Fragile Operating Environment Prompts Delay in ING’s Repayment of State Aid

Fragile Operating Environment Prompts Delay in ING’s Repayment of State Aid

On 13 January, during an investor presentation, ING Bank N.V. (Aa3/stable; C+/A2 negative)1 announced that it would likely delay repayment of its remaining €3 billion of core Tier 1 capital and relevant repurchase premium to the Dutch government. The delay is due to both higher regulatory capital requirements and a fragile operating environment, which make it more difficult for ING to raise capital through its planned divestments. This underscores the challenges that many European banks face in attracting and generating capital in the current operating environment.
That lack of investor confidence towards European banks was on display earlier this month when Italy’s Unicredit (A2 review for downgrade; C-/Baa1 review for downgrade) announced it was pricing a rights issue at a 43% discount and investors sent the bank’s shares tumbling 45% before they partially recovered.

ING has suggested that the likely main source of capital to finance repayment to the Dutch government will be retained earnings, boosted by gains resulting from a buyback of hybrid capital in December 2011 and the sale of ING Direct USA, which we expect will close in the first quarter of 2012. However, in the current operating environment, banks earnings are under pressure amid increased funding costs, mounting competitive pressures and deteriorating economic conditions.

At the same time, ING and other European banks are trying to increase their capital in order to meet more stringent regulatory prudential requirements. Unlike some of its peers, ING has not announced any significant deleveraging plans other than the separation of its insurance and investment management operations as part of a restructuring plan that ING and the European Commission agreed to in exchange for ING receiving state aid. Nevertheless, the bank said it would consider disposing non-core asset to accelerate the repayment of state funds. Market conditions, however, will make such disposals challenging.

ING’s delay in the repayment of state aid is evidence that the bank continues to benefit from systemic support. While we expect systemic support to diminish in many European countries as governments, including the Netherlands, propose resolution regimes, such support continues to mitigate the credit negative aspects of the current environment for banks.