DBRS: ING Direct Canada UR-Pos, Snr AH with announced Scotiabank acq; ING Bank NV AAL, Trend Stable

DBRS, Inc. (DBRS) has today placed the ratings of ING Bank of Canada (ING Direct Canada) Under Review with Positive Implications, including its Issuer & Long-Term Debt rating of A (high) and its Short-Term Debt rating is R-1 (middle). This ratings action follows the announcement by the ING Group that it has reached an agreement to sell ING Direct Canada for a total consideration of CAD 3.1 billion (EUR 2.5 billion at current exchange rates) to Scotiabank, a leading Canadian financial services company. On 29 August 2012, DBRS confirmed the ratings for Scotiabank, including its Deposits & Senior Debt at AA and Short-Term Instruments at R-1 (high), following the ING Direct Canada Announcement. This review also covers the locally issued lower tier 2 bond (ISIN CA 456847AA01) with a total outstanding amount of CAD 321 million that carries a guarantee from ING Bank N.V. and is rated A (high); Scotiabank is to assume the responsibility to redeem this bond on the first call date after the transaction closes. DBRS has also 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 ING Bank’s ratings remains Stable.

The Under Review with Positive Implications reflects the change in ownership should the transaction proceed as proposed. Under the terms of the agreement, ING Direct will become a wholly-owned subsidiary of Scotiabank at closing. The acquisition is subject to regulatory approvals and is expected to close in 4Q12. This agreed upon sale is a conclusion of ING’s recently announced review of its strategic options for ING Direct Canada. The review of ING Direct UK continues.

The confirmation of ING Bank’s ratings considers that the sale of ING Direct Canada does not have a material impact on ING Bank’s core franchise or its earnings power. ING Bank of Canada has CAD 40 billion in assets, focused primarily on residential mortgages (CAD 29 billion), relative to ING Bank’s EUR 900 billion in assets at the end of 2Q12. Moreover, the sale, when concluded, will bolster ING Bank’s capitalisation. ING Bank’s 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’s franchise in Europe, and a relatively low risk profile that is reinforced by improved capitalisation. The ratings also take into account the progress that the Bank is making with the execution of its restructuring plan. 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.

ING Bank’s ratings are underpinned by its 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 with operations in Austria, France, Germany, Italy and Spain, as well as Australia, that are not impacted by the sale of ING Direct Canada. ING is developing the ING Direct business model by increasing the product offering and extending distribution, while integrating the balance sheet with the rest of ING Bank.

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. 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.

ING Bank’s capital position has been considerably strengthened in recent years with capital ratios benefiting from a less complex, less leveraged business profile and a reduction in risk-weighted assets. DBRS’s ratings for ING Bank also factor in the challenges that ING Group, the Bank’s parent company, faces as it works to separate its Insurance and Banking operations. ING 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 an 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 rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Roger Lister
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 11 December 2008
Most Recent Rating Update: 23 January 2012

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