ING Groep NV (INGA), the biggest Dutch financial-services company, rose the most in almost a year after reporting improved results at its bank and insurance units, stoking optimism a restructuring plan is working.
The shares climbed as much as 6 percent as second-quarter earnings at ING’s bank grew by 14 percent to 1.15 billion euros ($1.5 billion), above analysts’ estimates, on cost cuts and improving margins. ING said today that it’s examining ways to extend a plan that aims to reduce expenses by 1 billion euros by 2015, resulting in 7,450 fewer jobs.
ING is nearing the end of a European Union-imposed plan that requires shrinking its balance sheet by 45 percent and disposing of its global insurance operations. Chief Executive Officer Jan Hommen, who led the Amsterdam-based firm through the aftermath of a government bailout, has raised about 23 billion euros through more than 35 disposals since taking the helm in 2009. The company’s market value has almost tripled since then.
“Numbers were slightly ahead of estimates, in the bank in particular,” said Corne Aben, who helps manage about 1.5 billion euros of assets, including ING shares at Amsterdam-based Optimix Vermogensbeheer.
Underlying pretax profit for the banking unit beat the 1 billion-euro estimate by Cor Kluis, an analyst at Rabobank International in the Dutch city of Utrecht.
Second-quarter net income fell 39 percent to 788 million euros, hurt by hedging losses for annuities sold in the U.S. and Japan, ING said in a statement today. That missed the 907 million-euro average estimate of nine analysts surveyed by Bloomberg.
ING shares rose 5.6 percent to 8.30 euros at 3:55 p.m. in Amsterdam and touched 8.33 euros, the highest level since July 2011. The stock has gained 17 percent this year, in line with the increase in the 30-member Bloomberg Europe 500 Insurance Index, which was little changed today.
“We have become simpler, more focused and notably stronger,” Hommen, 70, who will step down in October, told reporters today. “Apart from the separation of the bank and insurer, we have sharpened the strategic focus of the bank.”
ING has realized 279 million euros of about 840 million euros in banking savings it seeks to achieve by 2015, Hommen told analysts today. The banking division is “on track” to reach a return on equity of between 10 percent to 13 percent by 2015, ING said. The measure of profitability stood at 9.3 percent in the first half of 2013, it said.
“Better commission income and better cost control” boosted bank results, Rabobank’s Kluis said in a note to investors today. ING also benefited from reducing interest rates payable on savings deposits in Germany, he said.
Interest income rose to 3.01 billion euros from 2.86 billion euros, while bad-debt provisions increased 14 percent to 616 million euros, mainly due to a 30 million-euro provision for a restructured U.K. loan. The cost of risk on Dutch mortgages and real-estate finance remained elevated, yet stable compared to the previous quarter, ING said.
ING’s pro-forma core Tier 1 capital adequacy ratio under Basel III accounting rules, a measure of financial strength, was 10.2 percent at the end of June, exceeding a target of 10 percent, the company said. The leverage ratio, defined as Basel III Tier 1 capital divided by total balance sheet exposure, including off balance sheet holdings, was 3.9 percent at the end of June, ING said.
The company took a 190 million-euro charge on a hedge aimed at protecting capital in the Japanese variable annuity business. The Asian and European insurance division had an underlying pretax profit of 182 million euros in the second quarter, compared with a loss of 110 million euros a year earlier.
ING’s U.S. unit reported a loss by that measure of 19 million euros, compared with a profit of 394 million euros last year, also caused by a hedging loss on a variable annuity book.
Variable annuities offer policy holders guaranteed benefits that a provider will generate by relying on investment returns. Declining equity markets and interest rates can push up costs of the guaranteed returns, while hedges used to protect capital levels can incur a loss when markets rise.
ING received 10 billion euros in state aid from the Netherlands in 2008, while the government assumed the risks on 80 percent of its investments in U.S. mortgage securities a year later to stem losses. The firm has repaid 7.8 billion euros in aid and 2.4 billion euros in interest and premiums, and has pledged to repay the remainder by May 2015.
Hommen said the firm’s new management may return the money to the Netherlands sooner. He is being succeeded by Ralph Hamers, 47, who previously led ING’s Belgian and Luxembourg banking unit.
“If they have an ability to pay earlier, they will,” he told reporters on a call today. “But we have to watch that carefully. We cannot make any promises.”
To gain EU approval for the rescue, ING agreed to dispose of more than 50 percent of its European insurance arm by the end of 2015 and the remainder by 2018. The company must also sell its Asian insurance and investment-management operations and the U.S. unit by the end of 2016.
In Europe, it’s preparing to sell the insurance businesses in an initial public offering by mid-2014. ING hired JPMorgan Chase & Co. (JPM) and Morgan Stanley to lead the IPO, while ING Bank will also act as global coordinator, according to two people with knowledge of the process.
ING spokesman Raymond Vermeulen declined to comment.
ING plans to give investors an update on the IPO preparations on Sept. 19, Hommen said today. During the second quarter, ING raised $1.27 billion by selling 25 percent of its U.S. insurer in an IPO. An additional share sale to underwriters of the deal cut ING’s remaining stake to 71 percent.
The firm is in exclusive talks with MBK Partners Ltd. on a sale of its South Korean life insurance business, according to two people with knowledge of the matter. ING has already sold insurance units in Hong Kong, Macau, Thailand and Malaysia.
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