlands and Germany, which is 2 of our biggest books, right? And when you increase the core rate, you price the whole savings book. So that's something that I think you need to take a note of.

And I think as for the future, I think it's not so much that the replicated income will come down. It's more a reflection of the fact that the ECB curve is expected to reduce next year by 150 to 200 basis points. That's more on the reflection why we have said that liability margin, which is on the high side at the moment, will go to the historical average of 100 basis points.

[Operator]

Thank you. And our next question now comes from Giulia Miotto from Morgan Stanley.

[Giulia Miotto, analyst]

Two questions from me as well. I mean, I know that you have given the 2024 NII guidance, but I was trying to ask a question about 2025. Essentially, looking forward and assuming an interest rate of 2%, is the direction of travel downwards because you think liability margins will go down to 100% or in fact, given that in 2025, you can cut the deposit remuneration, NII can stay stable or even grow. So this is my first question.

And then on the second question, in terms of, sorry, actually, let me stick to one. This is my most important question.

[Steven van Rijswijk, executive]

Tanate?

[Tanate Phutrakul, executive]

Yes. So I think if you look into 2025, it's a question of the different levers that would happen. I think, one, if you look at replicated margin -- replicated revenue, that would be further downwards pressure from that in 2025 given the fact that we have roughly half of our replicated book in the bucket of below one year, okay?

But having said that, there are other levers that are at play in our NII line. Number 1 being clearly loan growth, potentially higher spread in terms of lending and deposit growth numbers. So these are also positive impact that would negate to a certain degree. And then the last one, which, of course, we don't give guidance on is what we do in terms of deposit rates offered to our customers, right? That you would imagine in a lower rate environment, we would start tracking downwards, but that's something for the future.

[Operator]

Thank you. And up next, we have Tarik El Mejjad from Bank of America.

[Tarik El Mejjad, analyst]

Just a couple of questions, please. First, on NII. So to come back to that again. But just to understand really the liability margin dynamics. So now we are at 1.2%. You guide for the full year will be converging towards 1. But I guess the downward trend will continue into '25 of the liability margin before we hope to see some improvements in the back end of '25 when you can start to cut deposit rates. Is that the way to look into it? And then obviously, volumes and asset spreads is another discussion.

And then secondly, on the costs. I mean the waterfall chart is very useful, and we can have my view on the different moving parts. But when you talk about additional savings, can you discuss a bit more what kind of savings you would be implementing? And should we expect the kind of savings we had in the last 2, 3 years, with exits from some geographies in the Retail and some businesses or will be more kind of working with what you have and trying to find here and there some better cost efficiency. .

[Tanate Phutrakul, executive]

I think on NII, I think it's not the right assumption to say that we expect deposit margin to go below 100%. There's a number of actions that we would take in that case in terms of promo rates to customer, in terms of core rate reductions, in terms of deposit growth, variability there. So I think from that perspective, we see the 100 basis point NII as more of a long-term levels that we're confident we can manage at that kind of particular level. So that's really the question on NII.

And to ask your second question in terms of cost reduction, what's contained in that 2% or EUR 200 million. It's not about the impact of reducing our footprint, right? It's really about digitizing the core operations of ING. And maybe I can call out what some of the big highlights for those EUR 200 million reduction would be. One would be clearly a reduction of front office staff and branches, that would be one area.

The second is the positive impact in terms of optimizing and automating our KYC processes. That would be the second. And then the third would be reductions in terms of our tech investments from the -- our digitization spend from the previous year. So these would be the three buckets that would drive those cost reduction more about digitizing the core of ING rather than footprint reductions.

[Tarik El Mejjad, analyst]

Very helpful.

[Operator]

Thank you. And from JPMorgan, we have Raul Sinha with our next question.

[Raul Sinha, analyst]

Two questions from me, one follow-up and one on capital distributions. Firstly, the follow-up, Tanate. I just come back to this because it seems to be very important. You're indicating that the liability margin, you can maintain at 100 basis points, which you're expecting to hit that level by the end of 2024 based on the forward curve, which implies that there will be further rate cuts in 2025. So essentially, what you're indicating to us is that your liability margin, you can manage around 100 basis points even in 2025, even if you have rate cuts. Is that the fair conclusion?

[Tanate Phutrakul, executive]

Do you have two questions. Do you want to ask both questions?

[Raul Sinha, analyst]

Yes. And the second one is just on the capital ratio on the distribution, and this is more for Steven. I mean, I'm sorry to flag this, but the capital ratio has actually increased to 14.7% from 14.5% last year despite your best efforts to get -- to reiterate the target of 12.5%. So I guess the real question is, what are you actually planning around this? It appears that doing capital return every 6 months is not enough based on the trajectory you have. So are you thinking about an acceleration? Because you're not mentioning this in your outlook for 2024.

Could you even consider maybe moving to every quarter in terms of capital distribution, perhaps including some special dividends if you're not able to buy back quickly enough, just to get some thoughts on where -- what gives you comfort that you can actually reduce the capital target towards the capital target when actually your capital ratio is going up.

[Steven van Rijswijk, executive]

Yes. Thank you very much, Raul. And thank you for calling out the fact that indeed, our capital went up compared to last year from 14.5% to 14.7%. That is correct. That also has to do, of course, with the performance. So I can't complain. But it also means because we have said that we want to move gradually towards -- around 12.5% by end of 2025 that we will continue with looking at how to optimally do our capital distribution and we maintained the rhythm that we have maintained for the past two years which is at every six months, we will come back and the next time, therefore during our first quarter results, in which we come back with explaining what we will do in terms of capital distributions at that point in time, including potential share buybacks.

[Tanate Phutrakul, executive]

In order to confirm, yes, our view is that we can maintain for the long term and interest rate margin of around 100 basis points on liabilities.

[Operator]

Thank you. And we're now moving on to our next questioner, which is Benoit Petrarque from Kepler Cheuvreux.

[Benoit Petrarque, analyst]

So a few questions on my side. I wanted to come back on the Slide 20 on the NII outlook. So if I sum up everything, my impression is that your convergence towards the 100 bps is clearly quicker than expected in '24. Now you will maintain that in '25. But trying to understand why you expect now in '24 this guidance. Obviously, you expect ECB rate to be cut quite aggressively. And it seems that you expect well, the core rate, the deposit rate adjustment will be more back-end loaded, i.e., competition forces will play. You might not be able to cut deposit rates as much as you might want in '24 and the cut might more be coming in '25, i.e., allowing you to maintain your say, liability margin relatively stable also in 2025. So I just wanted to kind of confirm this view.

Also on this chart, I wanted to come back on the lending margin because you assume flat lending margin -- margins. And I will expect in the low interest rate environment to see kind of more positive trends on lending margins. So just wanted to check if I missed something here. And then final, just a short question on the top line. I think you said it will be somewhat below the '23 level at 22.6%. Can we assume something around the EUR 22 billion just to help us to model the bank?

[Tanate Phutrakul, executive]

I think on liability margin, there's a number of views that you have to take, and this is one possible scenario, right? And you heard from the Federal Reserve last night that the liability or the discount rate could be delayed, right? So that could be a driving factor. And then as I reminded you at the beginning, half of our replicated portfolio is below one year. So we are driven to a certain degree by what happens to the discount rate by the ECB. So that's a simulation, that's a discussion point.

The second one that you mentioned is what do we expect in terms of tracking speed in terms of on the way down. It really depends on how sharp the ECB rate comes down, right? If the ECB brings rate down in a gentle manner, then you would expect that tracking will be slower, but if the ECB bring the tracking speed down in a dramatic fashion, then rates would be -- the market will be more open to our faster tracking speed on the way down. I think that will be my opinion.

Then on the lending margin itself, yes, it is an assumption that we have shown here. It's a one possible scenario. But one thing that you could already see in Q4 for ING is that the mortgage margin when rates come down, that margin opens up. So that's a potential different scenario, a more positive scenario than what we've shown here. And then the last question on guidance on total income that we do not give at this time.

[Benoit Petrarque, analyst]

Sorry, Tanate, tracking speed, just to come back on that, did you assume a relatively slow tracking speed in '24 versus the slow tracking speed in '24 versus the...

[Tanate Phutrakul, executive]

Sorry, that we don't give as guidance, but what we say is that we're confident we can manage the liability margin to around 100 basis points.

[Operator]

And we're now moving to a question from Sam Moran-Smyth from Barclays.

[Samuel Moran-Smyth, analyst]

So just the first one. So on the bridge in Slide 20, I apologize -- appreciate -- every analyst asked a question on this, but just on the other segment, which includes the MRR, I just wondered if you could outline the assumptions behind that, your modeling increased to 2% and then even further in a scenario where it does increase to 2%. Do you think you could get some kind of dispensation on the fact that you're having to take 1% of gross deposits, which for your business is quite different [indiscernible] above this or should we think about the EUR 8.5 billion doubling if you do go from 1% to 2%.

And then secondly, just on the loan growth assumptions of 4%. Could you possibly take us through the assumptions you have on different geographies and different products or at least where you see particular opportunities for volume growth?

[Tanate Phutrakul, executive]

Yes. Thanks, Sam. With regards to the MRR, indeed, when you talk about the EUR 8.5 billion, which is a deposit rate of 4%. If we don't get anymore, you -- then you get to the EUR 300 million that we have there, if that would not account for 2%, then actually you double that, that means that the 1% goes to 2%, then basically, you double that amount. So that means that, that would have an impact of an additional EUR 300 million on our P&L. So that's what it would mean.

And again, they are studying it that we have said already, we find that we will find it strange given the fact that the more direct policy of the ECB is focused on bringing inflation down. And the on the one hand and have higher interest rates, on the other hand, would charge banks for their deposits. That means that banks would move their deposits somewhere else to the capital markets, and that would then bring interest rates down again. So it will almost be counterintuitive to monetary policy. But let's just see what happens there.

The second one is on loan growth. I mean, actually, we see that across the Board happening now. If you look at the fourth quarter loan growth of Wholesale Banking of around EUR 3.5 billion is that is if you extrapolate that to the year, you get to around 4%. That was more or less the average over the last decade or so, excluding the year 2023. So that is coming back. That was actually quite subdued. And also in the mortgage markets, we see, for example, the number of houses being sold this year increase, depending on the market, with a number of percentage points compared to last year.

And the Netherlands, the number of dwellings sold, came down with 6%. In the coming year, we expect that to increase again with 3%. You see that more than half of the offers made is above the asking price, which again shows that it's going to be a sellers' market again. So we see actually growth on all fronts, both on private individuals and the mortgages and on Business Banking and the Wholesale Banking.

[Operator]

We're now moving on to a question from Kiri Vijayarajah race from HSBC.

[Kirishanthan Vijayarajah, analyst]

Yes. A couple of questions from my side. So firstly, coming back to the NII guidance, I'm afraid. So the deposit margin assumption, I just wondered, are you baking in another repeat of the aggressive deposit-led marketing campaign you did earlier on in 2023? I know it helped you add to customer numbers. But also you were standing optimistic on deposit volumes. So what have you baked in there in terms of repeating what you did last spring, I think it was primarily in Germany.

And then second question, turning to the costs on Slide 22 and your 3% of the cost growth in that waterfall coming from business investments. I just wondered how should we think about that? Is that to drive those operational efficiencies you show on the same slide? Or is it more about you need those investments to drive the kind of the volume growth assumption, the 4% or to drive the uptick in the fee growth, your [ easy ] amount for 2024. So how do you think about the investment cost growing, adding 3% to your cost base?

[Steven van Rijswijk, executive]

Yes. Thank you very much. Yes, look, in terms of marketing campaigns, yes, we will not announce a front when we will do specific marketing campaigns. That's how it works. But what we have penciled into our P&L is investments in marketing to grow our customer base. For example, we have a target in Germany to grow our customer base by 2025 to 10 million coming from 9 million in 2023. So there is a target, and I am confident to meet it, and that's also why we need to invest in marketing.

And in that setting, there are three buckets, if you will, where we invest. First of all is to -- is in growth and the marketing is part of that, but the investments in marketing will be there to support customer acquisitions in selected markets. The second bucket is to make investments in -- payment infrastructure. As you know, we are a top quartile, cost-efficient payment infrastructure. In Europe, we want to get to top decile because then you get more payments on your system and you can broaden your services. And for that, we make investments and we in the same bucket, we also make investments in enhancing our financial markets business to also being able to diversify further in financial markets.

And the third bucket is that we continue to strengthen the core banking operations as both the core banks, our cloud, our end-to-end digitalization journeys in [indiscernible] that we invest in that helps us to gain more customers, helps our customers to become more primary customers and do more with us, but at the same time, also realize those operational efficiencies that you also see on that page. But those are the three buckets. So marketing, payments infrastructure and financial markets infrastructure and strengthening core banking and enter on digitalization journeys.

[Operator]

And up next, we have Mike Harrison from Redburn Atlantic.

[Michael Harrison, analyst]

Two aspects, please. One on margin, one on capital. The guidance you're giving for the NII outlook, I assume that's predicated on 50% of the replicating portfolio sitting in [indiscernible]. Why this increase from -- I think it was 45% last quarter, it was 40% about a year ago. And might be the mix of -- duration mix of the replicating portfolio shift as rates fall.

And then second, just a numbers question really, just on your RWAs. I think your risk -- RWAs grew by EUR 3.5 billion this quarter. Is that the 20 bps for the standardization of [indiscernible] flagged in the previous quarter? Or is that something different?

[Steven van Rijswijk, executive]

I'm sorry, I take the question on operational risk-weighted assets. That is not the 20 basis points, but that is based on a change in our operational risk-weighted asset model that has caused that change. Sometimes it goes up, sometimes it goes down. You can also see it in previous quarters. So that is not different. In the end, by the way, we will go to standardized on operational risk-weighted assets. And that is what that 20 basis point is relating to.

[Tanate Phutrakul, executive]

Then your question on replication, why we are shortening the replication. We basically manage that on interest rate outlook, client behavior, their sensitivity to kind of rate movements. And given the current rate environment, we just feel that our models indicate we should be shortening the duration, and that's what happened between Q3 and Q4. So it's more driven by balance sheet stability, earnings stability than any particular interest rate strategy.

[Michael Harrison, analyst]

[indiscernible] is based on where rates -- what rates look like in the fourth quarter, not necessarily what the forward curve with pricing at the end of the year.

[Tanate Phutrakul, executive]

It's a combination. We run various different interest rate scenario and also customer behavior sensitivity to rate movements. So it's a combination of factors.

[Michael Harrison, analyst]

Understood. Thank you.

[Operator]

And we're now moving on to Marta Sanchez Romero from Citi with our next question.

[Marta Sánchez Romero, analyst]

Thank you very much. So you're stocking down today almost 9% because of an NII miss that was long in the making and I think, a result of a lack of transparency. So my question is, have you considered improving your disclosure? I'm not sure that [indiscernible] today are very helpful. And when I see other banks in Europe, they do provide a framework that allows the market to have a better picture about NII trajectory, and there is no disconnect that we are seeing today.

And my second question is on deposits. Can you give us an outlook for deposit volume, deposit growth for your three key markets, the Netherlands, Germany and Belgium? You've lost billion of deposits in the Netherlands. What is the expected trajectory? And then related to this, what has been the retention rate on the campaign you launched in Germany back in April?

[Steven van Rijswijk, executive]

Yes. I will respond on the first question and Tanate will respond to the second question. Thanks for the feedback. And I think that we have been very clear in what we guide for 2024, and we will always look at what present us well. So, thanks for the suggestion, we will look at it. But for now, I think that the rates are where they are, and I think we were very clear on what that means for 2024. Tanate?

[Tanate Phutrakul, executive]

And then the reduction in deposits in the Netherlands is more -- I think if you're looking at the table, more treasury-related declines, not so much on our core deposit numbers, which are somewhat up, actually. And in terms of deposit campaigns in Germany, you shouldn't take that as an indication for what may happen in Germany in 2024. That was an exceptional campaign. What we can say is that competition for deposits in Germany seems to be coming down in light of what rates are doing and what rates potentially happen in this year. So I think 2023 was more exceptional than normal.

[Operator]

And we're now moving on to Johan Ekblom from UBS.

[Johan Ekblom, analyst]

Just two clarifications on NII, please. Just first of all, do I understand it correctly that the rate assumptions you've used are forward curves as of the end of December, which would imply needs be at 2.2 or 2.3 at the end of this year?

And then secondly, just on this accounting asymmetry, which I think has caused a lot of the volatility or uncertainty in recent quarters, you make an assumption that it doesn't change from the Q4 run rate. Can you talk a little bit about to what extent that is a kind of simplifying assumption or if that's a prediction of what you think will happen in 2024 because I think in the past two quarters, you said that it should reverse over time. And I guess, at least my interpretation was that it was in the kind of medium term rather than something that will stay for years and then gradually reverse at some point?

[Tanate Phutrakul, executive]

So on the deposit curve, yes, the simulation was done on the basis of December curve. And then on the guidance on NII and other income that you see in treasury, we provide more stability now and more guidance on that. And our expectations is that it would remain during the course of 2024, but that, of course, can change depending on whether such arbitrage opportunity would continue to exist or not. But for now, our guidance, is that we would exist in the same pace in '24. And if that were to change, then obviously, you can see that in our quarterly results announcement through the course of this year.

[Operator]

Thank you. And we're moving on to a question from Matthew Clark from Mediobanca.

[Jonathan Matthew Clark, analyst]

Two more questions on the liability margin. I'm afraid. So the first one is to understand, does the liability margin as you presented include the drag from the treasury rate differential effect? So am I right to think that, that's based on statutory NII? So if you were to give an adjusted liability margin, it would be even higher, is that the right way to look at this?

And then secondly, this 100 basis point normalized level, how do you get to that? What time period or what's your frame of reference to get to that level because presumably you're having to look quite a long way back to find a previous normalized rate environment to base that on. So just to understand where you get your confidence in that 100 basis point end point from, please?

[Steven van Rijswijk, executive]

Okay. On the confidence of the 100 basis points, well, we have been through a number of cycles and have seen that we are able to actually manage it at that level. Secondly, if you now look and you can also see it in the appendix of the presentation, how much the amount of current accounts compared to the number of savings accounts that are still relatively high. So that still means that we have a lot more to -- a lot more cushion in that sense.

And thirdly, in the previous cycles, we had a lot more savings only customers and now we have a lot more primary customers that are a lot more sticky than we have seen in the past. And that gives us the confidence that we can manage this at 100 basis points.

[Tanate Phutrakul, executive]

Then to answer your question, Matthew. And I hope I understand your question correctly to say that if we don't have these arbitrage trades in the treasury line with our NII be higher? And the answer to that will be yes.

[Jonathan Matthew Clark, analyst]

But specifically, it would be in the liability margin.

[Tanate Phutrakul, executive]

It would be in the liability margin indeed.

[Operator]

[Operator Instructions] We're moving on to Hugh Moorhead from Berenberg.

[Hugh Moorhead, analyst]

Just a quick one on other income. I appreciate that you're assuming stable accounting asymmetry in the 2024 NII guidance. But what sort of assumptions around other income and retaining that EUR 3 billion 2023 figure are in your guidance for revenue to be somewhat lower in 2024?

And then the second one on cost of risk. You're currently guiding for through the cycle level of 25 basis points, is that assumes in your 12% 2024 ROE guidance? And could that level be reviewed as part of your CMD engine?

[Steven van Rijswijk, executive]

Sorry, can you repeat the second question, please?

[Hugh Moorhead, analyst]

Yes, of course, 25 basis points through the guidance cost of risk level, is that being assumed for 2024 cost of risk in your 12% ROE guidance? And could you review the 25 basis point level at your CMD as part of your kind of refresh of CMD targets in June.

[Steven van Rijswijk, executive]

Okay. Thank you very much. So I think, clearly, we don't guide for risk costs in a particular year. So we also don't do that for 2024. But what we have said is that our risk costs through the cycle are around the 25 basis points. Clearly, you see how we're doing on risk costs over '23. We are quite confident in our loan book and the strength of our assets and collateralization of that also in 2024 that we have factored in, but we have not given a specific guidance for 2024.

[Tanate Phutrakul, executive]

And then you see that our other income is somewhat elevated in 2023 and I think part of that is the symmetric accounting treatment between NII and other income, but partly is also driven by really strong financial results from Financial Market division and Treasury division in 2023. And that we don't give guidance on, but just to say that the results in '23 were very strong.

[Operator]

And as there are no further questions in the queue at the moment, I would now like to hand the call back over to you, Mr. Van Rijswijk for any additional or closing remarks.

[Steven van Rijswijk, executive]

Well, thank you very much for your time. Thank you very much for your attention and the good questions. All the best during 2024, and we look forward to seeing you again soon. Thank you.

[Operator]

And you may now disconnect. .