Company Reports

ING is more than merely a play on European interest rates. We believe ING's strong deposit franchises in its core markets is its greatest competitive advantage. Ultra low interest rates over much of the preceding decade completely obscured the benefits that come with having a constant source of cheap funding.

We are less bullish than before on narrow-moat ING. But we still believe the share offers value. We now forecast that ING's earnings will decline by 17% in 2024, and we are cutting our fair value estimate by 11% to EUR 17 per share. Despite our lower net interest margin estimates, we expect that ING will continue to generate profitability above its historical average. Even with the structural improvement in profitability and capitalization, ING continues to trade at a discount to its historical price/tangible book value multiple. A step-up in the pace of share buybacks could be a catalyst to drive a rerating of the share. We model for share buybacks and dividends in 2024 to equal 17% of ING's current market value.

Narrow-moat ING reported a net income of EUR 2 billion for third-quarter 2023, double what it booked a year earlier, but 10% lower quarter on quarter. ING also stepped up its share buyback program, announcing a fresh EUR 2.5 billion buyback—the previous two buyback programs were EUR 1.5 billion each. ING has returned EUR 21 billion to shareholders since 2018—something that we do not believe the market has adequately rewarded ING for. More importantly, it is evident that ING continues to generate significant organic capital, which could support an ongoing effective payout ratio above 100% of earnings. We maintain our fair value estimate of EUR 19/share for ING.

The lower house of the Dutch parliament approved proposals for higher bank taxes and measures to eliminate the difference between withholding taxes on dividends and share buybacks. We estimate that the increase in Dutch bank taxes implies a 2% hit to our 2023 earnings estimates for ABN Amro and ING. The tax treatment of withholding taxes differs according to investors' residency and tax status and should not directly influence our valuation for ABN Amro and ING. However, we are concerned that continued European regulatory and government intervention will lead to higher risk premiums and lower valuations for banks. We recently had the opportunity to speak to several U.S. institutional investors and the risk of increased government/regulatory intervention in European banks was a topic that came up in all our discussions. The Dutch proposals follow windfall taxes on Italian and Spanish banks and the pandemic-related dividend distribution ban.

Narrow-moat ING 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.

We now assign narrow-moat ING Groep 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.

Low—currently negative—interest rates and the impact on ING Groep's earnings is likely to weigh on the minds of investors for the foreseeable future. While understandable, as net interest income contributed 77% of its revenue for 2020, this is unfortunate; ING is more than merely a play on European interest rates. We believe ING's strong deposit franchises in its core markets is its greatest competitive advantage. This is completely obscured in the current low interest-rate environment. In our opinion ING has surplus capital, which could boost shareholder returns and a more focused geographical strategy could drive a rerating.

ING's results for the first quarter of 2023 followed the same script we saw at most of its European peers this quarter. Strong earnings growth was driven mainly by expanding net interest margins—benefiting from higher interest rates, sound credit quality with credit costs remaining below midcycle levels, some inflationary pressure on costs, and no signs of any spillover from the stress in U.S. regional banks. As with its peers, ING's valuation does not reflect the structural step-change in its profitability due to the return of positive interest rates. The market still seems to discount some undefined risk to the banking system. The announcement of a fresh share buyback of EUR 1.5 billion (4% of current market value) is a welcome development. The buyback is on top of ING's regular dividend payment of 50% of earnings. Currently, ING trades at a 7% forward dividend yield. If ING announces another buyback in November, as we now expect, investors are looking at a total distribution of 15% of ING's current market value this year.

Stress has returned to the European banking system less than a week after a solution for Credit Suisse had been announced. Shares in European banks have traded down through March 24 around midsingle digits, with Deutsche Bank taking the brunt of it, down 15% at its lowest point intraday. We maintain our fair value estimates and moat ratings across our European banking coverage. Allianz remains our Best Idea. Admiral is one of our top picks

With Credit Suisse shoring up liquidity, concerns around a banking crisis spreading in Europe have been firmly planted. While we expect that the next days and weeks will remain volatile, we do not currently see a liquidity crisis spreading through the European banking system. The issues at Credit Suisse are idiosyncratic in nature and we believe containable for now even in a worst-case scenario. With capital and liquidity levels high across the board, asset quality still good, and regulators much better equipped than 15 years ago to quell any sparks, we believe European banks are solid. The major caveat being that developments are currently happening at a rapid pace and views we form today may be stale tomorrow. We believe investors are best placed in European banks with a greater retail focus and a sound profitability outlook. We would highlight BBVA, Handelsbanken, ING, and Lloyds.

We do not believe investors should view the collapse of U.S.-based Silicon Valley Bank as a read-through of the health of European banks' balance sheets. Nevertheless, banks remain highly reliant on the confidence of depositors and other funders. It would be foolish to say there is no contagion risk for European banks, especially if other global banks run into trouble. The current uncertainty could also push up the cost of funding and increase the rate at which European banks pass on higher interest rates to depositors. But we believe it is vital for investors to take note of the contrasts between European banks' and SVB's balance sheets.

Low--currently negative--interest rates and the impact on ING's earnings is likely to weigh on the minds of investors for the foreseeable future. While understandable, as net interest income contributed 77% of its revenue for 2020, this is unfortunate; ING is more than merely a play on European interest rates. We believe ING's strong deposit franchises in its core markets is its greatest competitive advantage. This is completely obscured in the current low interest-rate environment. In our opinion ING has surplus capital, which could boost shareholder returns and a more focused geographical strategy could drive a rerating.

What stood out for us from narrow-moat ING’s third-quarter 2022 results was higher guidance for the potential evolution of net interest income as well as the announcement of a EUR 1.5 billion (4% of ING’s market value) share buyback. In addition to the announced share buyback, we are now building in another EUR 6 billion of cumulative share buybacks into our valuation model. The buybacks are the main driver of our higher fair value estimate of EUR 17/share now compared with EUR 14.30/share previously. By far, the bulk of questions during ING’s results call centered on NII. The NII sensitivity to interest rates is a complex topic with multiple moving parts. We believe the key takeaway for investors should be that negative interest rates made deposit-taking a loss-making activity for European banks. The banks with substantial retail deposits like ING, in particular, suffered greatly. A substantial base of cheap, stable retail deposit funding underpins our moat rating for ING. Negative interest rates obscured this benefit and dragged ING’s return on equity below its cost of capital. A return to positive interest rates will make the cost benefit of cheap retail deposit funding much more evident.

Narrow-moat ING reported a net attributable profit of EUR 1.2 billion for the second quarter, a 19% drop from the EUR 1.5 billion profit it reported in the year-ago period. The lower profit mainly resulted from the addition to loan-loss provisions and higher regulatory costs due to a one-off in Poland. Total operating expenses excluding regulatory costs and incidental items increased 1% annually, primarily a result of the rise in wages due to inflation. The net interest margin at 1.36% saw a small decrease compared with the prior quarter at 1.37%. We maintain our fair value estimate of EUR 14.30 per share.

Narrow-moat ING reported a lower net attributable profit of EUR 472 million for its first quarter, a 57% decrease from the EUR 1 billion it reported a year ago. The lower profit was largely the result of loan-loss provisions that tripled and higher contributions to the European Single Resolution Fund. Excluding regulatory costs, operating expenses decreased 6% year on year, driven by lower IT costs, which more than offset the rise in wages due to inflation. Net interest income was down 3% due to lower benefits from the European Central Bank targeted longer-term refinancing operations program. We maintain our EUR 14.30 fair value estimate.

Low--currently negative--interest rates and the impact on ING's earnings is likely to weigh on the minds of investors for the foreseeable future. While understandable, as net interest income contributed 77% of its revenue for 2020, this is unfortunate; ING is more than merely a play on European interest rates. We believe ING's strong deposit franchises in its core markets is its greatest competitive advantage. This is completely obscured in the current low interest-rate environment. In our opinion ING has surplus capital, which could boost shareholder returns and a more focused geographical strategy could drive a rerating.

The direct exposure of European banks to Russian and Ukrainian clients is insignificant. According to the Bank for International Settlements, claims on Russian counterparties from the major developed European countries' banks amount to 0.7% of the European banks' total claims reported to the BIS.

Narrow-moat ING reported a net attributable profit of EUR 945 million for fourth-quarter 2021, 30% ahead of the EUR 727 million it recorded a year earlier, but below the EUR 1.4 billion it booked for third-quarter 2021. The central tenets of our investment case for ING are its gearing toward a higher interest rate and significant potential for capital return of around EUR 10 billion (20% of ING’s current market value) to shareholders. There was limited new information about these two factors in the results. Net interest income will remain depressed in the near term as it will take some time for the benefit of higher interest rates to filter through into ING’s income statement due to its interest-rate hedging programme. ING does not expect the European Central Bank’s TLTRO support package to continue in 2022. TLTRO accounted for EUR 300 million of ING’s revenue in 2021, around 4% of its preprovision profits. Capital return is still under discussion with the regulators and ING expects to update the markets before announcing its first-quarter 2022 results. We maintain our EUR 14/share fair value estimate for ING.

Narrow-moat ING reported a net attributable profit of EUR 1.4 billion for the third quarter of 2021, a material recovery from the EUR 788 million profit it reported for the third quarter of 2020 and only slightly below the EUR 1.5 billion it reported in the second quarter of 2020. The trends of the previous quarter continued. Credit quality remains strong, fee income benefited from no COVID-19 restrictions, and interest margins are stabilising. As we have consistently highlighted, ING has substantial excess capital. It indicated that it would update the market about its plans to return the spare cash to shareholders after its first-quarter 2022 results announcement in May next year. A sizable capital return could be a catalyst for a further re-rating of the share. We maintain our EUR 14 per share fair value estimate.

ING confirmed on Oct. 1 that it will repurchase EUR 1.7 billion of its own shares starting Oct. 5. The buyback is intended as payment for the 2019 dividend that ING was unable to pay because of the regulatory ban on shareholder distributions. ING previously guided that it would honour the 2019 dividend, but at the time it was uncertain if the company would pay it in cash or repurchase shares. ING reserved the dividend outside of capital already and its payment will have no impact on the common equity Tier 1 ratio. ING is trading at a 15% discount to our EUR 14 fair value estimate, so we agree that share repurchases will be value-accretive.