DBRS Places Ratings for ING Bank of Canada Under Review with Negative Implications

DBRS has today placed its ratings for ING Bank of Canada (ING Direct Canada) Under Review with Negative Implications, including ING Direct Canada’s Issuer & Long-Term Debt rating of A (high) and its Short-Term Debt rating of R-1 (middle). The trend on these ratings had been negative.

The placement of the ratings Under Review – Negative follows the announcement by ING Groep N.V. (ING or the Group) of an agreed upon plan that will enable ING to repay the Dutch State and address the European Commission’s (EC) requirements for viability and fair competition. As part of this plan, ING is also accelerating the implementation of its previously announced “Back to Basics” program. The Group is the parent of ING Direct Canada’s direct parent, ING Bank N.V. (ING Bank). These announcements have heightened DBRS’s concern that the Group’s restructuring under this plan may have a greater impact on the ING franchise than previously anticipated.

As already recognized in the Negative trend, the Group faced challenges from the significant execution risk associated with restructuring the Group, as well as the risk to earnings from reducing or exiting various products and businesses. The diversity of the Group’s income and its underlying earnings ability are important rating factors. Recent announcements have heightened this risk, as the Group intends to completely exit the insurance business by 2013, reducing both earnings power and the overall strength of the ING brand. Beyond that, as part of the agreed upon plan ING will divest ING Direct in the US and certain consumer businesses in the Netherlands, weakening market shares in key retail product areas. Further, as noted when ING Bank of Canada’s trend was set at negative on 14 August 2009, there remains the potential for more substantial negative impact on ING from credit deterioration and legacy exposures, and, as a result, the Group may have less resources to provide support to ING Direct Canada in a stress scenario.

Still, DBRS sees longer-term benefits resulting from the Group’s restructuring, which will result in the Group focusing on its banking franchise. The resulting Group is expected to be less complex, more efficient, better capitalized and less leveraged. ING Bank will retain very strong market positions in business and retail banking that underpin the Bank’s fundamental franchise strength. DBRS also recognizes the relatively long time horizon the Group has to divest various businesses, increasing the likelihood of realizing attractive valuations.

The rating review will focus on the impact of the restructuring on ING’s franchise strength and its earnings generation capacity. The review will also consider the impact of the restructuring on the Group’s risk profile, capital position and liquidity. Though preliminary Q3 2009 earnings indicate a return to profitability for ING Bank, thanks to moderating loan loss provisions and improved IBPT, DBRS’s review will also include a review of underlying business trends and the remaining risks in the Group’s sizable ABS portfolio and commercial real estate related exposures.

The review will also consider the role of ING Direct Canada within ING Bank under the transformation program. The current rating level for ING Direct Canada, a notch below its parent ING Bank, reflects the importance of the ING Direct franchise to ING Bank which underpins an SA1 support assessment and the one notch differential. Should the review reveal any weakening in support for ING Direct Canada, a widening of the one notch differential is possible. The Group has stated that the ING Direct franchise remains a core business for ING Bank. ING is seeking to enhance the ING Bank franchise by better utilizing its ING Direct on-line deposit gathering to support 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.

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.