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ING to Spin Off Units in Bid to Assuage EU Over State Aid

Source: WSJ

Posted on 26 Oct 2009

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Dutch financial-services company ING Groep NV said Monday it will spin off its insurance and investment-management businesses and repay half the 10 billion euros ($15 billion) it owes the government in a bid to assuage European Union concerns over the state-aid package it received last year.

The government injected money into ING at the height of the financial crisis and agreed to guarantee the risks on a €28 billion portfolio of Alt-A securities that are backed by mortgages rated between prime and subprime.

The EU had been concerned that ING was paying too little for the state guarantee, effectively giving the company a competitive advantage. The company said Monday that, under terms agreed with the EU, it will make an extra payment of €1.3 billion for the Alt-A guarantee scheme.

ING also plans to launch a €7.5 billion rights issue and use part of the proceeds to repay €5 billion of state funds in December. It aims to repay the remainder with cash from divestments and retained earnings before the end of 2011, said Chief Executive Jan Hommen.

The company now expects to win EU approval for the Dutch government's support measures next month. The European Commission, the EU's executive arm, said Monday it had made "very good progress" with the Dutch government over ING and hopes to make a final decision in the matter over coming weeks.

To win the EU's approval, ING must divest itself of ING Direct in the U.S. and some Dutch retail-banking activities by the end of 2013. It will keep its ING Direct Internet banking operations in other countries and must refrain from making acquisitions.

"ING will be a dominant mortgage, savings and commercial bank in the Benelux and other parts of Europe, but also will keep its presence in growing Asian markets like India and Thailand," Mr. Hommen said.

It is exploring several options to offload its insurance and investment-management businesses, through initial public offerings, sales or a combination of such moves. The disposals should slash ING's balance sheet by about 45% or €600 billion to €760 billion, the company said.

The repayment of the first €5 billion tranche of state aid will generate a return for the government of 15% to 21.5%, or €593 million-€951 million, depending on the exact timing of the payback, Mr. Hommen said.

Details of the rights issue, including the offer price, subscription ratio and the number of shares, will be released after a Nov. 25 shareholder meeting has voted on it.

Banks world-wide have in recent months been maneuvering to shed state aid, hoping to resume operations without government intervention or undue oversight on strategy and operational decisions.

ING also said Monday it expects to post an underlying third-quarter net profit of €750 million, climbing back from a loss of €568 million a year earlier. The net result after divestments and special items is about €500 million, or €0.24 a share, up from a loss of €478 million a year-earlier period. ING will publish full third-quarter results Nov. 11.

Asked why ING was abandoning its bancassurance model, Mr. Hommen said the new ING would still be able to sell insurance products without having to own them. He said ING's insurance business could be broken up and sold off in parts and that the company will decide later about what to do with its real-estate business. "We are not in a hurry to make a decision," he said. "We know that we can't sell it for a good price in the current market."

KBC Securities cut ING's target price to €8 from €11, saying there are still uncertainties for the firm's remaining banking activities and that the disappearance of the insurance business will weaken earnings, while the rights issue will result in share dilution. KBC said the extra costs linked to ING's Alt-A portfolio were negative and that insufficient proceeds from selling its insurance business could lead to ING's banking operations being hit with further financial charges. It rates the stock at reduce.

Shares of ING shares fell 9.8% to €10.52, sharply underperforming the Stoxx Europe 600 financial services index, which was up 0.6%. ING shares have gained 46% so far this year.