ING - CMD feedback: more questions than answers

Yesterday, ING hosted its annual investor day which focused on the European insurance operations. The event failed to address our concerns about the capital adequacy of its core Dutch life operations which looks weak with an IGD ratio of 191% (relative to >200 percent life IGD reported by Delta Lloyd and Aegon). No clear targetlevel for the IGD was provided but the group mentions that it is currently at the low end of its targeted range suggesting that they might have to plow in additional capital ahead of the IPO.

All Asian disposal proceeds (ex Japan) were earmarked for further deleveraging whereas we anticipated some of them to be upstreamed to the Holding (to redeem government hybrids or group core debt). Pro-forma for these transactions, leverage of ING V (ie IPO vehicle) looks good at 22%. Even after a huge book value hit on Japan (which we deem likely), leverage would not exceed the 30% level which we deem the upper limit (considering the targeted A-rating).

No earnings growth or ROE targets were provided which we consider disappointing. Management sees nevertheless many possibilities to boost profitability through expense reductions, efficiency improvements, non-life premium increases, … . Given the challenging market backdrop (low yields, declining back book, competitive pressure group pensions), we do not see significant upside to the current earnings power of the franchise (~ 5% ROE).

Conclusion – cautiousness on net proceeds warranted:
Considering the weak capitalization of the Dutch unit and the fact that all Asian disposal proceeds (ex Japan) will be retained, net proceeds from the European insurance IPO will be a bit lower than we initially anticipated. We now more specifically aim for ~€ 6bn versus € 7.2bn previously, a deep discount to book (which also considers the sub-par ROE of the franchise). HOLD reiterated as valuation looks full after recent strong rally (with our revised SoP model pointing towards € 8.8 per share). Our target price is nevertheless upped to € 8.8 per share, our SoP outcome to which we no longer apply a discount considering that the bulk of the restructuring program has been executed.