Fitch Affirms ING Bank at 'A+'; ING Group at 'A'; Outlooks Negative

Thu Jul 24, 2014 1:48pm EDT

(The following statement was released by the rating agency) PARIS/LONDON, July 24 (Fitch) Fitch Ratings has affirmed ING Bank N.V.'s (ING Bank) Long-term Issuer Default Rating (IDR) and Support Rating Floor (SRF) at 'A+' and ING Group's Long-term IDR and SRF at 'A'. The Outlooks on both Long-term IDRs are Negative. At the same time, the agency has affirmed ING Bank's Viability Rating (VR) at 'a'. A full list of rating actions is available at the end of this rating action commentary. The rating actions follow a periodic review of major Benelux banking groups. KEY RATING DRIVERS - IDRS, SRFs, SUPPORT RATINGS AND SENIOR DEBT ING Bank's IDR and senior debt ratings are at its 'A+' SRF, reflecting Fitch's expectation that there is an extremely high probability that the Dutch state (AAA/Stable) will support the bank, given its systemic importance to the domestic economy and financial system. ING Group is the holding group for ING Bank and ING's insurance operations. Its SRF and Long-term IDR are currently notched down once from ING Bank's, reflecting Fitch's view that while the probability that the holding company will receive support is also high, it is slightly weaker than the bank's. The Negative Outlooks on the Long-term IDRs reflect Fitch's view there is a clear intention ultimately to reduce implicit state support for financial institutions in the EU, as demonstrated by a series of legislative, regulatory and policy initiatives. We expect the EU's Bank Recovery and Resolution Directive (BRRD) to be implemented into national legislation in 2H14 or in 1H15. We also expect progress towards the Single Resolution Mechanism (SRM) for eurozone banks in this timeframe. In Fitch's view, these two developments will dilute the influence the Netherlands have in deciding how Dutch banks are resolved and increase the likelihood of senior debt losses in its banks if they fail solvability assessments. RATING SENSITIVITIES - IDRS, SRFs, SUPPORT RATINGS AND SENIOR DEBT The ratings are sensitive to a weakening of Fitch's assumptions around the ability or propensity of the Dutch State to provide timely support to its domestic banks. ING Bank's 'a' VR means, however, that any support-driven downgrade of the bank's Long-term IDR and senior debt ratings would be limited to one notch, by which point the ratings would be based on its standalone strength. ING Group's Long-term IDR would likely continue to be notched from ING Bank's, in line with Fitch's methodology, and thus any downgrade would also be limited to one notch. The Support Ratings (SRs) and SRFs are primarily sensitive to further progress made in implementing the BRRD and the SRM. The directive requires 'bail in' of creditors by 2016 before an insolvent bank can be recapitalised with state funds. A functioning SRM and progress on making banks 'resolvable' without jeopardising the wider financial system are areas of focus for eurozone policymakers. Once these are operational they will become an overriding rating factor, as the likelihood of banks senior creditors receiving full support from the sovereign if ever required, despite their systemic importance, will diminish substantially, unless mitigating factors arise in the meantime. Fitch expects that the BRRD will be enacted into national legislation in the near term and progress made on establishing the SRM is looking close to being ready in the next one to two years. Our current base case is for ING Bank's and ING Group's SRs to be downgraded to '5' and their SRFs revised down to 'No Floor'. KEY RATING DRIVERS - VR ING Bank's VR reflects its strong franchise and diverse business model (mostly in the Benelux), which supports resilient earnings generation, and its balanced funding profile. The VR also factors in the bank's stabilising impaired loans ratio. ING Bank's operating performance has remained resilient 'through-the-cycle' due to its diversification by geography and sectors, as well as to cost restraint. Fitch expects loan impairment charges (LICs) will gradually reduce throughout 2014 and 2015, although some lag effect is likely to remain following recent weak economic conditions and low growth in most of ING Bank's markets. ING Bank's impaired loans ratio is in line with similarly rated European peers', and Fitch expects impaired loans to peak in 2014. The bank's impaired loans coverage is fairly low, but ING Bank's largely collateralised loan book offers some buffer and the bank has a track record of LICs consistently exceeding write-offs. ING Bank's funding profile is strong and benefits from the bank's solid franchise in deposit-rich jurisdictions, such as Belgium and Germany. ING Bank also regularly taps the wholesale funding market, to which it has ready access. Its liquidity position remains healthy, despite liquidity being not fully fungible within the group (although the EU banking union could remove some regulatory hurdles). Consistent profitability, combined with some deleveraging, has helped ING Bank to boost capitalisation, as it reported a fully loaded Basel III common equity Tier 1 ratio of 10.1% at end-March 2014. Its leverage (tangible equity-to-tangible assets of 3.7% at end-March 2014) is sound in a European context, and Fitch expects the bank will improve this further during 2014 and 2015, notably through the issuance of additional Tier 1 instruments once their tax treatment is voted in by the Dutch parliament. RATING SENSITIVITIES - VR Downward pressure on ING Bank's VR, while not expected, would most likely be a result of significantly increased risk appetite in higher-risk markets or sectors, or less prudent liquidity or, in particular, capital management, if it negatively affects the bank's access to and cost of wholesale funding. Capital is also vulnerable to collateral valuations given the fairly modest reserve coverage of impaired loans compared with peers. Given the current high rating, upside potential is limited. RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The subordinated Tier 2 debt securities issued by ING Bank are notched from the bank's VR, in accordance with Fitch's criteria, and their ratings are hence broadly sensitive to the same factors that would affect the bank's VR. The subordinated debt securities are rated one notch below the bank's VR to reflect above-average loss severity of this type of debt. The rating of the preference shares issued by ING Group is notched down four levels from the company's implicit intrinsic creditworthiness, reflecting the structural subordination of ING Group to ING Bank as its holding company. The notching reflects higher loss severity risk of these securities when compared with average recoveries (two notches) as well as high risk of non-performance (an additional two notches). The rating is hence broadly sensitive to the same factors as those that would affect ING Bank's VR. KEY RATING DRIVERS AND SENSITIVITIES - SUSBIDIARY AND AFFILIATED COMPANY Fitch considers ING Belgium as a 'core' subsidiary of ING Bank. This opinion is based on Belgium being a home market to ING Bank, a high level of management and operational integration, ING Bank's full ownership and the considerable reputation risk for the parent in the event of a default of ING Belgium. As a result ING Belgium's Long-term IDR is equalised with ING Bank's, in line with the agency's criteria 'Rating FI Subsidiaries and Holding Companies'. ING Belgium International Finance S.A. (ING Belgium IF) is a Luxembourg-based funding vehicle fully-owned by ING Belgium and the ratings of the debt securities issued by the vehicle are aligned with ING Belgium's IDR, based on Fitch's belief that there is an extremely high probability of support from ING Belgium if required. This belief is underpinned by ING Belgium's guarantees on securities issued by ING Belgium IF. ING Belgium IF's senior debt rating is sensitive to changes in ING Belgium's IDR. The ratings of the debt securities issued by Lion Connecticut Holdings Inc. (a US-based insurance holding company that is part of ING U.S. Inc., rated BBB/Positive) are aligned with ING Group's senior debt rating and reflect Fitch's belief that ING Group will meet its financial obligations arising from the guarantee it has extended to these securities. As the securities' ratings are aligned with ING Group's senior debt rating, changes to this rating would be reflected in the securities' ratings. The rating actions are as follows: ING Group Long-term IDR: affirmed at 'A'; Outlook Negative Short-term IDR: affirmed at 'F1' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A' Senior unsecured debt rating affirmed at 'A'/'F1' Subordinated perpetual preference shares (US456837AC74): affirmed at 'BB+' ING Bank Long-term IDR: affirmed at 'A+'; Outlook Negative Short-term IDR: affirmed at 'F1+' Viability Rating: affirmed at 'a' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A+'; Subordinated debt: affirmed at 'A-' Senior unsecured notes: affirmed at 'A+/F1+' Short-term senior unsecured notes: affirmed at 'F1+' Commercial paper affirmed at 'A+/F1+' ING Belgium Long-term IDR: affirmed at 'A+'; Outlook Negative Short-term IDR: affirmed at 'F1+' Support Rating: affirmed at '1' ING Belgium International Finance Senior unsecured notes: affirmed at 'A+' Lion Connecticut Holdings Inc. Senior unsecured debt securities guaranteed by ING group (US008117AG88, US008117AH61 and US008117AJ28): affirmed at 'A' Contact: Primary Analyst Philippe Lamaud (ING Bank, ING Belgium, ING Group) Director +33 144 29 91 26 Fitch France S.A.S. 60, rue de Monceau 75008 Paris Secondary Analysts Jens Hallen (ING Bank, ING Belgium) Senior Director +44 203 530 1326 Marc-Philippe Juilliard (ING Group) Senior Director +33 144 29 91 37 Committee Chairperson Maria Jose Lockerbie Managing Director +44 203 530 1083 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014', 'Assessing and Rating Bank Subordinated and Hybrid Securities', dated 31 January 2014, 'Rating FI Subsidiaries and Holding Companies' dated 10 August 2012, are available at www.fitchratings.com. Related Research: Sovereign Support for Banks - Rating Path Expectations Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Assessing and Rating Bank Subordinated and Hybrid Securities Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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