UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One) | ||
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
OR | ||
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2004 | ||
OR | ||
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-14642
ING GROEP N.V.
The Netherlands
ING Groep N.V.
Amstelveenseweg 500
1081 KL Amsterdam
P.O. Box 810, 1000 AV Amsterdam
The Netherlands
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
|
Name of each exchange on which registered | |
American Depositary Shares, each representing one Ordinary share
|
New York Stock Exchange | |
Ordinary shares, nominal value EUR 0.24 per Ordinary share
and
|
||
Bearer Depositary receipts in respect of Ordinary shares*
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New York Stock Exchange | |
9.20% Noncumulative Guaranteed Trust Preferred Securities
|
New York Stock Exchange | |
7.05% ING Perpetual Debt Securities
|
New York Stock Exchange | |
7.20% ING Perpetual Debt Securities
|
New York Stock Exchange | |
6.20% ING Perpetual Debt Securities
|
New York Stock Exchange |
* | Listed, not for trading or quotation purposes, but only in connection with the registration of American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report.
Ordinary shares, nominal value EUR 0.24 per Ordinary share
|
2,204,719,842 | |||
Bearer Depositary receipts in respect of Ordinary shares
|
2,203,264,448 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
TABLE OF CONTENTS
2
PRESENTATION OF INFORMATION
In this Annual Report, references to ING Groep N.V., we and us refer to the ING holding company, incorporated under the laws of the Netherlands, and references to ING, ING Group, the Company and the Group, refer to ING Groep N.V. and its consolidated subsidiaries. ING Groep N.V.s primary insurance and banking subsidiaries are ING Verzekeringen N.V. (together with its consolidated subsidiaries, ING Insurance) and ING Bank N.V. (together with its consolidated subsidiaries, ING Bank), respectively.
ING presents its consolidated financial statements in euros, the currency of the European Economic and Monetary Union. Unless otherwise specified or the context otherwise requires, references to $, US$, Dollars, USD and U.S. Dollars are to the United States dollars and references to EUR and are to euros.
Solely for the convenience of the reader, this Annual Report contains translations of certain euro amounts into U.S. dollars at specified rates. These translations should not be construed as representations that the translated amounts actually represent such dollar or euro amounts, as the case may be, or could be converted into U.S. dollars or euros, as the case may be, at the rates indicated or at any other rate. Therefore, unless otherwise stated, the translations of euros into U.S. dollars have been made at the rate of euro 1.00 = $ 1.3244, the noon buying rate in New York City for cable transfers in euros as certified for customs purposes by the Federal Reserve Bank of New York (the Noon Buying Rate) on March 4, 2005. Except as otherwise noted, financial statement amounts set forth in this Annual Report are presented in accordance with generally accepted accounting principles in the Netherlands (Dutch GAAP), which differ in certain significant respects from accounting principles generally accepted in the United States (U.S. GAAP). Reference is made to Note 6 of Notes to the consolidated financial statements for a description of the significant differences between Dutch GAAP and U.S. GAAP and a reconciliation of certain income statement and balance sheet items to U.S. GAAP. Certain amounts set forth herein may not sum due to rounding.
Unless otherwise indicated, gross premiums, gross premiums written and gross written premiums as
referred to in this Annual Report include premiums (whether or not earned) for insurance
policies written during a specified period, without deduction for premiums ceded, and net premiums,
net premiums written and net written premiums include premiums (whether or not earned) for
insurance policies written during a specified period, after deduction for premiums ceded.
When we refer to the Rest of Europe we refer to Europe and Russia, excluding the Netherlands and Belgium.
3
CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this Annual Report that are not historical facts, including, without limitation, certain statements made in the sections hereof entitled Information on the Company, Dividends, Operating and Financial Review and Prospects, Selected Statistical Information on Banking Operations and Quantitative and Qualitative Disclosure of Market Risk are statements of future expectations and other forward-looking statements that are based on managements current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation,
| changes in general economic conditions, including in particular economic conditions in INGs core markets, | |||
| changes in performance of financial markets, including emerging markets, | |||
| the frequency and severity of insured loss events, | |||
| changes affecting mortality and morbidity levels and trends, | |||
| changes affecting persistency levels, | |||
| changes affecting interest rate levels, | |||
| changes affecting currency exchange rates, including the euro/U.S. dollar exchange rate, | |||
| increasing levels of competition in the Netherlands, Belgium, the Rest of Europe, the United States and other markets in which we do business, including emerging markets, | |||
| changes in laws and regulations, | |||
| regulatory changes relating to the banking or insurance industries, | |||
| changes in the policies of central banks and/or foreign governments, | |||
| general competitive factors, in each case on a global, regional and/or national basis. |
ING is under no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or for any other reason. See Item 3. Key Information-Risk factors and Item 5. Operating and Financial Review and Prospects Factors affecting results of operations.
4
PART I
Item 1. Identity Of Directors, Senior Management And Advisors
Not Applicable.
Item 2. Offer Statistics And Expected Timetable
Not Applicable.
Item 3. Key Information
In the table below, we provide you with summary historical data of ING Group. We have prepared this information using the consolidated financial statements of ING Group for the five years ended December 31, 2004. The financial statements for the five fiscal years ended December 31, 2004 have been audited by Ernst & Young Accountants, independent registered public accounting firm, except for the financial statements of ING Bank N.V., a direct wholly-owned subsidiary, which were audited by KPMG Accountants N.V., independent registered public accounting firm, and whose report, insofar as it relates to the 2004, 2003 and 2002 consolidated financial statements of ING Bank N.V., is based in part upon the reports of other auditors.
The consolidated financial statements are prepared in accordance with Dutch GAAP, which differ in certain significant respects from U.S. GAAP. You can find a description of the significant differences between Dutch GAAP and U.S. GAAP and a reconciliation of certain income statement and balance sheet items to U.S. GAAP in Note 6 to the consolidated financial statements.
In 2002, a significant difference existed between the net profit pursuant to Dutch GAAP accounting principles, which amounted to EUR 4,500 million, and the net profit pursuant to U.S. GAAP accounting principles which amounted to EUR (9,627) million. This difference was primarily the result of the new goodwill requirements (SFAS 142) under U.S. GAAP. As of January 2002, goodwill is no longer amortized, but tested for impairment annually. This change resulted in a non-cash transitional impairment loss in 2002, related to the carrying value of goodwill as at January 1, 2002, of EUR 13,103 million, which was required to be recognized under U.S. GAAP net profit 2002 as the cumulative effect of changes in accounting principles. Excluding the effects of changes in accounting principles U.S. GAAP net profit in 2002 was EUR 3,476 million. The 2002 annual goodwill impairment test did not result in any impairment charges other than the transition impairment charge described above. In 2003 ING Group recognized a goodwill impairment charge of EUR 101 million. The 2004 annual goodwill impairment test resulted in a EUR 26 million goodwill impairment charge. The transitional goodwill impairment test and annual goodwill impairment tests are discussed in Note 7.12 to the consolidated financial statements.
Under ING Group accounting principles goodwill paid on acquisitions including related intangible assets are charged directly to shareholders equity.
ING Group evaluates the results of its insurance operations and banking operations using non-GAAP financial performance measures called operating profit before tax and operating net profit. Operating net profit and operating profit before tax are defined as profit before tax and net profit, excluding:
| capital gains and losses on equity securities, | |||
| the impact of the negative revaluation reserve on equity securities, and | |||
| realized gains on divestitures that are made with the purpose of using the proceeds to finance acquisitions. |
While these excluded items are significant components in understanding and assessing the Groups consolidated financial performance, ING Group believes that the presentation of operating profit enhances the understanding and comparability of its segment performance by highlighting net income attributable to ongoing operations and the underlying profitability of the segment businesses. We believe that trends in the underlying profitability of ING Groups businesses can be more clearly
5
identified without the fluctuating effects of realized capital gains and losses on equity securities and the impact of the negative revaluation reserve on equity securities. These results are largely dependent on market cycles and can vary across periods. The timing of sales that would result in gains or losses is largely at the discretion of the Company. The realized gains on divestitures that are made with the purpose of using the proceeds to finance acquisitions are excluded because the timing of these gains is largely subject to the Companys discretion, influenced by market opportunities and ING Group does not believe that they are indicative of future results. Operating profit before tax and operating net profit are not a substitute for profit before tax and net profit as determined in accordance with Dutch GAAP. ING Groups definition of operating profit before tax and operating net profit may differ from those used by other companies and may change over time.
The following information should be read in conjunction with, and is qualified by reference to the Groups consolidated financial statements and other financial information included elsewhere herein.
Year ended December 31, | ||||||||||||||||||||||||
2004 | 2004(2) | 2003 | 2002 | 2001(3) | 2000(4) | |||||||||||||||||||
USD(1) | EUR | EUR | EUR | EUR | EUR | |||||||||||||||||||
(in millions, except amounts per share and ratios) | ||||||||||||||||||||||||
Dutch GAAP Consolidated Income Statement Data |
||||||||||||||||||||||||
Operating income from banking insurance operations: |
||||||||||||||||||||||||
Gross premiums written: |
||||||||||||||||||||||||
Life(5) |
48,970 | 36,975 | 33,904 | 38,899 | 37,367 | 22,088 | ||||||||||||||||||
Non-life |
8,796 | 6,642 | 7,288 | 7,917 | 5,903 | 4,095 | ||||||||||||||||||
Total |
57,766 | 43,617 | 41,192 | 46,816 | 43,270 | 26,183 | ||||||||||||||||||
Investment income(6)(7) |
13,170 | 9,944 | 9,721 | 10,506 | 9,723 | 7,212 | ||||||||||||||||||
Commission and other income |
2,433 | 1,837 | 2,320 | 2,127 | 2,281 | 1,126 | ||||||||||||||||||
Total operating income from
insurance operations |
73,369 | 55,398 | 53,233 | 59,449 | 55,274 | 34,521 | ||||||||||||||||||
Operating income from banking
operations: |
||||||||||||||||||||||||
Interest income |
33,834 | 25,547 | 23,802 | 24,088 | 24,318 | 24,285 | ||||||||||||||||||
Interest expense |
22,169 | 16,739 | 15,687 | 16,442 | 18,246 | 18,499 | ||||||||||||||||||
Net interest result |
11,665 | 8,808 | 8,115 | 7,646 | 6,072 | 5,786 | ||||||||||||||||||
Commission |
3,418 | 2,581 | 2,464 | 2,615 | 2,765 | 3,630 | ||||||||||||||||||
Other income |
1,521 | 1,148 | 1,101 | 940 | 2,274 | 1,886 | ||||||||||||||||||
Total operating income from banking
operations |
16,604 | 12,537 | 11,680 | 11,201 | 11,111 | 11,302 | ||||||||||||||||||
Total operating income(8) |
89,813 | 67,814 | 64,746 | 70,633 | 66,360 | 45,782 | ||||||||||||||||||
Non-operating items |
280 | 325 | 8,597 | |||||||||||||||||||||
Realized capital gains (losses) |
781 | 590 | 20 | 1,003 | 779 | 855 | ||||||||||||||||||
Total income |
90,594 | 68,404 | 64,766 | 71,916 | 67,464 | 55,234 | ||||||||||||||||||
Operating expenditure from insurance
operations: |
||||||||||||||||||||||||
Life(5) |
59,732 | 45,101 | 42,539 | 48,135 | 46,425 | 27,951 | ||||||||||||||||||
Non-life |
8,333 | 6,292 | 7,208 | 8,144 | 6,057 | 4,263 | ||||||||||||||||||
Total operating expenditure from
insurance operations |
68,065 | 51,393 | 49,747 | 56,279 | 52,482 | 32,214 | ||||||||||||||||||
Total operating expenditure from
banking operations(9) |
12,082 | 9,123 | 9,309 | 9,733 | 8,941 | 8,697 | ||||||||||||||||||
Total operating expenditure(9) |
79,987 | 60,395 | 58,889 | 65,995 | 61,398 | 40,870 | ||||||||||||||||||
Non-operating items |
395 | |||||||||||||||||||||||
Total expenditure |
79,987 | 60,395 | 58,889 | 65,995 | 61,398 | 41,265 | ||||||||||||||||||
6
Year ended December 31, | ||||||||||||||||||||||||
2004 | 2004(2) | 2003 | 2002 | 2001(3) | 2000(4) | |||||||||||||||||||
USD(1) | EUR | EUR | EUR | EUR | EUR | |||||||||||||||||||
(in millions, except amounts per share and ratios) | ||||||||||||||||||||||||
Operating profit before tax from
insurance operations: |
||||||||||||||||||||||||
Life |
3,173 | 2,396 | 2,478 | 2,603 | 2,278 | 1,945 | ||||||||||||||||||
Non-life |
2,131 | 1,609 | 1,008 | 567 | 514 | 362 | ||||||||||||||||||
Total |
5,304 | 4,005 | 3,486 | 3,170 | 2,792 | 2,307 | ||||||||||||||||||
Operating profit before tax from
banking operations |
4,522 | 3,414 | 2,371 | 1,468 | 2,170 | 2,605 | ||||||||||||||||||
Operating profit before tax |
9,826 | 7,419 | 5,857 | 4,638 | 4,962 | 4,912 | ||||||||||||||||||
Taxation |
2,328 | 1,758 | 1,460 | 873 | 1,099 | 1,377 | ||||||||||||||||||
Third-party interests |
361 | 272 | 344 | 332 | 324 | 147 | ||||||||||||||||||
Operating net profit |
7,137 | 5,389 | 4,053 | 3,433 | 3,539 | 3,388 | ||||||||||||||||||
Non-operating items after taxation |
247 | 325 | 7,976 | |||||||||||||||||||||
Realized capital gains (losses) after
taxation |
767 | 579 | (10 | ) | 820 | 713 | 620 | |||||||||||||||||
Net profit |
7,904 | 5,968 | 4,043 | 4,500 | 4,577 | 11,984 | ||||||||||||||||||
Dividend on Preference shares of
ING Groep N.V. |
19 | 14 | 21 | 21 | 21 | 21 | ||||||||||||||||||
Net profit after deducting dividend on
Preference shares of ING Groep N.V. |
7,885 | 5,954 | 4,022 | 4,479 | 4,556 | 11,963 | ||||||||||||||||||
Dividend on Ordinary shares |
3,124 | 2,359 | 2,024 | 1,930 | 1,914 | 2,173 | ||||||||||||||||||
Addition to shareholders equity |
4,761 | 3,595 | 1,998 | 2,549 | 2,642 | 9,790 | ||||||||||||||||||
Distributable net profit |
6,580 | 5,968 | 4,043 | 4,253 | 4,252 | 4,901 | ||||||||||||||||||
Operating net profit per Ordinary
share(10) |
3.35 | 2.53 | 2.00 | 1.77 | 1.83 | 1.76 | ||||||||||||||||||
Distributable net profit per Ordinary
share(10) |
3.71 | 2.80 | 2.00 | 2.20 | 2.20 | 2.56 | ||||||||||||||||||
Net profit per Ordinary share(8) |
3.71 | 2.80 | 2.00 | 2.32 | 2.37 | 6.27 | ||||||||||||||||||
Net profit per Ordinary share and Ordinary
share equivalent (fully diluted)(10) |
3.71 | 2.80 | 2.00 | 2.32 | 2.35 | 6.18 | ||||||||||||||||||
Dividend per Ordinary share(10) |
1.42 | 1.07 | 0.97 | 0.97 | 0.97 | 1.13 | ||||||||||||||||||
Interim Dividend |
0.65 | 0.49 | 0.48 | 0.48 | 0.47 | 0.41 | ||||||||||||||||||
Final Dividend |
0.77 | 0.58 | 0.49 | 0.49 | 0.50 | 0.72 | ||||||||||||||||||
Number of Ordinary shares
outstanding (in millions) |
2,204.7 | 2,204.7 | 2,115.9 | 1,992.7 | 1,992.7 | 1,970.6 | ||||||||||||||||||
Dividend pay-out ratio(11) |
38.2 | % | 38.2 | % | 48.5 | % | 44.1 | % | 44.1 | % | 43.9 | % | ||||||||||||
U.S. GAAP Consolidated Income
Statement Data |
||||||||||||||||||||||||
Total income (operating) |
65,897 | 49,756 | 48,025 | 49,316 | 49,479 | 42,039 | ||||||||||||||||||
Net profit U.S. GAAP, excluding
cumulative effects |
8,858 | 6,688 | 4,512 | 3,476 | 1,770 | 10,925 | ||||||||||||||||||
Cumulative effects of changes in
accounting principles |
(121 | ) | (91 | ) | (13,103 | ) | ||||||||||||||||||
Net profit U.S. GAAP, including
cumulative effects(12) |
8,737 | 6,597 | 4,512 | (9,627 | ) | 1,770 | 10,925 | |||||||||||||||||
Net profit per Ordinary share and
Ordinary share equivalent(10) |
4.11 | 3.10 | 2.23 | (5.00 | ) | 0.90 | 5.64 |
7
Year ended December 31, | ||||||||||||||||||||||||
2004 | 2004(2) | 2003 | 2002 | 2001(3) | 2000(4) | |||||||||||||||||||
USD(1) | EUR | EUR | EUR | EUR | EUR | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Reconciliation of net profit to operating
profit before tax and operating net profit,
by segment for the consolidated Group |
||||||||||||||||||||||||
Total Group |
||||||||||||||||||||||||
Net profit |
7,904 | 5,968 | 4,043 | 4,500 | 4,577 | 11,984 | ||||||||||||||||||
Taxation |
2,343 | 1,769 | 1,490 | 1,089 | 1,165 | 1,838 | ||||||||||||||||||
Third-party interests |
361 | 272 | 344 | 332 | 324 | 147 | ||||||||||||||||||
Profit before tax |
10,608 | 8,009 | 5,877 | 5,921 | 6,066 | 13,969 | ||||||||||||||||||
Non-operating items |
280 | 325 | 8,202 | |||||||||||||||||||||
Realized capital gains (losses) |
782 | 590 | 20 | 1,003 | 779 | 855 | ||||||||||||||||||
Operating profit before tax |
9,826 | 7,419 | 5,857 | 4,638 | 4,962 | 4,912 | ||||||||||||||||||
Taxation |
2,328 | 1,758 | 1,460 | 873 | 1,099 | 1,377 | ||||||||||||||||||
Third-party interests |
361 | 272 | 344 | 332 | 324 | 147 | ||||||||||||||||||
Operating net profit |
7,137 | 5,389 | 4,053 | 3,433 | 3,539 | 3,388 | ||||||||||||||||||
Insurance operations |
||||||||||||||||||||||||
Net profit |
4,720 | 3,564 | 2,498 | 3,605 | 3,135 | 9,560 | ||||||||||||||||||
Taxation |
1,208 | 912 | 891 | 756 | 688 | 1,022 | ||||||||||||||||||
Third-party interests |
158 | 119 | 117 | 92 | 73 | 39 | ||||||||||||||||||
Profit before tax |
6,086 | 4,595 | 3,506 | 4,453 | 3,896 | 10,621 | ||||||||||||||||||
Gain on joint venture ANZ |
280 | |||||||||||||||||||||||
Result on sale of investments
re financing of acquisitions |
325 | 7,368 | ||||||||||||||||||||||
Release millenium calamity fund |
91 | |||||||||||||||||||||||
Realized capital gains (losses) |
782 | 590 | 20 | 1,003 | 779 | 855 | ||||||||||||||||||
Operating profit before tax |
5,304 | 4,005 | 3,486 | 3,170 | 2,792 | 2,307 | ||||||||||||||||||
Taxation |
1,193 | 901 | 861 | 540 | 622 | 540 | ||||||||||||||||||
Third-party interests |
158 | 119 | 117 | 92 | 73 | 39 | ||||||||||||||||||
Operating net profit |
3,953 | 2,985 | 2,508 | 2,538 | 2,097 | 1,728 | ||||||||||||||||||
Banking operations |
||||||||||||||||||||||||
Net profit |
3,184 | 2,404 | 1,545 | 895 | 1,442 | 2,424 | ||||||||||||||||||
Taxation |
1,135 | 857 | 599 | 333 | 477 | 816 | ||||||||||||||||||
Third-party interests |
203 | 153 | 227 | 240 | 251 | 108 | ||||||||||||||||||
Profit before tax |
4,522 | 3,414 | 2,371 | 1,468 | 2,170 | 3,348 | ||||||||||||||||||
Result Libertel |
376 | |||||||||||||||||||||||
Sales result CCF |
853 | |||||||||||||||||||||||
Re-organization provision CIB |
(486 | ) | ||||||||||||||||||||||
Operating profit before tax |
4,522 | 3,414 | 2,371 | 1,468 | 2,170 | 2,605 | ||||||||||||||||||
Taxation |
1,135 | 857 | 599 | 333 | 477 | 837 | ||||||||||||||||||
Third-party interests |
203 | 153 | 227 | 240 | 251 | 108 | ||||||||||||||||||
Operating net profit |
3,184 | 2,404 | 1,545 | 895 | 1,442 | 1,660 | ||||||||||||||||||
8
Year ended December 31, | ||||||||||||||||||||||||
2004 | 2004(2) | 2003 | 2002 | 2001(3) | 2000(4) | |||||||||||||||||||
USD(1) | EUR | EUR | EUR | EUR | EUR | |||||||||||||||||||
(in millions, except amounts per share and ratios) | ||||||||||||||||||||||||
Dutch GAAP Consolidated Balance Sheet Data |
||||||||||||||||||||||||
Total assets |
1,147.1 | 866.1 | 778.8 | 716.4 | 705.1 | 650.2 | ||||||||||||||||||
Investments: |
||||||||||||||||||||||||
Insurance |
306.9 | 231.7 | 216.0 | 214.8 | 241.0 | 219.2 | ||||||||||||||||||
Banking |
222.5 | 168.0 | 119.8 | 84.4 | 70.2 | 59.1 | ||||||||||||||||||
Eliminations(13) |
(2.3 | ) | (1.7 | ) | (0.8 | ) | (1.6 | ) | (3.8 | ) | (1.1 | ) | ||||||||||||
Total investments |
527.1 | 398.0 | 335.0 | 297.6 | 307.4 | 277.2 | ||||||||||||||||||
Lending |
420.5 | 317.5 | 292.6 | 284.4 | 254.2 | 246.8 | ||||||||||||||||||
Insurance provisions: |
||||||||||||||||||||||||
Life |
265.1 | 200.2 | 188.2 | 186.0 | 204.6 | 193.3 | ||||||||||||||||||
Non-life |
13.2 | 9,9 | 9.8 | 9.8 | 9.4 | 6.9 | ||||||||||||||||||
Total |
278.3 | 210.1 | 198.0 | 195.8 | 214.0 | 200.2 | ||||||||||||||||||
Funds entrusted to and debt securities
of the banking operations: |
||||||||||||||||||||||||
Savings accounts of the banking
operations |
292.8 | 221.1 | 168.1 | 115.1 | 69.6 | 52.4 | ||||||||||||||||||
Other deposits and bank funds |
190.7 | 144.0 | 137.3 | 129.2 | 132.4 | 134.1 | ||||||||||||||||||
Debt securities of the banking
operations |
93.8 | 70.8 | 72.4 | 75.5 | 74.4 | 66.3 | ||||||||||||||||||
Total |
577.3 | 435.9 | 377.8 | 319.8 | 276.4 | 252.8 | ||||||||||||||||||
Due to banks |
149.4 | 112.8 | 102.1 | 96.3 | 107.8 | 94.7 | ||||||||||||||||||
Capital Stock (in millions)(14) |
2,291.8 | 2,291.8 | 2,203.0 | 2,079.8 | 2,079.8 | 2,057.7 | ||||||||||||||||||
Shareholders equity |
34.3 | 25.9 | 21.3 | 18.3 | 21.5 | 25.3 | ||||||||||||||||||
Shareholders equity per Ordinary
share(10) |
15.57 | 11.76 | 10.08 | 9.14 | 11.03 | 13.04 | ||||||||||||||||||
Shareholders equity per Ordinary share
and Ordinary share equivalent(10) |
15.57 | 11.76 | 10.08 | 9.14 | 10.92 | 12.86 | ||||||||||||||||||
U.S. GAAP Consolidated Balance
Sheet Data |
||||||||||||||||||||||||
Total assets |
1,216.1 | 918.2 | 818.8 | 762.5 | 752.3 | 693.4 | ||||||||||||||||||
Shareholders equity |
46.5 | 35.1 | 28.0 | 25.1 | 38.8 | 41.6 | ||||||||||||||||||
Shareholders equity per Ordinary share
and Ordinary share equivalent(10) |
21.19 | 16.00 | 13.27 | 12.61 | 19.83 | 21.27 |
(1) | Euro amounts have been translated into U.S. dollars at the exchange rate of $ 1.3244 to EUR 1.00, the noon buying rate in New York City on March 4, 2005 for cable transfers in euros as certified for customs purposes by the Federal Reserve Bank of New York. | |||
(2) | Discontinued business in 2004: ING sold its Asian equity business, Australia non-life business, NN Zorg (the Netherlands), CenE Bankiers (the Netherlands), ING US Re individual life business, ING BHF Bank (Germany), Life of Georgia (United States), Baring Asset Management (United Kingdom) and NMB Heller Germany. In addition, ING divested itself of 27.1% of its interest in ING Canada Inc. in an initial public offering (additional shares were sold in the first quarter of 2005, see Item 4. Information on the Company-Recent developments). The total effect on net profit in 2004 from these dispositions amounted to approximately EUR 200 million. | |||
(3) | In 2001 acquisitions of ReliaStar and Aetna influenced the figures compared to earlier years. | |||
(4) | Discontinued business in 2000: Tiel Utrecht Group in the Netherlands (net profit EUR 63 million). | |||
(5) | As from 2004, Guaranteed Investment Contracts (GICs) are no longer reported in premium income and underwriting expenditure, to bring reporting in line with insurance industry practice. See Note 1.3 to the consolidated financial statements. The comparable figures have been adjusted accordingly. | |||
(6) | As of 2001, the Insurance operations-General is no longer reported separately. The items previously accounted for under this heading are now included in either the life result or the non-life result. The year 2001 has been restated accordingly. | |||
(7) | As of 2001, investment income for risk of policyholders has been netted with the related
underwriting expenditure. This results in a presentation of investment income of the insurance
operations for own risk, which is in line with insurance industry practice. The comparative figures
have been adjusted accordingly. |
|||
(8) | After elimination of certain intercompany transactions between the insurance operations and the banking operations. See Note 1.1. to the consolidated financial statements. | |||
(9) | Includes all non-interest expenses, including additions to the provision for loan losses. See Item 5. Operating and Financial Review and |
9
prospects Liquidity and capital resources. | ||||
(10) | Net profit per share amounts have been calculated based on the weighted average number of Ordinary shares outstanding and shareholders equity per share amounts have been calculated based on the number of Ordinary shares outstanding at the end of the respective periods. For purposes of this calculation ING Groep N.V. shares held by Group companies were deducted from the applicable number of outstanding Ordinary shares. All amounts and numbers are presented after giving effect to all stock dividends and retroactive application of the Companys 2-for-1 stock split, which became effective on July 2, 2001. See note 5.2.3 to the consolidated financial statements. | |||
(11) | The dividend pay-out ratio is based on distributable net profit. | |||
(12) | As of January 2002, SFAS 142 under U.S. GAAP requires that goodwill is no longer amortized but tested for impairment annually. This change resulted in a non-cash transitional impairment loss in 2002, related to the carrying value of goodwill as of January 1, 2002 of EUR 13,103 million, which was required to be recognized under U.S. GAAP net profit in 2002 as the cumulative effect of changes in accounting principles. | |||
(13) | Consisting of investments in banking operations held by Group insurance companies, investments in insurance operations held by Group banking companies, and ING Groep N.V. shares held by Group insurance companies. | |||
(14) | Reflects the Companys 2-for-1 stock split effected on July 2, 2001. |
EXCHANGE RATES
Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar amounts received by owners of shares or ADSs on conversion of dividends, if any, paid in euros on the shares and will affect the U.S. dollar price of the ADSs on the New York Stock Exchange.
The following table sets forth, for the periods and dates indicated, certain information concerning the exchange rate for U.S. dollars into euros based on the Noon Buying Rate.
U.S. dollars per euro | ||||||||||||||||
Period | Average | |||||||||||||||
Calendar Period | End(1) | Rate(2) | High | Low | ||||||||||||
2000 |
0.9388 | 0.9207 | 1.0335 | 0.8270 | ||||||||||||
2001 |
0.8901 | 0.8909 | 0.9535 | 0.8370 | ||||||||||||
2002 |
1.0485 | 0.9495 | 1.0485 | 0.8594 | ||||||||||||
2003 |
1.2597 | 1.2074 | 1.2597 | 1.0361 | ||||||||||||
2004 |
1.3538 | 1.2478 | 1.3625 | 1.1801 | ||||||||||||
2005 (through March 4, 2005)(2) |
1.3244 | 1.3189 | 1.3476 | 1.2773 |
(1) | The Noon Buying Rate at such dates differ from the rates used in the preparation of INGs consolidated financial statements as of such date. See Note 1.6.1.4. to the consolidated financial statements. | |||
(2) | The average of the Noon Buying Rates on the last business day of each full calendar month during the period. |
Recent Exchange Rates of U.S. dollars per Euro
The table below shows the high and low exchange rate of U.S. dollars per euro for the last six months
High | Low | |||||||
September 2004 |
1.2417 | 1.2052 | ||||||
October 2004 |
1.2746 | 1.2271 | ||||||
November 2004 |
1.3288 | 1.2703 | ||||||
December 2004 |
1.3625 | 1.3224 | ||||||
January 2005 |
1.3476 | 1.2954 | ||||||
February 2005 |
1.3208 | 1.2773 | ||||||
March 2005 (through March 4, 2005) |
1.3244 | 1.3127 |
The Noon Buying Rate for euros on December 31, 2004 was EUR 1.00 = $ 1.3538 and the Noon Buying Rate for euros on March 4, 2005 was EUR 1.00 = $ 1.3244.
10
RISK FACTORS
RISKS RELATED TO THE FINANCIAL SERVICES INDUSTRY
Because we are an integrated financial services company conducting business on a global basis, our revenues and earnings are affected by the volatility and strength of the economic, business and capital markets environments specific to the geographic regions in which we conduct business and changes in such factors may adversely affect the profitability of our insurance, banking and asset management business.
Factors such as interest rates, exchange rates, consumer spending, business investment, government spending, the volatility and strength of the capital markets, and terrorism all impact the business and economic environment and, ultimately, the amount and profitability of business we conduct in a specific geographic region. For example, in an economic downturn characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment and consumer spending, the demand for banking and insurance products would be adversely affected and our reserves and provisions would likely increase, resulting in lower earnings. Similarly, a downturn in the equity markets could cause a reduction in commission income we earn from managing portfolios for third parties, as well as income generated from our own proprietary portfolios, each of which is generally tied to the performance and value of such portfolios. We also offer a number of insurance and financial products that expose us to risks associated with fluctuations in interest rates, securities prices or the value of real estate assets. In addition, a mismatch of interest-earning assets and interest-bearing liabilities in any given period may, in the event of changes in interest rates, have a material effect on the financial condition or result from operations of our banking businesses.
Because our life and non-life insurance and reinsurance businesses are subject to losses from unforeseeable and/or catastrophic events, which are inherently unpredictable, our actual claims amount may exceed our established reserves or we may experience an abrupt interruption of activities, each of which could result in lower net profits and have an adverse affect on our results of operations.
In our life and non-life insurance and reinsurance businesses, we are subject to losses from natural and man-made catastrophic events. Such events include, without limitation, weather and other natural catastrophes such as hurricanes, floods and earthquakes, as well as events such as for example the September 11, 2001 terrorist attacks on the United States. The frequency and severity of such events, and the losses associated with them, are inherently unpredictable and can not always be adequately reserved for. In accordance with industry practices, reserves are established based on estimates using actuarial projection techniques. The process of estimating is based on information available at the time the reserves are originally established. Although we continually review the adequacy of the established claim reserves, and based on current information, we believe our claim reserves are sufficient, there can be no assurances that our actual claims experience will not exceed our estimated claim reserves. If actual claim amounts exceed the estimated claim reserves, our earnings may be reduced and our net profits may be adversely affected. In addition, because unforeseeable and/or catastrophic events can lead to abrupt interruption of activities, our banking and insurance operations may be subject to losses resulting from such disruptions. Losses can relate to property, financial assets, trading positions and also to key personnel. If our business continuity plans are not able to be put into action or do not take such events into account, losses may further increase.
Because we operate in highly regulated industries, changes in statutes, regulations and regulatory policies that govern activities in our various business lines could have an affect on our operations and our net profits.
Our insurance and banking operations are subject to insurance, banking and financial services statutes, regulations and regulatory policies that govern what products we sell and how we manage our business. Changes in existing statutes, regulations and regulatory policies, as well as changes in the implementation of such statutes, regulations and regulatory policies may affect the way we do business, our ability to sell new policies, products or services and our claims exposure on existing policies. In addition, changes in tax laws may affect our tax position and/or the attractiveness of certain of our products, some of which currently have favorable tax treatment.
11
RISKS RELATED TO THE COMPANY
Because we operate in highly competitive markets, including in our home market, we may not be able to further increase, or even maintain, our market share, which may have an adverse affect on our results of operations.
There is substantial competition in the Netherlands and the other countries in which we do business for the types of insurance, commercial banking, investment banking and other products and services we provide. Customer loyalty and retention can be influenced by a number of factors, including relative service levels, the prices and attributes of products and services, and actions taken by competitors. If we are not able to match or compete with the products and services offered by our competitors, it could adversely impact our ability to maintain or further increase our market share, which would adversely affect our results of operations. Such competition is most pronounced in our more mature markets of the Netherlands, Belgium, the Rest of Europe, the United States, Canada and Australia. In recent years, however, competition in emerging markets, such as South America, Asia and Central and Eastern Europe, has also increased as large insurance and banking industry participants from more developed countries have sought to establish themselves in markets which are perceived to offer higher growth potential, and as local institutions have become more sophisticated and competitive and have sought alliances, mergers or strategic relationships with our competitors. We derived approximately 42% of our operating profit before tax in 2004 from the Netherlands. Based on geographic division of our operating profit, the Netherlands is our largest market for both our banking and insurance operations. In the retail banking market our market share is approximately 23% based on total assets, approximately 24% based on total deposits and 23% based on retail mortgages. Our main competitors in the banking sector in the Netherlands are ABN Amro N.V. and Rabo Group B.A. In the Netherlands, we are also currently the largest insurance company, with a market share of approximately 24% in the life insurance market and approximately 9% in the non-life insurance market, each based on premium income. Our main competitors in the insurance sector in the Netherlands are Fortis Utrecht N.V. and Aegon N.V. We derived approximately 18% of our operating insurance profit in 2004 from the United States, which is our second largest market for the insurance operations. In the United States, we have two core operating units and own the second-largest broker-dealer network in the United States with over 10,000 registered representatives. Our main competitors in the United States are insurance companies such as Lincoln National, Hartford, Aegon Americas, Met Life, Prudential, Nationwide and Principal Financial. Increasing competition in these or any of our other markets may significantly impact our results if we are unable to match the products and services offered by our competitors.
Because our reinsurance arrangements are with a limited number of reinsurers, the inability of one or more of these reinsurers to meet its financial obligations could have an adverse effect on our results of operations.
Our insurance operations have bought protection for risks that exceed certain risk tolerance levels set for both our life and non-life business. This protection is bought through reinsurance arrangements in order to reduce possible losses. Because in most cases we must pay the policyholders first, and then collect from the reinsurer, we are subject to credit risk with respect to each reinsurer for all such amounts. As of December 31, 2004, approximately 36% of our (potential) reinsurance receivables were with our primary reinsurer and approximately 29% were with six other reinsurers. The inability of any one of these reinsurers to meet its financial obligations to us could have a material adverse effect on our net profits and our financial results.
Because we also operate in markets with less developed judiciary and dispute resolution systems, proceedings could have an adverse effect on our operations and net result.
In the less developed markets in which we operate, judiciary and dispute resolution systems may be less developed. In case of a breach of contract we may have difficulties in making and enforcing claims against contractual counterparties. On the other hand, if claims are made against us, we might encounter difficulties in mounting a defense against such allegations. If we become party to legal proceedings in a market with an insufficiently developed judiciary system, it could have an adverse effect on our operations and net result.
12
Because we are a financial services company and we are continually developing new financial products, we might be faced with claims that could have an adverse effect on our operations and net result if clients expectations are not met.
When new financial products are brought to the market, communication and marketing is focussed on potential advantages for the customers. If the products do not generate the expected profit, or result in a loss, customers may file claims against us for not fulfilling our potential duty of care. Potential claims could have an adverse effect on our operations and net result.
Because we are a Dutch company and because the Stichting ING Aandelen holds more than 99% of our Ordinary shares, the rights of our shareholders may differ from the rights of shareholders in other jurisdictions, which could limit your rights as a shareholder and reduce the accountability of the members of our Executive and Supervisory Boards and our management to our shareholders.
While holders of our Bearer receipts are entitled to attend and speak at the General Meetings of Shareholders, voting rights are not attached to the Bearer depositary receipts. Stichting ING Aandelen (the Trust) holds more than 99% of our Ordinary shares, exercises the voting rights attached to the Ordinary shares (for which Bearer receipts have been issued). Holders of Bearer receipts who attend in person or by proxy the General Meeting of Shareholders must obtain voting rights by proxy from the Trust. Holders of Bearer receipts and holders of the ADSs representing the Bearer receipts, who do not attend the General Meeting of Shareholders, may give binding voting instructions to the Trust. See Item 7. Major Shareholders and Related Party Transactions Voting of the Ordinary shares by holders of Bearer receipts as proxy for the Trust. The Trust is entitled to vote for any Ordinary shares corresponding with Bearer depositary receipts for which the Trust has not granted voting proxies, or voting instructions have not been given to the Trust. In excercising its voting discretion, the Trust is required to make use of the voting rights attached to the Ordinary shares in the interest of the holders of Bearer receipts, while having regard for
| our interests; | |||
| the interests of our affiliates; and | |||
| the interests of our other stakeholders, |
in such a way that all interests are balanced and safeguarded as effectively as possible. The Trust may, but has no obligation to, consult with the holders of Bearer receipts or ADSs in exercising its voting rights in respect of any Ordinary shares for which it is entitled to vote. These arrangements differ from U.S. practice and accordingly may affect the rights of the holders of Bearer receipts or ADSs and their power to affect the Companys business and operations and the accountability of the Companys directors and management. See Item 4. Information on the Company Corporate Organization for more information on voting rights and our corporate structure.
The share price of our Bearer receipts and ADSs has been, and may continue to be, volatile which may impact the value of our Bearer receipts or ADSs you hold.
The share price of our Bearer receipts and our ADSs has been volatile in the past due, in part, to the high volatility in the securities markets generally and more particular in shares of financial institutions. In addition, there are other factors, beside our financial results, that may impact our share price. These factors include, but are not limited to:
| market expectations of the performance and capital adequacy of financial institutions in general; | |||
| investor perception of the success and impact of our strategies; | |||
| a downgrade or review of our credit ratings; | |||
| potential litigation or regulatory action involving ING Group or sectors we have exposure to through our insurance and banking activities; | |||
| announcements concerning financial problems or any investigations into the accounting practices of other financial institutions; and | |||
| general market volatility. |
13
Because we are incorporated under the laws of the Netherlands and many of the members of our Supervisory and Executive Board and our officers reside outside of the United States, it may be difficult for you to enforce judgments against us or the members of our Supervisory and Executive Boards or our officers.
Most of our Supervisory Board members, our Executive Board members and some of the experts
named in this Annual Report, as well as many of our officers are persons who are not residents of
the United States, and most of our and their assets, are located outside the United States. As a
result, you may not be able to serve process on those persons within the United States or to
enforce in the United States judgments obtained in U.S. courts against us or those persons based on
the civil liability provisions of the U.S. securities laws.
You also may not be able to enforce judgments of U.S. courts under the U.S. federal securities laws
in courts outside the United States, including the Netherlands. The United States and the
Netherlands do not currently have a treaty providing for the reciprocal recognition and enforcement
of judgments (other than arbitration awards) in civil and commercial matters. Therefore, you will
not be able to enforce in the Netherlands a final judgment for the payment of money rendered by any
U.S. federal or state court based on civil liability, even if the judgment is not based only on the
U.S. federal securities laws, unless a competent court in the Netherlands gives binding effect to
the judgment.
Item 4. Information on the Company
GENERAL
ING was established as a Naamloze Vennootschap (public limited liability company) on March 4, 1991 through the merger of Nationale-Nederlanden, which was the largest insurer in the Netherlands, and NMB Postbank Group, which was one of the largest banks in the Netherlands. ING Groep N.V. is incorporated under the laws of the Netherlands.
The official address of ING Group is:
|
Our principal U.S. office is: | |
ING Groep N.V.
|
ING Financial Holdings Corporation | |
Amstelveenseweg 500
|
1325 Avenue of the Americas | |
1081 KL Amsterdam
|
New York, NY 10019 | |
P.O. Box 810, 1000 AV Amsterdam
|
United States of America | |
The Netherlands
|
Telephone +1 646 424 6000 | |
Telephone +31 20 541 5411 |
Mission
We strive to deliver our financial products and services in the way our customers expect: with exemplary service, maximum convenience and at competitive rates. This is reflected in our mission statement: To set the standard in helping our customers manage their financial future.
Profile
ING Group is a global financial services company of Dutch origin with 150 years of experience, providing a wide array of banking, insurance and asset management services in over 50 countries. Our 113,000 employees work daily to satisfy a broad customer base: individuals, families, small businesses, large corporations, institutions and governments. Based on market capitalization, ING Group is one of the 20 largest financial institutions worldwide and in the top-10 in Europe.
Business
ING is the number one financial services company in the Benelux home market based on market capitalization. ING services its retail clients in these markets with a wide range of retail-banking, insurance and asset management products. In our wholesale banking activities we operate worldwide, but also with a primary focus on the Benelux countries. In the United States, ING is a top-5 provider of retirement services and life insurance based on premium income. In Canada, we are, based on premium income, the top property and casualty insurer. ING Direct is a leading online (direct) bank with over 11 million customers in nine large countries. In the growth markets of Asia, Central Europe and South America we provide life insurance. We are also a large asset manager with assets under management of almost EUR 500 billion.
14
Stakeholders
ING conducts its business on the basis of clearly defined business principles. In all our activities we carefully weigh the interests of our stakeholders: customers, shareholders, employees, business partners and society at large. ING strives to be a good corporate citizen.
CHANGES IN PRINCIPLES OF VALUATION AND DETERMINATION OF RESULTS
Starting January 1, 2004, ING adopted the U.S. GAAP accounting standard Statement of Position 03- 1: Accounting and Reporting by Insurance Enterprises for Certain Non-Traditional Long-Duration Contracts and for Separate Accounts (SOP 03-1) for both its Dutch and US accounting. SOP 03-1 requires the establishment of benefit reserves for annuity contracts, such as guaranteed minimum death benefits, and affects the timing of profit recognition of universal life contracts. ING already held adequate reserves for guaranteed minimum death benefits with variable annuities, so the impact for ING mainly relates to the timing of the profit recognition in universal life contracts in the United States. This accounting change resulted in an EUR 91 million after-tax reduction in shareholders equity at January 1, 2004.
CHANGES IN PRESENTATION
Beginning January 1, 2004, Guaranteed Investment Contracts (GICs) are no longer included in premium income and underwriting expenditure in order to bring reporting in line with insurance industry practice. Premium income and underwriting expenditure related to these contracts are no longer included in revenues and expenses, respectively. Only the difference between premium income and underwriting expenditure of GICs is included in the profit and loss account. The comparable figures have accordingly been adjusted for all prior periods.
Beginning January 1, 2003, additions to the provision for investment losses are reported on a separate line within total (operating) expenditure. Previously, these additions were reported as an element of income from investments of the insurance operations. This makes the presentation of the addition to these provisions consistent with the presentation of the addition to the provisions for loan losses of the banking operations. The comparable figures have accordingly been adjusted for all prior periods.
Beginning January 1, 2003, claims handling expenses are accounted for as part of the operating expenses. Previously, these expenses were accounted for as part of the underwriting expenditure. This new classification better represents the nature of the claims handling expenses. The comparable figures have accordingly been adjusted for all prior periods.
The Latin America region is comprised of South America, including Mexico. Prior to January 1, 2003, Mexico was included in the North America region. This new regional classification is more in line with the internal management reporting structure. The comparable figures have accordingly been adjusted for all prior periods.
Prior to January 1, 2002, amortization of deferred acquisition costs (DAC) on insurance policies was accounted for as part of operating expenses of the insurance operations. In order to have a better view on the development of manageable operating expenses, we decided to transfer the amortization of DAC to underwriting expenditure. The comparable figures have accordingly been adjusted for all prior periods.
2004 CHANGES IN THE COMPOSITION OF THE GROUP
On December 10, 2004, ING Canada Inc. entered into an underwriting agreement to issue 34,880,000 common shares at a price of CDN$ 26.00 per share to a syndicate of underwriters. Part of the offering proceeds was used to fund the acquisition of Allianz Canada at a purchase price of EUR 228 million. The initial public offering was completed on December 25, 2004. On January 13, 2005, the underwriters exercised in full their over-allotment option to purchase 5,232,000 additional shares. The total gross proceeds of the IPO were CDN$ 1,043 million.
On December 2, 2004, ING Group finalized the agreement for the sale of ING BHF-Bank to Sal. Oppenheim (Germany) for approximately EUR 600 million. The sale was completed on December 31,
15
2004. ING Group will retain Deutsche Hypothekenbank of ING BHF-Bank and the restructured loan portfolio. On December 23, 2004, ING Group further announced it sold the London Branch of ING BHF-Bank to Deutsche Postbank (Germany), which was completed on January 1, 2005.
On November 22, 2004, ING Group reached an agreement to sell the activities of Baring Asset Management. Under the agreement, MassMutual Financial Group (United States) will purchase the investment management activities of Baring Asset Management, and Northern Trust Corporation (United States) will purchase Baring Asset Managements Financial Services Group. The sales will result in a net gain for ING Group of approximately EUR 250 million. The sale was finalized on March 31, 2005.
On November 18, 2004, ING announced it had reached an agreement with Jackson National Life, owned by Prudential (United Kingdom), for the sale of Life Insurance Company of Georgia. Under the terms of the transaction, Jackson National Life will pay ING EUR 197 million, subject to adjustment for actual capital retained by Life of Georgia, to acquire all of the stock of Life of Georgia. The transaction is expected to be finalized in the second quarter of 2005 and is expected to result in a pre-tax loss to ING under IFRS in 2005 of less than EUR 150 million.
On October 18, 2004, ING Group announced it had decided to exit the individual life reinsurance
business in the United States. ING Group signed a co-insurance agreement with Scottish Re. The
transaction with Scottish Re is structured such that Scottish Re will reinsure the individual life
reinsurance business of ING Re. ING Group will transfer all assets and reinsure the liabilities of
the business through Scottish Re. In addition ING Group will pay Scottish Re a ceding commission of
EUR 450 million. The agreement with Scottish Re is expected to result in a loss for ING Group of
approximately EUR 500 million after tax, including the ceding commission mentioned above. Of that
EUR 500 million, EUR 260 million was taken as a charge in 2004. The remaining EUR 240 million will
be amortized over the life of the business, resulting in a charge to the profit and loss account of
EUR 25 million in 2005 and gradually decreasing in subsequent years as the business runs off. The
transaction was completed on January 4, 2005.
On October 8, 2004, ING Group and Allianz Group (Germany) announced that ING Canada had concluded a definitive share purchase agreement for the acquisition of Allianzs property and casualty insurance operations in Canada for EUR 228 million. On December 9, 2004, ING Canada announced the closing of the acquisition pursuant to which it acquired Allianz of Canada and its subsidiaries: Allianz Insurance Company of Canada, group insurer Trafalgar Insurance Company of Canada and Canada Brokerlink.
On August 12, 2004, ING Group acquired Mercator Bank, a Belgium medium-sized savings bank. The negative goodwill amounted to EUR 26 million and is added to shareholders equity.
On July 20, 2004, ING Group announced its intention to sell CenE Bankiers to Van Lanschot (The Netherlands) for approximately EUR 250 million. On October 1, 2004 the sale was completed.
On May 13, 2004, ING Group announced that it had entered into a letter of intent regarding the sale of its Australian non-life interests to QBE Insurance Group (Australia) of Mercantile Mutual Insurance Limited, Mercantile Mutual Insurance (Workers Compensation) Limited and its 50% stake in the QBE Mercantile Mutual joint venture for EUR 431 million. The sale was completed on June 30, 2004. An additional EUR 14 million is payable by QBE Insurance Group in February 2007 subject to the run-off of pre-joint venture net insurance liabilities.
At the end of May 2004, ING Group acquired the Dutch real estate fund Rodamco Asia. As a result, the fund was delisted from Euronext in Amsterdam and will be delisted from the Frankfurt Stock Exchange in 2005. The goodwill amounted to EUR 22 million and is charged to shareholders equity.
On March 8, 2004, ING Group announced it had reached an agreement with Macquarie Bank Limited (Australia) for the sale of its Asian cash equities sales, trading, research and capital market operations in 10 countries in Asia and key locations in Europe and the United States. The transaction was completed in the third quarter 2004.
16
RECENT DEVELOPMENTS
On March 25, 2005 ING Bank announced an agreement with the Bank of Beijing to acquire up to a 19.9% holding for a consideration of approximately EUR 166 million as part of a broader strategic alliance. Subject to final regulatory approvals, ING Bank will take two seats to join the current 15-person board of directors of the Bank of Beijing as part of the strategic alliance.
On March 15, 2005, ING Group announced it will propose to the Annual General Meeting of Shareholders the appointments of Christine Lagarde (born 1956, French nationality) as of April 27, 2005, and Jan Hommen (born 1943, Dutch nationality) as of June 1, 2005, as members of the Supervisory Board of ING Group.
On February 28, 2005, ING Group announced it will reduce its 87.77% ownership in ING Bank Slaski by 12.77%. The reducement was completed in March 2005 through a secondary offering. By reducing its stake ING Group complies with a requirement of the Polish regulator set in 2001.
On January 13, 2005, ING Canada announced that the underwriters of its initial public offering had
exercised their over-allotment option in full and purchased an additional 5,232,000 common shares
of ING Canada at the offering price of CDN$ 26 for gross proceeds of CDN$ 136 million. The total
proceeds of the IPO of CDN$ 1,043 million resulted in a net gain
of about
EUR 285 million for ING
Group, of which EUR 24 million will be recorded in 2005. Following the offering we held
approximately 70% of the common shares of ING Canada.
GROUP STRATEGY
Key points
| Value-based management at the heart of INGs renewed strategic focus | |||
| New management structure client-oriented and based on accountability | |||
| Divestments free up capital to reduce leverage and to invest in future profitable growth | |||
| Good results in 2004 supported by focus on execution skills |
ING renewed its overall strategic direction in 2004. Our aim is to create value, which means outperforming our peers when it comes to shareholder return. In order to achieve this, ING focused on good execution skills in its core businesses and actively managed its business portfolio. Implementing these priorities allowed us to lay the foundations for profitable growth.
Managing for value
ING expanded at a fast pace in the past decade. After the initial mergers in the Netherlands, a number of acquisitions followed in Europe, the Americas and Asia. This has allowed ING to develop into a world player in the financial sector, with expertise in insurance, banking and asset management. Nationale-Nederlanden, Postbank and ING Bank in the Netherlands, ING Belgium and the wealth management and pension business in the United States all form part of INGs businesses in mature markets. ING Direct, the life insurance operations in developing markets and pension activities are INGs main growth business.
It is key in INGs new strategic direction to gear each of these businesses in their own way towards the same target, and that is to create value. Managing for value is at the core of INGs strategy. It forms an inherent part of INGs financial objective: to deliver value through a combination of return and growth higher than our peers. ING wants to make sure that, over a longer period, its shareholders have a better total return (return on shares in the form of capital gains and reinvested dividends) on their investment in ING than on most other investments in the financial sector.
Simplifying the management structure
One of the first steps taken in 2004 in order to facilitate the value-creating process was the introduction of a new management structure. Based on the principles of transparency, accountability and client-focus, ING reorganised its activities in six functional business lines: three business lines manage the insurance activities in respectively Europe, the Americas and Asia/Pacific, while INGs banking activities are managed by a business line each for Wholesale Banking, Retail Banking and ING Direct. Creating this new structure meant abolishing several management committees. Direct reporting lines
17
replaced these committees, raising as such the speed of decision-making. Direct reporting lines also ensure personal empowerment and more accountability which is key in a company that manages for value, because personal empowerment and accountability are the best guarantee for good execution.
Focus on execution
Good execution skills are vital in the value-creating process. Execution stands for implementing plans. In 2004, ING successfully repositioned itself in the wholesale banking market. INGs insurance business in the Netherlands introduced a far-reaching plan to improve its customer service, with positive results so far.
Execution also means we want to excel at what we do. INGs business lines sharpened their focus on profitable top-line growth, managing costs, managing risks and showing bottom-line results. These four pillars are all equally important to generate above-average returns for shareholders. The good financial results of ING Group in 2004 underline the efforts INGs business lines undertook in these areas last year. Operating net profit went up by 33.0%, revenue growth was 4.7%, compared to a growth in operating expenditure of 2.6%.
In order to support the execution skills on the company floor, ING set up a work shop for business managers to sharpen their focus on managing for value, because good execution comes from INGs employees. They are the companys most important asset and only via them can a better performance in value creation be achieved.
Exemplary customer service
We also count on our employees to have the right attitude towards the customer, because the customer is fundamental in INGs businesses. To underline the importance of good customer service, we amended our mission statement in 2004 to: To set the standard in helping our customers manage their financial future. We have placed customer satisfaction in all our markets as a key indicator of business performance, and we are acting upon it. In certain of INGs businesses, customer ratings are already high and need to be maintained at these levels. Clients judge Postbank first of the major banks in the Netherlands when it comes to service. Close to 80% of ING Directs customers indicate they are more satisfied with ING Direct than with other financial institutions they deal with. Surveys show ING Wholesale Bankings cash management services are highly appreciated by its clients. In other business units, ING is raising its efforts to bring customer satisfaction up to par. Our efforts to improve customer services at our Dutch insurance business company Nationale-Nederlanden are starting to pay off. Customer satisfaction ratings went up substantially in 2004.
Containing costs
The financial services industry is a mature industry, making it indispensable for any company in our sector to focus on costs. Cost containment is particularly important in INGs businesses in mature markets in the United States and Benelux. Operational efficiency and cost control, combined with excellent customer service are the way forward in these markets. In 2004, underlying cost developments were generally under control. ING will continue to pay special attention to cost containment.
Active business portfolio management
An important contribution to value creation comes from active management of the business portfolio. In 2004 this strategic priority manifested itself mostly through a number of divestments. These led to a better allocation of capital and strengthened INGs financial position, witness thereof the sharp improvement in INGs debt/equity ratio to 9.9% from 14.4% at the end of 2003.
A carefully chosen set of criteria guide INGs portfolio-management decisions. In judging whether a business can be defined as INGs core activities or not, growth opportunities are taken into account, as much as return potential, volatility, the scale of the business in question and its integration possibilities. It is the balance of answers to these questions that steer INGs decision to disengage from certain business activities.
In 2004, ING sold its insurance activities in Argentina, its health insurance activities in the Netherlands (NN Zorg), its Asian cash equities business and its interest in non-life insurance in Australia. With GE Commercial Finance, we reached an agreement to restructure our mutually owned working-capital joint venture, NMB-Heller. In the United States, ING announced the agreement to sell the tied-agent
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business of Life of Georgia and decided to exit the individual life reinsurance business, while in Canada we completed an initial public offering of a part of our non-life business. ING also sold Delta Asset Management in the United States and CenE Bankiers in the Netherlands (a subsidiary specialising in commercial and private banking). This was followed by the sale of the German unit ING BHF-Bank and of Baring Asset Management later on in the year.
The total of these divestments freed up EUR 1.5 billion in regulatory capital in 2004, money which ING will also use to invest in areas showing clear growth potential for the future.
Investing in future growth
Investing in future growth means investing in the right markets and the right product lines. We focus on further organic growth in our existing businesses, such as our businesses in Benelux, where over the years we have achieved strong results thanks to a focus on top-line growth and cost efficiency. Also in the important savings market of the United States, ING aims to achieve further organic growth.
Next to organic growth, future growth will also result from business portfolio management. In 2004, we only made investments in activities complementary to our own, such as Rodamco Asia, the savings customers of Egg France and some of the activities of Allianz in Canada. In Korea, ING acquired a 49% stake in a bancassurance joint venture with Kookmin Bank, called KB Life.
For clear future growth potential, three areas of business stand out: ING Direct, INGs life insurance operations in developing markets and opportunities derived from worldwide pension reforms. In all of these markets ING already has a strong starting position. ING Direct is the leading direct bank in the world and it was built largely from scratch. In life insurance, ING occupies the number two position as international insurer in Asia and the overall number one position in Central Europe and Russia, both based on premium-income. Pensions have been a core activity for ING for 150 years. At the end of 2004, INGs pension assets under management amounted to EUR 183 billion, up from EUR 158 billion a year earlier, and its importance keeps growing. With further selective expansion, ING wants to capture the growth potential that these business areas continue to offer.
The importance of economic profit
In order to measure its performance on value-based management, ING focuses on economic profit, which measures profit beyond the cost of capital. In the past, it was often considered sufficient to focus on accounting profit, because capital was abundant and profit and value creation went hand in hand. In todays circumstances, capital is scarce and the right allocation of capital is key as it is a major element to value creation. This makes economic profit a key measure when managing for value. Two important indicators help ING: Risk-Adjusted-Return on Capital (RAROC) and Internal Rate of Return (IRR). RAROC measures value creation in INGs banking activities. IRR on new business stands for the internal rate of return realized on new life business written and is a good measure of value creation in INGs insurance activities. ING improved on both measures in 2004, encouraging us to continue with the implementation of the new strategic focus.
Conclusions and ambitions
ING sharpened its strategic focus in 2004. Managing for value became the core of INGs strategy. Good execution, a focus on the customer and active business portfolio management led the way to improved results. But INGs strategy does not focus on one year. ING wants to offer continuity to its investors, providing them with better returns on their investment in the longer run. We will therefore continue to emphasize and implement the renewed strategic focus, by optimizing the business portfolio, guiding the business lines towards good execution skills and investing in future growth. The final result of this strategy will be a business mix that respects INGs identity, offers more value-creating opportunities and rewards our shareholders with a better total shareholder return.
CORPORATE GOVERNANCE
Corporate governance refers to the proper management and supervision of companies. The year 2004 was the year of the implementation of the Dutch Corporate Governance Code (Tabaksblat Code). During 2004, ING adapted its practices, its Articles of Association and the charters of the Executive Board and the Supervisory Board to the extent necessary in order to comply with the Tabaksblat Code.
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Application of the Dutch Corporate Governance Code
In a separate document, entitled: The Dutch Corporate Governance Code INGs implementation of the Tabaksblat Code for good corporate governance (which can be downloaded from www.ing.com and can be ordered in print through the same website), ING Group sets out whether and how it applied each of the best-practice provisions of the Dutch Corporate Governance Code (Tabaksblat Code).
The ING Group corporate-governance structure as reflected in this document, including some deviations from the Tabaksblat Code as explained, will be submitted for approval to the Annual General Meeting of Shareholders in 2005. Once the corporate-governance structure is approved by the General Meeting of Shareholders, ING will be considered to be in full compliance with the Code.
Changes in 2004
As the Executive Board and Supervisory Board decided to implement the Dutch Corporate Governance Code expeditiously, the best-practice provisions of the Tabaksblat Code were already applied in the preparation for and the follow-up of the 2004 General Meeting of Shareholders as much as possible. This was reflected in the agenda for this meeting, not only in the breakdown of the various items to be discussed, but also in the contents of the resolutions passed at that meeting, e.g.:
| the adoption of the remuneration policy for the Executive Board members; | |||
| an amendment to the Articles of Association to bring these into line with the best practices detailed in the Code and with the requirements of the Act on the large-company regime, which became effective in the meantime. One of the most significant amendments is the abolition of the required larger majority for the rejection of a binding proposal for nomination to the Executive Board or Supervisory Board and for dismissal of a member of either Board. Moreover, under the amended Articles of Association, the number of shareholder votes required for an item to be submitted for inclusion in the agenda of the General Meeting of Shareholders is reduced to 1 per mille of the share capital,or a total stock-price value of EUR 50 million; | |||
| three new Executive Board members Eric Boyer de la Giroday, Eli Leenaars and Hans Verkoren were appointed for a period of four years and shall be eligible for reappointment for four years without any limit to the number of times they may be reappointed, taking into account INGs retirement rules for Executive Board members. As they were already employed by ING, their employment contracts were continued on the same basis, taking into account their existing contractual rights as regards severance payments. |
Following the General Meeting of Shareholders, the draft minutes of that meeting were disclosed on the ING website. Moreover, the Supervisory Board appointed a Company Secretary (the General Counsel) in February 2004, and adopted a whistleblower procedure, which has since been approved by the Dutch Central Works Council.
In accordance with the Tabaksblat Code, ING announced a more active role as an institutional investor and published its global voting policy on its website.
With effect from the publication of the 2003 results in February 2004, INGs periodic meetings with analysts, such as those held after publication of the quarterly, half-year and annual figures, can be followed simultaneously by telephone or webcast.
Finally, the charters of the Supervisory Board and its committees and of the Executive Board were brought into line with the best-practice provisions of the Tabaksblat Code and were made available on the ING website.
Committees
The Supervisory Board has three Committees: the Audit Committee, the Renumeration and Nomination Committee and the Corporate Governance Committee.
Audit Committee
The Audit Committee consists of four members and meets at least four times a year of which at least one meeting a year with the external auditors, without the members of the Executive Board being present. The Committee consists of Aad Jacobs (chairman), Claus Dieter Hoffman, Paul Baron de Meester and Jan Timmer. The Audit Committee advises the Supervisory Board in observing its responsibility for
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ensuring that the Groups financial systems provide accurate and up-to-date information on its financial position and that the Groups published financial statements represent a true and fair reflection of this position. It also advises the Supervisory Board in ensuring that appropriate accounting policies, internal controls, risk management, compliance procedures and tax policy are in place. The meetings are attended by the chairman and vice-chairman/CFO of the Executive Board. The general manager(s) responsible for risk control, financing and accounting of Corporate Control & Finance, the General Counsel, the Group Actuary and the internal auditor and the external auditors also attend its meetings.
Remuneration and Nomination Committee
The Remuneration and Nomination Committee meets at least two times a year. It consists of four members Cor Herkströter (chairman), Luella Gross Goldberg, Paul van der Heijden and Jan Timmer. The Committee advises the Supervisory Board on compensation policies and the composition of the Supervisory Board and Executive Board. The committee advises the Supervisory Board, also supported by external consultants, on the compensation packages of the members of the Executive Board. From the Executive Board the meetings are attended by the chairman and vice-chairman.
Corporate Governance Committee
The Corporate Governance Committee meets at least once a year and consists of four members. The current members are Cor Herkströter (chairman), Luella Gross Goldberg, Paul van der Heijden and Jan Timmer. The primary tasks of the Corporate Governance Committee are to perform an annual evaluation of INGs corporate governance as a whole and the governance of the Executive Board, to make proposals to the Supervisory Board and to the Annual General Meeting for improvements and to ensure that the corporate governance of ING as a whole and the policy on which it is based is fully transparant and communicated in the Annual Report and to the Annual General Meeting of Shareholders. From the Executive Board the meetings are attended by the chairman and vice-chairman.
Corporate Governance Differences
Under the New York Stock Exchanges (NYSE) listing standards, foreign private issuers must disclose any significant ways in which their corporate governance practices differ from those followed by US domestic companies under the NYSE listing standards. We believe the following to be the significant differences between our corporate governance practices and NYSE corporate governance rules applicable to US companies:
| We have a two-tiered board, in contrast to the one-tier board used by most US companies. In the Netherlands, a Naamloze Vennootschap (public limited liability company) has an Executive Board as its management body and a Supervisory Board which advises and supervises the Executive Board. In general Executive Board members are employees of the company while members of the Supervisory Board often are former captains of state or industry and sometimes former members of the Executive Board. Usually the members of the Supervisory Board are independent of the company in the sense of the NYSE listing requirements. Our Audit Committee, Corporate Governance Committee and Remuneration and Nomination Committee are comprised of members of the Supervisory Board. | |||
| In contrast to the Sarbanes-Oxley Act of 2002, the Tabaksblat Code contains a comply-or-explain principle, offering the possibility to deviate from the Tabaksblat Code as long as any such deviations are explained. | |||
| Dutch law requires that our external auditors be appointed at the General Meetings of Shareholders and not by the Audit Committee. | |||
| Our Articles of Association provide that there are no quorum requirements to hold a General Meeting of Shareholders, although the taking of certain actions may require a quorum. | |||
| The shareholder approval requirements with respect to equity compensation plans under Dutch Law and the Tabaksblat Code differ from those applicable to US companies which are subject to the NYSEs listing standards. Under Dutch Company Law and the Tabaksblat Code shareholder approval is only required for equity compensation plans (or changes thereto) for members of the Executive Board and Supervisory Board, and not for equity compensation plans for other groups of employees. |
CORPORATE ORGANIZATION
ING Groep N.V. has a Supervisory Board and an Executive Board. The Executive Board is responsible
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for the day-to-day management of the Group and its business lines (Insurance Europe, Insurance Americas, Insurance Asia/Pacific, Wholesale Banking, Retail Banking and ING Direct). The function of the Supervisory Board is to supervise the Executive Board and the general course of events in the Companys business, as well as to provide advice to the Executive Board.
Business Lines
The Executive Board (supported by various corporate staff departments) determines the Groups corporate strategy, prescribes capital base ratios and reserving levels, allocates resources, sets financial performance targets and risk profiles for the business lines, appoints senior management, manages the Groups corporate image, establishes information technology strategy and monitors the realization of the objectives established for the Group. Certain actions of the Executive Board are subject to the approval of the Supervisory Board, including the issuance or cancellation of shares, significant acquisitions, the declaration of interim dividends, material capital expenditures and matters concerning substantial changes in employee relations. Each business line formulates the strategic, commercial and financial policies in conformity with the group strategy and performance targets set by the Executive Board. Each business line is also responsible for the preparation of its annual budget, which is then approved and monitored by the Executive Board. In addition, each business line, furthermore, approves the strategy, commercial policy and the annual budgets of the business units in its business line and monitors the realization of the policies and budgets of that business line and its business units. The six business lines, which are subdivided in business units, are:
Insurance
Insurance Europe
Operates the insurance activities in the Netherlands, Belgium and Central Europe and Russia and the asset-management activities in Europe. In these countries, we offer life insurance products with a particular focus on pensions. In the Netherlands and Belgium, we also offer non-life insurance products. ING has leading market share positions in the Netherlands and Belgium and throughout Central Europe and Russia.
Insurance Americas
Holds insurance operations and asset-management activities in the Americas. It has strong market positions in the United States, offering retirement services, annuities and life insurance products. It also has leading positions in non-life insurance in Mexico and Canada. Furthermore, we are active in Chile, Brazil and Peru.
Insurance Asia/Pacific
Holds the life insurance operations and asset/wealth management activities in Asia/Pacific. It has well-established positions in Australia, Hong Kong, Japan, South Korea, Malaysia and Taiwan. We consider that our activities in the Indian, Chinese and Thai markets are future growth engines for ING.
Banking
Wholesale Banking
In charge of our global wholesale banking activities. It has five business units: Clients, Network, Products, Corporate Finance and Equity Markets, and Financial Markets. It offers a full range of products to corporate clients and financial institutions in the Benelux markets. Beyond these domestic markets, it has a more selective and focused client and product approach.
Retail Banking
Undertakes retail banking activities in the Netherlands, Belgium, Poland, Romania and India. Retail Banking also offers private banking in selected markets such as the Netherlands, Belgium, Switzerland, Luxembourg and several countries in Asia.
ING Direct
Operates direct retail-banking activities for individual clients in the United States, Canada, Australia, the United Kingdom, France, Italy, Spain, Germany and Austria. It primarily offers savings and mortgage products.
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INSURANCE EUROPE
Year ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
(EUR millions) | ||||||||||||
Total operating income |
16,209 | 16,537 | 15,709 | |||||||||
Operating profit before tax |
1,733 | 1,791 | 1,296 |
The Netherlands
Distribution
INGs insurance operating companies within the Netherlands are grouped under the following four distribution channels:
Direct marketing
|
Independent intermediaries | Branches | Tied agents | |||
Postbank
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Nationale-Nederlanden Movir | ING Bank Nederland | RVS |
These operating companies have tailored their insurance products and services for certain target markets and distribution channels. For example, through the direct marketing channel (using the Postbank brand), ING offers primarily basic retail insurance products, while other distribution channels are more suitable for selling complex products requiring more personal service and specialized advice. ING considers the degree of personal service and specialized advice as an important factor in determining how to distribute its products and services in the Netherlands.
Products
The Groups insurance and banking products and services are offered to the Dutch market through each of ING Nederlands four distribution channels. The following is a summary of the primary insurance products offered.
Life products
INGs life insurance products in the Netherlands consist of a broad range of participating (with profit) and non-participating (without profit) policies written for both individual and group customers. Participating policies share in either the results of the issuing company or the investment returns on specified assets. In recent years, an increasing number of ING Nederlands policies consist of policies that participate in the investment return of a specified investment fund, consistent with the trends in the Dutch market.
Individual life. Individual life products include a variety of endowment, term and whole life insurance policies. ING offers single and recurring premium policies which are primarily linked to mortgages and also used for the funding of individual retirement benefits. These policies are often connected with tax incentives offered by Dutch law. Benefits under these policies are payable typically at the age of 60 to 65 on early death or supplementary to (company) pensions. The single premium endowment policies are mainly excess interest sharing, whereby policyholders receive profit sharing payments, which depend on the profit of the INGs insurance company.
Group life. Group policies are designed to fund private pension benefits offered by a wide range of businesses and institutions as a supplement to government provided benefits. These benefits include sums assured, annuities, disability benefits and widows and orphans benefits. For corporate clients, customized policies are offered to meet the needs of individual employers. For small and medium sized companies, standardized policies providing specified benefit levels are offered.
Non-life products
Fire. INGs fire insurance policies provide coverage to both individual and commercial clients. Fire policies generally provide coverage for a variety of losses, including, but not limited to, fires, storms, burglary and other perils. Individual coverage is provided on both a single-risk and multi-risk basis, with multi-risk policies providing coverage for loss or damage to dwellings, damage to personal goods and liability to third parties. Commercial coverage is provided to Dutch companies for buildings and facilities in the Netherlands and includes ordinary and commercial risks.
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Automobile. The automobile policies provide coverage to individual and commercial (fleet) insured for third-party liability (including property damage and bodily injury), as well as coverage for theft, fire and collision damage. Coverage for third party liability is required by law to be maintained with respect to each licensed motor vehicle. Other additional coverage is optional. Dutch law does not require that insurance be maintained for damage suffered by the policyholder, the driver of the vehicle or the vehicle itself. Policies are generally written for a minimum period of one year.
Disability and Health-Care. ING provides disability and health care insurance on both an individual and group basis. In 2004, ING formed a strategic alliance with Onderlinge Nationale Verzekeringen tegen Ziektekosten (ONVZ) regarding health insurance business. The types of risks covered by disability and health policies include death by accident and temporary and permanent disability. In the Netherlands, the government is decreasing its role in the field of disability insurance and sick pay, creating new opportunities for insurance companies to provide private-sector coverage for benefits previously provided by the Dutch government. ING offers a broad range of disability insurance products and complementary services for employers and individual professionals (such as dentists and lawyers).
Other Non-life. Other non-life insurance consists of transport and aviation insurance, third party liability insurance and indirect premiums (incoming reinsurance premiums).
Belgium
ING Insurance products targeted at the Belgian market are offered by ING Insurance SA/NV, since early 2002. These products are marketed through banking networks and independent brokers allowing the customer to opt for the channel of his/her choice.
Central Europe and Russia
The Group has life insurance companies in Hungary, Greece, Poland, the Czech Republic, Slovakia and Romania. The Group has pension funds in Poland, Hungary, the Czech Republic, Slovakia, Bulgaria and Russia. Together, these operations serve nearly 5 million clients throughout the region. In the past years, the life insurance and pension businesses in Central Europe and Russia have created substantial value for ING.
Our main objective is to continue the stable creation of value. To achieve this objective, ING Central Europe Insurance will implement a two-pronged strategy. First, we seek to improve the value of the existing operations by improving distribution and products and achieving operational excellence. Second, ING aims to achieve economies of scale and develop operations in countries with significant growth potential. Several countries are planning pension reforms, and ING is positioning itself to capture business opportunities created by these reforms.
Spain
ING Nationale-Nederlanden was established in Spain, in 1978. It offers individuals and families saving and pension solutions. The central office and its team of professionals consists of more than 700 people. It has a commercial network of 2,500 people. It provides insurance and investment advice to more than one million clients through its more than 55 offices.
ING Investment Management Europe
ING Investment Management Europe (ING IM Europe) is responsible for managing the investments of INGs insurance companies in Europe. It also manages equity, fixed income and structured investments for institutional investors and the private label investment funds sold by various ING companies, including ING Bank, ING Belgium, Postbank, Nationale-Nederlanden and third party distributors. In addition, ING IM Europe is responsible for managing the treasury activities of ING Insurance.
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INSURANCE AMERICAS
Year ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
(EUR millions) | ||||||||||||
Total operating income |
28,112 | 27,589 | 35,350 | |||||||||
Operating result before tax |
1,669 | 1,310 | 1,430 |
ING Insurance Americas (ING Americas) is comprised of three broad geographic-based business units in the United States, Canada and Latin America (including Mexico). ING Americas primarily offers various types of insurance, mutual funds, brokerage services and institutional products, including group reinsurance and principal protection products, as well as retail and institutional asset management. In addition, ING offers retail banking products and limited corporate and investment banking products and services in certain countries in the Americas through other ING business units.
ING Americas combined insurance operations place it among the top ten life insurers in the United States based on life and annuity premiums written. ING Americas total assets under management at the end of 2004 amounted to EUR 163 billion. ING Americas ranks as the number one international insurer in Latin America and is the largest property and casualty underwriter in Canada.
United States
Through its U.S. business operations, ING Americas offers a wide range of products that include traditional life, variable universal life, interest sensitive life, universal life, group life, stop loss, group reinsurance, guaranteed investment products, variable and fixed annuities, mutual funds, and retirement products that meet the requirements of 401(k), 403(b) and 457 plans. Distribution channels include independent producers, career agents, broker dealers and financial institutions.
On December 31, 2004, insurance company subsidiaries doing business under ING America Insurance Holdings, Inc., our U.S. insurance holding company, included the following: ING Life Insurance and Annuity Company, ING USA Annuity and Life Insurance Company, ING Insurance Company of America, Security Life of Denver Insurance Company and ReliaStar Life Insurance Company and ReliaStar Life Insurance Company of New York.
ING has a long history in the United States and is committed to further strengthening its existing US operations and optimizing their performance. Although in the process of consolidating, the U.S. life and non-life markets remain fragmented and subject to intense competition as clients move towards investment, savings, and pure risk products. Increasing bank participation in the insurance market may also intensify competition. Business units in the U.S. have been organized by client segment to support the offering of the entire breadth of ING products to INGs target markets, through the distribution channel of the clients choice.
In 2004, ING Americas operated in the United States in two business segments: US Financial Services (which includes retail-oriented businesses, worksite financial services, retirement services and institutional businesses), and ING Investment Management. The activities of each segment are described below.
United States Financial Services
ING US Financial Services (USFS), is comprised of six primary business units, which provide a wide variety of financial products and services to individuals both on a retail basis and through their employers. These business units are: Individual Life Insurance, Annuities, Retirement Services (which includes Defined Contribution Pensions and Rollover/Payout business), Group Insurance, Mutual Funds and ING Advisors Network. An extensive distribution network, Internet, a Voice Response Unit (VRU) and customer service representatives support products and services. The primary customer target market is the mass affluent segment. Additionally, institutional customers are served in two areas: group reinsurance, through ING Re, and principal protection products, through ING Institutional Markets. The divestment of the individual life reinsurance business to Scottish Re was completed on
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December 31, 2004. The sale of Life Insurance Company of Georgia is expected to be completed in the second quarter of 2005.
USFS products comprise a wide range of individual insurance and investment products, including variable universal life, universal life, and term insurance, fixed and variable annuities and mutual funds. Group insurance and employee benefit-related products and services are also offered, and include group life and disability insurance, dental and vision plans, defined contribution retirement plans, tax-sheltered annuities, voluntary employee-paid products and stop-loss coverage. Products focused on the corporate-owned insurance markets are also available. Additionally, USFS offers financial services such as financial planning, investment advisory services, pension plan administrative services and trust services primarily through the approximately 8,900 financial professionals affiliated with the wholly owned broker-dealers in ING Advisors Network.
ING Investment Management
ING Investment Management Americas (ING IM Americas) is comprised of two primary business activities: proprietary assets and third party business. ING IM Americas manages proprietary assets for ING Americas insurance entities, investing in a diverse mix of public fixed income, private placements, structured products and commercial mortgages. Third party business units include mutual fund sub advisory, institutional assets, alternative assets, and managed accounts.
Assets are managed in a wide range of investment styles and portfolios including: domestic and international equity funds across the value, blend and growth styles and small, mid- and large capitalization, domestic fixed income portfolios across the major bond market sectors, balanced portfolios, fund of hedge funds, and private equity.
Third-party products are distributed through proprietary, affiliated and outside distribution channels. The mutual funds it sub-advises for USFS are distributed primarily through USFS products (including worksite retirement products, individual annuity products and life insurance products), through ING and third-party financial intermediaries, and through INGs Internet bank, ING Direct. ING IM Americas institutional investment strategies primarily serve the defined benefit market and are distributed directly to pension plans and through consultants by ING IM Americas dedicated institutional sales force as well as through affiliated ING distribution channels in Europe and Asia/Pacific.
Alternative products are targeted to high net worth individuals and institutional investors. These products include hedge fund of funds, private equity, structured products and single strategy hedges funds which we distributed primarily through proprietary distribution channels. ING IM Americas managed account business serves almost 20,000 high net worth customers by offering individually managed portfolios through financial intermediaries.
ING IM Americas business strategy is to further leverage the powerful distribution network existing in INGs affiliate businesses and expand the model of maximizing the number of distribution channels for a given investment product or capability.
Canada
ING Americas business strategy for Canada is centered around risk management expertise delivered through strong manufacturing and distribution capabilities. In addition, a wealth management capability supports the distribution network.
ING Canada is the largest provider of property and casualty insurance in Canada with a market share of approximately 13%. In 2004, ING Group sold a 27.1% equity interest (increasing it to approximately 30% in 2005 upon the exercise by the underwriters of the over-allotment option) in ING Candad through an initial public offering reducing its share to approximately 70%. ING Canadas shares are listed on the Toronto Stock Exchange (TSX-IIC.LV).
ING Canadas principal insurance products are automobile and property and liability insurance, which are marketed to individuals and to small and medium size businesses. ING Canada also offers commercial specialty lines products, such as marine, surety and other niche products.
ING Canada uses independent brokers as its primary distribution channel, accounting for approximately 90% of direct premiums written. ING Canada also sells products directly to customers
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through the Internet and by telephone through call centers in Quebec and Ontario. Currently, ING Canada has in total approximately 2.9 million insurance policies in force.
In addition to insurance operations, ING Canada also has a mutual fund operation, ING Funds, and a registered mutual fund dealer, ING Wealth Management. It focuses on delivering financial solutions to ING clients through a number of distribution partners.
In December 2004, ING Canada acquired Allianz Canada, the thirteenth largest property and casualty insurance company in Canada. Allianz Canada is the sole shareholder of two insurance companies: Allianz Insurance Company of Canada and Trafalger Insurance Company of Canada. In addition, Allianz Canada owns Canada Brokerlink, Inc., a brokerage network with activities in two Canadian provinces. As a result of the transaction, ING Canada acquired approximately, 449,000 policies in force.
Latin America
ING Americas seeks to be a leading player in emerging and other selected markets outside North America which have the potential for attractive long-term returns. Therefore, ING Americas sells through subsidiaries and joint venture affiliates, life insurance, health insurance, pensions, auto, property and casualty insurance, and financial services products in selected markets in strategic Latin American markets. It focusses its activities on the Brazilian, Chilean and Mexican markets. ING also has a presence in the AFP (privatized pension) and annuities markets in Peru. We expect that the evaluation of non-strategic activities for divestment will continue throughout the Latin American operations.
Mexico
ING Americas current presence in Mexico consists of the largest insurance company, ING Comercial America (ING CA), and ING Comerical America Afore, which is a top five pension company in Mexico . ING CA is the market leader in the Mexican insurance industry with premium income of EUR 1.6 billion in 2004. ING CA has its strongest market positions in auto (ranked second), commercial property & casualty business (ranked first) and health insurance (ranked second). We are focusing our efforts to grow our business in personal lines of insurance, in particular life and wealth accumulation products.
ING Comercial America Afore, a privatized pension savings fund business, has more than 2.6 million clients and assets under management exceeding EUR 3.1 billion.
Argentina
In 2004, ING placed the life insurance business in Argentina into a service-only mode. The sale of the company was completed at the end of March 2005.
Chile
ING Americas has been gaining scale in order to become a leading financial services group in Chile. It rankst first in the life and health insurance markets. In 2004, total revenues (premium income and asset management fees) in Chile were EUR 555 million and assets under management were EUR 7.2 billion at year-end 2004.
Brazil
ING has a 49% joint venture partnership in Sul America, positioning ING at the forefront in the largest South American insurance market. Sul Americas health insurance business ranks first based on premiums written. It also offers products such as life and personal accident, pension, auto, other property and casualty, and fund management activities. Co-branded wealth management products were launched in 2004.
Peru
ING has a 60% stake in AFP Integra, the leading private pension fund in Peru with approximately EUR 1.9 billion in assets under management at year-end 2004. ING also has a minority stake in InVita Life, which offers life, survivor and disability insurance, as well as annuities.
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INSURANCE ASIA/PACIFIC
Year ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
(EUR millions) | ||||||||||||
Total operating income |
10,487 | 8,424 | 8,778 | |||||||||
Operating result before tax |
751 | 411 | 574 |
Insurance Asia/Pacific (IAP) is comprised of business units operating in certain Asian countries, Australia and New Zealand. The key markets are Australia/New Zealand, Hong Kong/Macau, Japan, Malaysia, South Korea and Taiwan. In addition IAP has launched smaller start-up businesses in China, India and Thailand. IAPs business units offer primarily various types of life insurance and asset/wealth management products and services, as well as retail and institutional asset management. In addition, we offer asset management in the Philippines and Singapore.
In general, the positive trends experienced in 2003 in the businesses of IAP continued through 2004. Australia, Japan, South Korea and Taiwan are the major contributors to the IAPs operating result before tax. With the exception of Japan and Australia, IAPs distribution of life insurance products in the region has been dominated by tied or career agents. However, this is changing with the growth of independent agents, financial planners, and bancassurance, together with e-business, which is making inroads of both direct customer access and supporting intermediary channels.
Market positioning strengthened in several countries through joint ventures as well as strong organic growth. In Australia and New Zealand, the life insurance and funds management joint venture with Australia New Zealand Banking Group Limited (ANZ). In China, a life insurance joint venture with Beijing Capital Group received approval to open a new branch in Beijing in 2004. Also in China, the Shanghai joint venture with China Pacific Insurance Company began operations in the Guangzhou province. In South Korea, ING invested in a new bancassurance joint venture, KB Life, with Kookmin Bank. ING Malaysia began operations at its new fund management company. As part of its active global portfolio management of businesses, ING sold its 50 per cent share in the Australian non-life insurance joint venture to its former partner, QBE, in June 2004.
A regional office in Hong Kong supervises and supports all business units in the region, ensures implementation of strategy and standards, encourages synergies, both regionally and globally, and produces regional management reports to headquarters in Amsterdam.
Australia and New Zealand
ING Australia (the life and wealth management joint venture with ANZ) ranks third in the life insurance business with gross premiums written of approximately EUR 1.2 billion in 2004 and fourth in the wealth management business with assets under management of EUR 20 billion in 2004. ING Australia offers a wide range of life insurance and wealth management products through a network of financial planners and independent brokers. ING Australia is focusing on leveraging its reach and scale. Additionally, it has lowered its operational cost ratios, developed new product platforms, and grown the ANZ Bank distribution capacity and production through equity-owned distribution in multiple channels. In New Zealand, INGs life businesses, ING Life and Club Life, are focusing on building market share and successfully finding ways to present an integrated set of products to their customers.
South Korea
In 2004, ING Life Korea was among the fastest growing international companies in South Korea. Currently it ranks fourth in the market, based on total premium income. ING Life Koreas gross premiums written in 2004 amounted to approximately EUR 1.6 billion. Life insurance premiums continued to grow rapidly through INGs productive agency force and bancassurance activities with Kookmin Bank. To further strengthen this position, ING Lifes priorities in 2005 include expanding distribution capacity to mass-affluent customers and broadening the product range. The extended strategic investment agreement with Kookmin Bank provides expanded distribution for life insurance
28
and asset management products. INGs 20% owned investment trust joint venture with Kookmin Bank ended the year 2004 with assets under management of over EUR 11.5 billion. It is the third largest asset manager in South Korea, based on assets under management. INGs bancassurance joint venture with Kookmin Bank, KB Life, began operations in June 2004 and has performed well in relation to its peer companies. INGs 49% shareholding started in January 2005.
Japan
In Japan, IAP plans to maintain its leadership positions in the Corporate Owned Life Insurance (COLI) segment and the Single Premium Variable Annuity (SPVA) segment. ING Life Japans gross written premium in 2004 was approximately EUR 3.5 billion. ING Life Japan ranks third in total annual sales in the SPVA segment based on assets under management. IAP will continue to be a producer for independent agents, banks and securities houses. Important new distribution alliances with three large banks have been successfully launched, and the product range will be broadened. The pension joint venture with Principal Financial Group (United States), which focuses on small and medium-sized companies, markets a comprehensive range of products related to defined contribution pensions. The pensions joint venture ranks sixth (based on the number of plans) among corporate defined-contribution pension plan providers in Japan. IAP will support the pensions and SPVA business by continuing to build its asset management proprietary funds capability.
Taiwan
Taiwan remains one of the most important markets for ING in the Asia Pacific region. IAPs businesses in Taiwan include our life insurance company, ING Antai, which ranks fifth in the market based on total premium income, and a mutual fund joint venture with Chang Hwa Commercial Bank. Our products are distributed primarily through career life agents, although bancassurance is growing in prominence. Due to the continued low interest rate environment, the life business introduced a number of new life and health products in order to reduce capital risk and to improve returns and profitability. Improving investment performance within the investment mandates is also critical given the low interest environment.
Hong Kong and Macau
In Hong Kong and Macau, IAP offers a range of life insurance, non-life insurance and asset management products. The presence of IAPs regional office in Hong Kong adds to INGs capabilities in this market. IAPs Hong Kong strategy is to focus on growing its market position, while continuing to develop alternative channels such as bancassurance and financial planning to accelerate growth for the life business. In particular, ING has deepened its relationships with regional banks by offering sales support and training to enhance operating efficiency and quality of sales. The non-life business aims to maximize synergies by cross-promoting its products with other ING businesses operating in Hong Kong. The pension business continues to seek and implement various cost reduction initiatives. The mutual fund business received encouraging response to its retail sales of ING structured products through local banks during the year.
Malaysia
In Malaysia, ING ranks fourth in terms of new life insurance business with a 10% market share. ING ranks first as a provider of employee benefits. In 2005, we expect to further broaden our product range, improve operational efficiency and expense performance to drive profitability. ING Malaysia has rebranded itself successfully from Aetna to ING leading to increased awareness of the ING brand. A separate bancassurance unit was established in 2004 to focus on and pursue the growing opportunities in this area. A new fund management operation was also started in April 2004 to provide one-stop wealth management services and products.
Thailand
In Thailand, ING offers a range of life insurance and asset management products. Both businesses will continue to focus on meeting accelerated greenfield sales and earnings plans through organic growth and strategic partnerships. The life business is expanding its bancassurance operations and pursuing
29
additional banking partnerships while growing its agency force and improving agent productivity. The funds company has created a number of award winning funds which are helping it grow successfully by obtaining several important mandates.
China
In China, ING has three joint ventures. In Shanghai, Pacific Antai Life Insurance Company (PALIC), INGs life insurance joint venture with China Pacific Insurance Company, currently ranks seventh in new business premiums and fifth in terms of total premium income. It continues to focus on improving agency productivity and developing alternative distribution channels, in particular bancassurance. PALIC obtained regulatory approval to sell group insurance policies in December 2004. In Dalian, ING Capital Life Insurance Company (ICLIC), INGs life insurance joint venture with Beijing Capital Group, started operations in December 2002 and now ranks third by new business premium . In Shenzhen, China Merchant Funds, INGs fund management joint venture with China Merchants Securities, launched Chinas first open-ended fund and first money market fund during 2003. During 2004, China Merchants Funds grew its assets under management to over EUR 1 billion, and it is currently ranked thirteenth by assets under management among fund managers in China.
India
In India, IAP offers life insurance through ING Vysya Life Insurance Company Private Limited and asset management through ING Investment Management (India) Private Limited. In 2004, ING Vysya Life Insurance continued to focus on building and developing a large, professional tied agency force while increasing its distribution reach by opening new sales offices and adding bancassurance and corporate agencies. It also expanded its product portfolio to include unit-linked sales and group policies. ING Vysya Life is ranked ninth based on new business premium income in India among 12 private life insurance companies. ING Investment Management (India) Private Limited offers a range of mutual funds.
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WHOLESALE BANKING
Year ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
(EUR millions) | ||||||||||||
Total operating income |
5,761 | 5,825 | 5,765 | |||||||||
Operating result before tax |
1,932 | 1,272 | 596 |
A client focused organization
In 2004, Wholesale Banking concentrated its efforts on reshaping and repositioning its business. ING decided to refocus service with the full range of products to corporate institutions in the European home market, in particular the Benelux countries. Outside the home markets, our approach became more selective, in terms of both products and clients. This repositioning was a natural consequence of ING Groups renewed strategic focus and the important shifts in global trends in the wholesale banking industry.
In line with the principles underlying the new structure of ING Group, Wholesale Banking moved away from its regionally organized structure, towards a functionally driven and more client-focused organization, with a particular emphasis on execution and accountability. The groundwork for this reorganization was put in place in 2004 and was fully implemented by January 2005. The new organization allows for a much more unified approach to clients. Senior account managers work directly with clients and are supported by sector heads and senior bankers, who provide the essential link between the key client and product divisions within Wholesale Banking. These divisions also aim to further enhance their cooperation with Wholesale Bankings Financial Markets division, whose business was also comprehensively restructured in 2004. The common aim of these different pillars of Wholesale Bankings new organization is to find further cross-selling opportunities across all the business lines, which add value for the client and ING. As of 2005, mid-corporates in the Netherlands and Belgium also form part of the new Wholesale Banking organization. This strengthens the home market position of the corporate-client business and supports the wider initiatives to increase cross-selling opportunities of the full product range in these markets.
Divestments and acquisitions
Wholesale Bankings repositioning and INGs overall focus on optimal capital allocation means that portfolio management was an important focus in the Wholesale Banking business line. During 2004 ING sold: in Germany ING BHF-Bank (excluding its DHB subsidiary); in Asia the cash equities business, and in the Netherlands CenE Bankiers. We also reached an agreement to sell United Kingdom-based Baring Asset Management, the sale was completed in the first quarter of 2005. In the United Kingdom, ING purchased the asset finance, country finance and vendor finance businesses of Abbey National.
The divestments were part of Wholesale Bankings continued efforts to streamline its international network. ING BHF-Bank no longer fitted into INGs strategy. Therefore, we sold most of BHF-Banks activities to Sal. Oppenheim, including ING BHFs asset management, private banking, financial markets and core corporate banking businesses, for EUR 600 million. An agreement, in principle, was also reached on the sale of the London Branch of ING-BHF-Bank to Deutsche Postbank and to sell part of ING BHF-Banks corporate lending portfolio to HVB Group. ING retains ING BHFs 83.7% stake in Deutsche Hypothekenbank (DHB), a restructured loan portfolio of about EUR 1.3 billion, and ING BHF-Banks private equity activities.
The sale of INGs Asian cash equities business to Macquarie Bank was part of Wholesale Bankings decision to concentrate on providing value-added products and services to a selected group of clients in Asia. It also allows Wholesale Banking to position itself for future sustainable growth.
CenE Bankiers, a subsidiary that specialized in commercial and private banking, was sold to Van Lanschot. As a result of its specialization and intensive segment approach, CenE Bankiers had
31
developed into a niche player with an independent status within ING. For these reasons, ING decided to sell rather than integrate CenE Bankiers with similar activities in Wholesale Banking or INGs other private banking activities.
The streamlining of Wholesale Bankings international network also meant further restructuring in other markets. Activities in Vietnam, Turkey, Thailand and Indonesia were reorganized to focus on certain client and product groups. Worldwide, Wholesale Banking will maintain its geographic coverage with branches or representative offices in more than 40 countries.
An important aspect of the new structure is the outward focus on clients needs, which is also reflected in Wholesale Bankings revised mission statement: to excel in delivering value-added financial solutions to our clients. ING seeks to accomplish this through our knowledge of our clients businesses and competitive products. Wholesale Bankings products include payments and cash management, lending and debt products, structured finance, securitization, syndication, securities services, leasing and diverse financial markets products (such as foreign exchange, integrated products and disintermediation, cash and derivatives products). Wholesale Banking also continues to improve its cross-selling of INGs asset management and insurance products (especially employee benefits) and the services of ING Real Estate.
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RETAIL BANKING
Year ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
(EUR millions) | ||||||||||||
Total operating income |
5,035 | 4,773 | 4,814 | |||||||||
Operating result before tax |
1,170 | 1,058 | 1,023 |
Retail Banking
The retail banking business focuses on retail banking services to individuals, and to small- and medium-sized businesses and on private banking. These businesses are supported by a multi-product, multi-channel distribution approach. We serve two types of retail markets, each reflecting our different market positions and therefore each requires a slightly different approach with regard to the retail strategy. In the mature markets of the Netherlands and Belgium, our strategy is to assist our clients in areas such as wealth accumulation, savings and mortgages. We seek to distribute these different products through an efficient mix of channels appropriate to the client segments and products. In a number of selected developing markets (Poland, Romania) with the right demographics, economic growth potential and stabile institutional environment, our strategy is to become a prominent player in the local retail banking markets, providing our clients with simple but with quality products. In the mature markets, achieving operational excellence and cost leadership, combined with the right level of customer satisfaction, will be important for continuing profit growth. ING considers developing economies as opportunities for structural growth due to their strong demographics, rapid income growth, emerging middle classes, and relatively low penetration of the financial services sector.
The Netherlands
Postbank is INGs on-line (direct) bank in the Netherlands. Postbank reaches its approximately 7 million individual customers through home banking, telephone, call centers, Internet banking, mailings and post offices. Using direct marketing methods, Postbank leverages its position as a leading provider of current account services and payments systems to provide other financial services such as savings accounts, mortgage loans, consumer loans, credit card services, investment and insurance products.
In 2004, Postbank successfully continued its marketing campaign for mortgages and savings. Postbanks tied agent mortgage sales force, which was created two years ago, is having a positive effect by increasing substantially our share of new sales in 2004. Postbank has invested, and continues to invest, in becoming a top Internet bank in the Netherlands. Since the launch of its new website in 2004, the number of clients and sales through the Internet increased considerably to well over one million customers.
ING Bank Netherlands operates through a branch network of 250 branches. It offers to its one million individual and business customers, a full range of commercial banking activities and life and non-life insurance products. In response to customer demands, ING Bank restored a number of cash withdrawal points and basic banking functions in 2004.
Belgium
ING Belgium provides banking, insurance (life, non-life, employee benefits) and asset management products and services to meet the needs of individuals, families, companies and institutions through a network of local head offices and 825 traditional branches. Its approximately 1.8 million customers can also access ING Belgiums direct banking channels which consist of 800 fully automated branches (Self Bank), home banking services, and INGs contact call center.
The rebranding process from BBL to ING Belgium, which started in 2003, was completed in 2004. External studies show that positive results with a spontaneous name recognition of 54% and total brand awareness of 97%. These figures are consistent with survey results for the former BBL brand. We consider this a success after only a year and a half of rebranding. We also reported strong growth in savings and investment products. Our subsidiary, Record Bank, strengthened its position by acquiring Mercator Bank. Through successive mergers, Record Bank is now the fourth largest savings
33
bank in Belgium, based on non-bank client deposits, operating through independent agents
Central Europe
ING Bank Slaski provides a full range of banking services to its 1.8 million business and individual customers through a network of 330 branches, supported by ATMs and telephone, Internet and electronic banking. In 2004, ING Bank Slaski introduced a new performance-oriented organization structure. We also introduced a program to rationalize the product portfolio and launched new products and marketing campaigns in order to re-establish our market presence and market position. In Romania, we launched a new franchising concept based on the SelfBank concept in Belgium and the ING brand. We believe this will help our growth in this market of 22 million people.
India
India represents a promising opportunity for ING to create value in retail banking. It is an attractive market in a rapidly growing and stable economy. ING Vysya Bank has continued to develop into a professional universal bank. The bank has 370 branches and a staff of more than 5,000 full-time employees supported by a sales force of tied agents, who provide services to its one million customers.
Private Banking
Private Banking provides wealth management services for high net worth individuals throughout the world. After the 2002/2003 restructuring, we believe Private Banking is now positioned for growth. To this end, we will raise the visibility of the Private Banking activities in our home markets and seek to penetrate INGs existing client base in these markets. In new international markets, we will seek to attract new assets to the group. Across all operations, we believe that improved segmentation and better aligned products and services will further contribute to revenue growth. As of June 2004, ING Trust, which serves corporate and private clients, reports to Private Banking.
ING DIRECT
Year ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
(EUR millions) | ||||||||||||
Total operating income |
1,705 | 1,045 | 618 | |||||||||
Operating result before tax |
432 | 151 | (48 | ) |
The ING Direct line of business consists of two functional areas: a direct bank (ING Direct) and a stand-alone credit card operation (ING Card).The direct bank ING Direct is an important part of INGs retail strategy. The strategy of ING Direct is to be a low-cost provider of financial services in large mature markets by offering clients best value for money and excellent service via call-centers, direct mail and the Internet. The main products offered are saving accounts and mortgages. ING Direct also sells a focused range of financial products such as mutual funds, e-brokerage services, pension management and life insurance.
ING Direct is active in nine countries. Each country forms a separate business unit, except for Austria, which is operated by the German business unit. All business units were profitable in 2004 except the United Kingdom, which started operations in May 2003 and is still incurring start-up losses. Ever since ING Direct started business in 1997, growth in clients, funds entrusted and mortgages have been substantial. In 2004, there was an autonomous increase of the client base by approximately 3 million clients, funds entrusted by EUR 46 billion and mortgages by EUR 12 billion. Brand awareness as well as customer satisfaction also continued to improve.
Compared to 2003, France and Italy turned to profit. The USA, Germany and Spain posted strong profit increases. Canada and Australia also produced double-digit growth in profit. Commercial developments in the UK have been much better than planned, with higher-than-expected funds entrusted and client numbers, which has resulted in lower than expected start-up losses.
In total, ING Directs customer base by year-end 2004 amounted to over 11 million customers. In 2004, ING Direct recorded strong growth in number of clients, funds entrusted and mortgage balances. ING
34
Directs leading offering is its savings product, followed by residential mortgage products, which are planned to be developed further in the future. The percentage of mortgages versus savings is increasing. The locked-in margins of the mortgages add stability to the overall business model.
On average, 78% of ING Direct customers respond that they receive better service from ING Direct than from other financial institutions (based on the global customer satisfaction survey September 2004 by Millward Brown). This is an important qualitative indication for ING Direct, as are client and deposit stability and brand awareness. The current attrition rate of ING Direct worldwide is, on average, below approximately 5% per year. The clients deposits (which average approximately EUR 13,500 per customer) are very stable over time and in different interest rate environments, which adds to the sustainability of the ING Direct business model. The ING brand was virtually unknown in all markets where ING Direct started. In 2004, brand awareness exceeded 80% in the majority of business units. ING Direct Germany, which was known as DiBa, was successfully rebranded to ING DiBa in 2004.
The year 2004 also marked the successful integration of German direct bank Entrium, which was acquired in 2003. Entrium was the second largest direct bank in Germany with almost one million customers and approximately EUR 8 billion in client funds entrusted. In 2004, the ING Direct business model was introduced in Austria by the German business unit under the brand ING DiBa.
With the acquisition of the 45,000 clients of Egg France at the end of 2004, ING Direct France witnessed a substantial growth of its customer base. This acquisition resulted from the decision by British direct bank Egg to exit the French market. Overall, ING Direct has reached strong market positions in all of the countries in which it operates a relatively short period of time, and six out of eight business units have achieved a top 10 position among all banks in their market in terms of funds entrusted. Moreover, ING DiBa is the number 4 bank in Germany in number of retail clients.
Number of Clients | Funds Entrusted | |||||||||||||||
(in thousands) | (in EUR billion) | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Canada |
1,121 | 905 | 9.0 | 7.0 | ||||||||||||
Spain |
975 | 753 | 10.2 | 7.9 | ||||||||||||
Australia |
996 | 719 | 8.5 | 6.9 | ||||||||||||
France |
413 | 339 | 9.2 | 7.6 | ||||||||||||
United States |
2,226 | 1,399 | 21.2 | 12.8 | ||||||||||||
Italy |
485 | 379 | 10.6 | 7.6 | ||||||||||||
United Kingdom |
762 | 305 | 27.9 | 11.5 | ||||||||||||
Germany* |
4,511 | 3,735 | 48.8 | 38.1 | ||||||||||||
Total |
11,489 | 8,534 | 145.4 | 99.4 | ||||||||||||
* | Including Austria |
ING Card
ING Card launched in 2003 and is accounted for within the ING Direct business line. The stand-alone credit card operation aims at leveraging the extensive retail customer databases within ING Group. As from January 2004, ING Card took over the credit card portfolios of Postbank Netherlands and ING Bank Netherlands and Belgium. At year-end 2004, the portfolio size amounted to 1.6 million cards and over EUR 500 million of total exposure. In the Netherlands, ING Card has a market share of approximately 25% based on the number of cards and around 45% in terms of total exposure, ranking it second in the Netherlands. In addition to the integration of the existing card portfolios, ING Card successfully introduced a new, modern type of credit card: with flexible repayment(client decides when and how much is repayed), value for money (low interest rate, no fees), transparent (24/7 access to all transaction data through the Internet), ease of use (change cards online or through the call centre) and safe (all purchases insured). ING Card has a pan-European ambition and will continue to implement throughout Europe its strategy of focusing on marketing, business intelligence (including database marketing and analysis) and risk management.
35
ASSET MANAGEMENT
The asset management activities in banking are comprised of ING Real Estate and Baring Asset Management.
In 2004, ING Real Estate and Baring Asset Management had an average of 1,436 and 1,333 full-time employees, respectively.
In November 2004, ING entered into an agreement to sell BAM to Mass Mutual and Northern Trust. The transactions were completed on March 31, 2005.
ING Real Estate
ING Groups real estate activities are conducted through ING Real Estate. Based on a portfolio of more than EUR 50 billion at the end of 2004, ING Real Estate is ranked as the largest property company in the world with offices in Europe, the United States, Asia and Australia. ING Real Estate constitutes a unique combination of investment management, development and finance activities. Its primary aim is to make maximum use of the global expertise in the creation of valuable products. Despite some stagnating real-estate markets in the world, revenues of all its business units strongly increased, and the 2004 results exceeded expectations.
Investment management activities are pre-dominantly carried out for institutional investors who want to diversify their property investments. As an investment manager, ING Real Estate launched ten new funds in 2004. ING Clarion Global Real Estate Income Fund (U.S.), a listed fund with EUR 2.2 billion in assets under management by year-end, was the largest-ever initial public offering of a real estate fund in history. The acquisition of Rodamco Asia added EUR 800 million to property assets under management. We believe that this acquisition will act as a stepping stone for further growth in Asia, a region with strong potential for real estate activities. In 2004, the investment management portfolio increased by 17% to EUR 30.9 billion.
ING Real Estate Development covers the development of shopping centres, offices and residential units in response to market demand. In 2004, development activities returned to a more normalized level. Prominent real estate projects were launched in Belgium, the Czech Republic, Italy and the United States. Construction started on major projects in Australia and a number of European countries. As of year-end 2004, the global real estate development portfolio amounted to EUR 2.1 billion.
Our finance business offers a wide range of products, from mortgages, project finance, construction finance and leasing arrangements to syndicated loans. The finance activities made a considerable contribution to ING Real Estates result, with significant portfolio growth. A noteworthy finance deal was the refinancing of the Vendex KBB real estate portfolio in close co-operation with ING Bank. It maintained its leading position in the Dutch financing market. In 2004, the real estate finance portfolio increased by 24% to EUR 17.1 billion. Roughly two-thirds of the increase stemmed from net new business awarded in an extremely competitive environment, while the rest was the result of internal transfers.
Baring Asset Management
Baring Asset Management (BAM) provides a diversified spectrum of investment management services to a variety of institutional and private clients.
In November 2004, ING entered into an agreement to sell BAM to Mass Mutual and Northern Trust. The transactions were completed on March 31, 2005.
36
THE FOLLOWING TABLE SETS FORTH OUR PRINCIPAL GROUP COMPANIES:
Unless otherwise stated our participating interest is 100%, or almost 100%
COMPANIES TREATED AS PART OF THE INSURANCE OPERATIONS
The Netherlands |
||
ING Verzekeringen N.V.
|
The Hague | |
ING Verzekeringen Nederland N.V.
|
The Hague | |
ING Vastgoed Belegging B.V.
|
The Hague | |
Nationale-Nederlanden Levensverzekering Maatschappij N.V.
|
Rotterdam | |
Nationale-Nederlanden Schadeverzekering Maatschappij N.V.
|
The Hague | |
Parcom Ventures B.V.
|
Utrecht | |
Postbank Levensverzekering N.V.
|
The Hague | |
Postbank Schadeverzekering N.V.
|
The Hague | |
RVS Levensverzekering N.V.
|
Rotterdam | |
RVS Schadeverzekering N.V.
|
Ede | |
Movir N.V.
|
Nieuwegein | |
Belgium |
||
ING Insurance N.V.
|
Antwerp | |
Rest of Europe |
||
ING Life Insurance Company a.s.
|
Bratislava, Slovakia | |
Nationale-Nederlanden Life Insurance Company Poland
|
Warsaw, Poland | |
NN Pension Fund Poland S.A.
|
Warsaw, Poland | |
ING Nederlanden Asigurari de Viata S.A.
|
Bucharest, Romania | |
ING Greek Life Insurance Company S.A.
|
Athens, Greece | |
ING Greek General Insurance Company S.A.
|
Athens, Greece | |
ING Nationale-Nederlanden Hungary Insurance Rt.
|
Budapest, Hungary | |
Nationale Nederlanden Vida, Compañia de Seguros y
Reasuguros S.A.
|
Madrid, Spain | |
Nationale Nederlanden Generales Compañia de Seguros y
Reasuguros S.A.
|
Madrid, Spain | |
North America |
||
ING Canada, Inc. (70%)
|
Toronto, Ontario, Canada | |
Belair Insurance Company Inc.
|
Montreal, Quebec, Canada | |
ING Insurance Company of Canada
|
Toronto, Ontario, Canada | |
ING Novex Insurance Company of Canada
|
Toronto, Ontario, Canada | |
ING America Insurance Holdings, Inc.
|
Wilmington, Delaware, U.S.A. | |
ING International Insurance Holdings, Inc.
|
Hartford, Connecticut, U.S.A. | |
ING Life Insurance and Annuity Company
|
Hartford, Connecticut, U.S.A. | |
ING North America Insurance Corporation
|
Atlanta, Georgia, U.S.A. | |
Life Insurance Company of Georgia
|
Atlanta, Georgia, U.S.A.* | |
Lion Connecticut Holdings Inc.
|
Hartford, Connecticut, U.S.A. | |
ReliaStar Life Insurance Company
|
Minneapolis, Minnesota, U.S.A | |
ReliaStar Life Insurance Company of New York
|
Woodbury, New York, U.S.A | |
Security Life of Denver Insurance Company
|
Denver, Colorado, U.S.A. | |
ING USA Annuity and Life Insurance Company
|
Des Moines, Iowa, USA | |
Latin America |
||
ING Seguros de Vida S.A.
|
Santiago, Chile | |
ING Afore S.A. de C.V.
|
Mexico City, Mexico | |
Seguros Comercial America S.A. de C.V.
|
Mexico City, Mexico | |
Asia |
||
ING Life Insurance Company (Japan) Limited
|
Tokyo, Japan | |
ING Life Insurance Company (Korea) Limited (80%)
|
Seoul, South Korea | |
ING Life Insurance Company of America
|
Hartford, Connecticut** |
37
Australia |
||
ING Australia Holdings Limited
|
Sydney, Australia | |
ING Australia Pty Limited (51%)
|
Sydney, Australia | |
Reinsurance companies |
||
ING Re (Netherlands) N.V.
|
The Hague, the Netherlands |
Branches
In addition, ING Insurance and its subsidiaries have offices in Brazil, the Czech Republic and Luxembourg.
* | sale expected to be completed in the second quarter of 2005 |
|
** | operating primarily as ING Antei in Taipei, Taiwan |
COMPANIES TREATED AS PART OF THE BANKING OPERATIONS
The Netherlands |
||
ING Bank N.V.
|
Amsterdam | |
Bank Mendes Gans N.V. (97.79%)
|
Amsterdam | |
ING Lease Top Holding B.V.
|
Amsterdam | |
ING Bank Corporate Investments B.V.
|
Amsterdam | |
ING Trust (Nederland) B.V.
|
Amsterdam | |
ING Vastgoed Management Holding B.V.
|
The Hague | |
InterAdvies N.V.
|
Amsterdam | |
Nationale-Nederlanden Financiële Diensten B.V.
|
Amsterdam | |
NMB-Heller Holding N.V. (50%)*
|
Amsterdam | |
Postbank N.V.
|
Amsterdam | |
Postbank Groen N.V.
|
Amsterdam | |
Stichting Regio Bank
|
Amsterdam | |
Belgium |
||
ING België N.V.
|
Brussels | |
Rest of Europe |
||
ING Bank Slaski S.A. Katowicach (87.8%)
|
Katowice, Poland | |
Baring Asset Management Holdings Ltd.
|
London, United Kingdom** | |
ING Bank Deutschland A.G.
|
Frankfurt, Germany | |
North America |
||
ING Financial Holdings Corporation
|
New York, NY, U.S.A. | |
Latin America |
||
ING Trust (Antilles) N.V.
|
Curaçao, Netherlands Antilles | |
Middenbank Curaçao N.V.
|
Curaçao, Netherlands Antilles | |
Asia |
||
ING Vysya Bank Ltd. (44%)
|
Bangalore, India | |
Other |
||
ING Direct N.V.
|
Canada, Germany, Spain, | |
Australia, France, USA, Italy, UK |
Branches
ING Bank N.V. has offices in most of the major financial centres, including London, Frankfurt, Hong Kong and Tokyo. In addition, ING Bank and/or ING Belgie N.V. have offices in Asunción, Bangkok, Bratislava, Bucharest, Buenos Aires, Curaçao, Dublin, Havana, Istanbul, Lima, Madrid, Manila, Milan, Paris, Prague, São Paulo, Seoul, Shanghai, Singapore, Sofia, Taipei and Vienna among others.
* | proportionally consolidated | |
** | sold on March 31, 2005 |
38
REGULATION AND SUPERVISION
The insurance, banking and asset management business of ING are subject to detailed comprehensive supervision in all the jurisdictions in which ING conducts business. This supervision is based in a large part on European Union (EU) directives, discussed more fully below. These directives have a significant impact on the supervision of the insurance, banking, asset management and broker dealer businesses in the EU.
In the EU, groups of companies are permitted to be engaged in both insurance and banking. However, direct mergers between banking and insurance companies are not permitted.
On December 16, 2002, the European Union adopted a directive on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate. This directive aims to address the supervisory issues that arise from the blurring of distinctions between the activities of firms in each of the banking, securities, investment services and insurance sectors. The main objectives of this directive are to:
| ensure that a financial conglomerate has adequate capital; |
| introduce methods for calculating a conglomerates overall solvency position; |
| deal with the issues of intra-group transactions, exposure to risk and the suitability and professionalism of management at financial conglomerate level; and |
| prevent situations in which the same capital is used simultaneously as a buffer against risk in two or more entities which are members of the same financial conglomerate (double gearing) and where a parent issues debt and downstreams the proceeds as equity to its regulated subsidiaries (excessive leveraging). |
ING does not expect this directive to have a material impact on its business, on its capital requirements nor on its solvency position, as it already complies with comparable national legislation for financial conglomerates.
ING and its subsidiaries are in compliance in all material respects with the applicable banking and insurance supervision, capitalization and capital base requirements of each applicable jurisdiction. On October 30, 2004, the merger of the Dutch Central Bank, de Nederlandsche Bank, (DNB) and the Pensions & Insurance Supervisory Authority of the Netherlands, Pensioen- & Verzekeringskamer, (PVK) was officially completed. On the operational level, the two prudential supervisors of the Dutch financial sector have already been working as an integrated body since May 3, 2004. The new merged organization shall continue under the name of DNB.
The merger between the two supervisors marks the second of three steps in an extensive restructuring of financial supervision in the Netherlands. The first step in early 2002, involved a shift in the basis or supervision. The supervisory body no longer based its supervision on the types of institutions, such as banks or insurers, but rather on the nature of supervision. As of 2002, the Dutch regulatory system for financial supervision consists of prudential supervision monitoring the soundness of financial institutions and the financial sector, and conduct-of-business supervision regulating institutions conduct in the markets. Prudential supervision is exercised by the DNB, while conduct-of-business supervision is performed by the Netherlands Authority for the Financial Markets, Autoriteit Financiële Markten (AFM). The second step is the recently completed merger of the two prudential supervisors, DNB and PVK.
The third step in the restructuring of supervision will be the introduction of the new Financial Supervision Act in the beginning of 2006. This law will replace the numerous existing laws and regulations in the area of supervision, and will represent a significant adjustment in the legislation in the Netherlands to reflect market conditions.
39
INSURANCE
Europe
Insurance companies in the EU are subject to supervision by insurance supervisory authorities. The relevant national regulations are based on the 1992 EU Insurance Directives. These directives are based on the home country control principle, according to which the ongoing regulation of insurance companies, including their foreign insurance operations, is the responsibility of the home country insurance supervisory authority. The home country insurance supervisory authority monitors compliance with applicable regulations, the capital base of the insurer and its actuarial reserves, as well as the assets of the insurer, which support such reserves. As a result of the implementation of these directives, an insurance company which has been licensed to conduct insurance business in one jurisdiction of the EU, may also conduct business directly, or through foreign branches, in all the other jurisdictions of the EU, without being subject to licensing requirements under the laws of the other EU member-states.
In the Netherlands, the home country insurance supervisory authority is the DNB, which regulates the insurers and pension funds that operate in the Netherlands.
In Belgium, INGs insurance operations are supervised by the Banking, Finance and Insurance Commission (CBFA), created as a result of the integration of the Insurance Supervisory Authority (ISA) and the Banking and Finance Commission. Since January 1, 2004, it is the single supervisory authority for the Belgian financial sector. In other European Union countries INGs insurance operations are subject to supervision by similar supervisory authorities.
ING Insurances life and non-life subsidiaries in the EU are required to file detailed annual reports with their home country insurance supervisory authority. These reports are audited by ING Insurances independent auditors and include balance sheets, profit and loss statements, actuarial statements and other financial information. The authorization granted by the insurance supervisory authority stipulates the class or classes of business that an insurer may write, and is required for every proposed new class of business. In addition, the home country insurance supervisory authority may require an insurer to submit any other information it requests and may conduct an audit at any time.
On the basis of the EU directives, European life insurance companies are required to maintain at least a shareholders equity level of generally 4% of insurance reserves (1% of separate account reserves), plus 0.3% of the amount at risk under insurance policies. The required shareholders equity level for Dutch non-life insurers is the greater of two calculations: one based on premiums and the other on claims. The former is based on 16% of gross premiums written for the year, the latter is based on 23% of a three-year average of gross claims.
In 1998, the directive of the European Parliament and Council on the supplementary supervision of the insurance undertakings in an insurance group was adopted. The directive enables the insurance supervisory authorities involved to form a more sound judgement on the financial situation of insurance undertakings that are part of a group, in order to provide additional safety to policyholders. Furthermore, the directive aims to prevent distortion of competition and contribute to the safety of the financial markets. 2002 has been the first financial year in which was reported according to this directive.
The supervision of our significant insurance businesses outside the EU is described below.
Americas
United States
ING Groups United States insurance subsidiaries are subject to supervision in the individual states in which they operate. Supervisory agencies in various states have broad powers to grant or revoke licenses to conduct business, regulate trade practices, license agents, approve policy forms and certain premium rates, set standards of capital base and reserve requirements, determine the form and content of required financial reports, examine insurance companies and prescribe the type and amount of investments permitted. Insurance companies are subject to a mandatory annual audit of
40
their statutory basis financial statements by an independent certified public accounting, and in addition are subject to an insurance department examination approximately every three to five years.
Insurers, including the companies comprising of ING Insurances U.S. operations are subject to the Risk Based Capital (RBC) guidelines. These guidelines provide a method to measure the adjusted capital (statutory capital and surplus plus other adjustments) that insurance companies should maintain for supervisory purposes, taking into account the risk characteristics of the companys investments and products. The RBC ratio of an insurance company varies over time depending upon many factors, including its earnings, the mix of assets in its investment portfolio, the nature of the products it sells and its rate of sales growth, as well as changes in the RBC formulas required by supervisors. The RBC guidelines are intended to be a supervisory tool only, and are not intended as a means to rank insurers generally. Each of the companies comprising ING Insurances U.S. operations was above its target and statutory minimum RBC ratios, at year-end 2004.
Insurance holding company statutes and regulations of each insurers state of domicile require periodic disclosure concerning the ultimate controlling person (i.e., the corporation or individual that controls the domiciled insurer in each state). Such statutes also impose various limitations on investments in affiliates and may require prior approval of the payment of certain dividends by the registered insurer to ING or several of its affiliates. ING is subject, by virtue of its ownership of insurance companies, to certain of these statutes and regulations.
Canada
Our insurance businesses in Canada are federal companies incorporated pursuant to the Canada Business Corporations Act. The various provincial statutes are almost identical. The law of Quebec, which is based on a Civil Code (modelled on the Napoleonic Code of France), varies in form from that of the other provinces. There are few significant differences between provinces in the administration of the insurance statutes. Ontario has case law that makes insurers absolutely liable for the actions of their agents, even if that agent is acting outside the scope of his or her appointment. The only defence which is available to the insurer is that of fraud. Due diligence may be pleaded; however, unless the insurer can prove that its standards of education, monitoring and auditing of agents are of the highest level, the insurer will be held responsible for the agents action. Quebec also has a statute that similarly makes the insurer responsible for the acts of its agents. As for mutual funds and other investment products, the various provincial statutes are almost identical and the rules are almost identical to the U.S. rules in this regard.
Asia/Pacific
Japan
In Japan, the Financial Services Agency (FSA) was established on July 1, 2000, by the integration of the Financial Supervisory Agency and the Financial System Planning Bureau of the Ministry of Finance. The FSA supervises insurance companies, banks and securities houses.
New products, revision of existing products and changes in policy provisions require approval by the FSA. The Cabinet Office and FSA ordinances stipulate the types of assets in which an insurance company can invest. In addition, ordinances limit the proportion of assets in which an insurance company may invest in certain categories of investments. The Insurance Business Law further requires that an insurance company set aside a liability reserve for each policyholder in every business period to provide for the fulfillment of the level of expected mortality and other assumptions that are applied in calculating liability reserves for long-term contracts. An insurance company shall appoint a corporate actuary at a meeting of the board of directors and have such a corporate actuary be involved in the method of calculating premiums and other actuarial matters. An external audit is required for all insurers. The auditors must report on whether the balance sheet and income statements represent fairly the status of the insurers assets and liabilities in conformity with relevant laws, Cabinet Office or FSA ordinances and the insurers articles of incorporation. In addition to the external audit, the statutory corporate auditors must be elected to examine whether there have been any serious violations by the insurers directives of the law, relevant FSA ordinances or the insurers articles of incorporation. The statutory corporate auditors are also responsible for accounting matters, depending on the results produced from the external audit and are required to draw up a report covering financial and non-financial issues, which is included in the annual report to shareholders.
41
South Korea
ING Groups South Korean insurance subsidiaries are subject to supervision by the Financial Supervisory Commission (FSC) and its executive arm, the Financial Supervisory Service (FSS). A second body, the Korean Insurance Development Institute (KIDI) advises the FSC, FSS and the Ministry of Finance and Economy on policies and systems related to life insurance. The KIDI must approve of all new products and revisions of existing products. In August 2003, the Insurance Business Act was revised to deregulate the insurance industry and to increase competition. In 2004, the FSS announced a plan to strengthen and change its supervisory policies based on the Risk Assessment and Application System (RAAS) from 2006 onwards.
Australia
The financial services activities of life insurance, investments, superannuation, general insurance and banking are currently governed by separate legislation under Australian law. The two main financial services regulators are the Australian Securities and Investment Commission (ASIC) and the Australian Prudential Regulation Authority (APRA). APRA is responsible for the prudential regulation of banks and other deposit taking institutions, life and general insurance companies, superannuation funds and Retirement Savings Account Providers. APRAs responsibilities include regulating capital and liquidity requirements and monitoring the management functions of product providers. ASIC is responsible for consumer protection and market integrity across the financial systems, including the areas of insurance banking and superannuation. All relevant business entities were licensed by March 11, 2004 pursuant to the Corporations Act 2001 requirements.
Taiwan
The Financial Supervisory Commission (FSC) was established on July 1, 2004 and supervises insurance companies, banks and securities houses in Taiwan. On July 9, 2004, the FSC issued new solvency requirements, stipulating that the paid-in capital held by Taiwanese life insurance companies must be at least 200% of their risk based capital (RBC). This applies to both local and foreign insurance companies in Taiwan; should the paid-in capital to risk capital ratio fall below 200%, the life insurance company is required to raise new funds to achieve the target. The Taiwanese RBC rules are quite similar to the U.S. RBC rules. ING Groups operations in Taiwan are regulated by both the insurance department of the State of Connecticut, as a branch of a US company, and by the Ministry of Finance (MoF) in Taiwan. In accordance with the Directions Governing Review of life Insurance Products, dated June 30, 2003 of the MoF, all kinds of life insurance products shall be filed and submitted for review by the Insurance Bureau of the FSC before marketing.
BANKING
Wholesale Banking, Retail Banking and ING Direct
Basel Standards
The Basel Committee on Banking Supervision of the Bank for International Settlements (BIS) develops international capital adequacy guidelines based on the relationship between a banks capital and all of its risks, including but not limited to credit, market and operational risk. In this context, on July 15, 1988, the Basel Committee adopted risk-based capital guidelines (the Basel guidelines), which have been implemented by banking regulators in the countries that have endorsed them. The Basel guidelines are intended to strengthen the soundness and stability of the international banking system. The Basel guidelines are also intended to reduce an existing source of competitive inequality among international banks by harmonizing the definition of capital and the rules for the evaluation of asset risks and by establishing a uniform target capital base ratio (capital to risk-weighted assets). Supervisory authorities in each jurisdiction have, however, some discretion in determining whether to include particular instruments as capital under the Basel guidelines and to assign different weights, within a prescribed range, to various categories of assets. The Basel guidelines were adopted by the European Community. In June 1999, the Basel Committee proposed a review of the Basel guidelines of 1988. Since then the proposals for a New Basel Accord from the Basel Committee were further discussed by several international working parties. In June 2004, the Basel Committee issued the final documentation with revised regulations governing the capital adequacy of banks that are active in the
42
international markets. The implementation of the New Basel Capital Accord is expected in the beginning of 2007.
The purpose of Basel II is to lay down capital requirements that are more risk-sensitive. There is greater emphasis on internal methods of risk control by banks. For example, the Accord further refines the system of risk weightings and permits capital requirements to be calculated based upon the ratings issued by recognized rating agencies. In addition, under certain conditions, banks will be permitted to use their internal models to determine the amount of capital that they must hold. It also adds capital requirements for operating risk to those laid down for credit risk and market risk.
The European Union is currently drawing up a directive, the Capital Requirement Directive (CRD), which shall apply to all European banks and investment firms. Through this European directive, Basel II will be implemented in the legislation and regulations and in supervisory practice in all EU member states.
European Union Standards
The European Community has adopted capital adequacy supervision for credit institutions in all its member states based on the Basel guidelines. In 1989, the EC adopted the Council Directive of April 17, 1989 on the own funds of credit institutions (the Own Funds Directive), defining qualifying capital (own funds), and the Council Directive of December 18, 1989 on a capital base ratio for credit institutions (the Capital base Ratio Directive. These two directives (the EC Directives) set forth the required ratio of own funds to risk-adjusted assets and off-balance sheet items. The EC Directives required the EU member states to transform the provisions of the Capital base Ratio Directive and the provisions of the Own Funds Directive into national law which shall be directly binding on banks operating in the member states. The EC Directives permit EU member states, when transforming the EC Directives into national law, to establish more stringent requirements, but do not permit more lenient requirements.
The EC Directives are aimed at harmonizing banking regulations and supervision throughout the EU by laying down certain minimum standards in key areas, and requiring member states to give mutual recognition to each others standards of regulation. The concept of mutual recognition has also been extended to create the passport concept: the freedom to establish branches in, and to provide cross-border services into, other EU member states once a bank has been licensed in its home state. The single market program for banking was completed when the Capital Adequacy Directive (CAD), was implemented in the Netherlands with effect from January 1, 1996. In particular, CAD introduces a new requirement for banks to provide capital for market risk.
The EC Directives require a bank to have a capital base ratio of own funds to risk-adjusted assets and certain off-balance sheet items of at least 8%. At least one-half of the own funds in the numerator of the ratio must be original own funds, or Tier 1 capital. The rest may be additional own funds, or Tier 2 capital. As of January 1, 1997, Tier 1 capital consists solely of paid-up share capital plus Tier 1 capital instruments, share premium accounts and certain other reserves, less a deduction for goodwill. Tier 2 capital includes revaluation reserves, value adjustments of certain assets and certain categories of long-term subordinated debt and cumulative preferred shares. The aggregate of a banks Tier 2 capital may not exceed 50% of the banks Tier 1 capital.
To compute the denominator of the capital base ratio, the assets of a bank are assigned to five broad categories of relative credit risk (0%, 10%, 20%, 50% and 100%) and the balance sheet value of each asset is multiplied by the percentage weight applicable to its risk category to arrive at the risk-adjusted value. With respect to off-balance sheet items, such as financial guarantees and letters of credit, first, their face value is adjusted according to their risk classification depending on the type of instrument (0%, 20%, 50% and 100%), then they are assigned, like on-balance sheet assets, to the credit risk categories depending on the type of debtor and multiplied by the applicable percentage weights. With respect to derivatives contracts, first, their fair value is adjusted with a product specific potential future credit exposure (0% to 15% over the notional amounts), then they are assigned, like on-balance sheet assets, to the credit risk categories depending on the type of debtor and multiplied by the applicable percentage weights.
ING Bank files consolidated monthly and annual reports of its financial position and results with the DNB in the Netherlands. ING Banks independent auditors audit these reports.
43
Our banking operations in Belgium are supervised by the CBFA Commission. Banking supervision in Germany is carried out by the German Federal Financial Supervisory Agency (BAFIN), working in cooperation with the German Central Bank (Deutsche Bundesbank). Similar authorities supervise INGs banking operations in other European Union countries, such as, the Financial Services Authority in the United Kingdom.
An EU member state credit institution is not permitted to start operations through a branch in another EU member state until it has received confirmation from its home country banking supervisory authority that the information required by the Second Directive on the Coordination of Legislation to the Taking Up and Pursuit of the Business of Credit Institutions (the Second Banking Coordination EC Directive) has been submitted to that supervisor and until, following this confirmation, a period of two months has elapsed or until, before the expiry of this period, it has received confirming information by that home country banking supervisory authority.
The supervision of our significant banking businesses outside the EU is described below.
Americas
United States
ING Bank has a limited direct presence in the United States through the facility of the ING Bank Representative Office in New York. Although the offices activities are strictly limited to essentially that of a marketing agent of bank products and services and a facilitator (i.e., the office may not take deposits or execute any transactions), the office is subject to the jurisdiction of the State of New York Banking Department and the Federal Reserve.
A major part of our banking activities in the United States, ING Direct USA, is regulated by the Office of Thrift Supervision, a division of the United States Department of the Treasury and, to a lesser extent, by the Federal Deposit Insurance Corporation, an independent agency of the Federal government that operates under the auspices of the Federal Deposit Insurance Act, a US federal law.
Canada
ING Bank of Canada (ING BOC) is a federally regulated financial institution that is subject to the supervision of the Office of the Superintendent of Financial Institutions (OSFI), which is the primary supervisor of federally chartered financial institutions (including banks and insurance companies) and federally administered pension plans. ING BOC operates a wholly owned mortgage loan company subsidiary, ING Mortgage Broker Services Inc., which is subject to provincial regulation in the provinces in which it operates. ING MBSs home province supervisor is the Financial Services Commission of Ontario, which supervises insurance, pensions, credit unions, caisses populaires, cooperatives, mortgage brokers and loan & trust companies in the province of Ontario. As of December 31, 2004, ING MBS is being wound up into ING BOC and will cease to be a subsidiary. Effective as of such date, the activities carried out under the ING MBS brand shall be governed by OSFI.
Furthermore, ING BOC operates a wholly-owned mutual fund dealer subsidiary, ING Direct Mutual Funds Limited. This company is subject to provincial regulation in the provinces in which it operates. ING Direct Mutual Funds Limiteds home province supervisor is the Ontario Securities Commission, which regulates the sale of mutual funds and equities in Ontario. ING Direct Mutual Funds Limited is also a member of the Mutual Funds Dealers Association, a mandatory self-regulatory body, which governs and oversees the conduct of mutual fund dealers in Canada.
Asia/Pacific
Australia
The Australian Prudential Regulation Authority is responsible for the prudential regulation of banks and other deposit taking institutions, life and general insurance companies, superannuation funds and Retirement Savings Account Providers. See also supervision insurance on page 42.
44
BROKER-DEALER AND INVESTMENT MANAGEMENT ACTIVITIES
INGs broker-dealer entities in the United States are regulated by the Securities and Exchange Commission, the states, and the self-regulatory organizations (e.g., the NASD and the NYSE) of which they individually are members. The primary governing statutes for such entities are the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and state statutes and regulations, as applicable. These laws, and the regulations promulgated thereunder, impose requirements (among others) regarding minimum net capital requirements, safeguarding of customer assets, protection and use of material, non-public (inside) information, record-keeping requirements, supervision of employee activities, credit to customers, suitability determinations in the context of recommending transactions to customers and clearance and settlement procedures. The rules of the self-regulatory organizations in some respects duplicate the above mentioned legal requirements, but also impose requirements specific to the marketplaces that these organizations oversee. For example, the NASD imposes requirements relating to activities by market-makers in the over-the-counter market in equity securities and the NYSE imposes requirements regarding transactions effected in its listed securities market. In addition, in December 2001, the Department of Treasury proposed new anti-money laundering standards applicable to broker-dealers.
Certain ING entities in the United States (including certain of its broker-dealers) also act in the capacity of a federally registered investment advisor (i.e. providing transactional advice to customers for a fee), and are governed in such activities by the Investment Advisers Act of 1940, as amended. Moreover, certain ING entities manage investment funds (such as mutual funds); the Investment Company Act of 1940, as amended, regulates the governance and activities of those funds. These laws impose record-keeping and disclosure requirements on ING in the context of such activities. Moreover, the laws impose restrictions on transactions or require disclosure of transactions involving advisory clients and the advisor or the advisors affiliates, as well as transactions between advisory clients. In addition, the Employee Retirement Income Security Act of 1974, as amended, imposes certain obligations on investment advisors managing employee plan assets as defined in this act.
The failure of ING to comply with these various requirements could result in civil and criminal sanctions and administrative penalties imposed by the Securities and Exchange Commission, the states, or self-regulatory organizations on these entities of ING which have committed the violations. Moreover, employees who are found to have participated in the violations, and the managers of these employees, also may be subject to penalties by governmental and self-regulatory agencies.
45
SELECTED STATISTICAL INFORMATION ON BANKING OPERATIONS
The tables below set forth selected statistical information regarding the Groups banking operations. Unless otherwise indicated, average balances, when used, are calculated from monthly data and the distinction between domestic and foreign is based on the location of the office where the assets and liabilities are booked, as opposed to the domicile of the customer. However, the Company believes that the presentation of these amounts based upon the domicile of the customer would not result in material differences in the amounts presented below.
The return on equity of the banking operations amounted to 15.8% in 2004 against 11.0% in 2003 and 6.5% in 2002, whereas the return on equity of ING Group amounted to 22.9%, 21.5% and 17.4% for the years 2004, 2003 and 2002 respectively. The dividend pay-out ratio of ING Group amounted to 38.2% in 2004, 48.5% 2003 and 44.1% in 2002. The return on assets ratio was 1.0% in 2004, 0.8% in 2003 and 0.9% in 2002. The equity to assets ratio amounted to 3.0%, 3.3% and 3.6% for the years 2004, 2003 and 2002, respectively.
AVERAGE BALANCES AND INTEREST RATES
The following tables show the banking operations, average interest-earning assets and average interest-bearing liabilities, together with average rates, for the periods indicated. The interest income, interest expense and average yield figures include interest on non-accruing loans and do not reflect:
| income on amortized results investments; | |||
| lending commissions; | |||
| interest income on off-balance sheet instruments; | |||
| other income not considered to be directly related to interest-earning assets; | |||
| interest expense on off-balance sheet instruments, or | |||
| other expense not considered to be directly related to interest-bearing liabilities, |
all of which are reflected in the corresponding interest income, interest expense and net interest result figures in the consolidated financial statements. A reconciliation of the interest income, interest expense and net interest result figures to the corresponding line items in the consolidated financial statements is provided below.
46
ASSETS
Interest-earning assets | ||||||||||||||||||||||||||||||||||||
2004 | 2003 | 2002 | ||||||||||||||||||||||||||||||||||
Average | Interest | Average | Average | Interest | Average | Average | Interest | Average | ||||||||||||||||||||||||||||
balance | income | yield | balance | income | yield | balance | income | yield | ||||||||||||||||||||||||||||
(EUR millions) | % | (EUR millions) | % | (EUR millions) | % | |||||||||||||||||||||||||||||||
Time deposits with banks |
||||||||||||||||||||||||||||||||||||
domestic |
4,845 | 113 | 2.3 | 1,984 | 98 | 4.9 | 3,625 | 128 | 3.5 | |||||||||||||||||||||||||||
foreign |
32,959 | 968 | 2.9 | 24,450 | 723 | 3.0 | 21,965 | 935 | 4.3 | |||||||||||||||||||||||||||
Loans and advances |
||||||||||||||||||||||||||||||||||||
domestic |
157,457 | 7,237 | 4.6 | 154,944 | 7,800 | 5.0 | 146,277 | 7,885 | 5.4 | |||||||||||||||||||||||||||
foreign |
183,458 | 7,792 | 4.2 | 160,338 | 6,790 | 4.2 | 148,979 | 7,149 | 4.8 | |||||||||||||||||||||||||||
Interest-earning securities(1) |
||||||||||||||||||||||||||||||||||||
domestic |
31,221 | 616 | 2.0 | 25,384 | 682 | 2.7 | 20,472 | 692 | 3.4 | |||||||||||||||||||||||||||
foreign |
165,173 | 5,922 | 3.6 | 116,092 | 4,450 | 3.8 | 92,616 | 4,182 | 4.5 | |||||||||||||||||||||||||||
Other interest-earning assets |
||||||||||||||||||||||||||||||||||||
domestic |
527 | 30 | 5.7 | 3,563 | 208 | 5.8 | 4,588 | 167 | 3.6 | |||||||||||||||||||||||||||
foreign |
2,941 | 158 | 5.4 | 9,188 | 262 | 2.9 | 11,040 | 465 | 4.2 | |||||||||||||||||||||||||||
Total |
578,581 | 22,836 | 3.9 | 495,943 | 21,013 | 4.2 | 449,562 | 21,603 | 4.8 | |||||||||||||||||||||||||||
Non-interest earning assets |
22,276 | 24,011 | 27,216 | |||||||||||||||||||||||||||||||||
Total assets(1) |
600,857 | 519,954 | 476,778 | |||||||||||||||||||||||||||||||||
Percentage of assets
applicable to foreign
operations |
66.5 | % | 64.9 | % | 62.1 | % | ||||||||||||||||||||||||||||||
Other interest income |
||||||||||||||||||||||||||||||||||||
(reconciliation to consolidated
financial statements): |
||||||||||||||||||||||||||||||||||||
amortized results investments(2) |
157 | 258 | 348 | |||||||||||||||||||||||||||||||||
lending commission |
96 | 96 | 102 | |||||||||||||||||||||||||||||||||
adjustment for interest on non-
performing loans(3) |
(84 | ) | (123 | ) | (105 | ) | ||||||||||||||||||||||||||||||
interest on off-balance
instruments (4) |
2,223 | 2,187 | 1,758 | |||||||||||||||||||||||||||||||||
other |
352 | 371 | 382 | |||||||||||||||||||||||||||||||||
Total interest income |
25,580 | 23,802 | 24,088 | |||||||||||||||||||||||||||||||||
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LIABILITIES
Interest-earning liabilities | ||||||||||||||||||||||||||||||||||||
2004 | 2003 | 2002 | ||||||||||||||||||||||||||||||||||
Average | Interest | Average | Average | Interest | Average | Average | Interest | Average | ||||||||||||||||||||||||||||
balance | expense | yield | balance | expense | yield | balance | expense | yield | ||||||||||||||||||||||||||||
(EUR millions) | % | (EUR millions) | % | (EUR millions) | % | |||||||||||||||||||||||||||||||
Time deposits from banks |
||||||||||||||||||||||||||||||||||||
domestic |
26,131 | 590 | 2.3 | 19,829 | 666 | 3.4 | 23,789 | 832 | 3.5 | |||||||||||||||||||||||||||
foreign |
50,522 | 1,111 | 2.2 | 36,870 | 771 | 2.1 | 43,435 | 1,238 | 2.9 | |||||||||||||||||||||||||||
Demand deposits(5) |
||||||||||||||||||||||||||||||||||||
domestic |
32,210 | 176 | 0.6 | 32,694 | 219 | 0.7 | 31,291 | 332 | 1.1 | |||||||||||||||||||||||||||
foreign |
26,992 | 423 | 1.6 | 23,867 | 391 | 1.6 | 20,994 | 528 | 2.5 | |||||||||||||||||||||||||||
Time deposits(5) |
||||||||||||||||||||||||||||||||||||
domestic |
14,432 | 371 | 2.6 | 13,082 | 391 | 3.0 | 17,675 | 746 | 4.2 | |||||||||||||||||||||||||||
foreign |
29,995 | 727 | 2.4 | 31,207 | 956 | 3.1 | 34,432 | 1,242 | 3.6 | |||||||||||||||||||||||||||
Savings deposits(5) |
||||||||||||||||||||||||||||||||||||
domestic |
58,277 | 1,504 | 2.6 | 50,051 | 1,425 | 2.9 | 43,463 | 1,300 | 3.0 | |||||||||||||||||||||||||||
foreign |
150,428 | 4,422 | 2.9 | 100,317 | 2,878 | 2.9 | 57,781 | 2,050 | 3.6 | |||||||||||||||||||||||||||
Short term debt
|
||||||||||||||||||||||||||||||||||||
domestic |
4,992 | 102 | 2.0 | 5,664 | 180 | 3.2 | 5,082 | 193 | 3.8 | |||||||||||||||||||||||||||
foreign |
29,879 | 696 | 2.3 | 48,305 | 909 | 1.9 | 48,836 | 1,309 | 2.7 | |||||||||||||||||||||||||||
Long term debt
|
||||||||||||||||||||||||||||||||||||
domestic |
15,645 | 670 | 4.3 | 15,586 | 895 | 5.7 | 19,278 | 865 | 4.5 | |||||||||||||||||||||||||||
foreign |
40,394 | 1,751 | 4.3 | 32,143 | 1,300 | 4.1 | 30,439 | 1,634 | 5.4 | |||||||||||||||||||||||||||
Subordinated liabilities |
||||||||||||||||||||||||||||||||||||
domestic |
13,061 | 732 | 5.6 | 10,915 | 647 | 5.9 | 9,109 | 589 | 6.5 | |||||||||||||||||||||||||||
foreign |
2,802 | 160 | 5.7 | 2,921 | 178 | 6.1 | 3,184 | 190 | 6.0 | |||||||||||||||||||||||||||
Other interest-bearing liabilities |
||||||||||||||||||||||||||||||||||||
domestic |
18,468 | 158 | 0.9 | 19,475 | 583 | 3.0 | 10,972 | 359 | 3.3 | |||||||||||||||||||||||||||
foreign |
32,470 | 971 | 3.0 | 25,253 | 1,063 | 4.2 | 22,890 | 1,103 | 4.8 | |||||||||||||||||||||||||||
Total |
546,698 | 14,564 | 2.7 | 468,179 | 13,452 | 2.9 | 422,650 | 14,510 | 3.4 | |||||||||||||||||||||||||||
Non-interest bearing liabilities |
36,299 | 34,587 | 36,726 | |||||||||||||||||||||||||||||||||
Total Liabilities |
582,997 | 502,766 | 459,376 | |||||||||||||||||||||||||||||||||
Group Capital |
17,860 | 17,188 | 17,402 | |||||||||||||||||||||||||||||||||
Total liabilities and capital |
600,857 | 519,954 | 476,778 | |||||||||||||||||||||||||||||||||
Percentage of liabilities
applicable to foreign
operations |
64.9 | % | 65.1 | % | 63.2 | % | ||||||||||||||||||||||||||||||
Other interest expense
(reconciliation to
Consolidated |
||||||||||||||||||||||||||||||||||||
Financial Statements): |
||||||||||||||||||||||||||||||||||||
interest on off-balance
instruments (6) |
2,078 | 2,027 | 1,718 | |||||||||||||||||||||||||||||||||
other |
130 | 208 | 214 | |||||||||||||||||||||||||||||||||
Total interest expense |
16,772 | 15,687 | 16,442 | |||||||||||||||||||||||||||||||||
Total net interest result |
8,808 | 8,115 | 7,646 | |||||||||||||||||||||||||||||||||
(1) | Substantially all interest-earning securities held by the banking operations of the Company are taxable securities. The interest income excludes the interest income on trading activities reported under result from financial transactions. | |
(2) | Includes amortization of premiums and discounts and deferred realized gains and losses on sales of investments in debt securities on a straight-line basis over the estimated average remaining life of the portfolio. | |
(3) | Interest on non-performing loans is included when calculating the average yield in this table but excluded from interest income reported in the consolidated profit and loss account. |
48
(4) | Includes amortization of deferred realized gains and losses on off-balance sheet hedging instruments on a straight line basis over the estimated average remaining life of the portfolio and interest accrued on hedging instruments, primarily on interest rate swaps. | |
(5) | These captions do not include deposits from banks. | |
(6) | Includes accrued interest expense on hedging instruments, primarily on interest rate swaps. |
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following table allocates changes in the Groups interest income and expense and net interest result between changes in average balances and rates for the periods indicated. Changes due to a combination of volume and rate have been allocated to changes in average volume. The net changes in interest income, interest expense and net interest result, as calculated in this table, have been reconciled to the changes in interest income, interest expense and net interest result in the consolidated financial statements. See introduction to Average Balances and Interest Rates for a discussion of the differences between interest income, interest expense and net interest result as calculated in the following table and as set forth in the consolidated financial statements.
2004 over 2003 | 2003 over 2002 | |||||||||||||||||||||||
Increase (decrease) | Increase (decrease) | |||||||||||||||||||||||
due to changes in | due to changes in | |||||||||||||||||||||||
average | average | net | average | average | net | |||||||||||||||||||
volume | rate | change | volume | rate | change | |||||||||||||||||||
(EUR millions) | (EUR millions) | |||||||||||||||||||||||
Interest-earning assets |
||||||||||||||||||||||||
Time deposits to banks |
||||||||||||||||||||||||
domestic |
67 | (52 | ) | 15 | (81 | ) | 51 | (30 | ) | |||||||||||||||
foreign |
250 | (5 | ) | 245 | 73 | (285 | ) | (212 | ) | |||||||||||||||
Loans and advances |
||||||||||||||||||||||||
domestic |
115 | (678 | ) | (563 | ) | 436 | (521 | ) | (85 | ) | ||||||||||||||
foreign |
982 | 20 | 1,002 | 481 | (840 | ) | (359 | ) | ||||||||||||||||
Interest-earning securities |
||||||||||||||||||||||||
domestic |
115 | (181 | ) | (66 | ) | 132 | (142 | ) | (10 | ) | ||||||||||||||
foreign |
1,760 | (288 | ) | 1,472 | 900 | (632 | ) | 268 | ||||||||||||||||
Other interest-earning assets |
||||||||||||||||||||||||
domestic |
(172 | ) | (6 | ) | (178 | ) | (60 | ) | 101 | 41 | ||||||||||||||
foreign |
(335 | ) | 231 | (104 | ) | (52 | ) | (151 | ) | (203 | ) | |||||||||||||
Interest income |
||||||||||||||||||||||||
domestic |
125 | (917 | ) | (792 | ) | 427 | (511 | ) | (84 | ) | ||||||||||||||
foreign |
2,657 | (42 | ) | 2,615 | 1,402 | (1,908 | ) | (506 | ) | |||||||||||||||
Total |
2,782 | (959 | ) | 1,823 | 1,829 | (2,419 | ) | (590 | ) | |||||||||||||||
Other interest income
(reconciliation to consolidated
financial statements) |
(45 | ) | 304 | |||||||||||||||||||||
Total interest income |
1,778 | (286 | ) | |||||||||||||||||||||
49
2004 over 2003 | 2003 over 2002 | |||||||||||||||||||||||
Increase (decrease) | Increase (decrease) | |||||||||||||||||||||||
due to changes in | due to changes in | |||||||||||||||||||||||
average | average | net | average | average | net | |||||||||||||||||||
volume | rate | change | volume | rate | change | |||||||||||||||||||
(EUR millions) | (EUR millions) | |||||||||||||||||||||||
Interest-bearing liabilities |
||||||||||||||||||||||||
Time deposits from banks |
||||||||||||||||||||||||
domestic |
142 | (218 | ) | (76 | ) | (133 | ) | (33 | ) | (166 | ) | |||||||||||||
foreign |
300 | 40 | 340 | (137 | ) | (330 | ) | (467 | ) | |||||||||||||||
Demand deposits |
||||||||||||||||||||||||
domestic |
(2 | ) | (41 | ) | (43 | ) | 9 | (122 | ) | (113 | ) | |||||||||||||
foreign |
49 | (17 | ) | 32 | 47 | (184 | ) | (137 | ) | |||||||||||||||
Time deposits |
||||||||||||||||||||||||
domestic |
35 | (55 | ) | (20 | ) | (138 | ) | (217 | ) | (355 | ) | |||||||||||||
foreign |
(30 | ) | (199 | ) | (229 | ) | (99 | ) | (187 | ) | (286 | ) | ||||||||||||
Savings deposits |
||||||||||||||||||||||||
domestic |
212 | (133 | ) | 79 | 188 | (63 | ) | 125 | ||||||||||||||||
foreign |
1,473 | 71 | 1,544 | 1,220 | (392 | ) | 828 | |||||||||||||||||
Short term debt |
||||||||||||||||||||||||
domestic |
(14 | ) | (64 | ) | (78 | ) | 19 | (32 | ) | (13 | ) | |||||||||||||
foreign |
(430 | ) | 217 | (213 | ) | (10 | ) | (390 | ) | (400 | ) | |||||||||||||
Long term debt |
||||||||||||||||||||||||
domestic |
3 | (228 | ) | (225 | ) | (212 | ) | 242 | 30 | |||||||||||||||
foreign |
358 | 93 | 451 | 69 | (403 | ) | (334 | ) | ||||||||||||||||
Subordinated liabilities |
||||||||||||||||||||||||
domestic |
120 | (35 | ) | 85 | 107 | (49 | ) | 58 | ||||||||||||||||
foreign |
(6 | ) | (12 | ) | (18 | ) | (16 | ) | 4 | (12 | ) | |||||||||||||
Other interest-bearing liabilities |
||||||||||||||||||||||||
domestic |
(9 | ) | (416 | ) | (425 | ) | 255 | (31 | ) | 224 | ||||||||||||||
foreign |
216 | (308 | ) | (92 | ) | 99 | (139 | ) | (40 | ) | ||||||||||||||
Interest expense |
||||||||||||||||||||||||
domestic |
487 | (1,190 | ) | (703 | ) | 95 | (305 | ) | (210 | ) | ||||||||||||||
foreign |
1,930 | (115 | ) | 1,815 | 1,173 | (2,021 | ) | (848 | ) | |||||||||||||||
Total |
2,417 | (1,305 | ) | 1,112 | 1,268 | (2,326 | ) | (1,058 | ) | |||||||||||||||
Other interest expense
(reconciliation to consolidated
financial statements) |
(27 | ) | 303 | |||||||||||||||||||||
Total interest expense |
1,085 | (755 | ) | |||||||||||||||||||||
Net interest
|
||||||||||||||||||||||||
domestic |
(362 | ) | 273 | (89 | ) | 333 | (208 | ) | 125 | |||||||||||||||
foreign |
727 | 73 | 800 | 228 | 115 | 343 | ||||||||||||||||||
Net interest |
365 | 346 | 711 | 561 | (93 | ) | 468 | |||||||||||||||||
Other net interest result
(reconciliation to consolidated
financial statements) |
(18 | ) | 1 | |||||||||||||||||||||
Net interest result |
693 | 469 | ||||||||||||||||||||||
50
LOAN PORTFOLIO
Loans and advances to banks and customers
Loans and advances to banks include all receivables from credit institutions, except for cash, current accounts and deposits with other banks (including central banks). Lending facilities to corporate and private customers encompass among others, loans, overdrafts and finance lease receivables. The following table sets forth the gross loans and advances to banks and customers for the last five years.
Year ended December 31, | ||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
(EUR millions) | ||||||||||||||||||||
By domestic offices: |
||||||||||||||||||||
Loans guaranteed by public authorities |
7,296 | 6,473 | 8,013 | 8,949 | 8,306 | |||||||||||||||
Loans secured by mortgages |
103,594 | 94,125 | 86,932 | 78,789 | 65,585 | |||||||||||||||
Loans to or guaranteed by credit institutions |
7,323 | 8,367 | 7,103 | 8,356 | 3,643 | |||||||||||||||
Other private lending |
6,420 | 7,009 | 8,201 | 3,775 | 3,532 | |||||||||||||||
Other corporate lending |
35,897 | 36,861 | 42,083 | 35,060 | 33,715 | |||||||||||||||
Total domestic offices |
160,530 | 152,835 | 152,332 | 134,929 | 114,781 | |||||||||||||||
By foreign offices: |
||||||||||||||||||||
Loans guaranteed by public authorities |
17,118 | 16,603 | 15,750 | 13,398 | 13,019 | |||||||||||||||
Loans secured by mortgages |
53,156 | 39,604 | 31,260 | 19,502 | 14,048 | |||||||||||||||
Loans to or guaranteed by credit institutions |
26,471 | 17,879 | 23,562 | 21,861 | 19,635 | |||||||||||||||
Other private lending |
8,474 | 7,813 | 6,810 | 3,259 | 2,790 | |||||||||||||||
Other corporate lending |
88,639 | 86,722 | 82,256 | 88,687 | 102,484 | |||||||||||||||
Total foreign offices |
193,858 | 168,621 | 159,638 | 146,707 | 151,976 | |||||||||||||||
Total gross loans and advances to banks
and customers |
354,388 | 321,456 | 311,970 | 281,636 | 266,757 | |||||||||||||||
The total net loans and advances to banks and customers amounted to EUR 350,126 million on December 31, 2004 and to EUR 316,785 million on December 31, 2003. The difference between total net loans and advances to banks and customers on the one hand and total gross loans and advances to banks and customers on the other, amounting to EUR 4,262 million, EUR 4,671 million and EUR 4,870 million on December 31, 2004, 2003 and 2002, respectively, represents the provisions for loan losses.
51
Maturities and sensitivity of loans to changes in interest rates
The following table analyzes loans and advances to banks and customers by time remaining until maturity as of December 31, 2004.
1 year | 1 year | After | ||||||||||||||
or less | to 5 years | 5 years | Total | |||||||||||||
(EUR millions) | ||||||||||||||||
By domestic offices: |
||||||||||||||||
Loans guaranteed by public authorities |
457 | 515 | 6,324 | 7,296 | ||||||||||||
Loans secured by mortgages |
9,023 | 10,918 | 83,653 | 103,594 | ||||||||||||
Loans guaranteed by credit institutions |
6,371 | 699 | 253 | 7,323 | ||||||||||||
Other private lending |
5,689 | 584 | 147 | 6,420 | ||||||||||||
Other corporate lending |
23,183 | 8,383 | 4,331 | 35,897 | ||||||||||||
Total domestic offices |
44,723 | 21,099 | 94,708 | 160,530 | ||||||||||||
By foreign offices: |
||||||||||||||||
Loans guaranteed by public authorities |
7,125 | 5,075 | 4,918 | 17,118 | ||||||||||||
Loans secured by mortgages |
5,005 | 15,347 | 32,804 | 53,156 | ||||||||||||
Loans guaranteed by credit institutions |
20,311 | 3,773 | 2,387 | 26,471 | ||||||||||||
Other private lending |
4,257 | 1,923 | 2,294 | 8,474 | ||||||||||||
Other corporate lending |
64,502 | 13,970 | 10,167 | 88,639 | ||||||||||||
Total foreign offices |
101,200 | 40,088 | 52,570 | 193,858 | ||||||||||||
Total gross loans and advances to
banks and customers |
145,923 | 61,187 | 147,278 | 354,388 | ||||||||||||
The following table analyzes loans and advances to banks and customers by interest rate sensitivity by maturity as of December 31, 2004.
1 year or | ||||||||||||
less | Over 1 year | Total | ||||||||||
(EUR millions) | ||||||||||||
Non-interest earning |
4,306 | 510 | 4,816 | |||||||||
Fixed interest rate |
86,040 | 57,018 | 143,058 | |||||||||
Semi-fixed interest rate(1) |
3,498 | 94,712 | 98,210 | |||||||||
Variable interest rate |
52,079 | 56,224 | 108,304 | |||||||||
Total |
145,923 | 208,465 | 354,388 | |||||||||
(1) | Loans that have an interest rate that remains fixed for more than one year and which can then be changed are classified as semi-fixed |
Risk elements
Non-accrual and past due loans
Each of the business units within the banking operations of ING Group, maintains its own system for servicing and monitoring past due loans. ING Groups international banking offices and subsidiaries generally account for delinquent loans in accordance with U.S. GAAP. When a loan is in default as to payment of principal and interest for 90 days or when, in the judgment of management, the accrual of interest should cease before 90 days, such a loan is placed on a non-accrual status. Any accrued, but unpaid, interest is reversed against current period interest revenue. Interest payments received on a cash basis during the period are recorded as interest income. Domestic banking offices follow the same policy for consumer mortgage and private loans. All of the foregoing loans are included in the table below under Non-accrual.
52
Under Accruing but past due 90 days, all loans reported are still accruing, but principal or interest payments are contractually past due 90 days or more. Domestic commercial loans combined with an overdraft facility, which make up approximately 50% of the reported amount in the domestic Accruing but past due 90 days category, were included in the 2004, 2003 and 2002 table below if the overdraft facility exceeded a specified limit for 90 days or more on December 31, 2004, 2003 and 2002, respectively. The amount of loans meeting these criteria in prior years was estimated by management based on the size of the underlying portfolio and specific risk factors.
Based on the foregoing, the following table sets forth managements estimate, without giving effect to available security or related specific provisions, of the amounts of its loan portfolio in each of the two categories indicated. These loans are under constant review of the credit risk department.
Year ended December 31, | ||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
(EUR millions) | ||||||||||||||||||||
Non-accrual |
||||||||||||||||||||
domestic |
1,143 | 965 | 1,093 | 1,425 | 711 | |||||||||||||||
foreign |
2,284 | 2,599 | 3,044 | 2,613 | 2,745 | |||||||||||||||
Sub-total |
3,427 | 3,564 | 4,137 | 4,038 | 3,456 | |||||||||||||||
Accruing but past due 90 days |
||||||||||||||||||||
domestic |
577 | 830 | 986 | 1,083 | 1,112 | |||||||||||||||
foreign |
510 | 819 | 1,048 | 957 | 756 | |||||||||||||||
Sub-total |
1,087 | 1,649 | 2,034 | 2,040 | 1,868 | |||||||||||||||
Total |
4,514 | 5,213 | 6,171 | 6,078 | 5,324 | |||||||||||||||
Restructured loans
The following table sets forth the troubled debt restructuring loans consisting of loans that are accruing interest but at rates different from the original terms of such loans as a result of the terms of any such restructuring.
Year ended December 31, | ||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
(EUR millions) | ||||||||||||||||||||
Troubled debt restructuring |
||||||||||||||||||||
domestic |
197 | 115 | 439 | 57 | 154 | |||||||||||||||
foreign |
651 | 516 | 461 | 1,054 | 569 | |||||||||||||||
Total troubled debt restructuring |
848 | 631 | 900 | 1,111 | 723 | |||||||||||||||
On receipt of cash, suspended interest is recovered prior to the principal outstanding, except that, where amounts are outstanding for costs and other late payment charges, the cash received is first used to recover these costs and charges. When it becomes apparent that recovery of interest is unlikely, interest ceases to be accrued and is suspended.
Interest income that would have been recognized in 2004 under the original terms of the non-accrual and restructured loans amounted to an estimated EUR 118 million from loans granted by domestic offices and an estimated EUR 143 million from loans granted by foreign offices. Interest income of approximately EUR 78 million from such domestic loans and approximately EUR 24 million from such foreign loans was recognized in the profit and loss account for 2004.
On December 31, 2004, ING Group had loans amounting to EUR 4,205 million that were not included in the risk elements schedule above. These loans are considered potential problem loans as the credit review officers obtained information that caused doubts as to the repayment of the loan by the borrower. Of this total, EUR 1,910 million relates to domestic loans and EUR 2,295 million relates to
53
foreign loans. Appropriate provisions, following ING Groups credit risk rating system, have been established for these loans.
Cross-border outstandings
Cross-border outstandings are defined as loans (including accrued interest), acceptances, interest-earning deposits with other banks, other interest-earning investments and any other monetary assets that are denominated in euro or other non-local currency. To the extent that material local currency outstandings are not hedged or are not funded by local currency borrowings, such amounts are included in cross-border outstandings.
The following tables analyze cross-border outstandings as of the end of each of the last three years, stating the name of the country and the aggregate amount of cross-border outstandings to borrowers in each foreign country where such outstandings exceed 1% of total assets, by the following categories.
Guaranteed or secured loans are deducted from gross cross-border outstandings to arrive at net cross-border outstandings provided that political and transfer risks are also covered explicitly by the agreement. Commitments such as irrevocable letters of credit are not considered as cross border outstanding. Total outstandings are in line with Dutch Central Bank requirements. On December 31, 2004, there were no outstandings exceeding 1% of total assets in any country where current conditions give rise to liquidity problems which are expected to have a material impact on the timely repayment of interest or principal.
Year ended December 31, 2004 | ||||||||||||||||||||
Banks | ||||||||||||||||||||
Government | & other | |||||||||||||||||||
& official | financial | Commercial | ||||||||||||||||||
institutions | institutions | & industrial | Other | Total | ||||||||||||||||
(EUR millions) | ||||||||||||||||||||
United Kingdom |
92 | 19,620 | 30,391 | 640 | 50,743 | |||||||||||||||
Germany |
9,641 | 19,367 | 3,538 | 4,721 | 37,267 | |||||||||||||||
United States |
507 | 3,097 | 19,462 | 3,998 | 27,064 | |||||||||||||||
France |
5,245 | 8,185 | 3,664 | 649 | 17,743 | |||||||||||||||
Spain |
3,850 | 8,595 | 2,566 | 1,449 | 16,460 | |||||||||||||||
Italy |
6,753 | 5,008 | 2,725 | 423 | 14,909 | |||||||||||||||
Belgium |
2,887 | 2,133 | 3,015 | 904 | 8,939 |
Year ended December 31, 2003 | ||||||||||||||||||||
Banks | ||||||||||||||||||||
Government | & other | |||||||||||||||||||
& official | financial | Commercial | ||||||||||||||||||
institutions | institutions | & industrial | Other | Total | ||||||||||||||||
(EUR millions) | ||||||||||||||||||||
United Kingdom |
503 | 19,403 | 16,818 | 1,034 | 37,758 | |||||||||||||||
Germany |
6,294 | 16,810 | 2,405 | 2,705 | 28,214 | |||||||||||||||
United States |
193 | 3,295 | 18,066 | 324 | 21,878 | |||||||||||||||
Spain |
2,157 | 9,760 | 1,490 | 221 | 13,628 | |||||||||||||||
France |
2,926 | 5,725 | 3,388 | 699 | 12,738 | |||||||||||||||
Italy |
4,141 | 4,384 | 2,440 | 409 | 11,374 |
54
Year ended December 31, 2002 | ||||||||||||||||||||
Banks | ||||||||||||||||||||
Government | & other | |||||||||||||||||||
& official | financial | Commercial | ||||||||||||||||||
institutions | institutions | & industrial | Other | Total | ||||||||||||||||
(EUR millions) | ||||||||||||||||||||
United Kingdom |
5 | 17,782 | 20,032 | 1,280 | 39,099 | |||||||||||||||
United States |
2,013 | 2,491 | 19,578 | 912 | 24,994 | |||||||||||||||
Germany |
4,660 | 8,899 | 2,165 | 2,070 | 17,794 | |||||||||||||||
France |
515 | 3,941 | 2,876 | 784 | 8,116 | |||||||||||||||
Belgium |
2,039 | 1,940 | 2,248 | 1,256 | 7,483 |
There were no cross-border outstandings in any country between 0.75% and 1% of total assets, on year-end 2004. On December 31, 2003 and 2002, the following countries had cross-border outstandings between 0.75% and 1% of total assets:
Cross-border outstandings | ||||
Year ended December 31 | ||||
(EUR millions) | ||||
2003 |
||||
Belgium |
6,888 | |||
2002 |
||||
Italy |
7,101 | |||
Spain |
5,828 |
Loan concentration
The following industry concentrations were in excess of 10% of total loans as of December 31, 2004:
Total outstandings | ||||
(EUR millions) | ||||
Financial institutions(1) |
68,897 | |||
Service industry |
55,746 |
(1) | Excluding bank deposits given of approximately EUR 57 billion. |
Bad and doubtful debts
A provision for loan losses is maintained for the banking operations, which is considered to be adequate to absorb losses arising from the existing portfolios of loans. The provision for loan losses is made in accordance with the overall supervisory direction of the Dutch Central Bank. Each operating company makes provisions for bad and doubtful debts, based on centrally given instructions. The provisions are reviewed on a quarterly basis by management. On the face of the balance sheet, the provisions are deducted from Lending and Banks. The net additions to or subtractions from such balance sheet provisions are reflected in the Groups profit and loss account, principally under Value adjustments to receivables of the Banking operations.
In determining the amount of the provisions, corporate loans are assessed on a case-by-case basis, and the following factors are considered:
| the financial standing of the customer, including a realistic assessment of the likelihood of repayment of the loan within an acceptable period and the extent of ING Groups other commitments to the same customer; | |||
| the realizable value of any security for the loan; and | |||
| the costs associated with obtaining repayment and realization of any such security. |
55
For certain groups of small private and corporate loans with similar characteristics, provisions are also assessed using statistical techniques.
On certain foreign outstandings, the country provision is calculated, for regulatory purposes, based on detailed instructions given by the Dutch Central Bank. The amount is a function of the risk of the country, as well as the risk of the transaction itself. For accounting purposes, adequate provisions are calculated for countries that are near default or have recently defaulted.
ING Group also maintains an unallocated provision for loan losses that is required to adequately capture various subjective and judgmental aspects of credit risk assessment that are not considered on an individual basis. Considerable judgement is exercised in determining the extent of the provision and is based on managements evaluation of the risk in the portfolio, current economic conditions, recent years loss experience, and credit and geographical concentration trends. When there is no prospect of recovering principal or interest, the outstanding debt and any suspense balances are written off.
56
Summary of loan loss experience
The following table shows the movements in allocation of the provision for loan losses on loans accounted for as loans and advances to banks and customers for the past five years.
Calendar period | ||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
(EUR millions) | ||||||||||||||||||||
Balance on January 1 |
4,671 | 4,870 | 4,474 | 4,272 | 4,522 | |||||||||||||||
Change in the composition of the Group |
(38 | ) | 104 | 93 | (171 | ) | ||||||||||||||
Charge-offs: |
||||||||||||||||||||
Domestic: |
||||||||||||||||||||
Loans guaranteed by public authorities |
(1 | ) | (1 | ) | ||||||||||||||||
Loans secured by mortgages |
(3 | ) | (1 | ) | (4 | ) | (4 | ) | (3 | ) | ||||||||||
Loans to or guaranteed by credit institutions |
(22 | ) | (27 | ) | (18 | ) | ||||||||||||||
Other private lending |
(57 | ) | (65 | ) | (31 | ) | (31 | ) | (77 | ) | ||||||||||
Other corporate lending |
(156 | ) | (166 | ) | (211 | ) | (166 | ) | (198 | ) | ||||||||||
Foreign: |
||||||||||||||||||||
Loans guaranteed by public authorities |
(13 | ) | (1 | ) | ||||||||||||||||
Loans secured by mortgages |
(31 | ) | (30 | ) | (8 | ) | (1 | ) | (1 | ) | ||||||||||
Loans to or guaranteed by credit institutions |
20 | (10 | ) | (3 | ) | (9 | ) | (91 | ) | |||||||||||
Other private lending |
(57 | ) | (105 | ) | (32 | ) | (1 | ) | (1 | ) | ||||||||||
Other corporate lending |
(589 | ) | (797 | ) | (530 | ) | (391 | ) | (458 | ) | ||||||||||
Total charge-offs |
(909 | ) | (1,202 | ) | (838 | ) | (603 | ) | (829 | ) | ||||||||||
Recoveries: |
||||||||||||||||||||
Domestic: |
||||||||||||||||||||
Loans guaranteed by public authorities |
||||||||||||||||||||
Loans secured by mortgages |
3 | 5 | ||||||||||||||||||
Loans to or guaranteed by credit institutions |
6 | 7 | 4 | |||||||||||||||||
Other private lending |
3 | 9 | 2 | 4 | 5 | |||||||||||||||
Other corporate lending |
3 | 8 | 4 | |||||||||||||||||
Foreign: |
||||||||||||||||||||
Loans guaranteed by public authorities |
||||||||||||||||||||
Loans secured by mortgages |
(1 | ) | 2 | 2 | ||||||||||||||||
Loans to or guaranteed by credit institutions |
23 | 4 | 1 | |||||||||||||||||
Other private lending |
11 | 10 | 7 | |||||||||||||||||
Other corporate lending |
42 | 19 | 15 | 23 | 34 | |||||||||||||||
Total recoveries |
84 | 49 | 33 | 38 | 51 | |||||||||||||||
Net charge-offs |
(825 | ) | (1,153 | ) | (805 | ) | (565 | ) | (778 | ) | ||||||||||
Additions and other adjustments
(included in value Adjustments to
receivables of the Banking operations),
excluding foreign currency exchange |
454 | 850 | 1,108 | 938 | 528 | |||||||||||||||
Balance at December 31 |
4,262 | 4,671 | 4,870 | 4,474 | 4,272 | |||||||||||||||
Ratio of net charge-offs to average loans and
advances to banks and customers |
0.24 | % | 0.37 | % | 0.27 | % | 0.22 | % | 0.31 | % |
Additions to the provision for loan losses are based on managements judgment, taking into account all available evidence, on borrower creditworthiness, contractual loan terms, available judicial and other remedies, historical patterns of losses and current economic developments.
Management regularly assesses the adequacy of the provision for loan losses by performing ongoing evaluations of the loan portfolio. A formal analysis of specifically identified loans takes place every quarter, including evaluation of economic risks associated with each loan, the current financial
57
condition of the borrower, the economic environment in which the borrower operates, the level of delinquent loans and the value of collateral. Credit ratings are assigned to the borrowers by allocating all outstanding loans into various Risk Rating categories on a regular basis.
The policy for determining the provision for loan losses is set out in more detail under the heading Bad and Doubtful debts and in Note 1.6.2.5. to the consolidated financial statements.
Additions to the provision for loan losses presented in the table above were influenced by developments in general economic conditions as well as certain individual exposures. Significant movements in the addition to the provision for loan losses are explained in the paragraph Addition to the provision for loan losses on page 113.
The following table shows the allocation of the provision for loan losses on loans accounted for as loans and advances to banks and customers for the past five years:
Year ended December 31, | ||||||||||||||||||||||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||||||||||||||||||||||
EUR | %(1) | EUR | %(1) | EUR | %(1) | EUR | %(1) | EUR | %(1) | |||||||||||||||||||||||||||||||
(EUR millions) | ||||||||||||||||||||||||||||||||||||||||
Domestic: |
||||||||||||||||||||||||||||||||||||||||
Loans guaranteed by
public authorities |
1 | 2.06 | 2.00 | 31 | 2.56 | 3.18 | 3.11 | |||||||||||||||||||||||||||||||||
Loans secured by
mortgages |
198 | 29.23 | 164 | 29.15 | 120 | 27.87 | 112 | 29.01 | 105 | 18.21 | ||||||||||||||||||||||||||||||
Loans to or guaranteed by
credit institutions |
2.07 | 2.59 | 2.28 | 2.96 | 1.37 | |||||||||||||||||||||||||||||||||||
Other private lending |
181 | 1.81 | 258 | 2.17 | 199 | 2.63 | 107 | 1.34 | 88 | 1.31 | ||||||||||||||||||||||||||||||
Other corporate lending |
692 | 10.13 | 728 | 11.83 | 649 | 13.49 | 742 | 11.42 | 766 | 19.03 | ||||||||||||||||||||||||||||||
Total domestic |
1,072 | 45.30 | 1,150 | 47.75 | 999 | 48.83 | 961 | 47.91 | 959 | 43.03 | ||||||||||||||||||||||||||||||
Foreign: |
||||||||||||||||||||||||||||||||||||||||
Loans guaranteed by
public authorities |
36 | 4.83 | 30 | 5.14 | 47 | 5.05 | 68 | 4.76 | 7 | 4.88 | ||||||||||||||||||||||||||||||
Loans secured by
mortgages |
213 | 15.00 | 238 | 12.27 | 73 | 10.02 | 41 | 6.92 | 103 | 5.27 | ||||||||||||||||||||||||||||||
Loans to or guaranteed
by credit institutions |
23 | 7.47 | 28 | 5.54 | 90 | 7.55 | 43 | 7.76 | 70 | 7.36 | ||||||||||||||||||||||||||||||
Other private lending |
344 | 2.39 | 385 | 2.42 | 145 | 2.18 | 181 | 1.16 | 82 | 1.05 | ||||||||||||||||||||||||||||||
Other corporate lending |
2,574 | 25.01 | 2,840 | 26.89 | 3,516 | 26.37 | 3,180 | 31.49 | 3,051 | 38.41 | ||||||||||||||||||||||||||||||
Total foreign |
3,190 | 54.70 | 3,521 | 52.25 | 3,871 | 51.17 | 3,513 | 52.09 | 3,313 | 56.97 | ||||||||||||||||||||||||||||||
Total |
4,262 | 100.00 | 4,671 | 100.00 | 4,870 | 100.00 | 4,474 | 100.00 | 4,272 | 100.00 | ||||||||||||||||||||||||||||||
(1) | The percentages represent the loans in each category as a percentage of the total loan portfolio for loans and advances to banks and customers. |
58
The following table shows the provision for loan losses on loans accounted for as loans and advances to banks and customers as a percentage of the related loan portfolio for the past five years:
Year ended December 31, | ||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
(in %) | ||||||||||||||||||||
Domestic: |
||||||||||||||||||||
Loans guaranteed by public authorities |
0.01 | 0.01 | 0.39 | |||||||||||||||||
Loans secured by mortgages |
0.19 | 0.17 | 0.14 | 0.14 | 0.16 | |||||||||||||||
Other private lending |
2.81 | 3.67 | 2.43 | 2.83 | 2.53 | |||||||||||||||
Other corporate lending |
1.93 | 1.91 | 1.54 | 2.31 | 2.27 | |||||||||||||||
Total domestic |
0.67 | 0.75 | 0.66 | 0.71 | 0.84 | |||||||||||||||
Foreign: |
||||||||||||||||||||
Loans guaranteed by public authorities |
0.21 | 0.18 | 0.30 | 0.51 | 0.06 | |||||||||||||||
Loans secured by mortgages |
0.40 | 0.60 | 0.23 | 0.21 | 0.73 | |||||||||||||||
Loans to or guaranteed by
credit institutions |
0.09 | 0.15 | 0.36 | 0.20 | 0.35 | |||||||||||||||
Other private lending |
4.06 | 4.93 | 2.13 | 5.55 | 2.94 | |||||||||||||||
Other corporate lending |
2.90 | 3.27 | 4.27 | 3.59 | 2.98 | |||||||||||||||
Total foreign |
1.65 | 2.09 | 2.42 | 2.39 | 2.18 | |||||||||||||||
Total |
1.20 | 1.45 | 1.56 | 1.59 | 1.60 |
DEPOSITS
The aggregate average balance of all the Groups interest-bearing deposits (from banks and customer accounts) increased by 16.80% to EUR 441,901 million. Interest rates paid reflect market conditions. The effect on net interest income depends upon competitive pricing and the level of interest income that can be generated through the use of funds.
Deposits by banks are primarily time deposits, the majority of which are raised by the Groups Amsterdam based money market operations in the worlds major financial markets.
Certificates of deposit represent 22% of the category Debt securities (31% at the end of 2003). These instruments are issued as part of liquidity management with maturities generally of less than three months.
59
2004 | 2003 | 2002 | ||||||||||||||||||||||
Average | Average | Average | Average | Average | Average | |||||||||||||||||||
deposit | rate | deposit | rate | deposit | rate | |||||||||||||||||||
(EUR millions) | % | (EUR millions) | % | (EUR millions) | % | |||||||||||||||||||
Deposits by banks |
||||||||||||||||||||||||
Demand non-interest bearing |
72 | 10 | 899 | |||||||||||||||||||||
interest bearing |
3,928 | 2.1 | 2,911 | 1.8 | 1,091 | 5.0 | ||||||||||||||||||
Time |
35,506 | 2.2 | 32,104 | 2.2 | 30,504 | 3.5 | ||||||||||||||||||
Total domestic offices |
39,506 | 35,025 | 32,494 | |||||||||||||||||||||
In foreign offices: |
||||||||||||||||||||||||
Demand non-interest bearing |
1,998 | 2,470 | 3,011 | |||||||||||||||||||||
interest bearing |
23,307 | 1.9 | 20,846 | 1.7 | 12,728 | 2.6 | ||||||||||||||||||
Time |
50,764 | 2.6 | 47,733 | 2.3 | 59,562 | 3.4 | ||||||||||||||||||
Total foreign offices |
76,069 | 71,049 | 75,301 | |||||||||||||||||||||
Total deposits by banks |
115,575 | 106,074 | 107,795 | |||||||||||||||||||||
Customer accounts |
||||||||||||||||||||||||
In domestic offices: |
||||||||||||||||||||||||
Demand non-interest bearing |
11,216 | 12,197 | 15,572 | |||||||||||||||||||||
interest bearing |
49,275 | 1.8 | 46,710 | 1.9 | 17,543 | 2.8 | ||||||||||||||||||
Savings |
26,220 | 3.1 | 24,443 | 1.3 | 43,389 | 3.0 | ||||||||||||||||||
Time |
29,501 | 2.7 | 27,601 | 3.0 | 23,252 | 4.2 | ||||||||||||||||||
Total domestic offices |
116,212 | 110,951 | 99,756 | |||||||||||||||||||||
In foreign offices: |
||||||||||||||||||||||||
Demand non-interest bearing |
1,631 | 3,036 | 3,407 | |||||||||||||||||||||
interest bearing |
34,015 | 1.4 | 34,057 | 1.8 | 25,973 | 2.0 | ||||||||||||||||||
Savings |
146,358 | 2.9 | 96,055 | 2.8 | 55,553 | 3.6 | ||||||||||||||||||
Time |
43,027 | 2.7 | 45,887 | 3.1 | 45,614 | 3.2 | ||||||||||||||||||
Total foreign offices |
225,031 | 179,035 | 130,547 | |||||||||||||||||||||
Total customers accounts |
341,243 | 289,986 | 230,303 | |||||||||||||||||||||
Debt securities |
||||||||||||||||||||||||
In domestic offices: |
||||||||||||||||||||||||
Debentures |
12,538 | 3.7 | 7,871 | 4.5 | 14,636 | 3.9 | ||||||||||||||||||
Certificates of deposit |
3,711 | 3.2 | 4,084 | 3.4 | 2,967 | 4.5 | ||||||||||||||||||
Other |
3,179 | 3.1 | 3,174 | 3.6 | 2,806 | 4.0 | ||||||||||||||||||
Total domestic offices |
19,428 | 15,129 | 20,409 | |||||||||||||||||||||
In foreign offices: |
||||||||||||||||||||||||
Debentures |
14,052 | 4.7 | 14,994 | 4.5 | 13,267 | 8.5 | ||||||||||||||||||
Certificates of deposit |
12,113 | 3.1 | 17,741 | 2.7 | 33,821 | 3.1 | ||||||||||||||||||
Other |
26,120 | 2.5 | 22,910 | 2.4 | 10,781 | 8.7 | ||||||||||||||||||
Total foreign offices |
52,285 | 55,645 | 57,869 | |||||||||||||||||||||
Total debt securities |
71,713 | 70,774 | 78,278 | |||||||||||||||||||||
For the years ended December 31, 2004, 2003 and 2002, the aggregate amount of deposits by foreign depositors in domestic offices was EUR 34,801 million, EUR 33,874 million and EUR 30,551 million, respectively.
60
On December 31, 2004, the maturity of domestic time certificates of deposit and other time deposits, exceeding EUR 25,000, was:
Time certificates of deposit | Other time deposits | |||||||||||||||
(EUR | (EUR | |||||||||||||||
millions) | % | millions) | % | |||||||||||||
3 months or less |
2,483 | 84.3 | 61,101 | 81.9 | ||||||||||||
6 months or less but over 3 months |
253 | 8.6 | 4,702 | 6.3 | ||||||||||||
12 months or less but over 6 months |
210 | 7.1 | 3,858 | 5.2 | ||||||||||||
Over 12 months |
0 | 0.0 | 4,914 | 6.6 | ||||||||||||
Total |
2,946 | 100.0 | 74,575 | 100.0 | ||||||||||||
The following table shows the amount outstanding for time certificates of deposit and other time deposits exceeding EUR 25,000 issued by foreign offices on December 31, 2004.
Year ended | ||||
December 31, 2004 | ||||
(EUR millions) | ||||
Time certificates of deposit |
11,722 | |||
Other time deposits |
77,809 | |||
Total |
89,531 | |||
INVESTMENTS OF THE GROUPS BANKING OPERATIONS
The following table shows the balance sheet value under Dutch GAAP of the investments of the Groups banking operations:
Year ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
(EUR millions) | ||||||||||||
Dutch government |
5,688 | 5,512 | 3,429 | |||||||||
German government |
9,403 | 7,211 | 2,783 | |||||||||
Central banks |
180 | 667 | 668 | |||||||||
Belgian government |
14,829 | 12,839 | 13,165 | |||||||||
Other governments |
27,192 | 21,152 | 15,200 | |||||||||
Corporate debt securities |
||||||||||||
Banks and financial institutions |
34,530 | 35,830 | 18,527 | |||||||||
Other corporate debt securities |
15,867 | 5,718 | 6,210 | |||||||||
U.S. Treasury and other U.S.
Government agencies |
1,953 | 2,834 | 5,180 | |||||||||
Other debt securities |
53,408 | 24,267 | 13,917 | |||||||||
Total debt securities |
163,050 | 116,030 | 79,079 | |||||||||
Shares and convertible debentures |
546 | 766 | 1,254 | |||||||||
Land and buildings (1) |
3,398 | 2,970 | 3,709 | |||||||||
Total |
166,994 | 119,766 | 84,042 | |||||||||
(1) | Including commuted ground rents |
61
Banking investment strategy
INGs investment strategy for its investment portfolio related to the banking activities is formulated by the Asset and Liability Committee (ALCO). The exposures of the investments to market rate movements are managed by modifying the asset and liability mix, either directly or through the use of derivative financial products including interest rate swaps, futures, forwards and purchased option positions such as interest rate caps, floors and collars. See Item 11. Quantative and Qualitative Disclosure of Market Risk.
The investment portfolio related to the banking activities primarily consists of fixed-interest securities. Approximately 29% of the land and buildings owned by ING Bank are wholly or partially in use by Group companies.
Portfolio maturity description
Between | Between | |||||||||||||||||||||||
1 year or less | 1 year and 5 years | 5 and 10 years | ||||||||||||||||||||||
Book value | Book value | Book value | ||||||||||||||||||||||
(EUR | Yield(1) | (EUR | Yield(1) | (EUR | Yield(1) | |||||||||||||||||||
millions) | % | millions) | % | millions) | % | |||||||||||||||||||
Dutch government |
112 | 3.1 | 348 | 4.1 | 5,313 | 4.3 | ||||||||||||||||||
German government |
992 | 3.1 | 2,690 | 4.1 | 5,710 | 4.1 | ||||||||||||||||||
Belgian government |
770 | 4.5 | 7,348 | 5.4 | 6,060 | 4.6 | ||||||||||||||||||
Central banks |
43 | 2.7 | 137 | 5.9 | ||||||||||||||||||||
Other governments |
4,615 | 3.3 | 9,265 | 4.4 | 11,783 | 4.3 | ||||||||||||||||||
Banks and financial institutions |
3,849 | 3.0 | 15,782 | 3.7 | 13,389 | 4.3 | ||||||||||||||||||
Corporate debt securities |
2,221 | 4.3 | 4,342 | 4.3 | 8,512 | 4.4 | ||||||||||||||||||
U.S. Treasury and other U.S.
Government agencies |
91 | 3.9 | 618 | 5.2 | 301 | 4.3 | ||||||||||||||||||
Other debt securities |
2,539 | 3.4 | 18,541 | 3.5 | 26,213 | 3.9 | ||||||||||||||||||
Total |
15,232 | 58,934 | 77,418 | |||||||||||||||||||||
Over 10 years | Without maturity | |||||||||||||||||||||||||||
Book | Book | Total | Balance | |||||||||||||||||||||||||
value | value | Book | premium/ | sheet | ||||||||||||||||||||||||
(EUR | Yield(1) | (EUR | Yield(1) | value | (discount) | value | ||||||||||||||||||||||
millions) | % | millions) | % | (EUR millions) | ||||||||||||||||||||||||
Dutch government |
5,773 | 85 | 5,688 | |||||||||||||||||||||||||
German government |
135 | 5.7 | 9,527 | 124 | 9,403 | |||||||||||||||||||||||
Belgian government |
643 | 5.0 | 14,821 | (8 | ) | 14,829 | ||||||||||||||||||||||
Central banks |
180 | 180 | ||||||||||||||||||||||||||
Other governments |
1,698 | 5.3 | 27,361 | 169 | 27,192 | |||||||||||||||||||||||
Banks and financial institutions |
1,627 | 3.6 | 34,647 | 117 | 34,530 | |||||||||||||||||||||||
Corporate debt securities |
777 | 4.8 | 15,852 | (15 | ) | 15,867 | ||||||||||||||||||||||
U.S. Treasury and other U.S.
Government agencies |
976 | 3.7 | 1,986 | 33 | 1,953 | |||||||||||||||||||||||
Other debt securities |
6,506 | 3.1 | 28 | 53,827 | 419 | 53,408 | ||||||||||||||||||||||
Total |
12,362 | 28 | 163,974 | 924 | 163,050 | |||||||||||||||||||||||
(1) | Since substantially all investment securities held by the banking operations of the Company are taxable securities, the yields are on a tax- equivalent basis. |
62
On December 31, 2004, ING Group also held the following securities for the banking operations that exceeded 10% of shareholders equity:
2004 | 2003 | |||||||||||||||
Book | Market | Book | Market | |||||||||||||
value | value | value | value | |||||||||||||
(EUR millions) | (EUR millions) | |||||||||||||||
Dutch government |
5,773 | 6,082 | 5,618 | 5,692 | ||||||||||||
Belgian government |
14,821 | 15,837 | 12,829 | 13,657 | ||||||||||||
German government |
9,527 | 9,903 | 7,331 | 7,424 |
COMPETITION
There is substantial competition in the Netherlands and in the other countries in which ING
undertakes business in insurance, retail and wholesale banking, and other products and services
provided. Competition is more pronounced in the mature markets of the Netherlands, the Rest of
Europe, the United States, Canada and Australia than in the developing markets. In recent years,
however, competition in developing markets has increased as financial institutions from mature
markets have sought to establish themselves in markets perceived to offer higher growth potential.
ING and all its competitors have sought to form alliances, mergers or strategic relationships with
local institutions, which have become more sophisticated and
competitive.
Competition with respect to the products and services provided by the Group in both mature and
developing markets is based on many factors, including brand recognition, scope of distribution
systems, customer service, products offered, financial strength, price and, in the case of
investment-linked insurance products and asset management services, investment performance.
Management believes its major competitors are the larger Dutch, other European, United States and
Japanese commercial banks, insurance companies, asset management and other financial-services
companies.
RATINGS
ING Groep N.V.s long-term senior debt is rated A+ (with a positive outlook) by Standard & Poors Ratings Service (Standard & Poors), a division of the McGraw-Hill Companies, Inc. ING Groep N.V.s long-term senior debt is rated Aa3 (with a stable outlook) by Moodys Investors Service (Moodys). ING Verzekeringen N.V.s long-term senior debt is rated A+ (with a positive outlook) by Standard & Poors and Aa3 (with a stable outlook) by Moodys.
ING Bank N.V.s long-term senior debt held a AA- (with a positive outlook) rating by Standard & Poors as of December 31, 2004. At the same date, Moodys rated ING Bank N.V.s long-term senior debt at Aa2 (with a stable outlook). Finally, ING Bank N.V.s long-term senior debt was rated AA- by Fitch Ratings, Ltd. as of December 31, 2004.
ING Verzekeringen N.V.s short-term senior debt is rated A1 (with a positive outlook) by Standard & Poors, as of December 31, 2004. Moodys maintains a rating of Prime 1 (P-1) with a stable outlook for the same time period.
ING Bank N.V.s short-term senior debt held a rating of A1+ (with a positive outlook) by Standard & Poors at December 31, 2004. Over the same time period, Moodys rated the short-term debt of the bank at Prime 1 (P-1) with a stable outlook.
DESCRIPTION OF PROPERTY
In the Netherlands, ING owns a significant part of the land and buildings used in the normal course of its business. Outside the Netherlands, ING predominantly leases all of the land and buildings used in the normal course of its business. On December 31, 2004, ING had more than 1,500 branch, representative and similar offices worldwide of which approximately 500 offices, principally branch offices, were located in the Netherlands. In addition, ING has part of its investment portfolio invested in land and buildings. Management believes that INGs facilities are adequate for its present needs in all material respects.
63
Item 5. Operating and financial review and prospects
The following review and prospects should be read in conjunction with the consolidated financial statements and the related Notes thereto included elsewhere herein. The consolidated financial statements have been prepared in accordance with Dutch GAAP, which differs in certain significant respects from U.S. GAAP. Reference is made to Note 6 of Notes to the consolidated financial statements for a description of the significant differences between Dutch GAAP and U.S. GAAP and a reconciliation of shareholdersequity and net profit to U.S. GAAP. Unless otherwise indicated, financial information for ING Group included herein is presented on a consolidated basis under Dutch GAAP.
FACTORS AFFECTING RESULTS OF OPERATIONS
ING Groups results of operations are affected by demographics (particularly with respect to life insurance) and by a variety of market conditions, including economic cycles, insurance industry cycles (particularly with respect to non-life insurance), banking industry cycles and fluctuations in stock markets, interest and foreign exchange rates.
General market conditions
Demographic studies suggest that over the next decade there will be growth in the number of individuals who enter the age group that management believes is most likely to purchase retirement-oriented life insurance products in INGs principal life insurance markets in the Netherlands, the Rest of Europe, the United States, Asia and Australia. In addition, in a number of its European markets, including the Netherlands, retirement, medical and other social benefits previously provided by the government will be, or are expected to be, curtailed in the coming years. Management believes this will increase opportunities for private sector providers of life insurance, health, pension and other social benefits-related insurance products. Management believes that ING Insurances distribution networks, the quality and diversity of its products and its investment management expertise in each of these markets, positions ING Insurance to benefit from these developments. In addition, the emerging markets in Central and Eastern Europe, Asia and South America, in which ING Insurance has insurance operations, generally have lower gross domestic products per capita and gross insurance premiums per capita than the countries in Western Europe and North America in which ING Insurance has insurance operations. Management believes that insurance operations in these emerging markets provide ING Insurance with the market presence which will allow it to take advantage of anticipated growth in these regions. In addition, conditions in the non-life insurance markets in which ING Insurance operates are cyclical, and characterized by periods of price competition, fluctuations in underwriting results, and the occurrence of unpredictable weather-related and other losses.
Fluctuations in equity securities markets
Our insurance and asset management operations are exposed to fluctuations in equity securities markets. Our overall investment return and fee income from equity-linked products are influenced by equity markets. The fees we charge for managing portfolios are often based on performance and value of the portfolio. In addition, fluctuations in equity securities markets may affect sales of life and pension products, unit-linked products, including variable business and may increase the amount of withdrawals which will reduce related management fees. Our banking operations are exposed to fluctuations in equity securities markets. Given the fact that ING Banks policy is to maintain an internationally diversified and mainly client-related trading portfolio, market downturns are likely to lead to declines in securities trading and brokerage activities which we execute for customers and therefore to a decline in related commissions.
Fluctuations in interest rates
Our insurance operations are exposed to fluctuations in interest rates through impacts on sales and surrenders of life insurance and annuity products. Declining interest rates may increase sales, but may impact profitability as a result of a reduced spread between the guaranteed interest rates to policyholders and the investment returns on fixed interest investments. Rising interest rates may increase the surrender of policies which may require liquidation of fixed interest investments at unfavorable market prices. This could result in realized investment losses. Our banking operations are exposed to fluctuations in interest rates. Our management of interest rate sensitivity affects the results of our banking operations. Interest rate sensitivity refers to the relationship between changes in market
64
interest rates and changes in net interest income. The composition of our banking assets and liabilities results in a structural mismatch which causes the banking operations net interest income to be affected by changes in interest rates.
Fluctuations in exchange rates
We publish our consolidated financial statements in euros. Because a substantial portion of our revenue and expenses are denominated in currencies other than euros, fluctuations in the exchange rates used to translate foreign currencies, particularly the U.S. dollar, the Australian dollar, the Canadian dollar, the Japanese yen, the British pound and the Polish zloty into euros will impact our reported results of operations and cash flows from year to year. Fluctuations in exchange rates will also impact the value (denominated in euro) of our investments in our non-Euro reporting subsidiaries. The impact of these fluctuations in exchange rates is mitigated to some extent by the fact that the revenues and related expenses, as well as assets and liabilities, of each of our non-euro reporting subsidiaries are generally denominated in the same currencies. As described below, until 2005, ING Groups policy was to hedge the translation risk of foreign operations in order to minimize the impact of foreign currency movements (See Note 7.11 of Notes to the consolidated financial statements).
The weakening during 2004 of most currencies against the euro had a negative impact of EUR 86 million on operating net profit. This was off set by a gain of EUR 188 million after tax on INGs US dollar hedge, compared with a gain of EUR 119 million in the same period last year. ING has hedged the expected profits in US dollar and US dollar-linked currencies for 2004. On the insurance side, profits were hedged at a EUR/USD exchange rate of 0.922 for 2004, on the banking side the EUR/USD exchange rate was 1.222. Based on a change in INGs view on the longer term outlook for the EUR/USD exchange rate, it was decided to unwind the hedges with respect to the 2005 results.
For the years 2004, 2003 and 2002, the year-end exchange rates (which are the rates ING uses in the preparation of the consolidated financial statements for balance sheet items not denominated in euros) and the average annual exchange rates (which are the rates ING uses in the preparation of the consolidated financial statements for income statement items and cash flows not denominated in euros) were as follows for the currencies specified below:
Average | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
U.S. dollar |
1.2472 | 1.1345 | 0.9458 | |||||||||
Australian dollar |
1.6912 | 1.7484 | 1.7404 | |||||||||
Canadian dollar |
1.6164 | 1.5912 | 1.4838 | |||||||||
Pound sterling |
0.6816 | 0.6899 | 0.6279 | |||||||||
Japanese yen |
133.9170 | 131.1930 | 117.9310 | |||||||||
Polish zloty |
4.5326 | 4.4110 | 3.8480 |
Year-end | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
U.S. dollar |
1.3645 | 1.2616 | 1.0487 | |||||||||
Australian dollar |
1.7485 | 1.6788 | 1.8594 | |||||||||
Canadian dollar |
1.6427 | 1.6281 | 1.6548 | |||||||||
Pound sterling |
0.7053 | 0.7063 | 0.6505 | |||||||||
Japanese yen |
139.7674 | 134.8000 | 124.4000 | |||||||||
Polish zloty |
4.0899 | 4.7070 | 4.0150 |
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Off-Balance-Sheet- Arrangements
Reference is made to pages F-40-F-42: Note 2.18.2 Off-Balance-sheet arrangements.
Less | More | |||||||||||
than | than | |||||||||||
Total | one | one | ||||||||||
2004 | year | year | ||||||||||
(EUR millions) | ||||||||||||
Insurance operations |
||||||||||||
Commitments concerning investments in land and buildings |
507 | 3 | 504 | |||||||||
Commitments concerning fixed-interest securities |
1,424 | 1,377 | 47 | |||||||||
Guarantees |
1,082 | 1,082 | ||||||||||
Other |
546 | 363 | 183 | |||||||||
Banking operations |
||||||||||||
Contingent liabilities in respect of: |
||||||||||||
guarantees |
17,080 | 6,634 | 10,446 | |||||||||
irrevocable letters of credit |
6,233 | 5,963 | 270 | |||||||||
other |
378 | 378 | ||||||||||
27,250 | 14,718 | 12,532 | ||||||||||
irrevocable facilities |
69,011 | 39,768 | 29,243 | |||||||||
96,261 | 54,486 | 41,775 | ||||||||||
Total tabular disclosure of contractual obligations
Payments due by period | ||||||||||||||||||||
Total | Less than | 1-3 | 3-5 | More | ||||||||||||||||
2004 | 1 year | years | years | than 5 years | ||||||||||||||||
(EUR millions) | ||||||||||||||||||||
Operating lease obligations (1) |
510 | 100 | 207 | 51 | 152 | |||||||||||||||
Subordinated Loans of Group Companies (2) |
15,675 | 242 | 664 | 432 | 14,337 | |||||||||||||||
Debenture Loans (2) |
9,481 | 2,605 | 3,398 | 1,613 | 1,865 | |||||||||||||||
Loans Contracted (2) |
4,540 | 3,499 | 658 | 221 | 162 | |||||||||||||||
Loans from Credit Institutions (2) |
3,438 | 3,077 | 343 | 18 | ||||||||||||||||
Insurance provisions |
210,107 | 9,379 | 7,006 | 6,516 | 187,206 | |||||||||||||||
Total |
243,751 | 18,902 | 12,276 | 8,833 | 203,740 | |||||||||||||||
(1) | The Companys operating lease obligations are described in Note 2.18.3 to the consolidated financial statements. | |
(2) | Subordinated loans of Group companies, Debenture loans, Loans contracted and Loans from Credit Institutions are included in the Companys consolidated balance sheet; refer to Note 2.16 to the consolidated financial statements for additional details. |
Insurance provisions represent INGs current best estimates of future payments that will be required in respect of life and non-life insurance claims, including expenses relating to such claims, and incorporate uncertainties as to the timing and amount of claim payments. Actual payments on insurance provisions may therefore vary substantially from the estimates above in respect of both timing and amount.
Critical Accounting Policies
Dutch GAAP
Reference is made to page to F-9: Note 1.5 Critical Accounting Policies.
Transition to IFRS
The European Union requires all listed companies in its member states to prepare consolidated financial statements based on International Financial Reporting Standards (IFRS). Therefore, as of January 1, 2005 we are required to publish our financial statements and report our operating results in accordance with IFRS.
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Most significant IFRS-related changes in ING accounting policies as of January 1, 2005
IFRS differs significantly from Dutch GAAP (as applied in the 2004 annual accounts) in several areas. Therefore, shareholders equity and net profit under IFRS may differ significantly from those under Dutch GAAP. The most important changes for ING are expected to be changes relating to accounting treatment for real estate, employee benefits and fair-value accounting of fixed-interest securities and derivatives. We expect that the implementation of IFRS will increase volatility in both earnings and equity as a result of fair-value accounting of fixed-interest securities and derivatives.
Goodwill
Under Dutch GAAP, goodwill arising from acquisitions is directly charged to shareholders equity immediately at the time of an acquisition. Under IFRS, goodwill arising from acquisitions in 2004 and later years is capitalized; there is no amortization but a charge needs to be taken for any accumulated impairment. Goodwill from acquisitions before January 1, 2004 is not recognized.
Real estate
Under Dutch GAAP and IFRS, investments in land and buildings are carried at the fair values, whereas under Dutch GAAP any unrealized revaluations are accounted for directly in shareholders equity and realized at the time of disposal. Under IFRS changes in fair value are recognized as income.
Under Dutch GAAP and IFRS, land and buildings in use by group companies are also carried at the fair values, with any unrealized revaluations accounted for directly in shareholders equity. Under IFRS however, upon disposal the revaluation reserve is reclassified as retained earnings, and remains equity. Under Dutch GAAP depreciation is not recognized, whereas under IFRS all property in use by group companies is depreciated.
Valuation of loans
Under both Dutch GAAP and IFRS, loans are measured at amortized cost. However, under IFRS certain fees/costs are capitalized and amortized while under Dutch GAAP they are expensed immediately (e.g., mortgage broker fees). Under Dutch GAAP realized results are amortized over the remaining term of the loan, whereas under IFRS these are reported immediately in net income
Except for the calculation of loan loss provisions the above related changes do not impact INGs US GAAP reporting.
Under IFRS, loan loss provisions are determined under a revised methodology. This methodology is based on the current estimate of losses incurred at the balance sheet date measured at amortised cost.
Differences which arise in the application of the IFRS and the Dutch GAAP methodologies are as follows:
| Portfolio based provisions on individually less significant exposures (e.g. mortgages and consumer loans) are subject to a revised methodology under IFRS. The use of a loss confirmation period is explicitly applied when measuring portfolio based provisions under IFRS and the meaning of observable data and current events are interpreted very narrowly in the context of an incurred loss model. As a consequence the implicit loss confirmation period under ING GAAP is in effect shortened. |
| The application of the IFRS methodology will significantly reduce the amount of the unallocated provision for loan losses that we provide to adequately capture various subjective and judgmental aspects of credit risk assessment that are not considered on an individual basis. Considerable judgement is exercised in determining the extent of the unallocated provision, which is based on managements evaluation of the risk in the portfolio, current economic conditions, loss experience in recent years and credit and geographical concentration trends. |
Our analysis of the impact of the revised method of estimating the loan loss provision continues to be underway; however, the change could result in a significant release of the provision which will be recognized in the 2005 US GAAP income statement so as to align US GAAP reporting with the change in estimation process when we adopt IFRS.
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Valuation of debt securities
Under Dutch GAAP, quoted debt securities are measured at amortized cost, whereas under IFRS they are reported at fair value.
Under Dutch GAAP, results realized on sales of debt securities are treated as a yield difference and are amortized over the remaining term of the related securities. Under IFRS they are recognized directly as income.
Through shadow accounting, insurance provisions and DAC are partly adjusted for the effect of realized and unrealized results on debt securities under IFRS.
Accounting for derivatives
Under Dutch GAAP, trading derivatives are reported at fair value and non-trading derivatives which are used for risk management purposes are valued similar to the item being hedged (mainly at cost). Under IFRS, all derivatives are reported at fair value.
Pension liabilities
While the accounting for pensions under Dutch GAAP is similar to IFRS a difference arises due to the first time application of IFRS. Under IFRS, actuarial gains and losses were deferred in a corridor on transition to IFRS and the amount in the corridor is reset to nil as of January 1, 2004.
Overview Group result 2003 versus 2002
Income
In 2004, total operating income increased by 4.7% to EUR 67,814 million, due to increased income from the insurance operations as well as the banking operations, which increased by 4.1% and 7.3%, respectively, and which offset a strengthening of the euro against most other currencies. Total operating income, excluding the impact of acquisitions, divestments and currency effects of the insurance operations increased by 11.3% and of the banking operations by 7.4%, respectively.
Efficiency
Total operating expenses increased 3.2% from EUR 13,081 million in 2003 to EUR 13,495 million. Operating expenses from the insurance operations declined 1.2% from EUR 4,897 million in 2003 to EUR 4,837 million in 2004. However, excluding the impact of divestments and currency effects, operating expenses increased 6.2%, mainly due to higher operating costs in the Netherlands, Belgium, the Rest of Europe, and Australia. Total operating expenses from the banking operations increased 5.8% to EUR 8,658 million, in large part due to continued investments to support the growth of ING Direct. Restructuring provisions incurred in respect of the wholesale operations had a negative impact of EUR 101 million in 2004, consisting EUR 60 million in the third quarter for ING BHF-Bank and EUR 41 million for the international Wholesale Banking network in the fourth quarter. The restructuring provision of EUR 41 million before tax, which was taken in the fourth quarter, will be used to streamline the International Network of the Wholesale Banking, as part of a strategy to focus on core products and clients. In total about 400 jobs are being eliminated in Asia, the U.K. and the Americas, primarily in back-office and IT functions.
Profit
Operating net profit rose 33.0% from EUR 4,053 million in 2003 to EUR 5,389 million in 2004, led by a strong performance in INGs banking operations, in particular ING Direct and Wholesale Banking, mainly as a result of higher income and historically low risk costs. The insurance operations also posted a healthy growth, driven by the life insurance activities in Asia/Pacific and the United States, which were impacted by one-off items regarding the exit from our U.S. individual reinsurance business, and continued strong non-life results, led by Canada.
Net profit rose 47.6% to EUR 5,968 million, lifted by EUR 579 million in realized capital gains on equities in 2004, compared to realized capital losses on equities of EUR 10 million in 2003. The high level of capital gains on shares, most of which were realized in the second half of 2004, is mainly due to a decision to sell part of the Dutch equity portfolio to reduce the volatility of the solvency ratios. Net profit per share rose 40.0% to EUR 2.80, compared to EUR 2.00 in 2003. The increase in earnings per share lagged growth in total net profit due to an increase in the average number of shares outstanding as a result of INGs dividend policy, which allowed investors to receive the dividend in
68
cash or stock. Operating net profit per share increased from EUR 2.00 in 2003 to EUR 2.53 in 2004, an increase of 26.5%.
Insurance operations
Operating net profit from insurance rose 19.0% from EUR 2,508 million in 2003 to EUR 2,985 million in 2004, driven by a strong increase in results from non-life insurance, due to a favorable claims experience as well as gains on the sale of INGs non-life insurance joint venture in Australia and the initial public offering of the Canadian non-life insurance business. Results from life insurance were negatively impacted by one-off items, including the charge in the U.S. individual reinsurance business, which offset higher results at the core life insurance businesses in the United States and Asia/Pacific.
Total premium income increased 5.9% to EUR 43,617 million, as strong growth, particularly from the life insurance businesses in the United States and Asia, was offset in part by divestments and currency effects. Excluding the impact of acquisitions and divestments as well as exchange rate differences, total premium income increased 13.6%. Total life insurance premiums increased 9.1% to EUR 36,975 million, and rose 15.6% excluding the impact of exchange rate differences and acquisitions and divestments. Total non-life premiums decreased 8.9% to EUR 6,642 million, mainly as a result of the sales of the Australian non-life joint venture and the Dutch health insurance business. Excluding the impact of divestments and acquisitions as well as exchange rate differences, non-life premiums increased 3.0%.
Operating expenses from the insurance operations declined 1.2% to EUR 4,837 million in 2004 from EUR 4,897 million in 2003. However, excluding the impact of divestments and currency effects, operating expenses increased 6.1%, mainly due to higher costs in the Netherlands, Belgium, the Rest of Europe, and Australia.
Banking operations
Operating net profit from banking rose 55.6% to EUR 2,404 million, driven by a 7.3% increase in operating income and a sharp reduction in risk costs. All three banking business lines reported higher profits before tax. One-off items, including results on divestments, restructuring charges, and the release of tax provisions had a negative impact of EUR 58 million. Excluding one-off items, operating net profit from the banking operations increased 52.9% to EUR 2,462 million from EUR 1,610 million in 2003. Operating profit before tax from banking rose 44.0% to EUR 3,414 million.
Total operating income from banking rose 7.3% to EUR 12,537 million. Interest income continued to be the most important and stable contributor to income at the bank. The net interest result increased 8.5% to EUR 8,808 million, driven by a higher average balance sheet total, mainly due to the continued strong growth of ING Direct.
Total operating expenses increased 5.8% to EUR 8,658 million, in large part due to continued investments to support the growth of ING Direct. Restructuring provisions had a negative impact of EUR 101 million, including EUR 60 million in the third quarter for ING BHF-Bank and EUR 41 million for the international Wholesale Banking network in the fourth quarter. Excluding those one-off items, currency effects, and the impact of transfers of activities between insurance and banking (EUR 30 million), operating expenses increased 5.5% of which 3.5% was due to ING Direct. As the increase in income outpaced the expense growth, the cost/income ratio of the banking activities improved to 69.1% in 2004, from 70.1% in 2003. Excluding one-off items, the cost/income ratio improved to 67.0% from 69.4%.
In 2004, ING added EUR 465 million to the provision for loan losses, compared with EUR 1,125 million in 2003. The addition equalled 18 basis points of average credit-risk-weighted assets in 2004, compared with 46 basis points in 2003. The lower addition was possible due to a further improvement of the credit portfolio, the release of some debtor provisions and the absence of large defaults
Return on equity
The operating net return on equity increased to 22.9% in 2004 from 21.5% in 2003. The operating net return on equity of the insurance operations was 22.6% in 2004, compared with 22.7% in 2003, while the operating net return on equity from banking rose to 15.8% from 11.1% in 2003.
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CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth the consolidated results of operations of ING Group for the years ended December 31, 2004, 2003 and 2002:
Year ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
(EUR millions) | ||||||||||||
Operating profit before tax: |
||||||||||||
Insurance operations |
4,005 | 3,486 | 3,170 | |||||||||
Banking operations |
3,414 | 2,371 | 1,468 | |||||||||
Operating profit before tax |
7,419 | 5,857 | 4,638 | |||||||||
Taxation |
1,758 | 1,460 | 873 | |||||||||
Third-party interests |
272 | 344 | 332 | |||||||||
Operating net profit |
5,389 | 4,053 | 3,433 | |||||||||
Non-operating profit after taxation |
247 | |||||||||||
Realized capital gains (losses) after taxation |
579 | (10 | ) | 820 | ||||||||
Net profit |
5,968 | 4,043 | 4,500 | |||||||||
The following table sets forth the breakdown of our non-operating profits by insurance and banking operations:
Year ended December 31, | ||||||||||||||||||||||||||||||||||||
2004 | 2003 | 2002 | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||||||||||||||||||||||||||
Insurance operations | Banking operations | Total | ||||||||||||||||||||||||||||||||||
(EUR millions) | ||||||||||||||||||||||||||||||||||||
Non-operating profit: |
||||||||||||||||||||||||||||||||||||
Result on joint venture ANZ |
280 | 280 | ||||||||||||||||||||||||||||||||||
Capital gains |
590 | (20 | ) | 1003 | 590 | (20 | ) | 1003 | ||||||||||||||||||||||||||||
Taxation on non-operating
results |
21 | (10 | ) | 216 | 21 | (10 | ) | 216 | ||||||||||||||||||||||||||||
Non-operating profit
after taxation |
579 | (10 | ) | 1,067 | 579 | (10 | ) | 1,067 | ||||||||||||||||||||||||||||
The following discussion is based on our consolidated financial statements (see Item 18. Financial Statements) and should be read in conjunction with those statements. ING Group evaluates the results of its insurance operations and banking operations using non-GAAP financial performance measures called operating profit before tax and operating (net) profit. Operating (net) profit is defined as (net) profit, excluding:
| capital gains and losses on equity securities, |
| the impact of the negative revaluation reserve on equity securities, and |
| realized gains on divestments that are made with the purpose of using the proceeds to finance acquisitions. |
While these excluded items are significant components in understanding and assessing the Groups consolidated financial performance, ING Group believes that the presentation of operating results enhances the understanding and comparability of its performance by highlighting net income attributable to ongoing operations and the underlying profitability of the businesses. Trends in the underlying profitability of ING Groups businesses can be more clearly identified without the fluctuating effects of realized capital gains and losses on equity securities and the impact of the negative revaluation reserve on equity securities. These results are largely dependent on market cycles and can vary across periods. The timing of sales that would result in gains or losses is largely at the discretion of the company. The realized gains on divestments that are made with the purpose of using the proceeds related to the divestments to finance acquisitions are excluded because the timing of these gains is largely subject to the Companys discretion, influenced by market opportunities and ING does not believe that they are indicative of future results. Operating profit before tax and operating net profit are not a substitute for profit before tax and net
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profit as determined in accordance with Dutch GAAP. ING s definition of operating profit before tax and operating net profit may differ from those used by other companies and may change over time. See Note 3.6.6 to the consolidated financial statements for a reconciliation of our segment operating results to our net profit.
The following table sets forth the operating profit before tax and operating net profit of the Groups consolidated operations by geographic region for the years ended December 31, 2004, 2003 and 2002:
Year ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
(EUR millions) | ||||||||||||
The Netherlands |
3,150 | 3,039 | 2,577 | |||||||||
Belgium |
841 | 587 | 687 | |||||||||
Rest of Europe |
533 | 216 | (156 | ) | ||||||||
North America |
1,921 | 1,118 | 614 | |||||||||
Latin America |
272 | 420 | 381 | |||||||||
Asia |
314 | 273 | 283 | |||||||||
Australia |
536 | 236 | 384 | |||||||||
Other |
(148 | ) | (32 | ) | (132 | ) | ||||||
Operating profit before tax |
7,419 | 5,857 | 4,638 | |||||||||
Taxation |
1,758 | 1,460 | 873 | |||||||||
Third-party interests |
272 | 344 | 332 | |||||||||
Operating net profit |
5,389 | 4,053 | 3,433 | |||||||||
The contribution of the insurance operations to the operating net profit of ING Group, after tax and third-party interests, was 55.4%, 61.9% and 73.9% in 2004, 2003 and 2002, respectively.
Year ended December 31, 2004 compared to year ended December 31, 2003
Total operating income of ING Group increased by EUR 3,068 million, or 4.7% to EUR 67,814 million, from EUR 64,746 million in 2003, reflecting an increase in income of the Groups insurance operations of 4.1% and in the banking operations of 7.3%. Total operating expenditure increased by EUR 1,506 million, or 2.6%, from EUR 58,889 million in 2003 to EUR 60,395 million in 2004, reflecting an increase in total operating expenditure of the insurance operations of 3.3%. and a decrease in total expenditure of the banking operations of 2.0%. The Groups operating profit before tax increased in the Netherlands, Belgium, the Rest of Europe, North America,Asia and Australia but declined in Latin America.
Consolidated operating profit before tax increased EUR 1,562 million, or 26.7%, to EUR 7,419 million in 2004 compared to EUR 5,857 million in 2003, reflecting increases of 14.9% for the insurance operations and 44.0% for the banking operations. Including non-operating results, profit before tax increased EUR 2,132 million, or 36.3%, to EUR 8,009 million in 2004 compared to EUR 5,877 million in 2003. The Groups consolidated taxes (operating) of EUR 1,758 million in 2004 and EUR 1,460 million in 2003 represented overall effective tax rates of 23.7% and 24.9%, respectively, compared to the statutory rates for the Groups primary operating subsidiaries that ranged from 16.5% to 47%, and averaged 35%. The difference between statutory and effective rates was due primarily to a reduction in the taxes paid by the Groups Dutch subsidiaries, for which the statutory rate was 34.5% and the effective rate was 29.0% in 2004.
Operating net profit increased EUR 1,336 million, or 33.0%, to EUR 5,389 million in 2004 compared to EUR 4,053 million in 2003, reflecting the increased pre-tax profits, as well as the release of EUR 932 million in capital gains (EUR 258 million in 2003), although the effect of exchange rate movements decreased operating net profit in 2004 by EUR 17 million, compared to a decrease of EUR 49 million in 2003, both net of US-dollar hedging. Including non-operating profits, net profit increased EUR 1,925 million, or 47.6%, to EUR 5,968 million in 2004 compared to EUR 4,043 million in 2003.
Year ended December 31, 2003 compared to year ended December 31, 2002
Total operating income of ING Group decreased by EUR 5,887 million, or 8.3% to EUR 64,746 million,
71
from EUR 70,633 million in 2002, reflecting an decrease in income of the Groups insurance operations of 10.5% and an increase in the banking operations of 4.3%. Total operating expenditure decreased by EUR 7,106 million, or 10.8%, from EUR 65,995 million in 2002 to EUR 58,889 million in 2003, reflecting decreases of 11.6% and 4.4% respectively, in total expenditure for the Groups insurance and banking operations. The Groups operating profit before tax increased the Netherlands, the Rest of Europe, North America, Latin America and Asia, but declined in Belgium and Australia.
Consolidated operating profit before tax increased by EUR 1,219 million, or 26.3%, to EUR 5,857 million in 2003 compared to EUR 4,638 million in 2002, reflecting increases of 10.0% for the insurance operations and 61.5% for the banking operations. Including non-operating results, profit before tax decreased by EUR 44 million, or 0.7%, to EUR 5,877 million in 2003 compared to EUR 5,921 million in 2002. The Groups consolidated taxes (operating) of EUR 1,460 million in 2003 and EUR 873 million in 2002 represented overall effective tax rates of 24.9% and 18.8%, respectively, compared to the statutory rates for the Groups primary Dutch and other non-domestic operating subsidiaries that ranged from 16.5% to 47%, and averaged 35%. The increase was mainly due to higher tax-exempt gains as well as the release of a tax provision in the insurance operations in 2002. The difference between statutory and effective rates was due primarily to a reduction in the taxes paid by the Groups Dutch subsidiaries, for which the statutory rate was 34.5% and the effective rate was 19.1% in 2002.
Operating net profit increased EUR 620 million, or 18.1%, to EUR 4,053 million in 2003 compared to EUR 3,433 million in 2002, reflecting the increased pre-tax profits, although the effect of exchange rate movements between the euro and certain of the Groups primary operating currencies decreased operating net profit in 2003 by EUR 49 million, compared to an increase of EUR 76 million in 2002, both net of U.S.-dollar hedging. Including non-operating profits, net profit decreased EUR 457 million, or 10.2%, to EUR 4,043 million in 2003 compared to EUR 4,500 million in 2002.
CONSOLIDATED ASSETS AND LIABILITIES
The following table sets forth ING Groups consolidated assets and liabilities for the years ended December 31, 2004, 2003 and 2002:
Year ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
(EUR billions, except amounts per share ) | ||||||||||||
Investments |
398.0 | 335.0 | 297.6 | |||||||||
Bank lending |
317.5 | 292.6 | 284.4 | |||||||||
Total assets |
866.1 | 778.8 | 716.4 | |||||||||
Insurance provisions
|
||||||||||||
Life |
200.2 | 188.2 | 186.0 | |||||||||
Non-life |
9.9 | 9.8 | 9.8 | |||||||||
Total insurance provisions |
210.1 | 198.0 | 195.8 | |||||||||
Funds entrusted to and debt securities of the banking operations (1) |
435.9 | 377.8 | 319.8 | |||||||||
Due to banks |
112.8 | 102.1 | 96.3 | |||||||||
Total liabilities |
840.2 | 757.5 | 698.1 | |||||||||
Shareholders equity |
25.9 | 21.3 | 18.3 | |||||||||
Shareholders equity per Ordinary share |
11.76 | 10.08 | 9.14 |
(1) | Funds entrusted to and debt securities of the banking operations consists of savings accounts, other deposits, bank funds and debt securities privately issued by the banking operations of ING. |
Year ended December 31, 2004 compared to year ended December 31, 2003
Total assets increased by 11.2% in 2004 to EUR 866.2 billion, mainly due to increased fixed income investments and bank lending. Investments increased by EUR 63.0 billion, or 18.8%, to EUR 398.0 billion in 2004 from EUR 335.0 billion in 2003, representing an increase of EUR 15.7 billion in insurance investments and an increase of EUR 48.2 billion in banking investments of which EUR 38.2 billion was attributable to ING Direct.
Bank lending increased by EUR 24.9 billion, or 8.5%, rising to EUR 317.5 billion at the end of 2004 from
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EUR 292.6 billion at the end of 2003. Of this amount, EUR 152.6 billion is related to lending in the Netherlands and EUR 164.9 billion to international lending. The total increase of EUR 24.9 billion was mainly due to a small increase of corporate loans, by EUR 4.0 billion and higher personal lending of EUR 18.5 billion. ING Direct contributed EUR 11.8 billion to the increase in personal lending.
Group shareholders equity increased by 21.2% or EUR 4,535 million to EUR 25,866 million at December 31, 2004 compared to EUR 21,331 million at December 31, 2003. Net profit from the year 2004 added EUR 5,968 million to shareholders equity and revaluations added EUR 1,063 million, offset by EUR (932) million in realized capital gains that were released through the profit and loss account, the interim cash dividend of EUR 399 million and exchange rate differences lowered shareholdersequity by EUR 966 million.
Year ended December 31, 2003 compared to year ended December 31, 2002
Total assets increased by 8.7% in 2003 to EUR 778.8 billion, due to increased fixed income investments, bank lending and banks. Investments increased by EUR 37.4 billion, or 12.6%, to EUR 335.0 billion in 2003 from EUR 297.6 billion in 2002, representing a small increase of EUR 1.5 billion in insurance investments and an increase of EUR 36.0 billion in banking investments of which EUR 29.8 billion was attributable to ING Direct.
Bank lending increased by EUR 8.2 billion, or 2.9%, rising to EUR 292.6 billion at the end of 2003 from EUR 284.4 billion at the end of 2002. Of this amount, EUR 143.7 billion related to lending in the Netherlands and EUR 148.9 billion to international lending. The total increase of EUR 8.2 billion was due to decreased corporate loans mainly as a result of negative currency rate fluctuations, by EUR 5.2 billion and higher personal lending of EUR 13.4 billion.
Group shareholders equity increased by 16.9% or EUR 3,077 million to EUR 21,331 million at December 31, 2003 compared to EUR 18,254 million on December 31, 2002. On balance, net profit of EUR 4,043 million increased and exchange rate differences decreased shareholders equity by EUR 1,123 million. In addition, the portion of the 2002 final dividend and 2003 interim dividend paid caused shareholders equity to decrease by EUR 943 million, partially offset by the issue of shares of EUR 925 million to fund the cash dividend.
SEGMENT REPORTING
ING Groups segments are based on the management structure of the Group, which is different from its legal structure. Each business line formulates its strategic, commercial and financial policy in conformity with the strategy and performance targets set by the Executive Board. Each business line is also responsible for the preparation of its annual budget and each business line monitors the realization of its policies and budgets and its business units. The following table sets forth the contribution of our six business lines to our operating income and operating profit before tax for each of the years 2002-2004:
Year ended December 31, | ||||||||||||||||||||||||
2004 | 2003 | 2002 | 2004 | 2003 | 2002 | |||||||||||||||||||
Total operational income | Operational result before taxation | |||||||||||||||||||||||
(EUR millions) | ||||||||||||||||||||||||
Insurance Europe |
16,209 | 16,537 | 15,709 | 1,733 | 1,791 | 1,296 | ||||||||||||||||||
Insurance Americas |
28,112 | 27,589 | 35,350 | 1,669 | 1,310 | 1,430 | ||||||||||||||||||
Insurance Asia/Pacific |
10,487 | 8,424 | 8,778 | 751 | 411 | 574 | ||||||||||||||||||
Wholesale Banking |
5,761 | 5,825 | 5,765 | 1,932 | 1,272 | 596 | ||||||||||||||||||
Retail Banking |
5,035 | 4,773 | 4,814 | 1,170 | 1,058 | 1,023 | ||||||||||||||||||
ING Direct |
1,705 | 1,045 | 618 | 432 | 151 | (48 | ) | |||||||||||||||||
Other (1) |
505 | 553 | (401 | ) | (268 | ) | (136 | ) | (233 | ) | ||||||||||||||
Total Group |
67,814 | 64,746 | 70,633 | 7,419 | 5,857 | 4,638 | ||||||||||||||||||
(1) | Reflects intersegment eliminations, part of the gain on old reinsurance activities, hege result and interest on core debt, not allocated to the different insurance business lines and interest expenses not allocated to the different banking business lines. |
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See Note 3.6.6 Segment Reporting of Notes to the consolidated financial statements for a reconciliation of our segment operating results to our net profits under Dutch GAAP.
Year ended December 31, 2004 compared to year ended December 31, 2003
Insurance Europe
Gross premiums written in the life operations increased by EUR 105 million, or 1.1%, to EUR 9,304 million, while gross premiums written in the non-life operations declined EUR 137 million, or 6.2%, to EUR 2,065 million.
The operating profit before tax decreased by 3.2% to EUR 1,733 million from EUR 1,791 million in 2003. Life results in the Netherlands declined 4.4%, caused by higher operating expenses, the impact of the transfer of a real estate portfolio to the banking operations, and a lower one-off gain on discontinued reinsurance activities. Life results in Belgium and Central Europe and Russia increased by 29.1% and 11.5% respectively from EUR 86 million to EUR 111 million in Belgium and from EUR 142 million to EUR 158 million for Central Europe and Russia. Operating profit before tax from non-life insurance increased 6.5% to EUR 312 million, mainly as a result of favourable claims experience in the Netherlands, which offset lower non-life results from Belgium.
Under U.S. GAAP, operating profit before tax would have been EUR 574 million higher in 2004 and EUR 205 million higher in 2003. This difference is mainly caused by the following reconciling items for 2004: the 2004 U.S. GAAP operating profit included provision for life policy liabilities of EUR 241 million (2003: EUR 42 million), real estate gains and losses of EUR 169 million (2003: EUR 268 million), accounting for derivative financial instruments held for risk management of EUR 185 million (2003: EUR(264)million), real estate valuation of EUR (118) million (2003: EUR (119) million) and amortization of premiums and discounts of debt securities of EUR (150) million (2003: EUR (174) million). For an explanation of differences between Dutch GAAP and U.S. GAAP please refer to Notes 6.1 and 6.2 on pages F-93 to F-99.
Insurance Americas
Gross premiums written in the life business increased by EUR 925 million, or 5.3%, from EUR 17,503 million in 2003 to EUR 18,428 million in 2004, boosted by the introduction of new products as well as enhanced distribution. Gross non-life premiums decreased EUR 484 million, or 10%, to EUR 4,332 million in 2004, mainly due to lower premium income from motor and property insurance in Mexico as well as currency effects.
The operating profit before tax increased by EUR 359 million from EUR 1,310 million to EUR 1,669 million. The results include several one-off items related to the U.S. individual reinsurance business, which ING has exited, the pending sale of Life of Georgia, and the initial public offering of the non-life insurance business in Canada.
Operating expenses declined 1.5%, mainly as a result of currency effects. Excluding currency effects, operating expenses increased 7.2% primarily as the result of the transfer of certain investment management activities from banking to insurance at the beginning of 2004, as well as additional expenses related to exiting the U.S. individual life reinsurance business and the pending sale of Life of Georgia.
Under U.S. GAAP, operating profit before tax would have been EUR 263 million higher in 2004 and EUR 439 million higher in 2003. This difference is mainly caused by the following reconciling items for 2004: impairment of goodwill of EUR (147) million (2003: EUR (101) million),realized results on sales of debt securities of EUR 233 million (2003: EUR 712 million), amortization of premiums and discount of debt securities of EUR (111) million (2003: EUR 75 million), accounting for derivative financial instruments held for risk management of EUR 176 million (2003: EUR 283 million). For an explanation of differences between Dutch GAAP and U.S. GAAP please refer to Notes 6.1 and 6.2 on pages F-93 to F-99.
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Insurance Asia / Pacific
Gross premiums written in the life business increased by EUR 2,039 million, or 28.3, from EUR 7,193 million in 2003 to EUR 9,232 million in 2004, led by South Korea and Japan, while non-life premium income fell 40.9%, reflecting the sale of the Australian non-life business in the second quarter of 2004. Excluding the impact of currencies and divestments, total life premiums increased 32.9%. Double-digit growth rates in local currencies were recorded in Japan 81.8%, South Korea 49.6%, Malaysia 17.1%, Hong Kong 16.2%, Thailand 37.6%, India 211.3% and China 10.5%.
The operating profit before tax of the insurance operations decreased by EUR 117 million, or 20.6%, primarily due to the operating gain of EUR 222 million in 2002 from the transaction with ANZ, to EUR 452 million in 2003. The operations in Australia, Japan, Hong Kong and Korea all showed improved results in local currencies. Results from Taiwan were lower, mainly because of an addition of EUR 50 million to the provision against a prolonged low interest rate environment. Excluding this provision and at constant exchange rates, profit increased.
The operating profit before tax of the banking operations decreased by EUR 33 million from EUR 34 million in 2002 to EUR 1 million in 2003, mainly because of lower dividends in 2003, EUR (18) million received on the investment in Kookmin Bank (South Korea) and lower results EUR (15) million regarding the 44% stake in Vysya Bank (India)
The operating profit before tax increased by EUR 340 million, or 82.7% to EUR 751 million in 2004 from EUR 411 million in 2003, including a one-time gain of EUR 219 million from the sale of INGs 50% stake in the Australian non-life insurance joint venture in the second quarter of 2004. Excluding that gain, operating profit before tax increased by 29.4% to EUR 532 million, led by the Australian life and wealth businesses and the life insurance businesses in South Korea and Japan.
Wholesale Banking
Total operating income of Wholesale Banking declined by EUR 64 million, or 1.1%, to EUR 5,761 million in 2004 from EUR 5,825 million in 2003, due in part to divestments. The interest result declined 4.6%, mainly as a result of a decrease in the Netherlands. Commission income decreased 0.4% to EUR 1,363 million from EUR 1,368 million in 2003. Other income increased 11.5% to EUR 1,017 million despite a charge of EUR 165 million from the combined impact of the sales of ING BHF-Bank activities (EUR (210) million), the Asian cash equities business (EUR (42) million) and CenE Bankiers (EUR 87 million). That was offset by an increase in other income in the Netherlands and Belgium due to higher results from financial transactions.
Operating profit before tax from Wholesale Banking increased by EUR 660 million, or 51.9%, to EUR 1,932 million from EUR 1,272 million in 2003. The increase was fully driven by a sharp decline in risk costs as the addition to the provision for loan losses decreased to EUR 192 million from EUR 868 million in 2003, as described below under Addition to the provision for loan losses. Profit was furthermore impacted by a number of one-off items, including losses on the sale of ING BHF-Bank activities and the Asian cash equities business, a gain on the sale of CenE Bankiers in the Netherlands, as well as restructuring costs and the transfer of businesses between insurance and banking. Excluding those items, operating profit before tax increased 57.0% to EUR 2,240 million from EUR 1,427 million in 2003. Currency effects had a negative impact of EUR 25 million.
Under U.S. GAAP, operating profit before tax would have been EUR 71 million lower in 2004 and EUR 131 million lower in 2003. This difference is mainly caused by the following reconciling items for 2004: real estate valuation of EUR (104) million (2003: EUR (48) million), realized results on sales and amortization of premiums and discount of debt securities of EUR (228) million (2003: EUR (151) million), accounting for derivative financial instruments held for risk management of EUR 206 million (2003: EUR (224) million). For an explanation of differences between Dutch GAAP and U.S. GAAP please refer to Notes 6.1 and 6.2 on pages F-93 to F-99.
Retail Banking
Total operating income of Retail Banking rose EUR 262 million, or 5.5%, to EUR 5,035 million in 2004 from EUR 4,773 million in the previous year. Interest income increased 8.2% from EUR 3,630 million in
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2003 to EUR 3,928 million in 2004 due to higher mortgage lending and increased savings, while interest margins narrowed slightly. Commission income rose 7.7%, mainly driven by higher securities-related commissions. Other income declined sharply, due in part to a EUR 48 million loss taken by Postbank in the first quarter of 2004 to compensate customers for a disappointing return on investments related to the unit-linked mortgage product MeerWaardehypotheek. Excluding this loss, total income increased 6.5%.
Operating profit before tax from Retail Banking rose 10.6%, or EUR 112 million, from EUR 1,058 million in 2003 to EUR 1,170 million in 2004, driven by solid income growth and slightly lower risk costs. Results were bolstered by higher profit in the Netherlands, driven by increased mortgage lending and savings, and in Poland, which benefited from lower risk costs. Profit from Belgium declined, due to non-recurring expenses and risk costs which resulted in a loss in the fourth quarter, despite a 12.1% increase in operating income for full-year 2004.
Under U.S. GAAP, operating profit before tax would have been EUR 184 million higher in 2004 and EUR 190 million higher in 2003. This difference is mainly caused by the following reconciling items for 2004: valuation of fixed interest securities of EUR 278 million (2003: nil), and amortization of premiums and discount of debt securities of EUR (62) million (2003: EUR (57) million). For an explanation of differences between Dutch GAAP and U.S. GAAP please refer to Notes 6.1 and 6.2 on pages F-93 to F-99.
ING Direct
Operating income from ING Direct increased by EUR 660 million, or 63.2%, from EUR 1,045 million in 2003 to EUR 1,705 million in 2004, driven mainly by a 62.1% increase in the interest result, caused by the continued growth in funds entrusted. Total funds entrusted grew by EUR 46.0 billion, or 46.3%, to EUR 145.4 billion at December 31, 2004. Growth in mortgage lending also boosted income. At yearend 2004, ING Direct had a total mortgage portfolio of EUR 33.1 billion, an increase of EUR 12.1 billion from the end of 2003, driven mainly by growth in Germany and the U.S.
Operating profit before tax from ING Direct increased to EUR 432 million in 2004 compared with EUR 151 million in 2003 as it continued to attract new customers and gain critical mass in the markets where it operates. Of the eight countries in which ING Direct is active, it is profitable in seven.
Under U.S. GAAP, operating profit before tax would have been EUR 237 million lower in 2004 and EUR 43 million lower in 2003. This difference is caused by the following reconciling item for 2004: accounting for derivative financial instruments held for risk management of EUR (237) million (2003: EUR (47) million). For an explanation of differences between Dutch GAAP and U.S. GAAP please refer to Notes 6.1 and 6.2 on pages F-93 to F-99.
Year ended December 31, 2003 compared to year ended December 31, 2002
Insurance Europe
Gross premiums written in the life operations increased by EUR 639 million, or 7.5%, to EUR 9,199 million. Gross premiums written in the non-life operations increased EUR 23 million, or 1.1%, to EUR 2,202 million.
The operating profit before tax increased by 38.2% to EUR 1,791 million from EUR 1,296 million in 2002. Pressure on investment income and higher expenses resulted in lower life results in the Netherlands. The life operations in Belgium and Poland, however, performed well. The non-life results on the home markets in the Netherlands and Belgium developed very favorably.
Under U.S. GAAP, operating profit before tax would have been EUR 205 million higher in 2003 and EUR 876 million lower in 2002. This difference is mainly caused by the following reconciling items for 2003: accounting for derivative financial instruments held for risk management of EUR (264) million (2002: EUR 105 million), realized result on sales and amortization of debt securities of EUR (120) million (2002: EUR (120) million), real estate gains and losses of EUR 268 million (2002: EUR 165 million), valuation of equity securities of EUR 349 million (2002: EUR (962) million). For an explanation of
76
differences between Dutch GAAP and U.S. GAAP please refer to Notes 6.1 and 6.2 on pages F-93 to F-99.
Insurance Americas
Gross premiums written in the life business decreased by EUR 6,550 million, or 23.1%, from EUR 28,380 million in 2002 to EUR 21,830 million in 2003, mainly caused by decreased fixed annuities sales, which suffered from the depressed interest rate environment. Gross non-life premiums decreased EUR 803 million, or 14.7%, to EUR 4,660 million in 2003.
The operating profit before tax decreased by EUR 120 million from EUR 1,430 million to EUR 1,310 million, due to the impact of lower interest rates causing margin compression and lower fixed annuity sales as well as unfavourable mortality in the reinsurance business.
Under U.S. GAAP, operating profit before tax would have been EUR 439 million higher in 2003 and EUR 11,557 million lower in 2002. This difference is mainly caused by the following reconciling items for 2003: impairment of goodwill of EUR (101) million (2002: EUR (10,942) million), valuation of debt securities of EUR (333) million (2002: EUR (375) million), realized results on sales and amortization of premiums and discount of debt securities EUR 786 million (2002: EUR 546 million), accounting for derivative financial instruments held for risk management of EUR 283 million (2002: EUR (538) million), deferred acquisition costs of EUR (169) million (2002: EUR 2 million). For an explanation of differences between Dutch GAAP and U.S. GAAP please refer to Notes 6.1 and 6.2 on pages F-93 to F-99.
Insurance Asia/Pacific
Gross premiums written in the life business decreased by EUR 243 million, or 3.3%, from EUR 7,436 million in 2002 to EUR 7,193 million in 2003. Gross premiums, life and non-life, of the developing markets operations (mainly South Korea and Taiwan) increased 23.6% in local currencies. In Japan, premium income decreased by 1.4% in local currency due to the flat sales of single premium variable annuity product. Gross premiums of the non-life operations increased by 10.8% from EUR 362 million in 2002 to EUR 401 million in 2003.
The operating profit before tax of the insurance operations decreased by EUR 163 million, or 28.4%, to EUR 411 million in 2003 primarily due to the operating gain of EUR 222 million in 2002 from the transaction with ANZ, to EUR 411 million in 2003. The operations in Australia, Japan, Hongkong and South Korea all showed improved results in local currencies. Results from Taiwan were lower, mainly because of an addition of EUR 50 million to the provision against a prolonged low interest rate environment. Excluding this provision and at constant exchange rates, profit increased.
Wholesale Banking
Total operating income of Wholesale Banking rose EUR 60 million, or 1.0%, to EUR 5,825 million from EUR 5,765 million in 2002. The interest result declined 5.1%, particular in the international wholesale banking activities. Commission income increased 2.5% to EUR 1,368 million. Other income increased 31.6% to EUR 912 million, especially in Asset Management (ING Real Estate and ING Furman Selz), the international wholesale banking activities and ING Bank Netherlands. In 2002, Other income included an exceptional profit of EUR 94 million on Cedel shares.
Operating profit before tax from Wholesale Banking more than doubled to EUR 1,272 million from EUR 596 million. The higher profit is to a large extent caused due to a decrease of the addition to the provision for loan losses to EUR 868 million from EUR 1,267 million in 2002, particular in the Americas. Profit was impacted by a number of one-off items, including the EUR 94 million gain on Cedel shares in 2002 and restructuring costs in both 2002 (EUR 128 million) and 2003 (EUR 82 million). Excluding those items, operating profit before tax increased 115% to EUR 1,354 million.
Under U.S. GAAP, operating profit before tax would have been EUR (131) million lower in 2003 and EUR 1,011 million lower in 2002. This difference is mainly caused by the following reconciling items for 2003: valuation fixed interest securities of EUR 298 million (2002: EUR 344 million), goodwill EUR 0 million (2002: EUR (1,070) million), realized results on sales and amortization of premiums and
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discount of debt securities of EUR (151) million (2002: EUR (97) million), accounting for derivative financial instruments held for risk of management EUR (224) million (2002: EUR (45) million). For an explanation of differences between Dutch GAAP and U.S. GAAP please refer to Notes 6.1 and 6.2 on pages F-93 to F-99.
Retail Banking
Total operating income of Retail Banking decreased EUR 41 million, or 0.9%, to EUR 4,773 million in 2003 from EUR 4,814 million in 2002. Interest income increased 0.3%. Commission income decreased 6.5%, mainly caused by the on average lower stock market levels and the reluctance of private clients to invest in securities. Other income rose EUR 20 million to EUR 87 million in 2003.
Operating profit before tax from Retail Banking rose 3.4%, or EUR 35 million, from EUR 1,023 million to EUR 1,058 million in 2003, entirely due to lower operating expenses.
Under U.S. GAAP, operating profit before tax would have been of EUR 190 million higher in 2003 and EUR 98 million higher in 2002. This difference is mainly caused by the following reconciling items for 2003: goodwill EUR 0 million (2002: EUR (98) million), valuation of debt securities of EUR 102 million (2002: EUR 196 million), accounting for derivative financial instruments held for risk management of EUR 169 million. For an explanation of differences between Dutch GAAP and U.S. GAAP please refer to Notes 6.1 and 6.2 on pages F-93 to F-99.
ING Direct
Operating income from ING Direct increased EUR 427 million or 69.1% from EUR 618 million in 2002 to EUR 1,045 million in 2003, driven mainly by a 78.4% increase in the interest result, driven by the continued growth in funds entrusted. Total funds entrusted grew by EUR 44.2 billion, or 80.1%, to EUR 99.4 billion at the end of December 2003.
Operating profit before tax from ING Direct turned from a loss of EUR 48 million in 2002 to a profit of EUR 151 million in 2003 as it continued to attract new customers and gain critical mass in the markets where it operates. ING Direct is profitable in five of the eight countries in which it is active. ING Direct is not profitable in France, Italy and the United Kingdom.
Under U.S. GAAP, operating profit before tax would have been EUR (43) million lower in 2003 and EUR 0 million in 2002. This difference is mainly caused by the following reconciling item for 2003 accounting for derivative financial instruments held for risk management of EUR (47) million (2002: EUR 0 million). For an explanation of differences between Dutch GAAP and U.S. GAAP please refer to Notes 6.1 and 6.2 on pages F-93 to F-99.
Investment portfolio impairments and unrealized losses
The carrying value of all investments in our investment portfolio is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The review includes, amongst other, an evaluation of the level and trends of interest rates, trends and level of volatility in stock markets, financial condition of the issuer or counterparty, economic developments and expectations in the business segment in which the issuer or counterparty operates, the extent to which the fair value is below the cost price, the period of time for which unrealized losses have existed and ING Groups intent and ability to hold a security until fair value will recover. For all investments for which, based on such review, the unrealized losses are expected to be other than temporary, the amount of unrealized loss is charged to the profit and loss account.
As of December 31, 2004, our consolidated investment portfolio included unrealized gains on a U.S. GAAP basis of EUR 14,424 million (December 31, 2003: EUR 11,245 million) and unrealized losses of EUR 921 million (December 31, 2003: EUR 1,408 million).
The investment portfolio unrealized losses and impairments under U.S. GAAP are discussed below.
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Investment portfolio unrealized losses
See Note 7.1 on page F-108 for the composition of investments in marketable securities on December
31, 2004 and December 31, 2003 on a U.S. GAAP basis.
The table below provides the gross unrealized
loss on a U.S. GAAP basis on debt and equity securities of EUR 921 million for the year ended
December 31, 2004 broken down by type of security and by the period of time for which the fair
value was below cost price.
Between 6 | ||||||||||||||||
Less than | and 12 | More than | ||||||||||||||
6 months | months | 12 months | ||||||||||||||
below cost | below cost | below cost | Total | |||||||||||||
(EUR millions) | ||||||||||||||||
Debt securities: |
||||||||||||||||
Dutch Government |
1 | 1 | ||||||||||||||
Foreign Governments |
29 | 17 | 38 | 84 | ||||||||||||
Corporate debt securities |
79 | 55 | 128 | 262 | ||||||||||||
Mortgage-backed securities |
124 | 118 | 87 | 329 | ||||||||||||
Other |
37 | 5 | 51 | 93 | ||||||||||||
Sub-total |
269 | 196 | 304 | 769 | ||||||||||||
Shares and convertible debentures |
67 | 26 | 59 | 152 | ||||||||||||
Total |
336 | 222 | 363 | 921 | ||||||||||||
The table below provides the gross unrealized loss on a U.S. GAAP basis on debt and equity securities of EUR 1,408 million for the year ended December 31, 2003 broken down by type of security and by the period of time for which the fair value was below cost price.
Between 6 | ||||||||||||||||
Less than | and 12 | More than | ||||||||||||||
6 months | months | 12 months | ||||||||||||||
below cost | below cost | below cost | Total | |||||||||||||
(EUR millions) | ||||||||||||||||
Debt securities: |
||||||||||||||||
Dutch Government |
61 | 2 | 63 | |||||||||||||
Foreign Governments |
152 | 124 | 83 | 359 | ||||||||||||
Corporate debt securities |
257 | 221 | 47 | 525 | ||||||||||||
Mortgage-backed securities |
123 | 80 | 49 | 252 | ||||||||||||
Other |
14 | 26 | 5 | 45 | ||||||||||||
Sub-total |
607 | 453 | 184 | 1,244 | ||||||||||||
Shares and convertible debentures |
75 | 19 | 70 | 164 | ||||||||||||
Total |
682 | 472 | 254 | 1,408 | ||||||||||||
The Company does not consider the securities with unrealized losses for over 12 months of EUR 363 million as of December 31, 2004 to be impaired, since either:
| the market values securities are only insignificantly lower than the cost price |
| the unrealized loss arose due to changes interest rates, however this has not effected the expected future cash flows, or |
| the issuers of debt securities are not considered to be in financial difficulty, despite the fact that their credit rating has been lowered, reducing the market value of their securities. |
The unrealized losses on securities on a Dutch GAAP basis are EUR 1,287 million higher as compared to U.S. GAAP as discussed in Note 6.1.e on page F-95 (2003: EUR 1,435 million higher).
Of the EUR 1,001 million unrealized losses on equit securities under Dutch GAAP that were in an unrealized loss position for more than six months as of December 31, 2004, EUR 717 million related to the equity security portfolio of our insurance operations in the Netherlands.
The unrealized losses are concentrated in the nutrition industry (EUR 145 million), chemical industry
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(EUR 49 million), IT-services (EUR 36 million), general industrials (EUR 70 million), publishing industry (EUR 19 million), retail industry (EUR 15 million) and temporary labour industry (EUR 10 million).
Of the EUR 1,324 million unrealized losses on securities under Dutch GAAP that were in an unrealized loss position for more than six months as of December 31, 2003, EUR 887 million related to the equity security portfolio of our insurance operations in the Netherlands. The unrealized losses are concentrated in the nutrition industry (EUR 174 million), chemical industry (EUR 104 million), IT services (EUR 76 million), retail-wholesale (EUR 64 million), general industrials (EUR 57 million) and financials (EUR 25 million).
Impairments
The carrying value of all investments in our investment portfolio is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The review includes, amongst other, an evaluation of the level and trends of interest rates, trends and level of volatility in stock markets, financial condition of the issuer or counterparty, economic developments and expectations in the business segment in which the issuer or counterparty operates, the extent to which the fair value is below the cost price, the period of time for which unrealized losses have existed and ING Groups intent and ability to hold a security until the fair value will recover. For all investments for which, based on such review, the unrealized losses are expected to be other than temporary, the amount of unrealized loss is charged to the profit and loss account.
The table below provides the impairments on a U.S. GAAP basis as on December 31, 2004, 2003 and 2002.
2004 | 2003 | 2002 | ||||||||||
Debt securities |
95 | 474 | 716 | |||||||||
Equity securities |
40 | 215 | 1,532 | |||||||||
Total |
135 | 689 | 2,248 | |||||||||
In 2004, we recorded impairments of EUR 135 million on a U.S. GAAP basis, of which EUR 95 million is related to our portfolio of debt securities.
Impairment of debt securities under Dutch GAAP
Unrealized losses on debt securities consist of two components: interest related unrealized losses and credit related unrealized losses. Interest related unrealized losses, which fully relate to fluctuations in risk free market interest rates, generally would not result in any impairments. Credit related unrealized losses may relate to impairment if it is uncertain whether future interest and principal payments will be collected.
Impairments on debt securities, recorded at redemption value under Dutch GAAP, are accounted for as a reduction of the carrying value of the debt security. This reduction is reversed in a subsequent period if the recoverable amount increases and the increase can be objectively related to an event occurring after the impairment was recognized in income. The amount of the reversal is then included in the profit and loss account for the period.
Developments in 2004
The impairment review of the debt securities in our investment portfolio produced an impairment of EUR 95 million for 2004. The impairment is related to our portfolio in the United States. The most significant item is the EUR 53 million impairment on asset-backed securities, collateralized debt obligations, mortgage-backed and mortgage-backed derivative securities.
Developments in 2003
The 2003 impairment review of the debt securities in our investment portfolio produced an impairment of EUR 141 million, of which EUR 135 million is related to our portfolio in the United States:
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| EUR 51 million on debt securities of issuers in the airline energy industry. The majority of our airline investments are comprised of Enhanced Equipment Trust Certificates (EETC). Since the events of September 11, 2001, the airline industry suffered from reduced passenger volume due to a combination of security concerns and the slowdown in 2002 and gradual recovery in 2003 of the U.S. economy. Compounding the reduced volume were increased costs of enhanced security measures, increased fuel costs and relatively high cost structures. Over the past two years several carriers have sought bankruptcy protection and rejected a number of leases supporting debt structures similar to those held by ING resulting in our impairment | |||
| EUR 31 million attributed to asset-backed securities | |||
| EUR 11 million on debt securities of issuers in the cable and telecommunications industry. During 2003, the telecommunications industry remained under pressure due to a gradual recovery in the economy and an overcapacity of the industrys infrastructure. | |||
| EUR 11 million on debt securities of issuers in the healthcare industry. The most significant holdings were impaired due to material accounting irregularities. |
Impairment of debt securities under U.S. GAAP
Under U.S. GAAP impairments are determined similar to Dutch GAAP. In the case of impairment, the related unrealized loss (included in shareholders equity) is recorded through the profit and loss account as a reduction of cost price. Under U.S. GAAP impairments may not be reversed in future periods. This difference has not resulted in any differences between the cost price of securities under Dutch GAAP and U.S. GAAP in 2004 or 2003 as no impairments were reversed under Dutch GAAP.
Impairment of equity securities under Dutch GAAP
Under Dutch GAAP, a distinction is made between unrealized losses due to general market fluctuations and unrealized losses due to issuer-specific developments. Unrealized losses due to temporary fluctuations in equity markets do not lead to impairment. The impairment review focuses on issuer specific developments regarding financial condition and future prospects, taking into account the intent and ability to hold the securities under the ING Groups long term investment strategy. Issuer specific developments may include significant financial difficulty of the issuer, a high probability of bankruptcy or other financial reorganization of the issuer and the disappearance of an active market for that financial asset due to financial difficulties. If, in a subsequent period, the recoverable amount increases and the increase can be objectively related to an event occurring after the impairment was recognized in income, the loss should be reversed, with the reversal included in net result for the period.
Developments in 2004
In 2004, ING Group recognized impairments of EUR 9 million under Dutch GAAP.
Developments in 2003
In 2003, ING Group recognized impairments of EUR 55 million under Dutch GAAP, consisting of several minor impairments, concentrated in the general industrials (EUR 16 million) and IT services (EUR 8 million).
Impairment of equity securities under U.S. GAAP
Under U.S. GAAP, based on strict Securities and Exchange Commission interpretations, additional impairments are recognized for other than temporary unrealized losses on top of the impairments already recognized under Dutch GAAP.
An additional impairment may be recognized under U.S. GAAP after giving additional consideration to the extent to which the fair value is below the cost price and the period of time for which unrealized losses have existed. Under U.S. GAAP, impairments may not be reversed in future periods. Impairments are treated as a reduction of cost. This last difference has not resulted in any differences
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between the cost price of securities under Dutch GAAP and U.S. GAAP in 2004 as no impairments were reversed under Dutch GAAP.
Developments in 2004
In 2004, we recorded an impairment of EUR 40 million on equity securities related to other than temporary losses on a U.S. GAAP basis.
Developments in 2003
In 2003, under U.S. GAAP, the adjustment for equity securities was EUR 335 million lower, as the adjustment for realized losses (either sold or impaired) under Dutch GAAP, which were already recognized under U.S. GAAP in prior years, exceeds the additional impairment on a U.S. GAAP basis.
In 2003, we recorded an impairment of EUR 215 million related to other than temporary losses on a U.S. GAAP basis, concentrated in the temporary labor industry (EUR 62 million), IT services (EUR 54 million), nutrition industry (EUR 40 million) and retail-wholesale (EUR 11 million).
Impact on future earnings
Although all individual securities were reviewed to ensure that all material impairments or other than temporary losses were charged to the profit and loss account in 2004, the identification of impairment and other than temporary losses and the determination of the recoverable amount are an inherently uncertain process involving various assumptions and factors, including the financial condition of the counterparty, expected future cash flows, observable market prices and expected net selling prices. Further developments after December 31, 2004 may indicate that certain unrealized losses that existed as of December 31, 2004 will need to be considered other than temporary, resulting in a negative impact on our profit and loss account.
Goodwill
In 2002, a significant difference existed between the result pursuant to Dutch GAAP, which was a profit of EUR 4,500 million, and the net loss of EUR 9,627 million pursuant to U.S. accounting principles. This difference was primarily the result of the adoption of new goodwill requirements under U.S. GAAP.
As of January 1, 2002 goodwill is no longer amortized but tested for impairment if any events or a change in circumstances indicate that impairment may have taken place, or at a minimum on an annual basis. See Note 7.12, Business Combinations for additional information on the accounting treatment of goodwill under U.S. GAAP.
Under Dutch GAAP, goodwill paid on acquisitions is directly charged to shareholders equity at the time of an acquisition. This difference between Dutch and U.S. accounting principles is explained in Note 6.1 to the financial statements.
Transitional goodwill impairment test 2002
ING Group adopted SFAS 142 as of January 1, 2002 and performed the required assessment of whether there was any indication that goodwill was impaired as of the date of adoption. As a result, certain goodwill was impaired and ING Group recognized a transitional goodwill impairment charge of EUR 13,103 billion in the 2002 profit and loss account for the cumulative effects of changes in accounting principles as required by SFAS 142.
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The transitional goodwill impairment charge related to the following reporting units:
2002 | ||||
Reporting unit |
||||
US |
8,077 | |||
Latin America |
2,836 | |||
Sub-total EC Americas |
10,913 | |||
Germany |
977 | |||
UK |
191 | |||
Sub-total EC Europe |
1,168 | |||
Greater China |
1,022 | |||
Sub-total EC Asia/Pacific |
1,022 | |||
Total transitional goodwill impairment charge |
13,103 | |||
In performing the transitional goodwill impairment test ING Group determined the fair value of the reporting units using valuation techniques consistent with market appraisals for insurance companies and banks. The fair value of our insurance operations, including the reporting units in the United States, Latin America and Greater China, was determined using a discounted cash flow model, discounting the future earnings arising on the books on December 31, 2001, requiring assumptions as to a discount rate and expectations with respect to future growth rates.
Goodwill allocated to the reporting units in the United States, Latin America and Greater China mainly relates to the goodwill paid on the acquisition of ReliaStar Financial Corp., Aetna Financial Services and Aetna International in 2000. ING Group acquired these companies in 2000 at the height of the acquisition market. At the time of the acquisition, similar models were used to estimate the fair value of these entities, using then prevailing assumptions. These assumptions were significantly affected by the ongoing weakness in the overall economic conditions. In 2001, market and business conditions deteriorated compared to 2000, which has adversely affected the assumptions used at the time of acquisition and as a result, adversely affected the fair value of the reporting units. Future earnings were discounted at the risk free rate, adjusted for the basic risk premium that differs per country, which depends on the size of the business, immature market conditions and economic and political conditions. Discount rates used in the transitional goodwill impairment test are 11% for the United States, 12.5% to 16% for Latin America and 13.5% for Greater China.
The fair value of our banking operations, including the reporting units in Germany and the United Kingdom, was determined with a price/earnings multiple model, in which the 2002 forecasted profit was multiplied by the current price/earnings multiple for similar acquisitions. In 1998, goodwill allocated to these reporting units relates mainly to the acquisition of BHF-Bank A.G. Since then, the price/earnings multiple for similar acquisitions has decreased significantly given the overall weakness in the economy set out above, which has adversely affected the fair value of the reporting unit.
Annual goodwill impairment tests
The annual goodwill impairment test is performed in the fourth quarter for all reporting units.
In 2004, with the exception of reporting unit Latin America discussed below, there is no indication
that goodwill is impaired as of December 31, 2004.
Goodwill for reporting unit Latin America was almost fully impaired in the 2002 transitional goodwill impairment test. Remaining goodwill for reporting unit Latin America was EUR 461 million, of which EUR 439 million related to the 49% interest in Sul América, accounted for under the equity method in the Dutch GAAP annual accounts. Goodwill allocated to equity method investments is not tested for impairment in accordance with SFAS 142 but under APB 18, which requires that a other than temporary decline in value of an equity method investments is recognized in the profit and loss account.
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Of the remaining goodwill for reporting unit Latin America, EUR 101 million was written off in the 2003 annual goodwill impairment test. As of December 31, 2003 the fair value, estimated using a discounted cash flow model was below carrying value. Since the acquisition in 2002, the local economic environment and business conditions deteriorated, leading to higher interest rates and devaluation of the Real. The decline in fair value was viewed as other than temporary and ING Group recognized an impairment charge of EUR 101 million in 2003 for U.S. GAAP purposes.
The fair value of the reporting unit, estimated using a discounted cash flow model, has continued to decrease in 2004 and the decrease is viewed as other than temporary. In 2004, ING Group has recognized an additional impairment charge of EUR 26 million for U.S. GAAP purposes for goodwill allocated to the reporting unit Latin America. The impairment charge had no impact on net income under Dutch GAAP since goodwill has not been capitalized but charged to equity immediately at the time of the acquisition.
The 2002 annual goodwill impairment test did not result in any impairment charges above that recorded as the transition impairment charge described above.
The business line structure that was introduced in 2004 changed ING Groups operating segments and, one level below, the components used in the transitional goodwill impairment test to identify the reporting units. As a consequence, ING Group revised the reporting units in 2004 which did not affect the outcome of the 2004 annual goodwill impairment test.
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INSURANCE OPERATIONS
The following table sets forth selected financial information for the Groups consolidated insurance operations for the years ended December 31, 2004, 2003 and 2002:
Year ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
(EUR millions) | ||||||||||||
Income from insurance operations: |
||||||||||||
Gross premiums written: |
||||||||||||
Life |
36,975 | 33,904 | 38,899 | |||||||||
Non-life |
6,642 | 7,288 | 7,917 | |||||||||
Total |
43,617 | 41,192 | 46,816 | |||||||||
Income from investments |
9,944 | 9,721 | 10,506 | |||||||||
Commissions and other income |
1,837 | 2,320 | 2,127 | |||||||||
Total (1) |
55,398 | 53,233 | 59,449 | |||||||||
Net premiums written: |
||||||||||||
Life |
35,355 | 32,803 | 37,806 | |||||||||
Non-life |
5,886 | 6,358 | 6,642 | |||||||||
Total |
41,241 | 39,161 | 44,448 | |||||||||
Operating profit before tax from insurance activities: |
||||||||||||
Life |
2,396 | 2,478 | 2,603 | |||||||||
Non-life |
1,609 | 1,008 | 567 | |||||||||
Total |
4,005 | 3,486 | 3,170 | |||||||||
Taxation |
901 | 861 | 540 | |||||||||
Third party interests |
119 | 117 | 92 | |||||||||
Operating net profit |
2,985 | 2,508 | 2,538 | |||||||||
(1) | Under U.S. GAAP total operating income 2004 was EUR 36,400 million (2003 EUR 32,349 million, 2002: EUR 31,523 million). The difference with Dutch GAAP mainly relates to contracts that do not expose the Company to significant mortality or morbidity risks. (See note 6.4.k to the consolidated financial statements). |
As of the first quarter of 2004, Guaranteed Investment Contracts (GICs) are no longer included in premium income and underwriting expenditure, to bring reporting into line with practice at other insurers. Premium income and underwriting expenditure related to these contracts are no longer included in revenues and expenses, respectively. Only the difference between premium income and underwriting expenditure of GICs is included in the profit and loss account. Figures in the corresponding periods have been adjusted accordingly. In 2004, EUR 3,356 million in GICs proceeds were received, compared with EUR 4,327 million in 2003 and EUR 5,468 million in 2002.
The following table sets forth the breakdown of gross premiums written and profits before tax by geographic area for the Groups consolidated insurance operations for each of the years indicated. The relationship between gross premiums written and profits before tax varies significantly between geographic areas and from year to year, based upon a variety of factors, including differences in regulatory requirements, product mixes and levels of competition in different countries, as well as our capital allocation and internal funding policies.
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Operating | ||||||||||||||||||||||||
Gross premiums written | profit before tax | |||||||||||||||||||||||
2004 | 2003 | 2002 | 2004 | 2003 | 2002 | |||||||||||||||||||
(EUR millions) | (EUR millions) | |||||||||||||||||||||||
The Netherlands |
7,516 | 7,429 | 6,786 | 1,423 | 1,451 | 1,067 | ||||||||||||||||||
Belgium |
2,439 | 2,568 | 2,335 | 128 | 109 | 74 | ||||||||||||||||||
Rest of Europe |
1,415 | 1,404 | 1,618 | 182 | 231 | 155 | ||||||||||||||||||
North America |
20,663 | 19,981 | 25,231 | 1,438 | 1,008 | 1,123 | ||||||||||||||||||
Latin America |
2,097 | 2,338 | 3,293 | 231 | 302 | 307 | ||||||||||||||||||
Asia |
8,046 | 5,950 | 6,035 | 314 | 235 | 245 | ||||||||||||||||||
Australia |
1,423 | 1,644 | 1,763 | 437 | 176 | 329 | ||||||||||||||||||
Other |
155 | 348 | 388 | (148 | ) | (26 | ) | (130 | ) | |||||||||||||||
Premiums between geographic areas (1) |
(137 | ) | (470 | ) | (633 | ) | | | | |||||||||||||||
Total |
43,617 | 41,192 | 46,816 | 4,005 | 3,486 | 3,170 | ||||||||||||||||||
(1) | Represents reinsurance premiums ceded between Group companies in different geographic areas. |
Year ended December 31, 2004 compared to year ended December 31, 2003
On a consolidated basis, the Groups insurance operations contributed EUR 4,005 million and EUR 3,486 million to the Groups profits before tax in 2004 and 2003, respectively, and EUR 2,985 million and EUR 2,508 million to the Groups net profits in those years. Changes in income and profit were affected by exchange rate movements, acquisitions and divestments in those years.
Total income
Total income from insurance operations in 2004 increased by EUR 2,165 million, or 4.1%, to EUR 55,398 million, from EUR 53,233 million in 2003. The increase was negatively affected by exchange rate movements, as the euro strengthened against most other currencies. Gross premiums increased by EUR 2,425 million or 5.9%, as strong growth, particularly from the life insurance businesses in the United States and Asia, was offset in part by divestments and currency effects. Investment income increased by EUR 223 million mainly due to one-time gains on the sale of the Australian non-life business and the IPO of ING Canada in 2004 (EUR 219 million and EUR 249 million respectively), partly compensated by disposals in 2003. Commissions and other income decreased by EUR 483 million, or 20.8%, amongst others due to lower gains from discontinued reinsurance activities (EUR 96 million in 2004 compared to EUR 303 million in 2003), the release of a catastrophe provision in 2003 (EUR 88 million) and currency effects.
The total impact of exchange rate movements amounted to EUR (2,607) million. Acquisitions and divestitures decreased total income on balance by EUR 825 million. The organic growth of total income, disregarding the influence of acquisitions, divestitures and exchange rate movements, was EUR 5,597 million or 11.3%, reflecting a 13.6% increase in gross premiums (life increased by 15.6% and non-life increased by 3.0%) and 3.6% higher investment income, commissions and other income.
As of 2004, the ING Real Estate Investment Management companies were transferred from the insurance operations to the banking operations, while the former Furman Selz activities were transferred from banking operations to the insurance operations. On balance, the transfer decreased the comparable operating profit before taxation of INGs insurance operations in 2003 as follows:
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Year ended December 31, | ||||
2003 | ||||
(EUR millions) | ||||
Income from investments |
(1 | ) | ||
Commissions |
(97 | ) | ||
Other income |
(5 | ) | ||
Total |
(103 | ) | ||
Personnel expenses |
(9 | ) | ||
Other operating expenses |
(21 | ) | ||
Operating expenses |
(30 | ) | ||
& |