ING Groep NV, the biggest Dutch financial-services company, posted a 39 percent drop in second-quarter profit as hedging losses for annuities sold in the U.S. and Japan outweighed improved banking results.
Net income fell to 788 million euros ($1.05 billion) from 1.29 billion euros a year earlier, Amsterdam-based ING said in a statement today. That missed the 907 million-euro average estimate of nine analysts surveyed by Bloomberg.
The shares rose as much as 4.3 percent after earnings at ING’s banking arm grew by 14 percent, beating estimates and stoking optimism that a restructuring plan is paying off. ING said today that it’s examining more savings to extend a cost-cutting plan that aims to reduce the company’s expenses by 1 billion euros by 2015, resulting in 7,450 fewer jobs.
“The hedging loss, always hard to predict, was bigger than expected,” said Corne Aben, who helps manage about 1.5 billion euros of assets, including ING shares at Amsterdam-based Optimix Vermogensbeheer. “For the rest, the numbers were slightly ahead of estimates, in the bank in particular. They are working hard on the restructuring.”
ING is nearing the end of a European Union-imposed plan that requires shrinking the company’s balance sheet by 45 percent, including disposing of its global insurance operations. ING has completed about 70 percent of the plan after selling a stake in its U.S. insurer to the public in May, according to Chief Executive Officer Jan Hommen. The company has executed 35 transactions so far, raising 23 billion euros, Hommen said.
Underlying pretax profit for the banking unit rose 14 percent to 1.15 billion euros as interest margins improved and cost cuts paid off, the company said. That beat the 1 billion-euro pretax profit seen by Cor Kluis, an analyst at Rabobank International in the Dutch city of Utrecht.
ING shares rose 4.1 percent to 8.19 euros at 11:15 a.m. in Amsterdam, extending gains this year to 16 percent and valuing the company at 31 billion euros. That compares with a 17 percent increase for the 30-member Bloomberg Europe 500 Insurance Index, which was little changed today.
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.
In Japan, one of ING’s remaining insurance units in Asia, ING stopped selling variable annuities in 2009. The business still has about 366,000 policies with a total account value of about 16.1 billion euros, according to Victorina de Boer, an ING spokeswoman.
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 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 loan 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.
“It is comforting that the increase in loan loss provisions doesn’t seem to be on Dutch mortgages,” Optimix’s Aben 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.
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, 70, who is stepping down in October, said the firm’s new management may return the money to the Netherlands sooner. Hommen will be 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.
During the second quarter, ING raised $1.27 billion by selling 25 percent of its U.S. insurer in the 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 Korean life insurance business, according to two people with knowledge of the matter. Since 2009, Hommen has sold the U.S. and Canadian online banks and insurance units in Hong Kong, Macau, Thailand and Malaysia.
In Europe, it’s preparing to sell the insurance businesses in an IPO by mid-2014. ING hired JPMorgan Chase & Co. and Morgan Stanley to lead the IPO, while ING Bank will also act as global coordinator, Dutch newspaper De Telegraaf reported today. ING spokesman Raymond Vermeulen declined to comment on the sales process.