ING's Divesting Strategy Will Lead to a Higher Stock Price

| About: ING Groep (ING)

ING is a Dutch global financial institution offering banking, investments, life insurance and retirement services. As of 31 March 2011, ING had a diverse workforce of about 105,000 people and served more than 85 million private, corporate and institutional clients in more than 40 countries.

On June 16 ING announced that it has reached an agreement to sell ING Direct USA for a total consideration of USD 9.0 billion (EUR 6.3 billion at current exchange rates) to Capital One Financial Corporation (NYSE:COF), a leading U.S.-based financial holding company. Under the terms of the agreement, ING will receive USD 6.2 billion in cash and USD 2.8 billion in the form of 55.9 million shares in Capital One.

The divestment is part of ING's restructuring plan, filed with the European Commission in 2009 to obtain approval for the support ING received from the Dutch State in the context of the financial crisis.

After this transaction, ING will focus on further building its ING Direct operations in Canada, Spain, Australia, France, Italy, Germany, the United Kingdom and Austria.

On June 20 Het Financieele Dagblad reported that ING is looking to sell its car leasing unit in a bid to free up more capital. ING Car Lease has a fleet of around 360,000 cars making it one of the biggest players in Europe. A transaction could total EUR4 billion, as a buyer would have to take over EUR3 billion in debt and bolster the unit's capital buffer by around EUR750 million. The newspaper said potential buyers could be the car-leasing units of BMW AG, Volkswagen AG and GE Fleet Services. Other bidders may be Arval UK Ltd. and Athlon Car Lease, a unit of Dutch Rabobank Group. It seems that ING is going back to basics.

Many divestments have taken place in the last number of years.

February 19, 2009 ING Canada EUR1400 million

September 25, 2009 Insurance business Australia, New Zealand EUR1100 million

October 7, 2009 Private Banking Switzerland, EUR300 million

October 15, 2009 Private Banking Asia, EUR1 billion

October 16, 2009 Reinsurance U.S., not available

November 3, 2009 Selling of three U.S. broker dealers, not available

August 27, 2010 0%-stake in ING Summit Industrial Fund, EUR1.5 billion

December 8, 2010 5%-stake Fuban Financial, EUR395 million

February 15, 2011 Real estate manager REIM, EUR810 million

Which divestments are going to happen next?

ING says that the company continues to work towards the physical separation of the banking and insurance activities. Also publicly known is the news that ING is laying the foundation for two IPOs, one for the U.S. and one for the European-Asian insurance business.

ING plans also to separate ING Investment Management (ING IM) into two parts, a European-Asian manager and a U.S. manager which will be sold separately. ING IM has Assets Under Management around EUR378 billion (EUR216 billion European-Asian and EUR162 billion U.S.)

In 2012 we have the following:

  • IPO Insurance business USA, EUR 10.7 billion
  • European Insurance business (including Nationale Nederlanden), EUR 9.5 billion
  • ING IM, EUR1.1 billion

    All amounts are based on book value

    What remains unknown but is spoken about -- with no specific timeframe includes:

  • Westland-Utrecht, between EUR500-800 million
  • Insurance business Latin America, EUR2.1 billion

First quarter results

ING presented good 1Q11 results, better than expected across the board. In addition, ING remains on track with its restructuring, ready to payback State aid by May 2012. The back to basics approach gives ING substantial hidden value.

EUR mln (Reuters) 1Q11 Act 1Q11 Est 1Q10 Act 4Q10 Act
Underlying pre-tax profit 2156 1939 1403 671
- Insurance 461 403 121 -808
- Banking 1695 1552 1282 1479
Underlying net result 1492 1411 923 341
Reported net result 1381 1265 1230 130
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The strong results were carried across the board as all activities performed better than expected. At the bank, underlying pre-tax profit was about 10% better than expected and 32% higher y-o-y. This was driven by modest loan growth but an improvement of the interest margin, which strengthened from 142 basis points last year to 144 basis points, and a further lowering of loan losses provisions, down 50% y-o-y to EUR 332mln. The cost income ratio improved to 55% from 57.4%, in line with long term targets. The balance sheet remains strong, with a core tier 1 ratio of 10%, above Basel III requirements.

The insurance business benefited from the measures that ING took in the 4Q10 results, when it restructured its U.S. business in anticipation of the separation and IPO in 2012. Underlying pre-tax profit was 12% better than expected at EUR 461mln, up from EUR 121mln last year. Again, solid results were driven by higher sales, better margins and expense control. The solvency ratio and balance sheet remain strong (IGD solvency stable at 241%) and the business continues to prepare for two IPOs (one for U.S. business and one for European / Asian business).

Operational trends are strong, with the bank earning an attractive net interest margin, loan losses low and the insurer showing margin improvement. The stock trades at an undemanding 0.70x book value and at about 5x 2012 earnings. This is around 20% below the market. ING has very limited exposure to peripheral Europe debt.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ING over the next 72 hours.