Research Update: Dutch ING Bank 'A/A-1' Ratings Affirmed On Stabilizing Economic Risks In The Netherlands; Outlook Remains Negative Primary Credit Analyst: Constance Hauville, Paris (33) 1-4420-6749; constance.hauville@standardandpoors.com Secondary Contact: Alexandre Birry, London (44) 20-7176-7108; alexandre.birry@standardandpoors.com Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria And Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 4, 2014 1
Research Update: Dutch ING Bank 'A/A-1' Ratings Affirmed On Stabilizing Economic Risks In The Netherlands; Overview In our view, the Dutch banking industry should benefit moderately from the domestic economy's gradual exit from a protracted correction phase. We consider that improving conditions in the housing market illustrate this trend, despite the still-weak commercial property market. In our view, the trend in domestic economic risk for Dutch banks is now stable. We are therefore affirming our 'A/A-1' ratings on ING Bank N.V. The negative outlook on ING Bank reflects our view that we may lower the ratings by one notch by year-end 2015 if we consider that extraordinary government support is less predictable under the new EU legislative framework. Rating Action On Nov. 4, 2014, Standard & Poor's Ratings Services affirmed its 'A/A-1' longand short-term counterparty credit ratings on Netherlands-based ING Bank N.V., its banking subsidiaries ING Belgium SA/NV and ING Financial Markets LLC, and its Dublin branch. The outlook remains negative. We are also affirming our 'A-/A-2' ratings on ING Bank's holding company, ING Groep N.V. The outlook is negative. Rationale The affirmation of the long-term rating reflects our view that the domestic economic risks under which Dutch banks operate are now stabilizing (see " Various Rating Actions Taken On Dutch Banks On Stabilizing Economic Risks," published today on RatingsDirect). Under our base-case scenario, we expect that real GDP will grow by about 1% on average in 2014 and 2015, after a two-year recession in 2012 and 2013. We anticipate that domestic house prices will continue to increase moderately. We also expect a continued gradual reduction in private sector leverage, limited demand for credit, and a steady decrease in credit losses next year (albeit from a relatively high level). Dutch property prices peaked in mid-2008 and had fallen by about 20% in WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 4, 2014 2
mid-2013, an average annual decline of about 4%. Prices have since stabilized and started to increase moderately. Encouragingly, the volume of property transactions increased by about 40% in the first nine months of 2014, year-on-year. We expect this trend to continue and forecast moderate nominal house price growth of about 2% in 2014 and 2015, supported by improved conditions in the domestic economy, increased affordability of housing, limited housing supply, and greater certainty on fiscal policy reforms. However, commercial real estate prices have continued to fall, a trend we expect to reverse only gradually from 2015. Gross household leverage remains elevated and growth in the eurozone (European Economic and Monetary Union) is forecast to be below average. Combined with ongoing geopolitical events that may encumber the export-orientated Dutch economy, we expect these factors to limit the improvement in the private sector. However, in our view, Dutch banks benefit from a diversified and competitive domestic economy, flexible fiscal policy, and adaptable labor market, underpinning the government's track record of reporting strong current account surpluses. Beyond our view of the stable banking environment in The Netherlands, which underpins ING Bank's 'bbb+' anchor--the starting point in assigning an issuer credit rating--we continue to consider ING Bank's business position as "strong," reflecting primarily its strong franchise in the Benelux (an economic union comprised of Belgium, the Netherlands, and Luxembourg) and good diversification of its revenues by product and geography. We view ING Bank's capital and earnings as "adequate." This is based primarily on our assumption that the bank's risk-adjusted capital (RAC) ratio before diversification adjustments will remain between 8.8% and 9.3% in the next 18-24 months, compared with 8.9% as of Dec. 31, 2013. We assume that ING Bank will pay the 683 million last tranche of core Tier 1 securities, with a 50% premium, to the Dutch state by May 2015, as agreed with the European Commission. We assume that it will be funded by special dividends from the bank to ING Groep, supported by our expectation of continued sound earnings generation. At this stage, we do not factor in the value of ING Groep's stakes in insurance companies NN Group N.V. and Voya Financial Inc. (reported at 5.7 billion at end-june 2014, net of holding company debt, pro forma the IPO of NN group in the third quarter) into our RAC calculation for ING Bank. But, we recognize this excess value enhances the group's overall financial flexibility. Furthermore, we do not include any possible additional tier 1 issuance in our forecasts and assume there will be a 10% annual phasing out of the other "old style" Tier 1 hybrids currently included in total adjusted capital. Our risk position assessment for ING Bank is "adequate." This reflects the material de-risking and deleveraging of the bank's balance sheet over the past five years, the good level of diversification in its exposures--with a risk appetite that we consider as broadly comparable across markets--and a generally sound asset quality track record of its retail and corporate portfolios. At the same time, these strengths are offset by the bank's flagging domestic asset quality since 2012, owing to the weaker economy. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 4, 2014 3
We consider ING Bank's funding as "average" and its liquidity as "adequate." The bank benefits from less reliance on wholesale funding compared with a number of peers. The bank reported an improving loan-to-deposit ratio of about 105% at end-june 2014, which compares favorably with the average of the Dutch banking system and its large domestic peers, albeit partly due to the deposit-rich Internet banking subsidiary ING Direct. Outlook The negative outlook on ING Bank reflects our view that we may lower the ratings by one notch by year-end 2015 if we consider that extraordinary government support is less predictable under the new EU legislative framework (The EU Bank Recovery and Resolution Directive). In addition to potential changes in government support, we will review other relevant rating factors in making any rating actions. These include potential changes in the stand-alone credit profile (SACP) and any steps the bank might take to mitigate bail-in risks to senior unsecured creditors, such as building a large buffer of subordinated instruments. We could lower the SACP on ING Bank if, contrary to our central expectation, the economic outlook for its main markets was to deteriorate again in the next two years, leading to weakening asset quality. We could revise the outlook to stable if we consider that potential extraordinary government support for ING Bank's senior unsecured creditors is unchanged in practice, despite the introduction of bail-in powers and international efforts to increase banks' resolvability; or if we believe that other rating factors, such as a stronger SACP or a large buffer of subordinated instruments, fully offset increased bail-in risks. This could occur if our RAC ratio improved more than we currently expect to above 10%. Ratings Score Snapshot ING Bank N.V. Issuer Credit Rating A/Negative/A-1 SACP a- Anchor bbb+ Business Position Strong (+1) Capital and Earnings Adequate (0) Risk Position Adequate (0) Funding and Liquidity Average and Adequate (0) Support +1 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 4, 2014 4
GRE Support 0 Group Support 0 Government Support +1 Additional Factors 0 Related Criteria And Research Related Criteria Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions, Sept. 18, 2014 Group Rating Methodology, Nov. 19, 2013 Banks: Rating Methodology And Assumptions, Nov. 9, 2011 Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 Bank Capital Methodology And Assumptions, Dec. 6, 2010 Related Research Various Rating Actions Taken On Dutch Banks On Stabilizing Economic Risks, Nov. 4, 2014 Banking Industry Country Risk Assessment: The Netherlands, Nov. 4, 2014 Ratings List Ratings Affirmed ING Bank N.V. ING Financial Markets, LLC ING Belgium S.A./N.V. ING Bank N.V. (Dublin Branch) Counterparty Credit Rating A/Negative/A-1 ING Bank N.V. Certificate Of Deposit A/A-1 Senior Unsecured A Subordinated BBB Short-Term Debt A-1 Certificate Of Deposit A-1 Commercial Paper A-1 ING Bank (Australia) Ltd. Counterparty Credit Rating ING Groep N.V. Counterparty Credit Rating A-/Stable/A-2 A-/Negative/A-2 ING (US) Funding LLC Commercial Paper (1) A-1 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 4, 2014 5
ING (US) Issuance LLC Senior Unsecured (1) ING Capital Funding Trust III Preferred Stock (2) A BB ING Groep N.V. Senior Unsecured A- Junior Subordinated BB (1) Guaranteed by ING Bank N.V. (2) Guaranteed by ING Groep N.V. Additional Contact: Financial Institutions Ratings Europe; FIG_Europe@standardandpoors.com Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 4, 2014 6
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