In recent years, ING’s orange lion has become a little leaner, but no less healthy, as the group becomes a pure bank. Steve Dunkerley speaks to chief financial officer Patrick Flynn about the transition, and how his role as a finance leader has evolved in a climate of complex and voluminous banking regulations.
Although the initials ING (Internationale Nederlanden Groep) have only been around for 23 years, the Dutch group has roots that go back 169 years. Its founding companies were a bank (NMB Postbank Group) and an insurance company (Nationale-Nederlanden), which were the result of mergers of De Postcheque and Girodienst and Nederlandsche Middenstands Bank on the bank side, and De Nationale Levensverzekering Bank and De Nederlanden van 1845 on the insurance side.
Over the past five years the Dutch giant divested all of its insurance and investment management businesses as part of a package agreed with the European Union to gain its approval for €10 billion of Dutch state aid pumped into the company in 2008. In 2014, the company took its last major step in restructuring, with its European/Japanese insurance arm NN Group floating for €2.1 billion. ING's current CFO Patrick Flynn joined a year after the bailout, and in addition to the NN Group IPO, as well as the IPO of the US insurance arm Voya Financial in 2013, he has overseen a massive transformation of the group.
It's been an unprecedented and highly concentrated period of transformation for ING, moving from a group consisting of banks and insurance companies to just a single bank, and, according to Flynn, the new structure is in place. The priority now is around the resumption of dividend payments, returning to growth and improving net-interest margins by diversifying away from mortgages and moving towards consumer and small business lending, and industry lending in commercial banking. The strategic plan behind these post-restructuring priorities is known as Financial Ambition 2017.
The rapid period of change has, of course, had an impact on Flynn's approach to daily routines as a CFO. When he joined, he envisioned Europe and beyond to improve steadily from 2009. But it got worse before it got better.
"In early 2009, ING decided to simplify the group by saying goodbye to the bancassurance model, separating the bank from the insurance organisation," says Flynn. "Later that year, the ECB's restructuring requirements following state aid put time pressure on our plans because of various deadlines for divestments that needed to be met. So we moved from a balance sheet of €1.3 trillion to €900 billion, which we achieved over the course of five years through a significant amount of divestment."
The ING transformation has been a remarkable story, with over 50 transactions and approximately €40 billion of transaction value achieved, which concluded effectively with the IPO of NN Group in July: the last major hurdle, according to Flynn. "Bringing businesses to the market is laborious and unpredictable, [and is] made even more difficult with the knowledge that there was a deadline, which changes the dynamics because buyers know this deadline, and this hampers one's negotiating position in M&A negotiations. Nonetheless, we got through it with a surplus cash position, which along the way was a big question mark," he says.
ING like Flynn
Born in Dublin, Ireland, Flynn's career has spanned 30 years and has comprised just three employers: KPMG, HSBC and ING. His first five years were spent at KPMG, followed by 20 at HSBC. The roles he has taken on within each company have varied, which according to Flynn has helped develop his capabilities as a leader. "If you get to the position when you feel that this is comfortable and you know what you are doing, then it is time to move on for another challenge," he says. "So I am a great advocate of rotation, to the extent that, within the finance function, we have been increasingly using hard limits around rotation.
Depending on their grade, people shouldn't be in jobs for more than two years. As you get more senior, then you can go up to five years, but that's an exception as we want people to move. That helps them develop."
In addition to having varied roles, perhaps the most important lever to help propel Flynn to the ING boardroom was the experience he gleaned in different geographic locations and cultures. He spent four years in Brazil as CFO of HSBC South America, which covered insurance and banking operations in Argentina, Peru, Chile and Paraguay. There, he had to quickly adapt to the language and culture.
"Nobody spoke English there; the whole family had to learn Portuguese really quickly, so that was a cultural eye-opener," he says. To Flynn, this was one of the major preparatory steps to develop a close alignment with what he would eventually undertake with ING.
According to Flynn, one of the attractions that led him to join ING was its ING Direct internet banking model, which had built and is continuing to build market share, most notably in Germany, where it is known as ING-DiBa and is now the third-largest private bank and largest online bank with more than eight million customers. The model has also been a success in Australia, France, Austria, Italy and Spain, and, according to Flynn, ING has been ahead of the digital banking curve with this at the heart of its innovation strategy.
"Internet banking has rapidly moved from the laptop or PC to the smartphone, which has meant getting to customers directly using a digital vehicle to deliver banking products for the retail and commercial side for the SME segment, which is a big opportunity," explains Flynn.
He acknowledges that the underlying technology of ING Direct is not unique and that competitor banks have access to the same type of technology. What he is keen to point out, however, is the importance of execution and the extent to which the technology can actually enhance the customer experience.
"What doesn't work is to take your branch-based application, stick it on to an internet front end and then have people fill out forms or make phone calls to complete the process. That's what a lot of banks do rather than having a seamless one or two-click online experience."
The ING Direct model has been the success story underpinning the group's desire to increase its investment in innovation. Group CEO Ralph Hamers recently said that it's better to disrupt before being disrupted. "Technology, data, analytics and digital information are very important to ING, particularly when it comes to understanding consumer behaviour to build trust and embed innovation into the ING culture," he commented.
While Flynn also champions ING's approach to innovation and, in particular, the direct business model, he is pragmatic, and explains that his role as CFO of late has been more focused on fixing and streamlining existing processes.
"Many of the things that I am doing I wouldn't regard as particularly innovative. It's about simplification and streamlining; these are things that have been there a long time and they are often the hardest to do. To actually do the streamlining, get the process working, tackle the age-old problems, and not try to go and do something new and sexy is the challenge to innovation."
He is also keen to distance himself from the type of innovation that helped bring down the financial system, such as CDOs. Instead, he focuses his energy on people management.
"I don't think regulators are particularly keen to see financial innovation from CFOs, but I think [what's important] is actually tackling the difficult stuff; making sure you use the best teams and move people around - invest in them," he says. "You have to deal with people issues and tackle the complex backlog of process problems and don't allow people to say it's an IT problem. It's actually getting the process fixed first. Do you want to call that 'innovation'? Maybe not, but I think that is where the real benefit comes from."
Flynn acknowledges that ING, like other major banks, isn't immune to legacy systems, complex back-office processes and old IT environments that need to be streamlined. It's a current focus for Flynn and he makes the point that process improvement should always be the precursor to IT change.
"Changing or investing in an IT process on the backdrop of an inefficient, complex, overly engineered system will not give you any benefit," he says. "One of the key things we're doing, which fits into the operational excellence part of the strategy, is process reengineering and process simplification, and we've hired a chief operating officer, Roel Louwhoff, from BT to oversee not only the customer operations in our commercial and retail businesses but also the back office, as in the finance and credit processes.
"I have a big chart on my wall to show how finance and risk run together, to streamline our engines that produce the data we need. We started this a couple of years ago before it became a mandatory requirement and it's now become something that the regulators dictate you must have. The regulatory environment is incredibly data hungry, so you have to provide regulators with the data and reporting they want, and we're building that capacity. It's an IT piece, but it is also a process reengineering piece."
A key reason for Flynn's current preoccupation with process reengineering is due to the ever-changing and evolving banking regulatory landscape, which has seen a new EU-wide supervisory reporting framework for financial reporting (FINREP) and common reporting (COREP) (see 'FINREP and COREP'). Coupled with this is the European Central Bank's Asset Quality Review (AQR). ING successfully transitioned to CRD IV, but according to Flynn it didn't happen overnight. Just figuring out what it meant was the first challenge for him and his team as the definitions and requirements were continually changing and were onerous, and there were many questions to ask in terms of what was needed.
"We are lucky in that we have some very good credit-risk technology we call Vortex," explains Flynn. "It's very data-rich and helps us a lot in terms of the AQR and with COREP reporting. However, the important questions still remained: What do you put in the right box? What really do you mean by this? There weren't really people on the other end of the phone to answer our questions, so those are more practical problems we faced. You need to build it once so that it is automated, so you need to get it right first time. These were some of the more practical issues that came with populating COREP."
Banking has certainly become more difficult: there was only a capital ratio regulation before; now there are three - capital, liquidity and leverage requirements - and being able to optimise these constraints is far more complex. And banks are still finding ways to regain their public credibility, so maintaining and building customer trust in this environment isn't easy. That trust, of course, also applies to regulators that are increasingly aware of their role having been a focus for criticism, making them more sensitive to making decisions with respect to banks.
"The regulatory burden, in terms of complexity and dealing with regulators, has become a far more... onerous environment," Flynn concludes. "But that's all worth it as it will increase transparency and contribute to building customer trust."
Asset quality review
ING Bank is one of approximately 130 "significant" European banks taking part in the comprehensive assessment conducted by the European Central Bank (ECB).
The asset quality review (AQR) is an important part of this overall assessment, which is widely viewed as the most comprehensive examination of the strength of the eurozone's major banks ever to be conducted on such a scale. The AQR project will be followed up with a stress test for all participating banks as well as most other European banks, the purpose of which is to identify the extent to which banks can resist market turmoil.
The overall outcome of the comprehensive assessment will be published before the ECB officially assumes its supervisory role in November 2014, and will include the findings of all phases. The findings will spotlight the banks' financial situation and thereby give the transparency stakeholders are demanding.
At ING, a couple of hundred people, based at both the head offices in Amsterdam and abroad, are working on the project full time. Due to the multidisciplinary nature of the AQR, representatives from all major functions such as risk management, finance and legal are involved, working closely with employees within various ING businesses. Together, they have been working on data requests, amounting to several millions data fields, which they analyse and submit to the ECB.
FINREP and COREP
Financial reporting (FINREP) and common reporting (COREP) are pan-European regulations developed by the European Banking Authority for banking organisations and became live on 1 January 2014. They come under the Capital Requirements Directive IV (CRD IV) and the Capital Requirements Regulations (CRR), and have significantly increased the level of reporting of financial information to the regulator and require a significant increase in quantity and quality of data disclosures, and more effective reporting processes and systems. The Guidelines on Common Reporting cover consolidated, sub-consolidated and solo reporting of the capital requirements and own funds based on amended directives 2006/48/EC and 2006/49/EC.