The recent events in Europe have punished the ADR shares of the Netherlands based ING Group (NYSE: ING) which traded for US$5.94 a share as of 21st May 2012, down 52% from their 52 week high of US$12.68.
There is no doubt that the European Banking system will need to strengthen its capital position and the issue of whether the Euro will survive is an open question. However, what we do know is that in times of distress often the best investment opportunities present themselves.
ING Bank NV is systemically important bank to a strong sovereign
When looking to invest in banks in Europe, I would approach it from this point of view. If the European Union was to dissolve, which bank and in what post Euro currency and country would I want to own? The Netherlands has AAA rating and ING Bank is systemically important to the Dutch economy. In a post Euro world, the Netherlands would remain one of the strongest sovereigns in Europe along with Germany, Finland and Switzerland to name a few.
Recently Moodys has indicated that it may reduce the ratings of the Netherlands and the ratings of ING, however, even with a ratings downgrade, I expect the the Netherlands & ING Bank to retain strong credit issuer ratings.
Strengthened capital position
ING Bank NV is one of just a few banks in Europe that has not participated in the LTRO operation offered by the ECB, including the second round in February 2012. Further, ING Bank has been methodically boosting its capital position and recently sold ING Direct USA for US$9 billion (€6.3 billion) to Capital One. This has helped raised its Core Tier 1 Capital position to 10.9%, well above the 9% level required under Basel III.
ING Group has repaid €$7 billion of the €10 billion of aid provided by the Dutch Government and with the eventual sale of ING Insurance Asia, which has received several offers as of the 18th May 2012 , they will be able to repay the remaining €3 billion.
ING shares fell recently as the EU re-opened the issue of whether ING received favourable treatment on its bailout. I think the ramifications of this investigation are manageable.
The catalysts for ING Group
· Sale of ING Insurance Asia for around US$7billion will boost the capital position of ING Group , allows ING to repay the remaining Dutch aid and also raise its dividend paying capacity.
· ING Group carries a cheap valuation as it trades at adjusted PE ratio (excluding interest on Dutch aid) of 3.5 based on its 2011 earnings and a price to book of 0.34. Further it is trading close to its 52 week low.
· ING management have said they will reinstate dividend payments once the Dutch Government is repaid & Basel III requirements are met.
· Slow economic improvement in the European and global economy will boost ING’s business and the market price of ING’s shares.
· The IPO of ING’s US insurance business, which is their preferred divestment option as required under their EU bailout, at an attractive valuation will further boost ING Group’s financial position.
The risks
· A severe further deterioration in the Netherlands economy , the European and global economy due to ongoing austerity measures and low economic growth. The Dutch unemployment rate has risen to 4.9% which could lead to higher NPLs on its loan book in the Netherlands as well as other European markets.
· A severe disruption in the wholesale bank funding market. ING has already raised €9.2 billion or over 50% of its wholesale funding needs for 2012 and has not needed to tap the LTRO financing. The Dutch Government would ultimately support ING Bank in a severe funding squeeze.
· There is political uncertainty over the whether tax deductions for interest payments on Dutch mortgages will gradually be reduced which could raise the real cost of mortgage debt , however, mitigating this factor are the high level of Dutch private savings, benefits for unemployed workers, Government guarantees on mortgage debt and low unemployment rate.
· ING Group’s loan exposures in Spain, Italy & Greece are potentially a problem, however, they appear manageable and ING has been reducing its exposure over the last few quarters.
· ING Group is unable to divest its insurance businesses at attractive valuations. So far, ING Group has been achieving good prices for its divestments.
Conclusion
I would recommend ING Group as a buy based on its cheap valuation, solid capital position and the strength of its franchise. ING Group will be a survivor in Europe among its financial peers.
Note: I own shares of ING Group. The author’s views expressed in this article are for journalistic purposes only and should be construed as investment advice or relied upon as investment advice.
