ING: We Increase Our Fair Value Estimate by 12% Due To Share Buybacks

We now assign narrow-moat ING Groep INGA a fair value estimate of EUR 19/share, up from EUR 17/share previously. We believe that ING is willing and able to execute share buybacks of EUR 15 billion (32% of its current market value) spread over the next four years and maintain a common equity Tier 1 capital ratio north of 13%. We estimate that ING will grow its EPS by 30% a year over the next three years, with the bulk of earnings growth to come in 2023. Revenue growth should continue to benefit from higher net interest margins. At the same time, the inherent operating leverage of a relatively stable cost base will amplify the impact on ING’s bottom line, tempered somewhat by higher loan-loss provisions.

ING trades at a 32% discount to our fair value estimate. We do not believe ING’s current valuation reflects a structural step-change in its profitability. We estimate that ING can comfortably generate a 12% midcycle return on tangible equity compared with the 8% ROTE we calculate ING generated between 2013 and 2022. However, ING’s valuation has hardly even budged—its current price/tangible book value ratio of 0.9 is in line with its long-term average and its current P/E multiple of 7.5 times our 2023 earnings estimate is at a sizable discount to its long-term price/forward earnings multiple of 10 times. For ING to trade in line with its historical valuation, while its profitability has increased significantly, one would expect that there have been adverse changes in its growth prospects or risk profile. We do not believe this is the case. We concede that the tailwind from higher interest rates will rapidly decrease in coming quarters. Still, we think that negative interest rates were an aberration that was unlikely to recur. Therefore, profitability should remain above its 10-year average. While we forecast higher loan-loss provisions, there are no signs of a deterioration in credit quality yet.