ING Profit Falls 22% on Spain Investment Sales, Loan Losses

ING Profit Falls 22% on Spain Investment Sales, Loan Losses
ING, the recipient of a 10 billion-euro taxpayer bailout in 2008, is seeking to bolster capital to meet new rules by 2013, while also repaying the state aid. Photographer: Jock Fistick/Bloomberg

ING Groep NV, the biggest Dutch financial-services company, reported a 22 percent decline in second-quarter profit after selling Spanish investments at a loss and booking an increase in bad loans.

The company fell as much as 2.8 percent in Amsterdam trading after posting net income of 1.17 billion euros ($1.45 billion), below the 1.26 billion-euro mean estimate of nine analysts surveyed by Bloomberg. Loan-loss provisions at the banking unit jumped 78 percent from a year earlier to 541 million euros.

ING, the recipient of a 10 billion-euro taxpayer bailout in 2008, is cutting risk as Europe’s sovereign-debt crisis roils financial markets. ING reduced its Spanish assets by 6.2 billion euros to 34.9 billion euros in the four months through July, booking a loss of 156 million euros in the second quarter and 78 million euros in July.

Earnings at ING’s bank were “a slight miss” relative to estimates, said Benoit Petrarque, an Amsterdam-based analyst at Kepler Capital Markets. Interest margins were at the lowest level since 2008, he said, while provisions were higher than he estimated. The “only positive news is the lower Spanish exposure,” he said.

ING fell 1.7 percent to 5.66 euros as of 11:19 a.m. in Amsterdam, valuing the company at 21.7 billion euros. The stock is up 1.8 percent this year, compared with a 14 percent gain in the Bloomberg Europe 500 Insurance Index.

Funding Gap

Profit excluding one-time items fell 18 percent to 1.05 billion euros, compared with the 1.03 billion-euro estimate of analysts, the Amsterdam-based company said.

By selling the Spanish investments, ING reduced its funding mismatch, or the gap between assets and local funding in Spain, to 12.3 billion euros by the end of July from 19.6 billion euros at the end of the first quarter, ING said in a presentation. It sold Spanish holdings including covered bonds and residential mortgage-backed securities.

“The reduction of their exposure to Spain is impressive and came at a lower-than-expected cost,” said Cor Kluis, a Utrecht-based analyst at Rabobank International. “They accelerated the pace, showing management is not closing its eyes to the risks there.” Kluis, who recommends clients to buy the stock, had expected ING would cut its Spanish investments by about 2 billion euros in the quarter.

Loan Provisions

“Derisking in this quarter was quite active,” Jan Hommen, ING’s chief executive officer, said on a call with reporters today. “Whether we will continue to maintain that pace we’ll have to see. If we see an opportunity -- and when it is appropriate -- we may decide to go further.”

The lender won’t sell assets at any price, Chief Risk Officer Wilfred Nagel told reporters. “This book is relatively healthy and we’re actively managing it, but not at fire-sale prices.”

The net result included a 305 million-euro gain as ING agreed on a revised pension plan for 27,000 Dutch workers.

Underlying pretax profit at ING’s banking operations fell 13 percent to 995 million euros. The firm set aside 541 million euros for doubtful loans, up from 304 million euros a year earlier. ING mainly increased provisions for Dutch mortgages after house prices in its home country dropped, and in commercial real estate.

Repaying Aid

Loan-loss provisions may remain elevated “aligned with economic conditions,” Chief Financial Officer Patrick Flynn said in an interview with Bloomberg Television. “If the economy continues to be troubled, then I think our loan-loss charges will be linked to that.”

The interest margin narrowed to 1.26 percent from 1.32 percent in the first quarter due to lower yields on investments and lower interest results from the Financial Markets unit.

The lender had a core tier 1 capital ratio, a key measure of financial strength, of 11.1 percent at the end of June. ING targets a ratio of more than 10 percent before the end of 2013 taking into account new capital rules known as Basel III.

ING has so far repaid the Netherlands 7 billion euros, in addition to 2 billion euros in interest and premiums. Hommen said in June he plans to use the proceeds from the sale of its U.S. online bank, completed this year, and a buyback and swap of subordinated debt in December for the next repayment. Full repayment by 2012, the original goal, became doubtful because of Europe’s crisis and higher capital demands.

Online Banks

Hommen repeated today his intention to repay another tranche of aid this year. ING said last week it may sell its Canadian and U.K. online banks as the company reviews banking assets that aren’t considered strategically important.

“It is too early to say where that will lead to but it certainly will help us to be in a position to repay the Dutch state,” said Hommen on the review of the Canadian unit.

The firm is under European Union orders to sell its global insurance operations as a condition for its bailout. After disposing of a unit in Latin America last year, the sale of ING’s Asian life-insurance and investment management business is “on track.” The sale will probably take place through multiple divestments, ING said today.

ING expects to sell some parts of the Asian insurance unit this year and hopes to complete the rest in 2013, Hommen said.

Insurance IPO

ING continues to prepare the U.S. insurance business for an initial public offering, he said. Investor interest in a debt sale by the unit is a “sign there is confidence this is a business that can be IPO-ed,” Hommen added. The U.S. market can quickly change and has been more open than Europe, he said.

The insurance division had an underlying pretax profit of 229 million euros, down from 472 million euros a year earlier. The Asian insurance unit reported a pretax profit of 160 million euros. The company took a 180 million-euro goodwill writedown at its investment management unit in South Korea ahead of its planned sale.

While pushing on with the unit sales, ING and the Netherlands are in talks with European antitrust regulators on a revision of the conditions imposed after the bailout. Some divestment plans were derailed by Europe’s debt crisis while the European Commission probes whether the Netherlands is making a sufficient return on the funds it provided.

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