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Update on my submission for monthly Gurufocus value idea contest - ING Group (ING-NYSE)
Posted by: Tarn Crowe (IP Logged)
Date: September 15, 2012 07:35AM
I last wrote about ING Group in May in an article “Finding Value in a European Banking Storm” . Please find the link here http://www.gurufocus.com/news/177589/finding-value-in-a-european-banking-storm
Since this article ING Group has made good progress on its divestures and the second quarter earnings were solid albeit lower than last financial year.
The net underlying 2nd quarter earnings for ING Group (excluding ING Asia classed as a discontinued operation) came in at €1.05 billion and both ING Bank & ING Insurance performed well. The results were good given the difficult economic conditions in Europe and Asia, the tepid growth in the US and slowdown in Asia including China.
There was a marginal increase in lending for ING Bank but the focus of management was clearly on strengthening ING’s capital position and loan exposures.
Capital & funding position
ING Bank’s Core Tier 1 ratio improved to 11.1% at the end of June 2012. Based on the Company analyst presentation on 11 Sep 2012, the sale for ING Canada and shares in Capital One will further strengthen ING’s capital position to 11.9%. This is well above the 9% level required by Basel III.
More than 60% of ING Bank’s funding comes from retail and corporate deposits. The customer deposits position of ING Bank experienced a marginal reduction of €4 billion or less than 1% to €473 billion with €4 billion in higher retail deposits offsetting €8 billion in lower corporate deposits.
ING has continued to reduce its funding mismatch in Spain by reducing its Spanish assets by 6.2 billion both in the lending book and reducing debt securities held.
The Spanish funding mismatch between assets and liabilities has been reduced to a little over €12 billion from €27 billion at the end of 2010.
Non-performing loans (NPLs) for ING Bank increased to 2.3% overall from 2.1% at the end of the first quarter due to pressure from Real Estate Financing and higher NPLs amongst SME corporates in the Netherlands. NPLs for Dutch mortgages remained at 1.2% due to the low unemployment levels in Holland. The housing market remains weak in Holland and along with difficult economic conditions in the Eurozone and Netherlands , ING Bank’s NPL ratio will remain under pressure.
Political risks – the Dutch bank tax
The Dutch labor party which is leading the pre-election polling in Holland, is seeking to raise the bank levy from the proposed €600 million to €1 billion, ING’s share would be €300 million or approximately 7% of underlying net earnings. Further they are seeking to impose a financial transactions tax http://www.businessweek.com/news/2012-09-10/feuding-dutch-politicians-agree-on-toughening-rules-for-banks.
There is further risk that mortgage interest deduction will be curtailed on home loan repayments in the Netherlands which could also damage the housing market, economy and ING Group’s loan exposures there.
The political risks above represent are negative for ING Group and do reduce my fair value for ING Group.
ING is close to divesting some or all of its Asian insurance businesses all of which have received expressions of interest. Due to regulatory considerations and the demand of potential buyers, ING is expected to divest the operations on a piece by piece basis.
I am confident ING Group will achieve good prices for its Asian businesses. ING Bank’s recent sale of its Canadian operations for US$3.1 billion (versus a book value of approximately US$1.7 billion) supports the view that ING’s management is committed to achieving solid sale prices for its assets and not just selling at any price.
In relation to the ING’s US Insurance operations, they have independently made debt issues this year strengthening their stand-alone status in preparation for an IPO. The European insurance operations are also being readied for an IPO.
ING Group’s ADR shares have increased since May 2012 due to
· a firmer commitment being shown by the ECB to protect to EU by undertaking sovereign bond purchases to lower interest rates for at risk countries such as Spain and Italy. This has boosted the value of financial firms and banks in Europe including ING Group in particular;
· an increase in the value for Euro versus the US Dollar raising the value of ING Group’s ADR shares;
· progress made by ING Group on the strengthening of its capital position with the sale of ING Canada, its stake in Capital One and the imminent sale of its Asian operations.
· Continued solid performance in ING Group’s underlying businesses.
· Investor recognition that ING Group’s shares were undervalued.
Disclaimer: This article represents the journalistic opinions of the author and is not intended to be provided as investment advice or relied upon as investment advice.
I own shares in ING Group for my company, personally and on behalf of investment accounts I manage.
Stocks Discussed: ING,
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