ING Is Facing a New Future

Sources:
WSJ: CrackING Down on Europe’s Banks
Star News Online: ING to Split in Two Amid $11.3 Billion Rights Issue
WSJ: ING to Spin Off Units in Bid to Assuage EU Over State Aid

This week the European Union forced the Dutch banking and insurance giant ING into a restructuring plan to comply with the EU’s rules on state assistance. The plan includes selling U.S. online banking subsidiary ING Direct, divesting 6% of the Dutch retail banking market, paying the Dutch government €1.3 billion for access to its bad-asset protection program, and divesting its entire insurance business. ING also had to agree not to buy or be a price leader in certain financial products for at least three years.

In October of 2008 the Dutch Government provided ING with €10 billion in emergency funds to help cushion the company’s Tier One capital level—a measure of a company’s financial strength. The government also provided €28 billion of guarantees to the bank’s illiquid securities. All of the European banks that received government assistance of this kind last year had to agree to restructuring plans under the European Union’s oversight. ING is making good on its word to restructure, and it is also raising €7.5 billion in equity through a stock issue to repay half of the aid the Dutch government provided during the crisis. The other half of the repayment will come from the divestment of bank assets and retained earnings.

The result of the bank restructuring will be a company with roughly half the balance sheet, with a third less assets, and a new management board by 2013. The bank has already begun to implement its so-called “back-to-basics” plan by trimming its major divisions from six to two and agreeing to sell its Swiss private banking unit to wealth manager Julius Baer. Oversea-Chinese Banking Corp. of Singapore has agreed to buy ING’s private banking assets in Asia, and ING’s Reinsurance Group of America is also up for sale. ING Direct could be harder to dispose of because many of the financially capable banks in the United States are preoccupied with buying U.S. failed banks at a discount with the U.S. government’s help.

It is no surprise that the future of ING looks much different than it did two years ago. Post restructure, a smaller, insurance-free ING will have to forego its “double leverage” model that allowed it to operate at lower capital requirements as a result of its diversified risk platform. The bank will also have to deal with weak growth prospects and a new era of cost cutting. Others banks are expected to follow ING’s lead, as 30 more European banks are currently awaiting financial restructuring plan approval from the EU, most notably Lloyds Banking Group and Royal Bank of Scotland.

Discussion:
1. Do you think ING knew of the consequences of the restructure plan when it agreed to take bailout money from the Dutch in 2008? Do you think knowing the consequences of the plan would have deterred it from accepting monetary assistance?
2. Did ING’s diversified risk program and lower capital requirements help or hurt? Would ING have been better or worse off had it had more reserves but been less diversified?