Feb. 15 (Bloomberg) -- ING Groep NV, the largest Dutch financial-services firm, said fourth-quarter profit unexpectedly rose 14 percent, driven by higher earnings from pensions in the U.S. and a rebound in banking as investment income gained.

Net income rose to 2.1 billion euros ($2.76 billion), or 98 cents a share, from 1.84 billion euros, or 85 cents a share, a year earlier, the Amsterdam-based company said today. That beat the 1.66 billion-euro median estimate of 12 analysts in a Bloomberg survey. Profit was also boosted by a lower tax rate.

Chief Executive Officer Michel Tilmant has sold more than 15 businesses since 2004 to invest in online banking, U.S. pensions and insurance in Asia. Insurance profit rose 31 percent as rising stock markets lifted the value of U.S. retirement plans. Banking profit advanced as the interest margin stabilized and equity and m

``A low tax rate explains a considerable part of the positive surprise,'' said Ton Gietman, an analyst at Petercam who has an ``add'' rating on ING stock. ``On balance though, the results support the view that ING has many growth engines.''

ING shares fell 25 cents, or 0.7 percent, to 34.38 euros. The stock has risen 16 percent in the past 12 months, the same as the increase in the Bloomberg Europe Banks and Financial Services Index and exceeding the 8.5 percent gain for ABN Amro Holding NV, its closest rival.

Tax Boost

ING's fourth quarter earnings benefited from a lower tax rate of 11.5 percent in the fourth quarter due to tax-exempt income from equity investments, releases of tax provisions and a reduction of corporate income tax rates.

ING's retirement services will continue to grow and the company will continue to invest in emerging markets such as China, India and Eastern Europe, Chief Financial Officer Cees Maas said in a televised interview.

Maas, who is also vice chairman, will retire at the annual shareholders meeting on April 24 and be replaced by John Hele. Hele, who spent most of his career at Merrill Lynch & Co., is currently deputy CFO. Maas has been CFO since July 1996 and vice chairman since April 2004. ING also plans to name Koos Timmermans as Chief Risk Officer.

ING has about 3 billion euros in excess capital and that it will continue to invest in ``growth engines'' like life insurance in Russia, Bulgaria, Romania and Thailand, Tilmant said at a press conference today. He also reiterated ING Direct is looking at opportunities to enter the Japanese market and will continue to add products and expand further in the U.S.

No Acquisitions

The company currently has no intention of making a ``large acquisition,'' Tilmant said. ING has the ``capacity'' to make a 20 billion-euro acquisition, he added. The CEO also said he isn't opposed to a share buyback.

``ING is well positioned to expand in growth markets even without major acquisitions.'' said Duco Frie, who manages $190 million at Nyenburg Asset Management in Amsterdam, including ING shares.

ING plans to invest at least 150 million euros this year to expand in life insurance in growth markets like Russia, Romania and Thailand.

Underlying profit at the banking unit rose to 941 million euros in the fourth quarter, lifted by an increase in investment income. Loan-loss provisions rose fourfold to 88 million euros. The quality of the loan portfolio is ``excellent,'' Maas said.

``While the current interest rate environment is challenging'' for the banking division, ``we have benefited from rallying equity and real estate markets, a benign credit environment, a favorable underwriting cycle in non-life insurance and lower taxes,'' ING said.

Insurance Profit

The company, which generates about half its profit from insurance, ranks second among foreign life insurers in the Asia- Pacific region and is also among the top five life insurance and retirement services companies in the U.S.

Profit at the insurance unit rose 66 percent to 1.18 billion euros boosted by higher earnings from pensions in the U.S., asset growth in Japan and growth in central Europe.

``The bulk of our businesses have shown a strong performance, although Japan and the U.S. individual life business require management attention, and we are actively addressing those,'' the bank said.

Banks across Europe have seen lending margins squeezed by a narrowing gap between short- and long-term interest rates. The difference between the two-year and 10-year yield on benchmark German bonds is close to a six-year low. The gap averaged 37 basis points last year, compared with 1.67 percentage point in 2004.

Commerzbank AG, Germany's second-largest bank by assets, yesterday said interest income, the biggest revenue contributor, fell in the fourth quarter because of the flattening yield curve.

Pretax earnings at ING Direct fell 0.5 percent to 183 million euros as staffing costs increased, ING said today. The online bank added 587,000 customers as it expanded in Chicago, as well as 5.4 billion euros in mortgages.

ING gets 25 percent of its profit from insurance in Europe 22 percent from corporate banking, 22 percent from insurance Americas, 18 percent from retail banking and 7 percent from ING Direct and 6 percent from insurance in the Asia-Pacific region.

To contact the reporter on this story: Joana Quintanilha in Amsterdam at quintanilha@bloomberg.net

Last Updated: February 15, 2007 12:01 EST