ING - Asset quality, disposal risks keep us cautious

We today re-initiate coverage on ING (7,58 EUR, 1,30%) with a HOLD rating and € 7.5 SoPbased target price. ING is trading at a deep discount to banking and insurance peers but deteriorating asset quality and disposal risks keep us cautious. The implied multiples one pays for the bank (0.82x TBV for ROTBV of 8.5%) are moreover no longer compelling following recent months’ strong stock price performance.

ING looks vulnerable to the deteriorating Dutch real estate markets given elevated levels of exposure (2.9x TBV) and the relatively weak quality of its mortgage book (only 18% NHG guaranteed, 35% underwater ex NHG, 60% interest only).

Execution risks related to the remaining Asian disposals (Japan, Korea) have moreover increased as the year end 2013 deadline starts to look challenging.

With visibility on ultimate insurance disposal proceeds improving, investors will increasingly focus on the implied valuation of the bank. Trading at 0.82x TBV for a ROTBV of 8.5% (adj. for holding int. exp.), the implied multiples look fair. With a BIII CT 1 of 10.4%, the bank is strongly capitalized but an onerous cap on leverage might require further buffer strengthening.

Following the recent strong stock price performance, residual upside seems capped. We hence initiate coverage with a Hold recommendation and €7.5 SoP based Target (72,03 USD, 0,36%) Price.