ING Direct (continued)
Business developments
ING Direct is the world's leading direct bank. It sells a limited number of simple banking products at very low cost to retail customers in nine major developed countries. ING Direct's vision is to become the world's most preferred consumer bank by being our customers' primary bank. ING Direct will therefore continue to put customers first and gradually expand its product offering while maintaining outstanding customer satisfaction levels.
In 2008, ING Direct continued to invest in building the business and expanding its product offering, with investment costs amounting to EUR 331 million. Given the current priorities of preserving ING's capital position and the worsening economic outlook, ING Direct is strictly managing its risks, capital and expense base.
In line with these priorities, it was decided early 2009 not to launch ING Direct operations in Japan. ING Direct will reduce expenses in 2009 by about EUR 150 million through lower operating and marketing expenses, and a headcount reduction of around 600 FTEs.
Sources of growth
ING Direct is focusing on different sources of future growth. First, it aims at continued growth in customer numbers and savings deposits in countries where it is already present. Our current market share in existing markets is around 2% in savings and less than 2% in mortgages, leaving ample room to grow.
Another source of growth is via an expansion of the product range. ING Direct aims to address the five major consumer needs: savings, mortgages, payment accounts, investment products and consumer lending. These products will only be introduced in a country if it is economically viable. Expanding the multi-product range will result in more diversified profit and also supports client retention and cross-selling opportunities.
Developing the major product categories
Savings — strong competition in 2008
The savings market has become increasingly competitive, with strong competition for retail deposits in all ING Direct countries, especially as banks worldwide seek to lock in liquidity. In light of this development, one of ING Direct's key focus points is to increase the repricing speed of assets in order to be able to track central bank rates more closely.
ING Direct used to offer only a single, simple savings product, but it refined its savings products in all countries to win new customers and new funds from existing customers in a more competitive market. An example are fixed-term savings products, which performed well in 2008; the total number of these accounts increased by 0.5 to 3.1 million (+21%). The new product offering also allows us to better meet customers' needs.
As the financial crisis deepened during late September/early October, consumers worldwide actively re-allocated their account balances among multiple financial institutions to maximise protection from government guarantees. This led to outflows, but also to an inflow of new customers coming over from other banks. Active rebalancing slowed after governments increased guarantee limits. From the end of October, customer behaviour returned to normal and ING Direct returned to growth.
Overall, production of funds entrusted was EUR 6.7 billion, mainly driven by strong growth in the United States. Including the impact of negative currency effects, total funds entrusted balances declined by EUR 0.5 billion to EUR 191.0 billion at year-end.
In the United Kingdom, ING Direct repositioned itself away from more price-sensitive customers and it also tracked the Bank of England rates more closely. It took several management, pricing and marketing actions in 2008, which resulted in ING Direct UK reaching break-even in the fourth quarter. In October, ING Direct UK acquired retail deposits from two British subsidiaries of Icelandic banks Kaupthing Edge and Heritable Bank.
Mortgages — portfolio growth under strict criteria
The own-originated mortgages portfolio grew by EUR 17.2 billion (up 18.6% from 2007), bringing the total residential mortgages portfolio to EUR 113.7 billion at year-end. ING Direct's own-originated residential mortgages reached 57% of funds entrusted.
A focal point in 2008 was to better balance the growth in savings and in mortgages and this will remain a priority for 2009. ING Direct also sharply monitors the quality of the new mortgage portfolio and has tightened its underwriting criteria accordingly.
The deterioration in the US housing market led to an increase in the provision for loan losses, reflecting a higher rate of delinquencies in the mortgage market and lower recovery. Within the US mortgage portfolio, the non-performing loans (90+ Days Past Due) rose to 2.7% at the end of December. However, the mortgage portfolio continues to perform better than the US industry average for prime adjustable-rate mortgages (ARMs), which showed a rate of non-performing loans of 8.3% as at the end of November 2008.
The overall US portfolio consists of quality customers with an average loan-to-value ratio of 75% (indexed for changes in property values), and 97% of the mortgages are to owner-occupiers.
In 2008, ING Direct acquired a 99.15% stake in Interhyp, Germany's largest independent distributor of residential mortgages. Interhyp offers residential mortgages from over 70 banks, building societies and insurance companies, using a state-of-the-art internet platform. In 2008, it distributed EUR 5.9 billion of mortgages that represent a market share of 3.3%.
Payment accounts — showing growth potential
Payment accounts help to develop a broader relationship with the customer and increase the share of a customer's total potential business. It has also become a client acquisition tool; by offering a broader range of products, ING Direct can effectively compete with local competitors and diversify its income stream.
The performance of payment accounts was encouraging in 2008: 431,000 new accounts were opened in Spain, the United States Germany and Italy, bringing the total to 1.3 million accounts over 2008. Payment accounts were launched in Italy in October and 8,000 accounts had been opened by year-end. Launches are being prepared in France and Australia in 2009.
Investment products — good results at ShareBuilder
Despite the ongoing financial crisis, ING Direct reported substantial net inflows of customers and funds in investment products, primarily in the US and Germany. Total balances of off-balance funds, however, declined by EUR 3.6 billion to EUR 15.1 billion as a result of lower asset prices.
An example of strong net inflows is ING Direct's US-based online brokerage platform, ShareBuilder. It showed strong growth during its first full year of operation with ING Direct, welcoming 315,000 new customers, bringing the total number of customers to 1.2 million at year-end. Of new accounts, 21% resulted from cross-sell efforts to ING Direct's customer base, evidencing the synergies between the two companies. Net asset inflows totalled EUR 655 million (USD 914 million).
ING Direct recognises the future potential of investment products and has launched initiatives in Canada and Italy.
Customer satisfaction — meeting expectations
One of ING Direct's most valuable assets remains its high level of customer satisfaction, standing at the core of the company's success. Research shows customers perceive ING Direct as innovative, reliable, value-for-money, easy to deal with and fair. 93% of customers state that their expectations are met. ING Direct's aided brand awareness is now 73-95% in all markets in which it operates.
State-of-the-art IT systems
Excellent direct banking facilities require advanced IT support. ING Direct has highly integrated, 24/7 online and synchronised distribution channels. We are always looking to achieve industry-leading reliability and provide flawless service to end-users and customers in order to remain competitive. In 2008, the business continued to invest in systems to ensure that they are highly secure, in addition to being flexible and cost-effective.
Number of clients, total funds entrusted, residential mortgage portfolio, off-balance sheet funds
| Clients in thousands |
Clients | Funds entrusted |
Residential mortgage portfolio | Off-balance sheet funds | ||||
|---|---|---|---|---|---|---|---|---|
| Funds entrusted, residential mortgage portfolio and off-balance sheet funds in EUR billion |
2008 | 2007 | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 |
| Canada | 1,562 | 1,526 | 13.4 | 13.9 | 13.5 | 13.2 | 0.2 | 0.2 |
| Spain | 1,836 | 1,624 | 12.5 | 12.9 | 7.7 | 6.5 | 1.5 | 1.9 |
| Australia | 1,363 | 1,316 | 9.2 | 12.0 | 16.9 | 18.3 | — | — |
| France | 751 | 716 | 10.3 | 12.9 | — | — | 1.4 | 1.5 |
| United States | 7,546 | 6,524 | 51.5 | 41.3 | 25.2 | 17.9 | 1.7 | 1.8 |
| Italy | 1,103 | 937 | 14.6 | 14.2 | 5.3 | 3.3 | 0.3 | 0.4 |
| Germany/Austria | 6,646 | 6,481 | 63.2 | 62.0 | 43.7 | 35.9 | 10.1 | 12.9 |
| United Kingdom | 1,330 | 1,137 | 16.2 | 22.3 | 1.3 | 1.9 | — | |
| Total | 22,172 | 20,262 | 191.0 | 191.5 | 113.7 | 97.0 | 15.1 | 18.8 |
