DBRS Comments on ING’s 3Q12 Results; Ratings Unchanged 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) 3Q12 earnings. The trend on all ratings remains Stable. For the quarter, the Bank reported an underlying profit before tax of EUR1,021 million, up 2.6% from 2Q12. Notable items affecting pre-tax 3Q12 results included a EUR323 million gain on the sale of the Bank’s stake in Capital One that was offset by EUR173 million of CVA/DVA charges and EUR258 million of realized losses related to further de-risking of the Bank’s securities portfolio.

This quarter’s results continue to reflect the deteriorating economic climate across Europe, which is leading to reduced client activity and increasing risk costs. Additions to loan loss provisions were EUR555 million for 3Q12, up just 2.6% QoQ, but up 59.5% from 3Q11. At 75 bps of average risk weighted assets (RWA), DBRS notes that provisions remain above 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 and controlling expenses. The Bank’s liquidity remains solid and the funding profile continues to improve, as evidenced by an EUR11 billion QoQ increase in funds entrusted.

Total underlying income (revenue) was EUR3.8 billion in 3Q12, up 3.4% from 2Q12. Despite a smaller average balance sheet (loans declined EUR3.4 billion from 2Q12) net interest income increased 3.2% in the quarter to EUR3.1 billion as a stronger result from Financial Markets drove a 7 bps increase in the net interest margin to 1.33%. Notwithstanding this solid revenue performance in a difficult environment, DBRS expects additional revenue growth will likely prove challenging in coming quarters, as loan balances decline, deposit margins remain pressured and de-risking efforts continue.

As a result, ING remains keenly focused on managing its costs and announced plans to reduce Bank run rate expenses by some EUR260 million by 2015. This will be accomplished by running-off certain leasing units, shrinking the equities business and improving efficiency in its cash management operations. These actions will reduce headcount in ING’s commercial banking business by around 1,000 over the next three years. DBRS notes that the Group also announced plans to reduce headcount in its European insurance business by 1,350 FTEs. Third quarter operating expenses of EUR2.2 billion were up 3.9% QoQ primarily due to higher performance-related fees and the absence of a one-time reimbursement that lowered second quarter expenses. The underlying cost/income ratio, excluding CVA movements and market impacts, was similar to 2Q12 at 56.9%. The Bank continues to target a cost/income ratio of between 50% and 53% for 2015.

Relative to 2Q12, the increase in risk costs in 3Q12 was mainly attributable to higher provisions related to mid-corporate and SME borrowers in Benelux. While down QoQ, risk costs in Real Estate Finance remain elevated at EUR102 million. With commercial real estate markets weakening across much of Europe, DBRS anticipates this trend to continue and expects loan loss provisions to remain elevated. The non-performing loan (NPL) ratio in the Bank’s EUR31 billion Real Estate Finance portfolio was 8.0% at 30 September 2012, up from 7.3% at the end of 2Q12. Overall, NPLs were 2.3% of total loans at the end of 3Q12, unchanged QoQ.

ING continues to reduce Spanish assets in an effort to improve its funding mis-match in that country and reduce potential credit-related risks. In the quarter, the Bank lowered its exposure to Spain by EUR1.8 billion to EUR34.6 billion and reduced the funding mis-match to EUR10 billion. The mismatch declined EUR2.3 billion QoQ and is down from EUR23.3 billion at the end of 2011. In addition to selling Spanish covered bonds and RMBS, ING sold some European CMBS and Irish RMBS in 3Q12. In all, the Bank sold EUR2.4 billion of securities, resulting in realized losses of EUR258 million. This compares to losses of EUR178 million related to 2Q12’s de-risking efforts. DBRS notes that another EUR3.5 billion of debt securities were sold in October, albeit at a loss of EUR119 million and involved the disposal of EUR1 billion of RWA’s.

Capital remains solid in DBRS’s view. At quarter-end, the Bank reported a Basel 2.5 Core Tier 1 ratio of 12.1%, up from 11.1% at the end of 2Q12. The Bank estimates that on a fully-implemented basis its pro-forma Basel III Core Tier 1 ratio was 10.9% at 30 September 2012, up from 9.4%. Third quarter regulatory capital ratios benefited from a EUR17 billion QoQ decline in RWAs, in addition to continued positive earnings. DBRS notes that the EUR3 billion of State Aid received will be repaid by the Group using a capital upstream from the Bank. This would also include the potential exit premium of 50%, i.e. EUR1.5 billion. Redeeming these securities remains a priority for the Bank, but DBRS expects ING will maintain its strong capital levels.

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: 31 August 2012

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