ING puts in a solid first half year
ING Group announced on August 4 that it had recorded a solid second quarter in 2011, with underlying net profit rising 19.7% to EUR 1,528 million. Taking into account a strong first quarter, the first half of 2011 has been particularly positive with underlying net profit rising 39.1% to EUR 2,991 million. ING Bank reported another solid quarter and Insurance recorded substantial improvement in performance.
ING maintained strong capital ratios in the second quarter following the 13 May 2011 payment of EUR 3 billion to the Dutch State. ING Bank’s core Tier 1 ratio remained robust at 9.4%. However, if the positive impact of the announced sales of ING Direct USA, the majority of ING Real Estate Investment Management and ING Car Lease are taken into account, the pro-forma core Tier 1 ratio at 30 June 2011 was 10.7%.
Given the uncertain financial environment, increasing regulatory requirements and ING’s priority to repurchase the remaining outstanding core Tier 1 securities, no interim dividend will be paid in 2011.
Important milestones reached
Commenting on the results, Jan Hommen, CEO of ING Group, said: “ING reached important milestones in the second quarter as we work towards the separation of the Group and the establishment of strong stand-alone banking and insurance companies. In May we paid EUR 3 billion (including EUR 1 billion premium) to the Dutch State, while maintaining strong capital buffers to withstand potential shocks given the uncertain economic environment.
We reached an agreement to sell ING Direct USA, meeting one of the principal restructuring requirements imposed by the European Commission. And last week we announced an agreement to sell our Latin American life and pension business for EUR 2.7 billion, marking the first major step in the divestment of the Insurance and Investment Management activities.
“The US and European & Asian insurance businesses are making good progress on performance improvement initiatives as they prepare for separate IPOs. The operating profit for Insurance increased compared with a year ago, as measures to improve returns continue to gain momentum. The Bank posted another strong quarter, as margins held up well and we continued to grow volumes in savings and lending despite the challenging operating conditions in the second quarter. As the economic environment and financial markets remain uncertain, we will reinforce our vigilance on costs by focusing on structural improvements in our processes and organisation, while continuing to invest responsibly in the growth of our franchises for the long-term benefit of our customers.”
Bank records solid second quarter
ING Bank recorded a solid second quarter, although the underlying result before tax was down on the same period last year and the first quarter, largely due to impairments on Greek government bonds 1. Underlying result before tax of EUR 1,304 million was 18.9% lower on the same quarter last year and down 23.1% on the very robust first quarter.
Excluding the Greek impairments, the decline was 7.2% as the second quarter last year included a a EUR 86 million gain on the sale of an equity stake and EUR 43 million of positive fair value changes on the Bank’s Tier 2 debt.
Healthy interest margins, higher client balances and lower risk costs helped support the second quarter result.
Despite the lower quarterly result, Bank half year profit is 3.8% higher than the first half in 2010.
The second quarter result shows the Bank is on track to meeting its Ambition 2013 targets. These are business improvement program targets, mostly established in October 2009. These targets involved boosting underlying income, lowering overall costs, reducing risk costs and lifting return on equity.
Under Ambition 2013, underlying income is targeted to grow by a Compound Annual Growth Rate (CAGR) of 5% by 2013. From the first half of 2009 to the end of the first half for 2011, underlying income grew by a CAGR of 5.5%.
ING Bank is focused on keeping costs under control. The cost target, the underlying cost/income ratio, was 54.6% excluding market impacts in the second quarter. It is the second consecutive quarter that operating costs have declined, but they are higher compared to the second half last year. ING Bank is committed to reducing this ratio to 50% in the Ambition 2013 programme.
The year-to-date underlying return on equity based on a 7.5% core Tier 1 ratio was 18.6%, exceeding the Ambition 2013 target of 13-15%.
Risk costs returning to normalised levels
Risk costs were higher than the previous quarter, but declined from a year ago, confirming a gradual trend back to more normalised levels. ING Bank’s total second-quarter risk costs2 fell to 47 basis points of average risk-weighted assets compared to 55 basis points in the same period last year. This compares with the Ambition 2013 expectation of a normalised level of between 40 and 45 basis points. For the coming quarters, the Bank expects risk costs to remain below the average level seen in 2010.
The increase in risk costs compared to the first quarter occurred in the mid-corporate and Small to Medium sized (SME) business sectors, which had a very modest level of loan losses in the first quarter of 2011. There were also higher risk costs in the Real Estate Finance portfolio in the Netherlands and Australia due to some specific files.
The level of client balances at ING Bank rose for the eighth consecutive quarter, driven by growth in Retail Banking.
Overall, ING Bank’s ambition is to become the preferred bank for its customers. The focus in 2011 is on combining and building on the strengths of ING’s banking businesses, managing the balance sheet more efficiently, and increasing the focus on growth.
Insurance/Investment Management (IM) continues along improvement path
Insurance/IM results showed strong improvement, as performance improvement initiatives introduced last year continued to gain momentum.
Total operating profit leapt 82.5% to EUR 690 million from the second quarter of 2010 and 35% from the first quarter. The result was supported by higher investment and technical margins3 compared to both prior periods.
ING Insurance/IM posted an underlying result before tax of EUR 673 million in the second quarter, a significant improvement compared with EUR 18 million in the same
quarter of 2010 and up 57.2% from the first quarter.
The second quarter result reflected the progress the insurance/IM business is making towards meeting its goal of improving operating performance ahead of the planned two IPOs of the business.
In April last year, ING Group set down its strategy to improve performance. This entailed improving investment margins4, containing costs and pursuing growth to achieve a double digit return on equity by 2013. Under the Ambition 2013 program, ING Insurance/IM plans to lift investment performance and thereby income by widening the investment margin to 105 basis points; to lower costs to achieve an administrative expenses/operating income (Life & ING IM) ratio of 35%, to grow sales by 10% a year and to lift return on equity to 10%.
Investment margin widens
In the second quarter of 2011, the investment margin widened to 99 bps from 79 bps in the same period last year. The ratio of administrative expenses to operating income improved to 38.0% from 44.8% in the second quarter 2010, reflecting the increase in operating income, which was supported in part by seasonal and nonrecurring items. The underlying return on equity was 8.4% for the first half of this year, compared to 1.3% for the first half last year.
In 2011, the key priority is preparing the business for a base case scenario of two IPOs (one Europe led and the other US based) by focusing on constantly improving operating performance.
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1. On 21 July 2011, as part of an emergency financial package for Greece, a private sector initiative was announced. This initiative involves a voluntary exchange of existing Greek government bonds maturing before 2020 together with a buyback facility. ING is currently assessing the alternative exchange options in this initiative. Based on this private sector initiative, it was concluded that bonds that are in the scope of the initiative (i.e. Greek government bonds maturing before 2020) are impaired in the second quarter of 2011.
2. Risk costs mainly refer to what are called “loan loss provisions,” or the funds a bank needs to set aside to cover for loans that may default. Those costs increase in times of economic uncertainty.
3. Margin between charges for benefits and incurred benefits. It includes mortality, morbidity and surrender profits.
4.Spread between investment income earned and interest credited to policyholder reserves (excluding market impacts, including dividends & coupons).