Tuesday, Oct. 27, 2009

ING takes steps to simplify

AMSTERDAM -- European services giant ING Groep NV said Monday it will split itself in two, spinning off its insurance arm to simplify its business and issuing 7.5 billion euro ($11.3 billion) in new shares to repay state bailout money.

The dramatic change in strategy caps a year of cutting costs and selling operations since the financial crisis struck, when ING was kept afloat only with two major rounds of assistance from the Dutch state.

The insurance operations have a book value of 22 billion euro, and the company said it will likely seek an initial public offering for them within four years.

"This is a momentous day for us: Splitting the bank and insurance is not a decision to be taken lightly," said Chief Executive Jan Hommen, a former board chairman who took the executive job in January after his predecessor was fired.

"We're making a decisive move to turn ourself into a simple organization."

Shares slid 18 percent to 9.56 euro in Amsterdam as investors reacted to the prospect of the share issue. They reached a year low of 2.30 euro in March.

ING has been a leading advocate in Europe of the advantages of combining banking and insurance, and historically the two arms have generated about equal shares of the company's earnings.

But Hommen said the events of the past year "have changed the environment in which we operate, and the complexity of ING didn't help us during the crisis."

He said ING bank, which will remain within the holding company, will benefit more from transparency and a smaller balance sheet than it did from cost savings on related businesses.

ING issued a series of related announcements Monday: It will also sell or float its asset management arm, which does not now report its earnings separately but oversees 500 billion euro in investments; will sell its U.S. Internet banking arm, ING Direct, by 2013; and will sell some of its Dutch banking operations.

With these and earlier disposals, the bank's balance sheet will shrink by some 45 percent from 1.3 trillion euro in September 2008.

The disposal of ING Direct, considered one of ING's most attractive businesses, was made under pressure from the EU's competition authority, which is also investigating whether parts of ING's bailout amounted to improper state aid.

"The Commission hopes to be able to take a decision within the next few weeks," spokesman Jonathan Todd said.

Along with the structural changes, ING gave a preview of its third-quarter earnings, saying it made a profit of 750 million euro, compared to a loss of 568 million euro in the same period a year ago. Banking profits were around 250 million euro and insurance earnings around 500 million euro.

It said in a statement Monday that profits were helped by 10,400 job cuts so far this year, 8.3 percent of its total.

However, losses on investments, especially in real estate and derivatives linked to the U.S. housing market, continue to weigh on results.

Analysts from SNS Securities said in a note that the earnings were better than expected, with smaller losses on bad loans. They praised the company's strategic moves, saying they were considering changing their "reduce" advice on shares.

In addition, "ING seems to have negotiated the best deal by far" with the Dutch state among companies that received aid, they wrote.

ING received a 10 billion euro direct investment lifeline from the Dutch state last October.

The company said Monday it will use 5.9 billion euro of the money raised in the share issue to pay back half of that 10 billion euro, plus interest and premiums.

"We're not planning to come back for any more: This is it," Hommen said.

The company will also pay the state 1.3 billion euro in a compromise to appease the EU. In January, the Netherlands assumed the risks for an 80 percent stake in ING's 28 billion euro portfolio of mortgage-backed securities. The sweetheart deal assumed the securities were worth 90 percent of their face value when the real value was much lower.

The company will book the payment as a one-time charge in the fourth quarter.