Fitch: Planned Efficiency Boost Already Factored Into ING Rating
There is no radical departure from the bank's existing strategy, and financial targets for 2020 set out previously are not changing significantly. A targeted return on equity (ROE) is not disclosed, and the bank says this will depend on future regulatory capital requirements. European banks are facing material uncertainties around the final implementation of risk-weight harmonisation and how much Pillar 2 capital will have to be held as a guidance rather than a requirement. ING Bank's ROE has ranged from 8.1% to 11.9% in recent quarters, which is significantly above the European average, but its overall profitability remains in line with what is being achieved by similarly highly rated peers.
The plan is to invest around EUR0.8bn over five years and take upfront restructuring costs of EUR1.1bn to deliver EUR0.9bn of recurring savings - equivalent to 10% of 2015's operating expenses - by 2021. The expected cost savings, if achieved, should compensate for higher regulatory costs, which have more than doubled since 2014 and which the bank estimates will reach more than EUR0.9bn in 2016. We have a high opinion of ING Bank's ability to execute on its strategic plans.
Dutch banks have so far managed to protect their net interest margins by saving on funding costs in a low interest rate environment, but their ability to continue to do so is becoming more difficult as rates paid on retail savings deposits are already close to zero. ING Bank is partly compensating for this by cautiously expanding in higher-yielding lending segments. Low loan impairment charges have helped preserve profitability throughout the sector, reflecting the more benign operating environment in the Netherlands. We expect this to continue in the closing months of 2016 and into 2017.
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