DBRS Downgrades ING Bank of Canada to A (high), Trend Now Negative

DBRS has today downgraded the long-term ratings for ING Bank of Canada (ING Direct Canada), including its Issuer & Long-Term Debt to A (high) from AA (low). ING Direct Canada’s short-term ratings were confirmed at R-1 (middle). The trend on all ratings is Negative. Concurrently, all ratings were removed from Under Review with Negative Implications, where they were placed on 14 April 2009.

The downgrade reflects DBRS’s view that the challenging operating environment has negatively impacted the strength of ING Direct Canada’s direct parent, ING Bank N.V. (ING Bank), and its ultimate parent, ING Groep N.V. (ING or the Group). As Q2 2009 results illustrated, the Group’s earnings are likely to remain under considerable stress for some quarters due to deteriorating credit quality and the cost of legacy exposures at a time when economies remain weak and financial markets are still fragile. DBRS also sees these pressures as being likely to constrain the Group’s financial flexibility as ING restores its core franchise under its “back to basics” programme. ING’s prospects are also being impacted by the Group’s extensive efforts to improve its risk profile and concentrate on a narrower, less global set of core businesses. While DBRS anticipates that success with these efforts is likely to lead to an improved core business profile, they also require retrenchment that could impact earnings and business opportunities from ING’s global reach.

The Negative trend on the ratings for ING Direct Canada reflects the potential challenges for its parent from the ongoing execution risk in these restructuring efforts, as well as the risk to earnings from reducing or exiting various products and businesses. There is also the potential for more substantial negative impact on ING than currently anticipated from credit deterioration and legacy exposures, especially given weakness in economies globally and the still high level of stress in financial markets.

The current ratings level for ING Direct Canada, a notch below its parent ING Bank, reflects the importance of the ING Direct franchise as a core business for the Group which ING is seeking to more effectively leverage under its new strategy. One element of the strategy is to enhance the ING Bank franchise by better utilizing its ING Direct on-line deposit gathering to support ING’s customer lending. DBRS views positively that ING Direct Canada has had success with its retail customer franchise in generating not only deposits, but also mortgages. More broadly, the Group’s strength reflects its leading banking franchise in the Benelux region, the unique position of ING Direct in important mature markets, the potential growth opportunities in the CEE region, and ING’s diverse insurance operations with their solid positions in the Benelux region, and key product strengths in Europe, the Americas and Asia. DBRS also views the Group as benefiting from systemic support from the Dutch government.

ING’s Q2 2009 results illustrate the challenges that the Group faces, but also show the resiliency of its franchise. ING reported a positive net profit of EUR 77 million for Q2 2009, an improvement from a net loss of EUR 793 million in the prior quarter; but still down substantially from a net profit of EUR 1.9 billion in Q2 2008. The negative impacts of diverse market exposures aggregated to EUR 1.4 billion. The deteriorating trend in credit was reflected in still elevated loan loss provisions of EUR 852 million, which impacted ING Bank. Demonstrating its resiliency, the Retail Banking segment was important in sustaining the Group’s underlying earnings. The other banking segments remained negative despite gains in underlying income with credit costs, real estate write-downs and ABS impairments taking their toll. While reduced, ING still has substantial exposure in various legacy positions, including commercial real estate and Alt-A securities that remain under stress in the current environment. One positive sign was an improvement in the net interest margin to 1.31%. On the insurance side, all businesses regained profitability after two or more quarters of negative underlying results before taxes. While improved equity markets helped asset management fees and the insurance business balance sheets, they also negatively impacted income through losses on ING’s short-term equity hedge position. Revenues in the insurance businesses were still subdued with reduced customer demand for investment products and ING’s decision to no longer offer certain variable annuity products. Expense reductions driven by ING’s cost-cutting efforts also helped improve results.

Notes:
All figures are in euros unless otherwise noted.

The applicable methodologies are Analytical Background and Methodology for European Bank Ratings, Second Edition, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.