S&P: ING Ratings, Outlook ‘Unchanged’ by Q2 Profit Decline

August 14, 2008

Standard & Poor’s Ratings Services announced that its ratings and outlooks on ING Groep N.V. (currently ‘AA-‘ – Stable – ‘A-1+’) and related entities are unchanged following the publication of the Group’s second quarter results, which showed a 25 percent decline [See IJ web site – https://www.insurancejournal.com/news/international/2008/08/13/92722.htm].

“The related entities include core insurance and bank subsidiaries, such as ING Bank N.V. (that are rated AA/Stable/A-1+),” said S&P.

“ING’s performance has been relatively resilient given the economic and market conditions, which partly reflects its excellent diversification,” the bulletin continued. “The decline in earnings from the second quarter of 2007 is principally due to two factors: lower investment results, partly owing to equity impairments, and negative revaluations of real estate, mostly in Canada. The commercial performance of its businesses was generally healthy in the second quarter, with good growth in the value of new business and banking product balances. Capital and leverage ratios are broadly stable, and the bank’s liquidity position remains robust.

S&P added: “ING has a sizable exposure to pressurized asset classes, most notably €22.0 billion [$ 32.8 billion] of U.S. Alt-A residential mortgage-backed securities (RMBS) (based on a broad definition of Alt-A), €2.2 billion [$3.28 billion] of U.S. subprime RMBS, and a €4.3 billion [$6.4 billion] net exposure to collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs) (mostly backed by corporate credit). The vast majority of these assets are long-term investments held as available-for-sale securities, and they are therefore mostly revalued through equity, not earnings.

“At end-June, 99 percent of the Alt-A RMBS and 72 percent of the subprime RMBS was ‘AAA’ rated. The credit enhancement supporting these RMBS positions currently exceeds pipeline delinquencies by a comfortable margin, and consequently, impairments on these securities have been relatively small to date.

“However, changes in credit spreads and interest rates have resulted in a €4.6 billion [$6.86 billion] pretax cumulative negative revaluation through equity on the Alt-A RMBS, and a further €800 million [$1.193 billion] on the subprime RMBS, CDO, and CLO exposures.”

S&P indicated that if the ultimate losses on the loans underlying the Alt-A RMBS reach its latest projections (see – “Standard & Poor’s Revises U.S. Subprime, Prime, And Alternative-A RMBS Loss Assumptions,” published on July 29, 2008, on RatingsDirect), “ING estimates on the basis of June 30, 2008, market prices that it would incur a pretax impairment charge of about €400 million [$596.5 million] over several years. This sum could be comfortably absorbed within ING’s earnings generation.”

S&P said it will “continue to pay close attention to the performance of these pressurized asset classes, and a negative rating action could result if a substantial impairment charge relative to group earnings becomes a meaningful possibility.”

The rating agency also noted that “ING has tightened risk management further in response to the external environment. For example, it reduced its equity exposure during the market rally in April, and it holds €5 billion [$7.45 billion] of equity put options to protect capital against a significant market decline. It is also controlling balance sheet growth, although lending has increased relatively strongly, particularly in the Netherlands.

“Loan loss provisions increased to 36 basis points (bps) of average credit risk-weighted assets in the second quarter, closer to ING’s 40 bps-45 bps expected over-the-cycle loss. This partly reflects portfolio growth, but also the deterioration of three corporate borrowers.”

S&P said the “stable outlook reflects our expectation that ING’s earnings and balance sheet will remain relatively resilient. Its excellent diversification and disciplined risk management are key rating strengths, and it has good growth opportunities in areas such as emerging markets and U.S. retirement services.

“We expect capital and leverage ratios to remain within ING’s targets. A positive rating action is not likely in the near term given market conditions, but could follow thereafter if ING’s business diversity supports a superior risk-adjusted performance on a sustained basis. A negative rating action could result from a marked deterioration in the portfolios of Alt-A RMBS and other pressurized asset classes, or from a general decline in earnings or capital.”

Source: Standard & Poor’s – www.standardandpoors.com

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