DBRS confirms ING Bank N.V. at AA (low); trend stable

DBRS Ratings Limited (DBRS) has today confirmed the ratings of ING Bank N.V. (ING Bank or the Bank) at AA (low) for Issuer & Long-Term Debt ratings and R-1 (middle) for Short-Term Debt. The Trend is Stable. ING Bank’s ratings reflect an intrinsic assessment (IA) 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. The rating action follows a review of the Company’s operating results, financial fundamentals and outlook.

In confirming the ratings, DBRS continues to recognise ING Bank’s leading retail and commercial banking franchise in the Benelux region, significant international banking capabilities, solid liquidity profile and a relatively low risk profile that is reinforced by the improved capital position. These strengths are partially offset by the challenging environment in which the bank operates, especially in the Netherlands, as well as the ongoing challenge the Bank faces as it continues to execute on its restructuring plan and separates its operations from those of the insurance businesses that have historically been closely intertwined under their parent company, ING Groep N.V. (ING or the Group).

DBRS also views positively the progress that the Group has made in achieving its European Commission (EC) mandated restructuring plan. This was amended in November 2012 and now provides an extended time horizon and increased flexibility to complete the main part of the plan which is to divest all of its Insurance and Investment Management operations. ING continues to prepare for two IPOs of its insurance businesses in Europe and in the USA (of which 29% has already been disposed of) and has already completed the divestment of the ING Direct business in the USA. The requirement for the EC mandated restructuring plan was a result of the substantial State Aid received by the bank including an Illiquid Asset Backup Facility (IABF) for U.S. mortgage-related securities and a EUR 10 billion government investment (in the form of Core Tier 1 securities). ING has now paid over EUR 10 billion to the Dutch State and the remaining repayment, totalling EUR 3.375 billion, is scheduled to be repaid in three tranches of EUR 1.125 billion in November 2013, March 2014 and May 2015, these payments cover principal as well as premiums and interest. The ING Direct businesses in Canada and the UK have also been sold although these were not part of the mandated EC restructuring.

Given the sale of the US and Canadian ING Direct businesses, ING Bank is becoming a more European focused bank. Internationally, ING Bank focuses on markets with attractive growth opportunities and that enhance its existing presence in Central Europe (Poland and Romania), Turkey and selected markets throughout the Asia/Pacific region. ING Direct remains a core franchise, but the Bank is now focused on those markets where it can originate and fund loans, not just generate deposits. DBRS views this realignment positively as it will result in a better aligned balance sheet.

ING continues to generate solid pre-provision income, primarily driven by its retail banking operations in the Benelux region, but supported by its other operations including retail banking in Germany and its commercial banking operations. In the six months to end-June 2013 the Bank reported underlying income before provision and taxes (IBPT) of EUR 3.59 billion up from EUR 3.28 billion in the first six months of 2012. In the second quarter of 2013 the Bank reported underlying IBPT of EUR 1.62 billion. Given the challenging macroeconomic environment, especially in the Netherlands, DBRS views ING Bank’s ability to generate solid underlying income as evidence of the strength of the franchise.

Overall DBRS sees ING Bank’s risk profile as relatively low given its focus on retail and business banking. The remainder of the Bank’s loan portfolio consists of the Commercial banking portfolio, including EUR 28.8 billion of real estate lending. As a result of the challenging economic environment, especially in the Netherlands where both residential and commercial property values have fallen in recent years, provisioning costs have been at elevated levels, and DBRS would expect this to continue in the short to medium term. DBRS views the exposure to commercial real estate as a major challenge facing the Bank although positively the portfolio is spread across several countries with, at end-June 2013, 52% of the total exposure of EUR 29 billion being in the Netherlands, 11% in the USA, 9% in Spain and 6% in Italy. The impaired loan ratio for the total portfolio increased to 10.4% at end-June 2013, although following the sale of a Spanish exposure in July the pro-forma impaired loan ratio was 8.8%. For the Netherlands portfolio this ratio remained lower at 6.6%. In August 2012 the Bank sold USD 1.6 billion of commercial real estate in the USA, further reducing its exposure.

ING Bank has a solid funding profile, underpinned by a broad deposit base in the Netherlands, Belgium and Germany. Deposits from customers and other funds on deposit totalled EUR 475.7 billion as of end-June 2013. This led to a reported loan to deposit ratio of 107% at end-June 2013. The wholesale funding profile has improved with the proportion of long-term funding increasing and total short-term debt (commercial paper and certificates of deposit) reducing. In terms of liquidity, ING is well placed with, at end-June 2013, a total eligible collateral position, at market values, of EUR 197 billion compared to total short-term funding at end-June 2013 of EUR 74 billion. Importantly the Bank has also continued to execute on its strategy of better aligning funding and lending across the franchise.

DBRS views ING Bank’s capital position as sound. At end-June 2013 the Bank reported a Core Tier 1 ratio of 11.8% and a Tier 1 ratio of 14.3%, down slightly on end-March 2013 as a result of dividends paid to the group. On a fully-loaded Basel III basis the pro-forma core Tier 1 ratio was 10.2%, already above the 10% target level of the bank.

Given the difficult operating environment in the Netherlands any positive rating pressure is unlikely in the short to medium term. Negative pressure could however increase in the case that there is further deterioration in the credit quality of the residential mortgage, domestic business or real estate lending that would lead to substantially higher impairment charges. In addition, if there are indications that the separation from ING’s insurance business has impacted the overall franchise, or if divestitures and the repositioning of the Banking franchise result in permanently lower profitability on a risk-adjusted basis, this could result in negative rating pressure.

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

The principal methodology applicable is: the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. The rating methodologies and criteria used in the analysis of this transaction can be found at: http://www.dbrs.com/about/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.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Ross Abercromby
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 6 September 2005
Most Recent Rating Update: 31 August 2012

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