ING Shores Up Capital and Surplus

October 20, 2008 - Back to Deck's Page

ING Shores Up Capital and Surplus

 

Many of you have contacted us concerning the news this week of ING accepting a $13 billion cash infusion from the Dutch government. (See below column from the Financial Times for more commentary.) This is a positive and well-received move by ING in order to maintain their proper capital and surplus ratios.  ING has always benchmarked its business model at a “AA” S&P rating.  Rather than sell stock on the open market or sell off present assets at a discount, ING has prudently arranged for cash in order to continue their business model.  We believe this is a positive move that other strong insurance carriers will follow in order to ride out the difficult financial environment.  Most assets are being revalued on the balance sheets of banks and insurance companies. 


You may also wish to view this short interview with Michel Tilmant, CEO of ING Group, along with some comments from the Dutch Finance Minister. The Dutch Finance Minister's comment don't appear until you click "view interview."


We will continue to advise you on any further updates that may affect your customers. 

 

Deck McCormick

CEO

InSource, Inc.

 

 

Another Monday, another bailout
October 20 2008
Lex Column - Financial Times
Just a few months ago, ING was still buying back stock to address criticisms that it was overcapitalised. Now the Dutch banking and insurance group needs €10bn, although “need” is a relative concept these days.

ING has no liquidity or funding problems. It has roughly €100bn of untapped liquidity, and can even fund itself below the interbank rate.The bank also has one of the most favourable loan-to-deposit ratios going, a proxy for stable funding in the crisis. Nor does ING have an investment bank chock-full of toxic assets. True, it has roughly €18bn of US Alt-A mortgage securities, where some credit losses are expected, and it will report a loss for the third quarter.

But with the market fixated on a one-size-fits-all capital ratio across Europe, ING’s own buffer to cope with future losses was deemed inadequate. A Tier One ratio of 10 per cent minimum is this season’s must-have. ING now sports one of over 10 per cent, courtesy of the Dutch state. Maybe it was in recognition of ING’s relative strength that it got its capital injection on relatively favourable terms. They are certainly sweet compared to those offered to the UK goats.

First, ING’s new capital comes with no strings. The bank keeps control of its dividend policy and can choose how it buys the Dutch state out. Second, dilution to shareholders has been kept to the low double digits, because the new securities issued to the government are not ordinary shares, even though they count as permanent capital. The Dutch state has accepted some equity downside (there are no coupons for the state if there is no dividend on ING’s ordinary shares), and has negotiated some upside (its securities can be bought out at a premium), but the upside is capped at 50 per cent or €5bn.

Longer term, bank bosses will have to ponder the consequences of extreme capital cyclicality, namely the inconvenience of having to raise capital just when it is most expensive for them to do so. For now, ING, its share price rising by 20 per cent on the day, deserves some praise for making the best of a bad job.