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ING - The Destination Is Known, But The Path Is Murky At Best
Banking is still complicated, particularly in Europe, and insurance is pretty murky today as well. Combine the two, add in certain (but uncertain) divestitures, and bailout repayments and you have ING (NYSE:ING). While there's a decent bank buried in here, the uncertainties that attend the insurance divestitures mean that valuation is close to a shot in the dark.
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Good Results, but It's Messy
Investors who want to consider troubled banks like Citigroup (NYSE:C) or Santander (NYSE:SAN), or multi-national insurers like Allianz (OTC:AZSEY) or AXA (OTC:AXAHY) have to dig through an intimidating amount of dross to get to the underlying performance.
The good news is that ING's underlying performance is pretty good. As of the last reported quarter, the bank was performing pretty well even though the net interest margin is under pressure and bad loans are ticking up a bit. The insurance operations also aren't doing too bad. The Asian business is looking strong, although the closed U.S. variable annuity business is still something of a mess.
SEE: Intro To Insurance: Introduction
Forced Sales Are Bad Sales
When ING took a bailout, it came with a pretty serious string attached - the company had to get out of the insurance business by the end of 2013. Given the scale of those insurance operations, that is a tall order. Making matters worse, other firms like Aviva (NYSE:AV) and Hartford (NYSE:HIG) are looking to dispose of part of their operations (U.S. life and annuity operations, mostly).
ING has contemplated multiple strategies and there's still no definitive answer on how the divestitures are going to go. The idea at one point seemed to be launching IPOs, but now it looks as though the company would prefer to sell the Asia insurance operations outright. This business could be worth more than $5 billion, but it remains to be seen whether companies like MetLife (NYSE:MET), Manulife (NYSE:MFC), Sun Life (NYSE:SLF) and Samsung Life can muster the necessary mixture of "can do" and "want to do."
If the fate of an attractive, growing Asian insurance is uncertain, what then of the company's other insurance operations? The U.S. variable annuity business is in run-off and an uninspiring one at that, while the corporate retirement business is a better asset. Whether it's the U.S. or European businesses, however, the question seems to be why a potential buyer with the capital to buy the business would pay any sort of premium instead of just targeting organic growth?
The Once and Future Bank
A few years from now, ING will likely be a solid (albeit slow-growth) retail and commercial bank with a nearly 50/50 split between retail and commercial and about half of its business in the Benelux countries. While there could be some growth from banking interests in Poland, Thailand, Turkey, China and India, so far there haven't been too many "Western banks look east" success stories.
In the meantime, ING has to figure out how and when to repay a perpetual loan to the Dutch government that carries an 8% interest rate, but also operate a bank that is presently required to "refrain from price leadership." And there may or may not be a new "bank tax" in the Netherlands. In addition, the malaise that is dissolving Greece and Spain could still drag France and other countries into the mire.
SEE: 6 Types Of Insurance Coverage You Didn't Think You Needed
The Bottom Line
Imagining ING as a more or less pure bank in three or four years takes some creativity and assumptions. The capital that ING can reap from its divestitures will, for instance, have a lot to do with the bank's capital standing.
Even if the insurance operations are sold at less than tangible book (the going rate for even good insurance operations is a 20 to 30% discount to book), these shares are probably undervalued on a long-term basis. If an insurance company like AXA or Allianz is worth less than tangible book and a bank like Santander gets a premium, it seems reasonable to say that ING is probably undervalued today.
There's a long road left to travel and anybody thinking of owning these shares today has to have patience and risk tolerance. While the long-term value is there, the short-term volatility could still be significant.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.
Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers
Good Results, but It's Messy
Investors who want to consider troubled banks like Citigroup (NYSE:C) or Santander (NYSE:SAN), or multi-national insurers like Allianz (OTC:AZSEY) or AXA (OTC:AXAHY) have to dig through an intimidating amount of dross to get to the underlying performance.
The good news is that ING's underlying performance is pretty good. As of the last reported quarter, the bank was performing pretty well even though the net interest margin is under pressure and bad loans are ticking up a bit. The insurance operations also aren't doing too bad. The Asian business is looking strong, although the closed U.S. variable annuity business is still something of a mess.
SEE: Intro To Insurance: Introduction
Forced Sales Are Bad Sales
When ING took a bailout, it came with a pretty serious string attached - the company had to get out of the insurance business by the end of 2013. Given the scale of those insurance operations, that is a tall order. Making matters worse, other firms like Aviva (NYSE:AV) and Hartford (NYSE:HIG) are looking to dispose of part of their operations (U.S. life and annuity operations, mostly).
ING has contemplated multiple strategies and there's still no definitive answer on how the divestitures are going to go. The idea at one point seemed to be launching IPOs, but now it looks as though the company would prefer to sell the Asia insurance operations outright. This business could be worth more than $5 billion, but it remains to be seen whether companies like MetLife (NYSE:MET), Manulife (NYSE:MFC), Sun Life (NYSE:SLF) and Samsung Life can muster the necessary mixture of "can do" and "want to do."
The Once and Future Bank
A few years from now, ING will likely be a solid (albeit slow-growth) retail and commercial bank with a nearly 50/50 split between retail and commercial and about half of its business in the Benelux countries. While there could be some growth from banking interests in Poland, Thailand, Turkey, China and India, so far there haven't been too many "Western banks look east" success stories.
In the meantime, ING has to figure out how and when to repay a perpetual loan to the Dutch government that carries an 8% interest rate, but also operate a bank that is presently required to "refrain from price leadership." And there may or may not be a new "bank tax" in the Netherlands. In addition, the malaise that is dissolving Greece and Spain could still drag France and other countries into the mire.
SEE: 6 Types Of Insurance Coverage You Didn't Think You Needed
The Bottom Line
Imagining ING as a more or less pure bank in three or four years takes some creativity and assumptions. The capital that ING can reap from its divestitures will, for instance, have a lot to do with the bank's capital standing.
Even if the insurance operations are sold at less than tangible book (the going rate for even good insurance operations is a 20 to 30% discount to book), these shares are probably undervalued on a long-term basis. If an insurance company like AXA or Allianz is worth less than tangible book and a bank like Santander gets a premium, it seems reasonable to say that ING is probably undervalued today.
There's a long road left to travel and anybody thinking of owning these shares today has to have patience and risk tolerance. While the long-term value is there, the short-term volatility could still be significant.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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