DBRS Ratings for ING Bank N.V. Unchanged after 1Q12 Earnings; Senior at AA (low), Stable Trend

DBRS, Inc. (DBRS) has today commented that its ratings for ING Bank N.V. (ING or the Bank), including its Issuer & Long-Term debt rating of AA (low), are unchanged following the release of ING Groep N.V.’s (the Group) 1Q12 earnings. The trend on all ratings remains Stable.

For the quarter, the Bank reported an underlying profit before tax of EUR 1.1 billion as compared to EUR 682 million in 4Q11 and EUR 1.5 billion in 1Q11. The improved results were supported by lower impairments and lower de-risking losses, and came despite a EUR 198 million net loss from credit valuations adjustments (CVA) as well as a EUR 106 million negative fair value charge on the Company’s own debt. Excluding these items, results were down 6.8% from a very strong 1Q11. Despite the lower year- on-year results, DBRS views the Bank’s results as acceptable given the deepening European sovereign debt crisis, the ongoing financial market volatility, the current economic environment in the Netherlands, and negative sentiment for the near-term economic outlook.

For the quarter, the Bank generated underlying income (revenues) of EUR 3.8 billion, which was up 12% from 4Q11, but down 6% from the year-ago quarter. However, excluding CVA and negative fair value changes on ING’s own debt, underlying income increased 1.6% from 1Q11. DBRS views this revenue performance as solid given the environment. Net interest income slipped 2.0% from 4Q11 and was 1.3% lower than the year ago quarter. Lower interest margins on savings and higher balances at central banks drove the net interest margin down 4 bps to 132 bps. DBRS notes that higher funding costs, ongoing competition for deposits, and depressed loan volumes may continue to pressure net interest margin in the near-term.

Importantly, the results illustrated the strength of the ING Bank franchise. Client balances in residential mortgages continued the solid growth pattern that was established in 1Q10. At quarter end, residential mortgages increased to EUR 306.8 billion. DBRS sees this as a positive given the muted housing activity in the Netherlands. In terms of funds entrusted, the Bank ended the year with EUR 464 billion, increasing some EUR 25 billion since 1Q11, with the increase in the retail bank more than offsetting the decline in the commercial bank.

Operating expenses for the Bank were well-controlled. Underlying operating expenses of EUR 2.2 billion were 1.2% lower than 1Q11. Still, with underlying income down by more, the cost/income ratio increased to 58.8% from 56.0% in 1Q11. DBRS notes that excluding market impacts and CVA/DVA, the underlying cost/income ratio was 54% in 1Q12. The Bank remains keenly focused on controlling costs going forward, especially given the challenging environment for revenue growth. ING continues to target a cost/income ratio of between 50% and 53% for 2015.

Credit costs were lower in 1Q12, but remain elevated. The addition to loan loss provisions was EUR 441 million, down from EUR 447 million in 4Q11. The quality of the loan book did not change significantly with non-performing loans at 2.1% of total loans. However, the cost of credit increased from its low base in 1Q11, almost doubling year-over-year. The addition to loan loss provisions was equivalent to 59 basis points of average risk-weighted assets for the first quarter compared to 61 bps in 4Q11 and 34 bps for 1Q11. The increase in risk costs was mainly attributed to higher provisions for the mid-corporate and SME books in the Benelux, some specific files in general lending, as well as in the Dutch mortgage book. Given the uncertainty in the economic environment, especially the disrupted housing market in the Netherlands, DBRS expects loan loss provisions will remain at elevated levels for the coming quarters.

ING was able to maintain access to funding sources despite the disrupted capital markets. During the quarter, customer deposits increased by EUR 7 billion to EUR 475 billion, which kept the Bank’s loan to deposit ratio, excluding securities and IABF receivable, stable at 114%. Evidencing access to the markets during the quarter, ING Bank issued EUR 9.2 billion of long-term debt, consisting of EUR 6 billion of senior debt, EUR 2.5 billion of covered bonds and EUR 0.7 billion of RMBS. The bank has limited refinancing needs in 2012, with only EUR 18.2 billion maturing in 2012. In terms of capitalisation, at the end of 1Q12, the Bank reported a solid Core Tier 1 ratio of 10.9%, benefiting from the sale of ING Direct USA, as well as de-risking efforts and the restructuring of the Financial Markets platform. At quarter end, risk weighted assets totaled EUR 299.6 billion, adjusted for pending divestments, increasing EUR 2.4 billion largely due to the stake in Capital One.

Notes:
All figures are in Euros 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 commentary was disclosed to the issuer and no amendments were made following that disclosure.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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
Approver: Alan G. Reid
Initial Rating Date: 18 August 2010
Most Recent Rating Update: 23 January 2012

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