ING Direct's ALM and investment policy

21 Pages·2008·0.18 MB·English

ING Direct’s ALM and investment policy:
Supporting business growth while limiting market risk
Paul Zelissen, CRO ING Direct
John Mason, CIO and Treasurer ING Direct USA
Madrid – 19 September 2008
www.ing.com
ALM and investment policy: supporting business
growth while limiting market risk
1. ALM and risk management support the business
2. Robust and profitable business model:
Managing through adverse yield curve environments
3. Low-risk investment portfolio:
High-quality fixed income securities
4. Key points
ING Investor Day, 19 September 2008 2
ING Direct’s ALM and Risk Management are
aligned with overall business strategy and growth
Business Leads Treasury Follows
Deposit and loan • Clear preference to generate own mortgages
growth are leading reflecting retail character of the business
• Treasury compliments the duration gaps
Low risk model • Low risk appetite to optimize net interest margin
• No interest rate bets; durations are
economically matched
• Model based on mass market volumes; limited
credit risk appetite
• High levels of core liquidity
Operational • Superior modelling of client behaviour
excellence
• Active balance sheet management to reflect
changes in the competitive environment
ING Investor Day, 19 September 2008 3
Business leads, Treasury follows
Example: ING Direct USA
ING Direct USA Earning Assets
• Successfully developed the core deposit
$50B
Retail Loans $44.2B base by building strong franchise and brand
Investment Portfolio
$40B
• Prudently developed mortgage generation
89% CAGR
capability
$30.2B
$30B (2000 – 2008)
• Balanced mortgage growth with credit quality
$20B
(cid:198) We originate for own balance sheet
not to sell to the market
$10B
(cid:198) Historically large buyer of securities,
- now migrating to mortgage origination
2000 2001 2002 2003 2004 2005 2006 2007 Q2 2008
Retail Balance Sheet Growth
$18B
$16.2
• Retail mortgage origination capabilities
$15B
$13.5 becoming more aligned with deposit
$12.6
$12B $11.2 gathering activities: less dependent on
$10.3
investment portfolio
$9B
$7.2 $7.3
$6B
$4.4 $4.2 (cid:198) Deposits and retail mortgages are
$3B $1.9 $2.0 $2.1 growing more in sync
$-
2003 2004 2005 2006 2007 2008 YTD
Deposit Growth Retail Mortgage Growth
ING Investor Day, 19 September 2008 4
Desired asset mix: balance between securities
and loans
ING DIRECT USA Retail Share of Earning Assets
ING Direct ING Direct U.S. Savings Banks
(Q2 2003) (Q2 2008) (Q2 2008)
25% 41% 79%
Securities Preferred through Retail Loans
0% Maturing Retail Franchise the cycle range 100%
Securities Right-sizing the Balance Sheet requires trade-offs Retail loans
+ Excess Liquidity • Strengthening franchise through Limits Liquidity -
higher share of retail balances
Ability to Manage Ability to Manage
+ Interest Rate Risk Interest Rate Risk -
• Prudent risk management
on Balance Sheet on Balance Sheet
Lower Yielding Higher Yielding
- +
• Managing the balance sheet
Asset Assets
through interest rate / credit cycles
Lower Risk-weighted Higher Risk-weighted
+ -
Assets Assets
ING Investor Day, 19 September 2008 5
ING Direct is highly liquid
ING Direct’s liquidity position is favourable
• Loan to Deposit ratio is 57%
• High-rated liquid investment portfolio EUR 140 billion:
To a large degree repo-able and/or discountable when needed
• Own-originated retail mortgages EUR 104 billion:
Potential source of contingency liquidity and funding
ING Investor Day, 19 September 2008 6
ALM and investment policy: supporting business
growth while limiting market risk
1. ALM and risk management support the business
2. Robust and profitable business model:
Managing through adverse yield curve environments
3. Low-risk investment portfolio:
High-quality fixed income securities
4. Key points
ING Investor Day, 19 September 2008 7
Pro-active ALM addresses client behaviour and
competitive pressures
Market drivers ALM tools Results
• Duration: asset
Profitability
duration needs to
match liability duration
Earnings sensitivity:
Client behaviour
• Tracking speed of Earnings-at-Risk (1)
client rate: percentage
of market rate changes Value sensitivity:
we need to follow in a
NPV-at-Risk (2)
certain time frame
Growth
Competitive
• Re-pricing speed of
environment
assets:
percentage of assets (1) impact on IFRS
that reprice within a earnings (1-yr) of yield
curve shock or gradual
certain time frame
change (ramp)
Yield curve • Reinvestments: (2) impact on the Net
Asset Value of a yield
reinvestment volume to
curve shock
pick up new credit
spread
ING Investor Day, 19 September 2008 8
ING Direct maintained its profitability despite a
prolonged flat yield curve environment
Yield curve steepness in bps (LHS) Profit before tax in EUR million (RHS)
200 200
150
150
100
50 100
0
50
-50
-100 0
1Q 06 2Q 06 3Q 06 4Q 06 1Q 07 2Q 07 3Q 07 4Q 07 1Q 08 2Q 08
EUR (3-yr -/- 1-month) USD (3-yr -/- 1-month) Underlying profit before tax
ING Direct maintained attractive profit levels in flat yield curve environment:
• Decline in 2H 2007 mainly due to the specific UK situation
• Yield curve steepening and wide credit spreads beneficial to profitability
ING Investor Day, 19 September 2008 9
Robust net interest income
Sensitivity of net interest income in various yield curve scenarios (3-yr projections)
Interest income (base = 100%)
120% • Capped by
100% earnings-at-
80% risk and NPV-
at-risk
60%
appetite
40%
20% • Not that
sensitive to
0%
yield curve
Base Ramp Shock Tilt Volumes Volume
shifts,
100% & Tilt
steepening or
flattening
Various yield curve scenarios:
• Benefits from
Base = projected interest income over the next 3 years
diversification
Ramp = interest rate changes develop over a 12 month period
over different
Shock = interest rate changes happen instantaneously
yield curves
Tilt = interest rate changes that lead to flattening/steepening of
curves
Volume = changes in volume funds entrusted
ING Investor Day, 19 September 2008 10