ING Groep did announce that they plan to divest their insurance group on the request of the authorities. The Dutch government came to the rescue of ING during the financial crisis to provide a $10B euro backstop on some of ING Groep’s bets on the U.S. mortgage portfolio, particularly related to mortgages considered Alt-A. Because of that deal the European authorities and ING agreed to sell its insurance unit and its Internet banking operations that was largely targeted towards U.S. markets. ING is still repaying the Dutch state and took a charge of 930M Euros related to that bailout in this quarter, as the European Commission claims that the terms of the bailout from the Dutch were too favorable. At that time, the Dutch government bought 80% of their portfolio for only a 10% discount to face value. In hindsight, that price appears to be much to high which has prompted this new round of charges to ING as a means of appeasing the European Commission.
As for ING’s insurance group, they did experience a pretax loss of 47M euros, as gross premium income dropped 22% largely as a result of scaled down variable-annuity sales. However, that represents a substantial turnaround from the 2.5B euro loss of a year ago. The firm said that they will focus now on the best way to spin off the insurance unit, but it is unlikely to commence until 2011. Some investors had hoped that a plan for an IPO may come as soon as late 2010.
It is clear that Dutch authorities wish to lessen the risks in ING’s business, so as to avoid the need for future bailouts. In essence, ING is restructuring to be solely a banking operation with primary exposure to European markets, which in the process is about halving their balance sheet, according to the Wall Street Journal. If it weren’t for charges related to divestments and special items, ING Groep would have had a profit of 74M euros, and the banking division was the bright point with underlying pretax profit of 132 million euros.
At Ockham, we currently have our neutral or Fairly Valued rating on ING because the stock is not especially expensive, but we do have concerns about their future earnings power after all the restructuring and divestitures. ING is trading slightly higher in morning trading, but considering the worse than expected results, increasing loan loss reserve, and uncertainty surround restructuring, we would not advise buying these shares unless the price were to drop considerably.
Ockham Research Staff