ING and the financial environment
Back to Basics

After the unprecedented shockwave that hit financial markets in 2008, we initiated transactions with the Dutch State to strengthen our capital base and reduce our risk exposure, while redefining our strategic course. Hence, it was clear from the
beginning that 2009 would be a difficult year for ING. Throughout the year, market conditions remained challenging, but the second half of 2009 also brought the first signs of recovery.

ING's first priorities were to stabilise the Company, restore credibility and regain trust. We thus introduced Back to Basics, a change programme comprising a series of measures to decrease costs, reduce risk and capital exposures, and deleverage the balance sheet, with the ultimate objective of increasing focus on the essence of financial services and creating a more coherent set of activities.

We simplified the governance structure by operationally separating the Bank and the Insurer under the umbrella of the Group, and carried out a portfolio review, which led to a number of divestments.

Meanwhile, we managed to turn around our commercial performance. Above anything, however, 2009 will be remembered as the year in which we took the most far-reaching decisions in the history of the Company. First of all, we set a clear course for the future by announcing an independent future for our Bank and our Insurer. In addition, we closed an early repayment agreement with the Dutch State on 50% of the capital provided in October 2008.

GLOBAL ECONOMY SHOWING SIGNS OF RECOVERY AFTER STEEP DOWNTURN
From September 2008 onwards, especially after the collapse of Lehman Brothers, market conditions rapidly worsened. Due to the impact of the financial crisis, macro-economic prospects at the beginning of 2009 were very bleak. The steep economic downturn was reflected in a sharp decline in world trade, asset prices and industrial production and a tightening availability of credit.

As a consequence, even a repetition of the Great Depression was considered a plausible scenario. In contrast to the 1930s, however, policy makers around the world acted swiftly and firmly, by providing significant economic stimuli and loosening monetary conditions. Governments took exceptional measures to reinvigorate financial institutions and stabilise the financial system. As a result, an increasing number of countries were able to report positive economic growth in the second half of the year.

World trade seems to have picked up firmly and in many countries the rise in unemployment seems to have a less adverse impact on the economy than expected. Nevertheless, the recovery of the global economy remains fragile. Companies have rebuilt inventories despite a strengthening consumer and investor demand.

However, as a result of the market interventions to cushion the impact of the crisis, public finances have been thrown off-balance. Our Economics Department¡¯s forecasts for 2010 and 2011 indicate that the global economy will return to growth, albeit at a slower pace than before the crisis.

Notwithstanding the negative impact of the financial crisis on the overall economic climate, which clearly weakens the growth
prospects for the financial services industry, the crisis also offers new opportunities for financial institutions. The substantial reduction in asset values during the financial crisis has reinforced customer demand for wealth accumulation and raised consumer awareness of the need for financial protection.

ING ENTERING INTO TRANSACTIONS WITH TH E DUTCH STATE
The rapidly worsening conditions following the summer of 2008 fuelled an internationally recognised belief that capital requirements for financial institutions had to be raised. In order to create a strong buffer to navigate the challenging environment, ING therefore decided to strengthen its capital position in October 2008 by issuing EUR 10 billion of core Tier 1 securities to the Dutch State.

Under the terms of the agreement we obtained the right to buy back all or some of the securities at any time at 150% of the issue price. In addition, we obtained the right to convert all or some of the securities into (depositary receipts for) ordinary shares on a one-for-one basis, from three years after the issuance onwards.

It was also agreed that should ING choose to do so, the Dutch State would be able to opt for repayment of the securities at
EUR 10 each in cash. The coupon on the core Tier 1 securities will only be payable if a dividend – either interim or final – was paid on common shares over the financial year preceding the coupon date.

This transaction enabled ING to strengthen its capital position significantly.

In the fourth quarter of 2008 market conditions deteriorated even further, making it the worst quarter for equity and credit markets in over half a century. Market prices for residential mortgage-backed securities (RMBS, including Alt-A classified RMBS), collateralised debt obligations (CDOs) and collateralised loan obligations (CLOs) fell sharply as liquidity dried up. This eventually affected ING’s results and equity more than expected, in particular due to ING’s portfolio of Alt-A RMBS. We therefore entered into an agreement with the Dutch State on an Illiquid Assets Back-up Facility (IABF) covering 80% of our Alt-A RMBS.

Under the terms of the IABF, a full risk transfer to the Dutch State was realised on 80% of our approximately EUR 30 billion par value portfolio of Alt-A RMBS at ING Direct USA and ING Insurance Americas. As a consequence, the Dutch State now participates in 80% of any results of the portfolio. The risk transfer took place at a discount of 10% of par value. In exchange, the Dutch State was to pay a funding fee and principal payments on two Government receivables to ING.

The first receivable initially had a funding fee of 3.5%, the second receivable initially had a funding fee of Libor +50 basis points (please note that these fees were revised following discussions with the European Commission, which will be discussed below). ING remained the legal owner of 100% of the securities with an exposure of 20% to the portfolio’s results. The transaction significantly strengthened ING’s capital and balance sheet as it resulted in a reduction of equity volatility.

Moreover, it had a positive impact on shareholders’ equity amounting to EUR 5 billion through a reduction of the negative revaluation reserve. ...

Read Full Report: ING Group Annual Report 2009

PDF format, 2.8MB, 312Pages.

In This Report
1.1 Who we are
Key figures 3
ING at a glance 4
Chairman’s statement 6
ING share 8
1.2 Report of the Executive Board
ING and the financial environment 10
Strategy 15
Corporate responsibility 18
Capital management 21
Risk management 23
Banking overview 27
Retail Banking 28
ING Direct 31
Commercial Banking 34
Insurance overview 37
Insurance Europe 38
Insurance Americas 41
Insurance Asia/Pacific 44
Investment management 47
Human resources 49
1.3 Our governance
Report of the Supervisory Board 52
Corporate governance 56
Report of ING Trust Office 69
Report of ING Continuity Foundation 72
Conformity statement 73
Section 404 Sarbanes-Oxley Act 74
Remuneration report 76
Works councils 88
2.1 Consolidated annual accounts
Consolidated balance sheet 90
Consolidated profit and loss account 91
Consolidated statement of comprehensive income 92
Consolidated statement of cash flows 93
Consolidated statement of changes in equity 94
Accounting policies for the consolidated
balance sheet and profit and loss account 96
Accounting policies for the consolidated
statement of cash flows 112
Notes to the consolidated balance sheet 113
Additional information to the
consolidated balance sheet 148
Notes to the consolidated profit and loss account 177
Segment reporting 189
Notes to the consolidated statement of cash flows 194
Risk management 195
Capital management 250
2.2 Parent company annual accounts
Parent company balance sheet 256
Parent company profit and loss account 257
Parent company statement of changes in equity 258
Accounting policies for the parent company
balance sheet and profit and loss account 259
Notes to the parent company balance sheet 260
2.3 Other information
Auditor’s report 265
Proposed appropriation of result 266
2.4 Additional information
Risk factors 267
RAROC performance 280
Additional Pillar 3 information for ING Bank only 281
Financial glossary 301
General information 308

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