Bowing to pressure from the European Commission (EC) and major
creditor the Dutch government, ING Group has turned its back on
bancassurance, a model it has championed since its formation almost
two decades ago.
Under an agreement reached with the EC in late-October, ING will
dismantle its bancassurance edifice, leaving its banking and
insurance operations as completely separate entities.
Go deeper with GlobalData
The dismantling process is set to take four years and will be
achieved by a divestment of all insurance operations via options
including initial public offerings, sales or combinations
thereof.
Indicative of the scale of the disinvestment, ING ranked as the
world’s sixth-largest global insurance company in 2008 based on its
total revenue of $64.5 billion, according to research firm
Datamonotor.
Disinvestment of insurance operations includes ING’s investment
management units which currently have total assets under management
of almost $600 billion. Notably, the CEO of ING’s investment
management unit, Jacques de Vaucleroy, announced his resignation
shortly after the announcement of the sweeping changes confronting
ING.
In ceasing to be a bancassurer ING joins the exodus from the model
that saw Allianz sell Dresdner Bank to Commerzbank in 2008, this
year’s Belgian government-led break-up of Fortis and, most
recently, Standard Life’s sale of its banking unit to Barclays
Bank.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataA brave front
Putting on a brave front ING has variously described its demise as
a bancassurer as the “logical next step” and “next chapter” in its
‘Back to Basics’ transformation programme announced in April
2009.
Aimed at what ING termed “simplifying the organisation”, the
programme set out to “reduce complexity” by operating banking and
insurance separately under one group umbrella and by disposing
between €6 billion ($8.9 billion) and €8 billion in non-core
activities as market conditions permitted.
However, prior to the devastating impact it suffered at the hands
of the global financial crisis ING had undoubtedly intended to
remain a bancassurer. Former CEO Michel Tilmant made this
abundantly clear in a presentation delivered at the Morgan Stanley
European Banks & Financials Conference held in Amsterdam on 3
April 2008 in which he strongly championed the bancassurance
model.
“Differences between banking and insurance are becoming irrelevant.
There is one savings and investment pool,” Tilmant told conference
attendees.
He continued: “Banks own the customer relationship, and insurers
will become increasingly dependent on banks for
distribution.”
Tilmant also emphasised that life insurance is being distributed
more and more through bank channels, “which are more
cost-effective”.
The task of steering ING through the Back to Basics programme was
handed over to ING’s then-chairman, Jan Hommen who replaced Tilmant
as CEO on 26 January this year.
A tough decision
Hommen himself has made it clear that a break with ING’s
bancassurance tradition was something that until now would have
been unthinkable.
“Splitting the company is not a decision we took lightly,” stressed
Hommen in a comment immediately following the announcement of the
agreement to separate the group into two entities.
Hommen continued: “ING has a proud history as a global financial
services leader and has been a strong advocate for combining
banking and insurance in one company. The combination provided us
with advantages of scale, capital efficiency and earnings stability
through a diversified portfolio of businesses.”
Putting a positive spin on the break-up, Hommen noted: “However,
the financial crisis has diminished these benefits. Now, the
widespread demand for greater simplicity, reliability and
transparency has made a split the optimal course of action.
In addition to the break-up, ING has also had to accept a
considerable reduction in the scale of its banking operations. To
this end, ING will dispose the US unit of its online banking
operation ING Direct by the end of 2013. Together with ING
Insurance Americas, ING Direct USA was a source of a significant
portion of ING’s financial problems as a result of their exposure
to plummeting US mortgage backed securities’ values.
Indicating that disposal of ING Direct USA was a tough requirement
to comply with ING stressed that it regards the banking unit as “a
very strong franchise” in a market that offers potential for
growth. ING Direct USA has total assets of some $90 billion and a
customer base approaching 8 million, up from just over 2 million at
the end of 2004.
For now at least, ING has stated that it remains committed to the
ING Direct franchise which is characterised by “simple transparent
products and market-leading efficiency”. In addition to the US, ING
Direct has operations in Australia, Canada, France, Germany
(ING-DiBa), Austria (ING-DiBa), Italy, Spain and the UK.
In addition to the ING Direct USA disposal, ING will create a new
company in the Dutch retail market out of part of its operations by
combining the Interadvies banking division comprising Westland
Utrecht Mortgage Bank and Nationale-Nederlanden and the existing
consumer credit business of ING Retail into a new company.
Once established, the new banking company which will have total
lending book of about €34 billion and 1.1 million customer
contracts will be sold.
Payback time
Taking its restructuring programme filed with the EC a step
further, ING has reached an agreement with the Dutch government
that facilitates early repayment of a portion of the €10 billion
core Tier 1 convertible securities issued by ING to the Dutch
government in October 2008. The issue of the securities was used to
bolster the balance sheets of insurance and banking operations and
reduce debt.
Under the agreement now reached with the government, ING will repay
€5 billion of the securities in December 2009 at the issue price of
€10 per security plus a premium consisting of the accrued coupon
and a repayment premium of up to about €950 million.
In addition to the securities repayment, ING has agreed to make
additional payments to the Dutch state in respect of a full risk
transfer to the government of 80 percent of the of €27.7 billion
portfolio of Alt-A (below investment grade) residential mortgage
backed securities at ING Direct US and ING Insurance Americas
undertaken in January 2009. ING noted that the additional payments
were a prerequisite for its obtaining approval from the EC of its
restructuring plan.
Under the agreement now reached, ING will make additional payments
to the Dutch government equal to a reduction of 50 basis points on
the funding fee received monthly by ING and an increase of 82.6
basis points on the guarantee fee annually paid by ING.
In total, these extra payments amount to a net present value of
€1.3 billion, which ING will reflect as a one-off pre-tax charge in
the fourth quarter of 2009. The additional payments will not be
borne by ING’s US subsidiaries.
To finance the early repayment of the securities and mitigate the
€1.3 billion charge’s capital impact, ING has announced that it
will undertake a €7.5 billion rights issue.
News of the underwritten rights issue received less than a warm
reception from investors with ING’s share price closing at €9.56
per share on the day of the announcement (26 October), down 18
percent from €11.66 per share at the close of business the previous
week. During the same period the Euronext Amsterdam stock
exchange’s benchmark AEX Index fell by 3.7 percent.
ING expects to finance any further repayments of core Tier 1
securities from internal resources, including proceeds from the
divestment of the insurance operations. ING currently anticipates
that it will complete the repurchase of the remaining securities
before the end of 2011.
A shadow of its former self
Once completed, ING’s sweeping restructuring will, the company
estimates, have more than halved its total assets from €1,376
billion as at 30 September 2008 to €760 billion in 2013.
The €616 billion reduction in total assets comprises a €164 billion
reduction in banking assets completed as of 30 June 2009, €40
billion from seven disinvestments already either completed or
underway at the time of the restructuring’s announcement, €277
billion from the disposal of insurance businesses and €135 billion
from the disinvestment of certain banking businesses.
Given an annual organic growth rate of 5 percent ING anticipates
that its total assets will stand at €970 billion following
completion of its restructuring.
