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Wednesday, 16 February 2011

Annual profit ING: Results look promising, but must be seen as a result of nearly free money and assets not valued “marked to market”.

Today ING presented the annual returns for 2010 and the Q4 results for 2010. Some pertinent snips of the press data:

-        ING Group full-year underlying net profit rises fourfold to EUR 3,893 million from EUR 974 million in 2009
-        ING Group full-year 2010 net result EUR 3,220 million, or EUR 0.85 per share, including divestments and special items
-        Group 4Q10 underlying net profit of EUR 644 million vs. EUR 90 million in 4Q09 and EUR 1,032 million in 3Q10
-        4Q10 net result EUR 433 million, or EUR 0.11 per share, vs. net loss of EUR 712 million in 4Q09
-        ING will not pay a dividend over 2010 given the financial environment, regulatory requirements and priority to repay Dutch State
-        Bank continues strong performance with 4Q10 underlying profit before tax of EUR 1,479 million vs. EUR 163 million in 4Q09
-        Net interest margin increases to 1.47%, up 6 basis points, supported by healthy margins on savings and lending
-        Risk costs increase in 4Q10 after three quarters of decline to EUR 415 million, or 51 basis points of average risk-weighted assets
-        Cost/income ratio improves to 57.2% vs. 74.5% in 4Q09; full-year 2010 cost/income ratio of 56.0% vs. 68.7% in 2009
-        Core Tier 1 ratio rises to 9.6% from 9.0% at the end of 3Q10; EUR 5.9 billion core Tier 1 capital generated in 2010

At first glance these figures look very promising. The profit over the whole year 2010 rose fourfold and the profit over 4Q10 is much higher than over 4Q09. But there are a series of “but’s “ to these figures:

-   Profit in 4Q10 decreased, compared to 3Q10 as a result of write-offs in the American insurance portfolio.

-  The bank profited of almost free money from the ECB and their savers and this helped to create an “extreme” profit margin on loans:
o  The interest rates of the ECB are currently extremely low with a rate of 1.75% for the marginal lending facility and 1.0% for the fixed rate (Main refinancing operations)
o  The interest rates for savings are at most 2.4% for a 3 month teaser rate and 2.0% for the normal variable rate
  Only the interest on longterm deposits is much higher with 4% for a 10-year loan.

o  The interest on mortgages for private customers, however, ranges between 3.4% for variable interest against 75% of execution value collateral uptil 6.95% for 20 year fixed against 125% of execution value collateral.           
o  The interest on business loans ranges from 4,20% uptil 7.20%
        • This means profit margins ranging from at least 1.4% uptil 5.8% on every loan and mortgage

-   It is expected that this current situation of almost free money will not last very much longer:
o  The interest margins within the bond market are rising
o  I expect that the ECB rates will rise also  in the near future
o  The current margins on mortgages are under scrutiny by the Dutch consumer club (Consumentenbond), as banks are accused of supernormal profits on their mortgages and loans.
o  Private and professional savers (pension funds) are complaining about the low interest rates on their savings.

-  The bank still has a government debt of about 10.6 billion EUR, which they want to pay back before paying dividend again.

-  Although the Core Tier 1 capital ratio according to the bank is 9.6%, which the bank calls a strong capital postions, the following should be noticed:
o  The ratio assets / equity is still more than 26. This is much better than it was a few years ago (70 without government support), but it does mean that a write-off of only 5% on total assets is enough to wipe-out total equity and get into negative equity.
o  The assets of the bank are still not “marked to market”, which means that it is still at the bank’s discretion to value their assets. A result is probably that the valuation of assets is rather too high than too low
-   The bank has exposure to sovereign bonds of Greece and Ireland for at least 1 billion EUR
-   The exposure to Assett Backed Securities is still significant with US Agency RMBS of 11 billion, prime RMBS of 0.7 billion and Alt-A and subprime exposure of 2.5 billion EUR

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