ING CEO Says Stress Tests Without Safety Net Bring RisksMaud van Gaal
ING Groep NV Chief Executive Officer Jan Hommen, who steps down from the biggest Dutch financial-services firm in 11 days, questioned how banks will raise capital should they fail a continent-wide stress test.
Hommen, who spent four years restructuring ING’s banking and insurance operations in the wake of a 10 billion-euro ($13.5 billion) government bailout, said Europe’s policy makers have created doubts because they have yet to decide on a way forward.
“The question for me is: who is going to provide that capital,” Hommen, 70, said in an interview at ING’s offices in London yesterday. “Because I don’t think there is a safety net built yet that makes sure that if a bank needs more capital, it is there.”
The bank reviews are the final opportunity to restore confidence in the region’s financial system, European Central Bank Executive Board member Joerg Asmussen said this month. Europe’s lenders have undergone two stress tests since 2010, with eight banks failing the last round conducted by the European Banking Authority in 2011 with a combined capital shortfall of 2.5 billion euros. Belgium’s Dexia SA was among banks that passed only to be wound down.
Hommen said lenders that need to raise funds from shareholders after the next stress test risk losing public confidence as the process takes too long under European rules, as much as 75 days. That would allow hedge funds to short the stocks, or borrow the shares and sell them with the expectation of repurchasing them at a lower price and pocketing the difference.
“When financial companies need equity, they need it quick because they deal with confidence,” he said. “Europe needs to take a look at how capital is being raised and in particular for financial institutions. Make the rules a little lighter than they are for other companies.”
European policy makers have agreed to carry out the bank reviews as they prepare a Europe-wide banking union designed to avoid a repeat of sovereign bailouts that helped push the continent into its deepest recession since the 1930s. In coming months, the ECB will assess the balance sheets of the banks that it will begin supervising as early as October next year.
Dutch Finance Minister Jeroen Dijsselbloem, who also chairs meetings of the group of euro-area finance ministers, has said that if the ECB finds shortfalls in its bank assessments, institutions will first have to seek additional capital from private investors. After that, nations must apply new state-aid rules that require some private investors to absorb losses, before turning to national bank-resolution funds or other assistance programs.
Direct aid to banks from the European Stability Mechanism, the 17-nation euro zone’s 500 billion-euro firewall fund, won’t become available until after the ECB has taken up its supervisory work, Dijsselbloem said.
Hommen said an experience tapping investors for funds was the most critical period of his tenure. While the December 2009 share sale was challenging, raising 7.5 billion euros to bolster capital was decisive in securing ING’s future following the 2008 and 2009 bailouts, he said. The firm repaid 5 billion euros, half its bailout, to the Netherlands from the proceeds.
“It wasn’t an easy call at the time,” Hommen said. “You have to arrange a shareholders meeting and there’s the whole process of a rights issue. In the meantime your share price is under pressure.”
ING, which traded as high as 27.79 euros in October 2006, plunged as low as 1.77 euros in March of 2009. The stock fell
1.7 percent to 8.60 euros in Amsterdam. That compared to a 0.8 percent drop in the Stoxx 600 Bank Index, while the Stoxx 600 Insurance Index was down 0.7 percent.
Hommen said he doesn’t expect European regulators to find fault with ING’s current capital position.
“We have a sound balance sheet -- our capital ratios are among the best in Europe,” Hommen said.
ING ’s core Tier 1 ratio, a measure of its core capital reserve as a percentage of risk-weighted assets, rose to 11.8 percent at the end of June, from 7.3 percent at the end of 2008. Its leverage ratio, or the relation of equity to total assets, was 3.9 percent, exceeding a 3 percent threshold proposed by the Basel Committee on Banking Supervision for 2018.
ECB President Mario Draghi has said the central bank will provide details of its balance sheet assessment in mid-October. Executive Board member Yves Mersch said last month that the central bank and the EBA will provide “one single figure of capital needs.”
In May, the London-based EBA delayed this year’s round of stress tests until 2014 to make room for the ECB’s asset-quality reviews of banks joining the euro-area supervision regime.
Hommen led ING through the aftermath of a government bailout that prompted European regulators to demand a 45 percent balance sheet reduction, one of the region’s most extensive restructuring programs. While avoiding fire sale-prices across the world, he steered the firm through tougher regulation and capital requirements as well as Europe’s debt crisis.
“He’s been able to deal with a forced-seller position,” Holger Weeda, who manages 1 billion euros, including ING shares, as head of Dutch equity at BNP Paribas SA’s Investment Partners unit in Amsterdam, said by telephone. “He took a step-by-step approach in breaking up the company and made the most of the limited room to maneuver he had.”
Since taking the helm in 2009, Hommen has raised 23 billion euros through more than 35 disposals, including its U.S. and Canadian online banks and insurance assets from Latin America to Thailand. The company’s market value has more than tripled since then. That leaves his successor, Ralph Hamers, with the task of shedding European insurance assets and convincing investors of the value of the remaining bank, predominantly relying on Europe for its earnings.
“Hommen has done an impressive job,” Cor Kluis, an Utrecht, Netherlands-based analyst at Rabobank International, said in an e-mailed response to questions. “This places ING in a good spot, while there are quite some other banks which still have to resolve past problems.”
The firm has paid back the Dutch government 7.8 billion euros in aid and 2.4 billion euros in interest and premiums, and pledged to repay the remainder by May 2015. EU regulators approved the bailout on condition the company would dispose of its global insurance and asset management operations, ING Direct USA and a Dutch mortgage lending unit.
Hommen said the company could possibly repay the remainder of the state aid by the end of next year should market conditions and Europe’s economy continue to strengthen. That call is up to Hamers, 47, to make.
“The unfortunate thing is that I leave at a point where not all the restructuring is done yet. We still have to divest the insurance business in Europe, and pay the last tranches to the Dutch government,” Hommen said. “I wish I could have done that so that he could have really focused on the bank. That is unfortunately not possible today. There are still things to do. And they have to be done first.”
ING yesterday said it’s preparing its European insurance operations for an initial public offering in the second half of 2014, while a spinoff to existing shareholders is also possible. The company hired JPMorgan Chase & Co. and Morgan Stanley to lead the IPO, while ING Bank will also act as global coordinator, two people with knowledge of the process said last month.
Hommen had served on ING’s supervisory board from June 2005, and was chief financial officer of Royal Philips NV and Alcoa Inc. prior to that. As CEO, he received an annual base salary of 1.35 million euros and hasn’t received any bonuses.
On Oct. 1, Hommen will become the chairman of the supervisory board of Royal Ahold NV, the Dutch owner of U.S. grocery chain Stop & Shop.