ING results: Good but no cigar

ING (8,14 EUR, 3,56%) released a mixed set of 2Q results as the slightly better than expected Underlying Net Profit (€ 942m versus KBCS € 872m, CSS € 867m) is balanced by a further deterioration in asset quality (NPLs increased to 2.8% from 2.6%, risk costs up to 89bps vs. 81bps 1Q).
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The bank did better than expected reporting Underlying Earnings Before Tax (UEBT) of € 1.147m (KBCS € 928m, CSS € 983m), up 13% y/y. The solid numbers were driven by an improvement in the net interest margin, a reduction in the cost base and strong results in Financial Markets (in part supported by € 52m positive Credit valuation and debt valuation adjustments).
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Insurance numbers missed our and consensus expectations due to higher than expected losses on the US Closed Block Variable Annuity business. Underlying Profit Before Tax as such came in 44% below our estimate at € 141m. Excluding the non-economic closed block losses, the insurance performance was solid on the back of improved non-life results, lower costs and higher technical spreads.
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Risk costs surprised negatively rising 10% sequentially to € 616m (KBCS € 616m, CCS € 581m). The increase is driven by a further deterioration in asset quality (NPL increased to 2.8% from 2.6%). For the coming quarters, the group expects risk costs to remain elevated at around these levels (89bps versus 81bps in Q1).
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Capitalization: The bank’s CT1 ratio dropped to 11.8% (KBCS 12.0%), slightly down on the Q1 level of 12.3% reflecting a € 1.8bn dividend upstream to the group. BIII CT1 arrived at 10.2% while we were looking for 10.4%, the miss partially attributable to the higher than anticipated dividend upstream to the group (€ 1.8bn vs. € 1.5bn expected).

Conclusion:

ING released a mixed set of results as deteriorating asset quality is overshadowing the solid underlying performance. We will leave our estimates broadly unchanged and stick to our HOLD recommendation. TP slightly upped to € 7.8 reflecting higher relative valuations