6th February 2019

Ring (ING) in the profits | Bank Capital Insights

Beauty in its simplicity…

ING reported Q4 and fully year 2018 earnings on Wednesday morning and investors seem to like the simplicity of the underlying business model and overall ease in understanding the drivers of its earnings.  Net income for 2018 came in at EUR 4.7 billion (despite the EUR 775 million of regulatory settlement costs) translating to a soild ROE of 11%.

The bank’s stock was up almost 6% on the day despite the overall banking sector being down.   After years of internal restructuring and unwinding of the bank assurance model, the bank is finally starting to show the benefits of its simple yet powerful business model.

This is in sharp contrast to the lukewarm / downbeat reaction to the earnings reports from other European national champion banks like BNP, SANTAN, DB and even Nordea.

ING has the same headwinds like the other Eurozone banks – negative interest rates, slowing economic growth, costs relating to compliance/operational risk and yet, in 2018, it delivered positive operating jaws as it kept a tight lid on costs.

Strong earnings report

With a cost to income ratio in the low 50% area and cost of risk substantially subdued at 21 bps of average RWA, the bank was able to deliver a solid set of pre-tax operating income and a ROE of 11%  But for the one-off settlement charges, this would have been an even better quarterly report.

As they say, sometimes, keeping it simple is the best strategy. ING focus on its domestic Benelux markets and within that retail banking allows it to generate decent returns on equity but with good capital metrics.

Asset quality remains solid with reported NPLs (now called Stage 3) at 1.5% of loans. Having said that, the loan book is likely to be impacted by the large exposure to the Oil and Gas industry (almost EUR 38 billion) and loan books in Turkey (EUR 13 billion) and Russia (EUR 5 billion).

With a CET 1 ratio of 14.5% and a leverage ratio of 4.4%, the bank is well placed to handle potential downside risks.  In addition, estimated annualized pre-provision income of almost EUR 8 billion allows the bank to absorb unexpected spike in loan losses.

ING now becoming core name to own in sub debt land

ING is one of the few examples amongst the large European banks where in AT1 bonds look attractive to own/hold given the defensive nature of the bank’s business model and ongoing capital buildup.

From a credit angle, especially in senior and LT2, ING is going back to earning its “boring but defensive” tag.   There is some supply due to come from the bank as it replaces its existing bank level senior and LT2 debt into Holdco Senior and Holdco LT2 but given the strength of its balance sheet and capital adequacy metrics, it should not have a problem in getting them done (although it may come at a slightly higher spread level).

In conclusion, ING is starting to ring in the profits, which should see further build-up of its capital buffers.  And that is a very good place to be as far as credit investors are concerned.

GJ Prasad

A senior European bank research specialist with significant breadth/in-depth sector knowledge, GJ has researched bank capital instruments extensively - having covered the asset class for more than 15 years as an analyst and 7 years as a risk taker in buy-side roles. His specialisation includes carrying out detailed financial modelling work on the European banks focusing on asset quality, earnings and capital adequacy metrics. His deep-dive work focuses on single name selection and extensive risk analysis on capital securities, especially on structural features, issuer credit profile and equity/AT1 valuation.