Thursday, January 7, 2010

ING Basel Uncertainty: Not An Immediate Concern

ING Basel Uncertainty: Not An Immediate Concern

Quick comment:
Uncertainty over Basel proposals
not an immediate cause for concern. Consultation
papers issued by the Basel Committee in Dec 2009
create uncertainty over ING Bank’s capital, given that
concrete proposals for the definition of capital, minimum
requirements, liquidity and leverage ratio controls are
likely to be published in H2 2010. There may also be
some change to the rules after industry consultation.
However, our analysis of the possible impact on core
tier-1 capital under the current proposals does not
suggest immediate cause for concern.

We estimate a ~7% core tier-1 ratio at 3Q09 based
on the proposals for eligibility of capital. Using ING’s
3Q09 disclosure, we have made preliminary estimates
for the impact of adding back revaluation reserves,
removing minorities, adjusting for pension funds,
deferred tax assets and applying other tier-1 deductions.
Under the current company structure (where the Bank is
separate from Insurance), we see core tier-1 dropping to
~7% from 7.6% at 3Q09. However, this ignores free
cash generation by 2012 (when the rules may come into
force) and assumes that ING Bank still carries a sizeable
deferred tax asset. Although the rules have yet to be
finalized we do not believe ING stands out as being
overly affected by the current proposals.

Insurance business deduction unlikely to become

an issue, in our view. If ING switches to a Bank holding
company structure (which is its ultimate aim), then it
would have to make a sizeable deduction for capital in
its Insurance business under the current rules. However,
we do not believe ING will go down such a route if this
negatively affects its capital position until it has disposed
of its Insurance operations (expected by 2013).

Remaining OW. We still think the share price is
undervaluing ING’s sum-of-the-parts. We believe ING
can sell the Insurance business for >1x BV (it is not a
forced seller) and, therefore, the implied market multiple
for residual Bank is at a discount to tangible book value.

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