EU raises doubts about ING, Dutch loan deal

September 15, 2009

By Ben Berkowitz
AMSTERDAM, Sept 15 (Reuters) – The European Commission has extended a review of a 22 billion euro ($32 billion) loan portfolio guarantee between ING and the Dutch state, saying the government may have paid too much.

ING and the Dutch state struck a deal in January for the government to guarantee 80 percent of a 27.7 billion euro portfolio of so-called Alt-A and subprime residential mortgage-backed securities.

The government is due to receive 80 percent of the cash generated from the portfolio, which it took on at a 10 percent discount to par value. The Commission gave the deal six-month approval in March while it conducted an investigation.

In a sharply-worded statement on Tuesday, the Commission made it clear the deal seemed to unduly favour ING, but said its decision would not prejudice the final outcome of the inquiry.

“The Commission continues to have doubts that the price paid by the Dutch Government, equivalent to a transfer price of 90 percent of the face value, is justified,” it said in a statement.

“Taking account of input from external experts, the Commission considers that the valuation seems at this stage not conservative enough… The Commission found that a significant proportion of securities were valued above purchase price.”

A commission spokesman said, in general, if the commission finds governments have not been properly compensated for taking on impaired assets, the banks in question can either increase the compensation or submit to further restructuring measures.

The commission has similar inquiries ongoing for both Dexia and Fortis of Belgium and British banks Lloyds and Royal Bank of Scotland.

The ruling comes at an awkward time for the Dutch government. It presented the 2010 budget in parliament Tuesday — a budget which showed sharp deficits due, in part, to the massive aid it gave the financial sector.

Shares in ING were down 2.2 percent at 10.67 euros at 1341 GMT. They had been down more than 5 percent at one point to lead Amsterdam decliners.

KBC Securities downgraded ING to “reduce” on Tuesday, saying the bank could be forced to pay another 1 billion euros, or 50 cents per share, to get the risk transfer approved.

SNS Securities said in a note on Tuesday that the ruling supported its decision to downgrade ING to “reduce” last week.

In a worst-case scenario for the revaluation of the portfolio, ING could suffer a hit of 60 basis points to its core Tier I ratio, SNS said. ING had a Tier I ratio of 7.3 percent on June 30, so such a hit would take it below minimum levels and leave it with a capital shortfall.

The Dutch finance ministry declined to comment on
whether the state would further support ING if the deal was modified or rejected.

“We are in constructive dialogue on the state aid provided to ING but… it is a very complex matter,” the spokeswoman said. “We will still be going on with technical discussions, which are taking place in a co-operative spirit.”

An ING spokesman said the bank had no comment other than it looked forward to “further constructive discussions.”

In addition to the Alt-A deal, last October the state gave ING 10 billion euros to shore up its capital position. The terms of that package are still under review, though ING has already started the process of selling assets to restructure.

ING stock has been resurgent lately, helped by sharp increases in some analysts’ target prices. Sources have said it was also about to successfully complete a sale of its Asian and Swiss private banking assets.

Since touching an intra-day low of 7.75 euros on Aug. 12, the stock is up 41 percent. Over the same period the DJ STOXX European bank index iss up 7.7 percent.

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