Background to the sale of ING DIRECT USA

ING announced on 16 June 2011 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, a leading US-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.

This background article aims to give you more insight into this divestment and answer questions with regard to the Dutch state aid and the future of the ING Direct franchise.

Why did ING sell ING Direct USA?

The divestment of ING Direct USA is part of a package of restructuring measures required by the EC in order to gain its approval for state aid given to ING by the Dutch Government in 2008 and early 2009.

"Although I regret that ING Direct USA will no longer be a part of ING, I am very pleased that we have found in Capital One a good home for our customers and employees who are very important to the continued success of the ING Direct USA business. It is with confidence that we are taking a stake in Capital One. The diversified asset base of Capital One combined with the large deposit base and marketing strengths of ING Direct USA make an ideal combination for a strong future," said Jan Hommen, CEO of ING Group. "In addition, the transaction today shows ING is taking decisive steps in the restructuring of ING Group and underlines our commitment to meet the requirements of the EC in a prudent yet decisive manner".
The sale of ING Direct USA is expected to result in a net positive result of USD 0.7 billion and a capital release at closing of USD 4.1 billion or EUR 2.9 billion at current exchange rates. The transaction is expected to have a substantial positive impact on ING Bank's core Tier 1 ratio of 99 basis points at closing, based on the core Tier 1 ratio of 10.01% per 31 March 2011.

With ING Direct USA sold, will ING have any remaining business operations in the US?

ING has commercial finance activities and insurance operations in the US and these will be unaffected by the sale of ING Direct US. However, as announced earlier, ING is also preparing to exit from its US retirement, insurance and investment management businesses as part of the agreement with the European Commission to completely separate its Banking and Insurance operations and divest the latter.

For the separation and divestment of the insurance operations, ING is working on a base case of two IPOs. One Europe-led IPO with solid cashflow combined with strong growth positions in developing markets, and one separate US-focused IPO with a leading franchise in retirement services.

What does this mean for the other ING Direct businesses?

ING Direct’s other business units are not affected by today’s announcement or the EC restructuring. ING will focus on further building its ING Direct operations in Canada, Spain, Australia, France, Italy, Germany, the United Kingdom and Austria. Eli Leenaars, ING's CEO Retail Banking Direct and International: “ING will continue to build on the innovative and successful ING Direct model outside of the US in its quest to become the world's most preferred consumer bank."

The press release mentions ING’s Illiquid Assets Back-up Facility (IABF) arrangement with the Dutch government. What is this and how is it linked to ING Direct USA?

In January 2009, ING entered an agreement with the Dutch government on an illiquid assets guarantee (Illiquid Assets Back-up Facility) which was designed to significantly reduce the uncertainty of the impact on ING of any future losses in ING’s portfolio of Alt-A mortgage securities (US mortgage bonds between prime and sub-prime). Market prices for these securities had become depressed as market liquidity had dried up, which had an impact on ING’s results and equity far in excess of reasonably expected credit losses.
Under the terms of the agreement with the State, 80% of the EUR 27.7 billion portfolio of Alt-A RMBS (Residential Mortgage Backed Securities) at ING Direct USA and ING Insurance Americas was transferred to the Dutch State. The Dutch State receives 80% of all cash flows from the portfolio and a guarantee fee from ING. In return, the State pays a funding fee and management fee to ING. On its balance sheet, ING Direct USA held a receivable from the Dutch State (a note from the Dutch government representing the payment obligations of the Dutch State under the IABF) and the remaining 20% of the Alt-A portfolio.

With the sale of ING Direct USA, where does ING now stand with the IABF?

The facility remains in place. ING has reached an agreement with the Dutch State to adjust the structure of the Illiquid Assets Back-up Facility (IABF).The adjustment involves delinking the IABF from ING Direct USA.
Under the terms of the agreement announced today, the government receivable will be transferred from ING Direct USA to ING Bank. In return, ING Direct USA will receive on its balance sheet an amount in cash from ING Bank. Also, after the sale of ING Direct USA, ING Bank will receive the funding fee and management fee from the Dutch State and pay the guarantee fee.
The 20% of the Alt-A portfolio not covered by the IABF will remain on the balance sheet of ING Direct USA and will move to Capital One as part of the sale of ING Direct USA. In order to ensure continued alignment between the interests of ING and the Dutch State with regard to the Alt-A portfolio, ING will provide a counter guarantee to the Dutch State covering 25% of the 80% part of the Dutch State. This guarantee will cover realised cash losses if they would exceed the 35% that is implied by the current market value of the portfolio. This adjustment will therefore lower the risk exposure for the Dutch State. The potential capital and P&L impact of the alignment for ING Bank is expected to be limited.

What about ING’s other State aid arrangement?

In November of 2008 ING received EUR 10 billion from the Dutch State by issuing 1 billion core Tier 1 securities. In December 2009 ING repurchased EUR 5 billion of the core Tier 1 securities. On 13 May, ING paid EUR 3 billion to the Dutch State, consisting of a repurchase of EUR 2 billion of the Core Tier 1 securities and a 50% premium. ING funded this transaction from retained earnings.

So far, ING has repaid EUR 7 billion in principal plus interest totalling EUR 684 million and premiums totalling EUR 1,347 million, resulting in a total amount of EUR 9,031 million.

Provided that the strong capital generation continues, ultimately by May 2012 ING intends to repurchase the remaining EUR 3 billion core Tier 1 securities from retained earnings, on terms that are acceptable to all stakeholders. This will be conditional upon there having been no material changes regarding ING’s capital requirements and/or ING’s outlook on external market circumstances.

A lot is going on within ING; is this impacting your ability to service customers?

All through the separation and divestment work, ING will continue to focus on delivering quality products, maintaining and improving services for customers while improving business performance and operational results.
If you have more questions about this or other developments at ING, please do not hesitate to contact us by filling in our contact form