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ING Groep N.V. Message Board

  • jpomper jpomper Nov 8, 2011 8:17 AM Flag

    Comments on Q3 results and valuation

    1.ING underlying Q3 results dropped compared to last year, and to last quarter. Both bank and insurance business performed in Q3 below former quarters, by cca. 20%.
    The underperformance is due partly to Greek impairments costs, and partly to general financial market stress.

    This disapponting performance is reflected in the results as:
    -interest margin dropped, from 142bps to 137bps
    -loanloss provisions increased, from 47bps to 55 bps
    -the losses originated mostly from: Benelux SME segment, and from Realestate Finance. No surprise here. Just keep lighten up.
    -the cost/income ratio increased, to 61% from 55%(in Q1)
    -return on equity, ROE, dropped by 3%, to 10%.

    2.Formally, the Q3 net results are saved only from "poor quality" by the extraordinary items. The sold assets (CarLease 347M, and CRES 175M) income has lifted the net profit to "acceptable" level.

    ING management feels the disappointment. It is reflected partly in the analyst questions, in the remarks of the CEO, see Q3 discussion transcript, and in the announced further measures to cut cost, plus 2000 staff cut.

    3. ING's CEO reiterated and confirmed ING's intention to pay back the outstanding 3.0B to Dutch state, in May 2012. The next 2 quarters should generate enough cash for those payments.

    So, after payback in May2012, ING should have no debt remaining from the crash of 2009, show cca. 11.7 euros equity and Book value, and should have a 1.65-1.75 euros (TTM) earnings past, and similar profit outlook for FY 2012.

    If ING Direct sale goes as planned, will be completed in Q4 (or slipping over to 2012Q1), their liquidity and cash position will nicely improve, while losing cca.10% earnings power. This is why most analysts expect 2012 earnings in the same range, cca. at 1.70 euros, as it is expected in FY 2011.

    4.Not much happened in insurance business IPO. The current market conditions are definitely adverse to all IPOs, as the world M/A and IPO activity dropped, by over 60% this year. No market appetite for new shares. We can only hope the conditions will improve by 2013.

    5. Still, the ttm earnings growth momentum is showing improvement.
    The earning trend looks like this:
    1Q2010 0.35
    2Q2010 0.29
    3Q2010 0.10
    4Q2010 0.11 FY2010 0.85

    1Q2011 0.37
    2Q2011 0.40
    3Q2011 0.45 (0.28 underlying)
    4Q2011 Est.0.44 FY2011 = 1.66 euros, 2.3 USD

    The underlying earnings growth slowed down considerably by the underlying results in this quarter.

    6.On the positive side, insurance business looks stabilised by now. This is a welcome status after years of writedowns. Insurance is generating 550-700B euros earnings per quarter (or 2.0-2.6B euros/year) now, so in normal conditions its IPO should sucessfully generate 20-25.0B euros, in 2013.

    This is about as much cash as all ING is valued by the market now (market cap is $31B). And you get the ING bank for free.

    When the Greek bond crisis gets out of the way,
    and the looming world recession subsides, and we get 1.5-2.5% moderate growth in 2013-15,
    ING should be able to generate 8.0B euros earnings a year.

    7. The curent PE of the S&P500 is 12.9.
    With bank's longterm relative PE at 0.81, the normal bank PE should be 12.9*0.81=10.4
    The US bank PE average currently is 8.5, with some notable exceptions, like the extrem low's as JPM= 6.3, and C= 5.7.

    The bank sector moved up a little on the list of "favorite sectors", from the place 89 (in a list of 90 sectors) to 79th place, in the last 3 months. A 10% sentiment improvement is not much but important. I think this might indicate a slow climb from worldwide bank-hate to neutral bank-feelings, and the process has begun.

    In all, the current ING forward PE=4, which is century-low extrem, clearly indicates a compelling investment.


    Disclosure: I have ING shares.

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    • Conclusions for EU banks and ING in particular:

      -the EU Comitte to save the banks should take a look at TARP. Copy the main ideas and adapt to the special features of EU bank crisis. TARP was highly critized at the start, but in the end it was really successful to stabilise the banks, and was profitable for taxpayers. Do not try all other unproven methods first, and at last turn to the already proven, successful method.

      -the Eu banking system just started to get stabilised when PIIGS debt crisis hit. All the efforts since 1.5 years, first reluctantly, are focused to stabilize and keep financing the debtor states, while they further try to spend and blackmail those who help them. Stop this immediately.

      -I do not see much reason to try to pour more money into those EU state’s coffers, whose politicians have already proved their irresponsibility in the last 5 years by overburden their people with debt, and now are reluctant to stop spending. Just consider the Greek idea on referendum to accept the rescue package, or Italy to start strikes against minor austerity measures. Stabilize the banking system with EU’s TARP package first, and support the banks to negotiate PIIGS states into strict austerity measures combined with selling state assets for cash, with IMF leadership.

      -ING is punished by investors for two main reasons. First, ING has the most complicated business structure of the 10 large banks in Eu, with very low transparency. Today it seems nobody wants to invest in a web of complicated bank and insurance conglomerate (see the similarity to BAC and C).

      The current ING efforts to separate bank and insurance, and sell noncore businesses will improve the investor’s confidence. But the adverse IPO environment, plus low trust in ING ’s management’s past performance history does not help investor’s confidence in successful execution.

      -Second, ING has to show much higher earnings predictability and stability. ING’s earnings fluctuated more rapidly and widely than at other banks in the crisis years, and repeatedly have shown negative surprises. The last quarter has also disappointed, albeit not the net result, but the earnings quality and stability.

      Break with ING’s worst tradition of this erratic behavoir. Focus, perform confident and stable. Nonperforming business sector’s managers must resign. (PIIGS’ prime ministers had to resign no matter who failed or bankrupted their country) Bring in new talent. No sacred cows, take a hard look at nonperforming departments. Give absolutely clear guidance and execute reliably.

      -There are clear hints what the market expects. In 2012 pay down Dutch debt, and start to pay 3% dividend. Show progress on IPO. Account their performance separately and transparently to help generate market confidence in them before trying to sell.

      -ING share price will most probably recover slower than others, just like the similar US peers has done. This is acceptable as long as progress is lagging behind others by less than a year. ING’s valuation must improve to the current Eu bank’s average in a year. in 2012 ING must show at least $2.3 earnings and sport a PE=7, and hit $16 share price.

      Anything less must bring mandatory top management change. Period.

    • I used the largest 10 EU banks’ data, nov.14 2011, to get an overview about the current state of this sector. The computer analysis results the following current valuation metrics for Eu banks:

      1)The simplest method of valuation is Price to Book. The average current P/B=0.57, with high correlation 0.96. This is historic low, and a sharp 63% lower than the similarly below average US data at 0.93.

      2)The Price to Earnings(ttm) current average is PE=6.9 for EU banks, with correlation 0.95. This is very low, 36% lower than the US bank’s average PE of 9.4.

      3)Using Bookvalue and Earnings(ttm) we get the following best approximate equation: P=0.03*B+7.1*E

      4)From the many valuation combination I found the the best approximation for bank share price in EU currently:
      Price=6.4*Earnings+0.62*Dividend.
      The correlations of both above parameters are high (0.97, 0.42) to the price. Apparently EU investors do not put much emphasis (0.62) on Dividend, especially compared to US (4.6). This might come from doubts on instability of the dividend. Actually, half of the big banks do not pay dividend. But those who pay, they pay relativly higher percentages (4% average).

      Most bank’s price can be estimated with this Eq. confidently, within 10% of the actual price. The notable exemptions are ING, which is way undervalued, using any of the above equations, and HSBC which is slightly overvalued compared to others.

      The conclusions for the EU banks in general, and ING in particular are:

      ... to be continued....

    • 1) Investors assign value to the EU and the US bank sector very differently.

      By a short overview you can easily conclude that the US banks are in average 50% higher valued by investors, than they were at the bottom of the financial crisis in marc2009. The Eu banks in average are currently valued very closely to the crisis value bottom; since the average EU bank is only 10% above their marc.2009 value.
      Clearly the banking systems, and a particular bank (for us ING) must be evaluated separately and with different metrics, on the 2 sides of the Atlantic.

      2. I used the largest 18 US banks’ data, nov.14 2011, to get an overview about the current state of this sector, and analized this database using a math package Multiple Linear Regression. This is a litle more complicated least squares method’s based calculation, and can use more than one independent variable to estimate the best approximations and correlations.

      The results from the US banks’ data yields the following valuation metrics:

      1)The simplest method of valuation is Price to Book. The best current P/B=0.93, with correlation 0.93 (0=no correlation, 1=perfect correlation).

      2)The classic PE, Price to Earnings(ttm) valuation is the most widely used. The current average PE is 9.4 for US banks , with a correlation 0.96. This is considered a very good approximation.

      3)Using Bookvalue and Earnings(ttm) we get the following equation:
      Price=0.17BookValue+ 7.8*Earnings
      This equation is just a little better approximation than 2), and its reliability is similarly good.4)From the many valuation combination I found the the best approximation, for bank share price currently:Price=7.1*Earnings+4.6*Dividend%The correlations of both above parameters are high (0.91, 0.67) with the price. Most bank’s price can be estimated with this Eq. pretty confidently witthin 10% of the actual price. The notable exemptions are BankOfAmerica, and somewhat less extremely Citigroup on undervaluation, and Amex on the overvaluation side.The conclusions for the US banks are:- the US bank saving package in 2009 called TARP worked pretty well to restore the confidence in american banks in the last 2.5 years, without much dilution, but still with sizeable losses for shareholders- despite all complaints, the US taxpayers came out with profit by saving the banks with TARP, by selling the state’s stakes at higher prices.- the US banking system stabilised in 2 years, and 90% of the banks are on a stable recovery path- BAC and C is recovering slower as they are bigger and inherited more problems, and I think they are also on the way of recovery, but with cca. a year behind other banks- the current basic valuation metrics see above (PE=9.4, PB=0.93) for banks are still cca. 20% below their longterm average (PE=11,PB=1.2)- banks also are started to come out of deep unpopularity by now, and their price and earnings starting to gain momentum. The Eu banks (and ING) are in different phase and situation due to PIIGS debt and (overblown) euro crisis....to be continued...

      • 1 Reply to jpomper
      • to repeat:

        1) Investors assign value to the EU and the US bank sector very differently.

        By a short overview, you can easily conclude that the US banks are in average 50% higher valued by investors, than they were at the bottom of the financial crisis in marc2009. The Eu banks in average are currently valued very closely to the crisis value bottom; since the average EU bank is only 10% above their marc.2009 value.

        Clearly the banking systems, and a particular bank (for us ING) must be evaluated separately and with different metrics, on the 2 sides of the Atlantic.

        2. I used the largest 18 US banks’ data, nov.14 2011, to get an overview about the current state of this sector, and analized this database using a math package Multiple Linear Regression. This is a litle more complicated least squares method’s based calculation, and can use more than one independent variable to estimate the best approximations and correlations.

        The results from the US banks’ data yields the following valuation metrics:

        1)The simplest method of valuation is Price to Book. The best current P/B=0.93 as approximation, with correlation 0.93 (0=no correlation, 1=perfect correlation).

        2)The classic PE, Price to Earnings(ttm) valuation is widely used. The current average PE is 9.4 for US banks. With a correlation 0.96, which is considered a very good approximation.
        This shows investor's valuation metrics shifted more to Earnings from Bookvalue, as a mood change, in 2 years.

        3)Using Bookvalue and Earnings(ttm) we get the following equation:
        Price=0.17BookValue+ 7.8*Earnings

        This equation is just a little better approximation than 2), and its reliability is similar.

        4)From the many valuation combination I calculated, I found the the best approximation for bank share price Equation currently:

        Price=7.1*Earnings+4.6*Dividend%

        The correlations of both above parameters are high (0.91, 0.67) with the price. Most bank’s price can be estimated with this Eq. pretty confidently within 10% of the actual price.

        The notable exemptions are BankOfAmerica, and somewhat less extremely Citigroup on undervaluation, and Amex on the overvaluation side.


        3)The conclusions for the US banks are:

        - the US bank's saving package called TARP, worked pretty well to restore the confidence in american banks in the last 2.5 years, without much dilution, but still with sizeable losses for shareholders.

        - despite all complaints, the US taxpayers came out with profit by saving the banks with TARP, by selling the state’s stakes at higher prices.

        - the US banking system is stabilised in 2 years, and 90% of the large banks are on a stable recovery path

        - Banks with large and complicated business, like BAC and C, were and are stll valued much lower, than smaller and simpler bank businesses. After 2 years they are still punished for less transparancy. However, cca. 1 year behind in recovery from simpler bank businesses, BAC and C continues to recover, and are getting closer to average valuations. Their price recovery potential is "2-3 bagger" now, compared to average 20-40%.

        -the valuation moved from Bookvalue at the bottom of the crisis, after 2.5 years, to Earnings and Dividend.
        Currently 1% paid dividend is valued in sizeable increase in share price. (See Eq. 4)

        - the current basic valuation metrics (see above, PE=9.4, PB=0.93) for banks are still cca. 20%-30% below their longterm average (PE=11,PB=1.2)

        - banks started to emerge out of deep unpopularity by now. They are not that far from average popularity now. Most new articles paint favorable pictures on bank's outlook.


        The Eu banks (and ING) are in different phase and situation, due partly to PIIGS debt and partly to the overblown euro crisis.


        ....to be continued...

    • thanx for your analysis,
      well done!

    • Good thoughts.

 
ING
13.77+0.37(+2.76%)Apr 16 4:02 PMEDT

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