DBRS Comments on ING’s 4Q12 Results, Ratings Unchanged Senior at AA (low), Trend Stable

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) 4Q12 earnings. The trend on all ratings remains Stable. For the quarter, the Bank reported an underlying profit before tax of EUR 184 million, 81.3% lower sequentially. Notable items affecting pre-tax 4Q12 results included a EUR 175 million charge for Dutch bank tax, EUR 188 million of CVA/DVA charges and EUR 126 million of realized losses related to further de-risking of the Bank’s securities portfolio. Excluding those and other market related items, results were 36.2% lower sequentially primarily driven by seasonally lower activity in Financial Markets, higher liquidity costs, and reduced results in Retail Banking. DBRS notes that 3Q12 results also benefited from a EUR 323 million gain on the sale of the Bank’s stake in Capital One.

The quarter’s results continue to reflect the weakening macroeconomic environment in the Netherlands and across Europe, which is leading to reduced new business volumes on moderating demand and increasing risk costs. Additions to loan loss provisions were EUR 588 million for 4Q12, up 6.1% quarter-on-quarter (QoQ), but up 32.1% from 4Q11. At 84 basis points (bps) of average risk weighted assets (RWA), DBRS notes that provisions continue to exceed the Bank’s expected through-the-cycle range, but are consistent with the challenging economic conditions in the Eurozone. Against this back-drop, DBRS considers ING’s results as acceptable. Positively, the Group continues to advance on its strategic plans to remove risk from the balance sheet while maintaining a firm control on the cost base. The Bank’s liquidity remains solid and the funding profile continues to improve, as evidenced by an EUR 8.2 billion QoQ increase in funds entrusted.

Total underlying income (revenue) was EUR 3.2 billion in the quarter, a 15.1% decline from 3Q12. Net interest income was 3.9% lower at EUR 2.9 billion on higher funding costs as the Bank continues to lengthen the funding profile and lower returns on the bond portfolio due to de-risking actions. Margin was broadly stable QoQ at 1.33%. Looking forward, DBRS expects achieving revenue growth in 2013 as likely to be challenging for ING, as well as its domestic peers, as the weak economic conditions in the Netherlands will continue to constrain demand for banking products and services and deposit margins remain elevated.

Given the challenging operating environment, ING remains focused on reducing its cost base, announcing planned actions that will reduce the Bank’s expense run rate by some EUR 1.0 billion by 2015. To this end, ING announced a broadening of its change programme in Retail Banking Netherlands and a new programme in Retail Banking Belgium. This follows the initiatives announced in the prior quarter for Commercial Banking and Insurance Europe. The new actions will reduce headcount in ING’s Retail Netherlands business by around 1,400 and ING Belgium by 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. Fourth quarter operating expenses of EUR 2.4 billion were up 9.1% QoQ primarily due to the Dutch bank tax. Excluding this tax, operating expenses were 1.2% higher sequentially reflecting higher marketing expense costs for year-end campaigns. The underlying cost/income ratio, excluding CVA movements and market impacts, was 75.7% compared to 58.8% in the prior quarter. The Bank continues to target a cost/income ratio of between 50% and 53% for 2015.

Relative to 3Q12, the increase in risk costs in 4Q12 was mainly attributable to higher provisions related to mid-corporates and SME borrowers in Benelux as well as a small Acquisition Finance portfolio in Industry Lending. Risk costs in Real Estate Finance were stable QoQ, but remain elevated at EUR103 million. Given the operating environment, DBRS expects that commercial real estate markets will remain soft across much of Europe in 2013 keeping loan loss provisions at elevated levels. The non-performing loan (NPL) ratio in the Real Estate Finance portfolio moderated in the quarter to 7.6%, 40 basis points lower than at 30 September 2012. Overall, NPLs were 2.5% of total loans at the end of 4Q12, a 20 bps increase QoQ.

ING continues to reduce exposure to European peripheral countries as part of its balance sheet de-risking efforts. In 4Q12, the Bank lowered its exposure to Greece, Italy, Ireland, Portugal and Spain by EUR 2.6 billion to EUR 60.4 billion. During the quarter, the Bank sold EUR 0.9 billion of bonds, resulting in realized losses of EUR 126 million. This compares to losses of EUR 258 million related to 3Q12’s de-risking efforts.

From DBRS’s perspective, capital remains solid and views the Bank as well-placed for forthcoming regulatory requirements. At quarter-end, the Bank reported a Basel 2.5 Core Tier 1 ratio of 11.9%, up from 9.6% at the year-end 2011. The Bank estimates that on a fully-loaded basis its pro-forma Basel III Core Tier 1 ratio was 10.4% at 31 December 2012, up from 7.9% at September 2011. Despite EUR 2 billion of negative foreign exchange impacts, RWAs were EUR 8 billion lower QoQ reflecting the sale of ING Direct Canada, lower lending volumes and the de-risking of the investment portfolio. DBRS notes that the EUR 1.125 billion of State Aid received was repaid by the Group using a capital upstream from the Bank. DBRS notes this includes a premium of EUR 375 million. Redeeming these securities remains a priority for the Bank, but DBRS expects ING will maintain its strong capital levels. DBRS notes that the revised IAS 19 on pensions came into effect, at the beginning of 2013, and on a pro-forma basis would lower core Tier 1 ratio by approximately 60 bps. However, the impact was already factored in ING’s expected Basel III impact, which calls for the phase out of net pension assets from capital calculations over a period of time.

Notes:
All figures are in Euros (EUR) unless otherwise noted.

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]