ING’s demerger good news for shareholders

October 26, 2009

ING has finally decided to split itself into its constituent bank and insurer. It is going further and faster than expected, as a result of EU pressure. This move, combined with a large rights issue to repay the Dutch government, is a welcome sign of a simpler, more coherent strategy.

The demerger is long overdue. There have been limited benefits to the bancassurance deal since ING was created in 1991. Cross-selling, never a big deal, is even less important where both regulators and customers demand choice. The supposed hedge between insurance and banking has also been discredited: both businesses suffered in the credit crunch.

Clarity on the repayment of much of the Dutch government’s support is also welcome. ING will have to pay at least 15 percent to redeem half of the 10 billion euros capital injected by the government.

Neelie Kroes, the EU’s competition commissioner, has forced her compatriots to cough up more cash for the government’s underwriting of its dodgy U.S. mortgage assets. This is equivalent to 1.3 billion euros today, but at least the liability is now known.

The cost of this clarity is a 7.5 billion euro rights issue, equivalent to almost a third of ING’s market capitalisation, and more than the market was expecting.

The restructuring will also take time — the sale of ING Direct’s U.S. arm is expected to take four years. Moreover, the disentanglement and divestment of certain Dutch mortgage and consumer lending operations could be tricky.

ING needs to raise at least net book value, or 12 billion euros, from an initial public
offering of sale of the insurance businesses. Life businesses, including ING’s 51 percent stake in ING Australia, have been fetching around 1.4 to 1.5 times book, suggesting this should not be a stretch. However, analysts are concerned that the insurance business as a whole bears 10 billion euros of debt that must be repaid before any group debt can be repaid.

Moreover, some of the insurance businesses are not especially attractive. The Dutch market is highly competitive, while many of the overseas businesses are subscale.

While all this distracting corporate activity is going on, managers will also be trying to buff up the remaining bank. There will be a European retail bank centred on the Benelux and a wholesale bank serving clients around the world. This will be a duller business, though that is no bad thing in the new banking landscape. It may indeed attract predators.

All this should erode the historic discount that has weighed on ING’s shares. However, the 10 percent drop in the shares on Monday suggests the benefits are still some way off.

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