DBRS: Bank Tax and Restructuring Impact Otherwise Solid Q4 for ING Bank

Summary:
•Underlying profit before tax down 18% QoQ, primarily due to the annual Dutch bank tax and an extension of the existing cost-saving programme. These costs led to a 10.9% increase in operating expenses compared to Q313.
•Core franchise remains resilient. Risk costs up slightly on Q3, but capital remains sound despite the dividend to ING Group to facilitate the repayment of State Aid.
•DBRS rates ING Bank NV at AA (low) with a Stable trend for Issuer & Long-Term Debt.

DBRS Ratings Limited (DBRS) considers the Q4 2013 results of ING Bank NV (ING or the Bank) as solid, despite the increase in operating expenses. The Dutch bank tax, which totalled EUR 149 million for 2013, is paid in the fourth quarter on an annual basis and therefore operating expenses in the period are impacted by this. The EUR 76 million restructuring charge taken in the quarter relates to an extension of cost-saving programmes already in place in the Retail Banking Netherlands division. This additional programme will lead to a further reduction in headcount of 300 full-time employees and EUR 30 million of cost savings by 2015, taking the total cost savings from the restructuring programmes in the 2011-2015 period to EUR 880 million.

The Bank’s overall performance in Q413 was robust. Despite the challenging economic conditions in the Netherlands total underlying income rose 1.1% quarter-on-quarter (QoQ), boosted by a EUR 99 million positive result from the unwinding of the Illiquid Assets Back-up Facility with the Dutch government. The underlying net interest margin (NIM) was stable and the cost of risk was up only slightly on Q313, and it fell in comparison with Q412. As expected, the operating environment in the Netherlands continues to impact on asset quality with non-performing loans increasing in both the Dutch mortgage and business lending portfolios. However the overall non-performing loan ratio increased only slightly to 2.8% from 2.7% at end-Q313. In the Real Estate Finance book the non-performing loan ratio increased slightly but this was primarily due to a reduction in the size of the portfolio; positively the cost of risk reduced for the third successive quarter. Both capital and funding remain sound, reflecting the improvements the Bank has made in recent years.

The Bank reported a 10% Common Equity Tier 1 (CET1) on fully loaded CRD4 basis. This incorporates a EUR 1.125 billion dividend payment to ING Group in November 2013 to facilitate repayment of State Aid, as well as a 4% increase in risk-weighted assets. The increase in risk-weighted assets primarily reflects the economic environment in the Netherlands and as a result the risk-weighting of Dutch mortgages is now 19%, up from 15%. On a CRD4 basis, the leverage ratio was 3.9% at end-2013. Due to the Bank’s solid internal capital generation DBRS views the Bank as well placed to manage the impact of the evolving regulatory environment.

DBRS rates ING Bank NV at AA (low) with a Stable trend for Issuer & Long-Term Debt.

Notes:
All figures are in Euros (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: Support Assessment for Banks and Banking Organisations. All can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company reports and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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Lead Analyst: Ross Abercromby
Approver: Alan G. Reid
Initial Rating Date: August 18, 2010
Most Recent Rating Update: October 18, 2013

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