DBRS Comments on ING’s 2Q12 Results and the Strategic Review of ING Direct Canada; Ratings Unchanged

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) 2Q12 earnings. The trend on all ratings remains Stable. DBRS notes that ING recently announced that it was reviewing strategic options for ING Direct Canada and ING Direct U.K. DBRS’s current Issuer & Long-Term Debt rating of ING Bank of Canada is A (high) and its Short-Term rating is R-1 (middle). ING Bank of Canada’s outstanding subordinated debt that is guaranteed by ING Bank N.V. is currently rated A (high). These ratings are largely based on anticipated support from the Group and the core nature of the ING Direct franchise globally, both of which are reflected in ING Bank of Canada’s SA-1 support assessment.

While the strategic review suggests that the Canadian market may no longer be seen as core to ING, ING Direct remains a key component of the Group’s overall deposit gathering and growth strategy. As such, DBRS’s view is that the support currently ascribed to ING Direct in Canada will not be diminished materially, because any perceived weakening of support may raise questions about the Group’s support for ING Direct in its key European and Australian markets. Given this perspective, DBRS does not view the Group’s announcement as warranting immediate rating action on ING Bank of Canada. However, should this perspective change, ING Bank of Canada’s non-guaranteed ratings would come under pressure. DBRS does not rate ING Direct U.K.

For the quarter, the Bank reported an underlying profit before tax of EUR 995 million, down 11.6% from 1Q12. The somewhat weaker results reflected the deteriorating European economy, which led to subdued client activity and loan demand. The weakening environment also drove an increase in credit costs. Additions to loan loss provisions were EUR 541 million for 2Q12, up from EUR 441 million in 1Q12 and EUR 301 million in 2Q11. At 72 bps of average risk weighted assets, DBRS notes that provisions are above of the Bank’s expected through-the-cycle range, but reflect the economic stresses in the economies in the Eurozone. Nevertheless, DBRS views ING’s results as acceptable. The Group continues to execute on its strategic priorities, while proactively reducing risk. The Bank’s liquidity remains solid and the funding profile continues to improve. Indicative of positive franchise trends, retail deposits were up EUR 4.3 billion QoQ, and the Bank grew its loan book in the quarter.

Total underlying income (revenues) was EUR 3.7 billion in 2Q12, down from EUR 3.8 billion in 1Q12. DBRS views this revenue performance as solid given the environment. Net interest income declined 3.2% in the quarter to EUR 2.95 billion, as the low rate environment and a smaller contribution from Financial Markets, led to a 6 bps decline in the net interest margin (NIM) to 1.26%. Earning assets increased modestly QoQ, reflecting loan growth and higher balances in the investment portfolio that offset reduced balances at central banks. With an improving asset mix and positive loan re-pricing trends, the Bank anticipates the NIM may improve modestly in coming quarters. However, with a smaller overall balance sheet, net interest income is expected to remain around current levels.

Importantly, operating expenses for the Bank were well-controlled. Despite lower revenues, the underlying cost/income ratio improved by approximately 40 bps QoQ to 58.4%, excluding CVA movements and market impacts the ratio increased from 1Q12. Still, total operating expenses declined 3.6% from 1Q12 to EUR 2.15 billion and, given the weak economic environment, ING remains keenly focused on controlling costs. The Bank continues to target a cost/income ratio of between 50% and 53% by 2015.

The increase in risk costs in 2Q12 was mainly attributable to higher provisions for commercial real estate, as well as Dutch mortgages. Given the uncertainty in the economic environment, and the continued, albeit modest, pressure on Dutch home prices, DBRS expects loan loss provisions will remain at elevated levels for the coming quarters. At the end of 2Q12, NPLs were 2.3% of total loans, up from 2.1% at the end of 1Q12. The loan books in Spain and Italy, which totaled EUR 16.2 billion and EUR 16.7 billion, respectively at quarter end, weakened somewhat in the quarter, evidenced by increased NPLs. However, risk costs in these portfolios remain low. The residential mortgage portfolios in both countries have NPL ratios below one percent and the corporate loan books are well-diversified. DBRS notes that the Bank’s EUR 2.7 billion Real Estate Finance portfolio in Spain has resulted in no charge-offs, though NPLs are elevated at 18%.

ING also continues to reduce Spanish assets. In the quarter, the Bank lowered its exposure to Spain by EUR 4.8 billion. This was accomplished by selling covered bonds and RMBS and buying CDS protection to reduce net exposure to the Government. These Spain-related de-risking efforts accounted for EUR 156 million of the total EUR 178 million of de-risking losses that ING recorded in 2Q12.

The Bank’s funding profile continues to improve and evolve. As noted, deposits and loans both increased QoQ and ING reduced short-term debt in the quarter. Importantly the Bank has continued to execute on its strategy of better aligning funding and lending across the franchise. From April through July, ING was able to transfer EUR 6.9 million of assets from the Dutch legal entity into other entities with surplus deposit funding. Nevertheless, DBRS notes that the Bank has a funding mismatch (assets less local funding) of EUR 12.3 billion in Spain. This is down from EUR 23.3 billion at the end of 2011, reflecting the noted de-risking efforts in Spain.

In terms of capitalisation, at the end of 2Q12 the Bank reported a solid Basel 2.5 Core Tier 1 ratio of 11.1%, up from 10.9% at the end of 1Q12. The Bank estimates that on a fully-implemented basis its pro-forma Basel III Core Tier 1 ratio was 9.4% at 30 June 2012. DBRS notes that ING’s capital includes EUR 3 billion (of the initial EUR 10 billion) of the Dutch State’s investment in the Bank in the form of Core Tier 1 securities. Redeeming these securities remains a priority for the Bank, but DBRS expects ING will maintain its strong capital levels.

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 the disclosure.

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

Lead Analyst: Roger Lister
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.