ING Earnings: Running Comfortably Ahead of Guidance; Buybacks Can Be Greater Than We Expected

Narrow-moat ING INGA reported a net income of EUR 2.2 billion for second-quarter 2023, 83% higher than a year earlier and comfortably ahead of FactSet consensus of EUR 1.7 billion. If ING can maintain the current earnings run rate into the second half of the year, our estimate of EUR 6 billion for fiscal 2023 net income is starting to look light. While management will only update the market on its distribution policy at its third-quarter results, we believe there is a good possibility that ING can step up the pace of share buybacks. We anticipate earnings growth to slow, but we think that a return to positive interest has led to a lasting structural increase in ING’s profitability, which is not reflected in its 0.9 times price/tangible book multiple. Given its increased profitability, we believe ING should trade at a premium to its long-term multiple, which is not the case currently. We recently updated our fair value estimate for ING to EUR 19/share.

Higher interest income and lower-than-expected pass through of higher interest rates to depositors continue to be the primary driver of earnings growth. ING confirmed that its interest-rate hedging policy would result in it enjoying the benefit of increasing interest rates for around 40% of its deposits—even after the peak of interest rates. This makes ING an attractive option late in the interest-rate cycle. The pass through of higher interest rates was running at around 20% for the quarter, but with recent deposit-rate increases in the Netherlands, this will increase to 29%. ING noted that the pass through remains below its historical experience and we anticipate that pass-through rates will pick up. Lending margins remained under pressure—given that fixed-rate mortgages dominate ING’s loan book, but ING believes that lending margins will stabilize.