DBRS Confirms ING Bank N.V. at AA (low), Trend Stable

DBRS, Inc. (DBRS) has today confirmed the ratings of ING Bank N.V. (ING Bank or the Bank), including its Issuer & Long-Term Debt rating of AA (low) and its Short-Term Debt of R-1 (middle). The trend on all ratings is Stable. The ratings are based on ING Bank’s leading retail and commercial banking franchise in the Benelux region, significant international banking capabilities, a solid liquidity profile that is bolstered by ING Direct and a relatively low risk profile that is reinforced by improved capitalisation. The ratings also take into account the challenges facing the Bank as it executes on its restructuring plan and separates its operations from those of the insurance businesses that have historically been closely intertwined under their parent company, ING Groep N.V. (ING or the Group). ING Bank’s ratings reflect an intrinsic assessment (IA) rating of A (high) combined with a support assessment of SA-2 that results in a one notch uplift to the final rating from the IA. The SA-2 considers the importance of ING Bank to the financial system in the Netherlands and DBRS’s expectation of government support should it prove necessary.

DBRS has also confirmed the ratings for ING Bank of Canada (ING Direct Canada), including its Issuer & Long-Term Debt rating of A (high) and its Short-Term Debt rating of R-1 (middle). The trend on these ratings is also Stable. The current rating level for ING Direct Canada is a notch below its parent, ING Bank, reflecting the importance of the ING Direct franchise to ING Bank. ING Direct remains a core business for ING Bank, and ING Direct Canada was the Bank’s original direct banking franchise. This underpins a SA1 support assessment for ING Direct Canada and the one notch differential.

ING Bank’s ratings are underpinned by leading or near leading positions across most retail banking products in the Netherlands, a well-positioned retail bank in Belgium, and a leading commercial banking franchise across the Benelux region. In addition, extending the reach of the Bank’s international banking operations, ING Direct, the Bank’s direct banking franchise, is one of the most successful direct banking franchises globally with solid market positions in Germany, Canada, Australia, and Poland. DBRS sees the ING Direct banking franchise as an important avenue for the Bank to generate deposits to fund loan growth across Europe. Strategically, ING Bank is focusing on optimising its balance sheet by concentrating on those markets where it is able to better align its deposit generation and funding with its ability to source and support lending. ING also has a solid commercial banking franchise across Central and Eastern Europe (CEE) and retail branch-banking operations in select CEE countries, most notably Poland and Turkey.

Highlighting the durability of the ING Bank franchise, the Bank’s results for the first nine months of 2011, while down 7.3% from the previous year, are still viewed as very respectable, particularly considering the EUR 455 million impairment on Greek government bonds which was recorded in during the nine month period. Excluding these impairments, pretax income was largely flat to the corresponding period in 2010. In DBRS’s view, the overall solid underlying performance, despite the disrupted market conditions, illustrates the Bank’s overall strong underlying earnings generation ability and low cost structure. Importantly, loan loss provisions decreased by 14.6% in the nine-month period, which DBRS views as an illustration of the strengthening of the loan book as well as the results of management’s efforts to de-risk the balance sheet. Furthermore, the Bank continues to benefit from the relatively milder economic cycle in the Benelux economies and has continued to increase lending volumes in both retail and commercial businesses.

DBRS views ING Bank’s funding profile as solid with appropriate liquidity, anchored by its broad deposit franchise. Deposits from customers and other funds on deposit totalled EUR 470 billion as of 30 September 2011. Deposits have proven resilient adding stability to the Bank’s liquidity profile. The Bank’s Dutch and Belgian retail franchises account for 35% of the Group’s retail funds entrusted, which provides a level of stability. While DBRS views the online deposits gathered by ING Direct as potentially less stable in a crisis scenario compared to branch-originated retail deposits, ING Direct has demonstrated resilience and grown deposits in nearly all of its markets. DBRS also perceives that ING Direct benefits from the strength of the ING brand.

DBRS views ING Bank’s risk profile as generally low, reflecting strong credit quality across the large majority of the Bank’s residential mortgage portfolio, and acceptable performance, given the challenging environment, from the Bank’s commercial and SME portfolios. Overall, additions to the loan loss provision were EUR 1,141 million for the nine months ending 30 September 2011, or 48 bps of average risk-weighted assets. Nonperforming loans represented just 2% of total loans. With only moderate involvement in capital markets businesses, the Bank has relatively low exposure to market risk. DBRS recognises ING Bank’s progress in removing risk from the balance sheet and management’s commitment to limit both balance sheet and risk-weighted asset growth. Moreover, the execution of the ING Direct USA sale, which is expected in 1Q12, will further advance the Bank’s de-risking efforts.

ING Bank’s capital position has been considerably strengthened in recent years. Capital ratios benefits from a less complex, less leveraged business profile and a reduction in risk-weighted assets. At the end of September 2011, ING Bank reported a Core Tier 1 ratio of 9.59% and a Tier 1 ratio of 12.22%, both up considerably year-over-year. ING Bank has set out its plan to reach its Basel III capital targets, which includes having a Core Tier 1 ratio in excess of 10% by 2013, through capital generation and balance sheet optimisation. DBRS notes that ING Bank comfortably passed the stress tests conducted by the European Banking Authority, with a Core Tier 1 ratio of 9.2% after taking into account the forthcoming CRD3 from market risk as well as sovereign debt at market prices based on September 2011 figures. DBRS notes that, to date, ING has repaid EUR 7 billion of principal and EUR 2 billion of coupons and exit fees to the State. Management has indicated it remains committed to repaying the State as quickly and as economically as possible.

DBRS’s ratings for ING Bank also factor in the challenges that ING, the Bank’s parent company, faces as it works to separate its Insurance and Banking operations. The Group is currently in the process of preparing for two IPOs of its insurance divisions and expects to proceed when markets recover. Given the difficult operating environment across the Euro zone, stiff competition, and increased regulatory requirements, DBRS believes that growing income will become more challenging in the short- to medium-term. While the Bank is embarking on growth plan that may go beyond Europe, DBRS views diversity of income and underlying earnings ability as important rating factors that may be diminished by required divestitures. Importantly however, DBRS views the de-risking efforts, the focus on higher yielding retail assets, and the sound cost cutting initiatives as mitigating factors. As a result, DBRS sees ING’s ability to capitalise on growth opportunities as important challenge.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This credit rating has been issued outside the European Union (EU) and may be used for regulatory purposes by financial institutions in the EU.

Lead Analyst: Steven Picarillo
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 11 December 2008
Most Recent Rating Update: 18 August 2010

For additional information on this rating, please refer to the linking document under Related Research.