DBRS Morningstar Confirms ING Bank’s LT Issuer Rating at AA (low), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the Long- and Short-Term Issuer Ratings of ING Bank N.V. (ING Bank or the Bank) at AA (low) / R-1 (middle), and the Long- and Short-Term Issuer Ratings of the holding company, ING Group N.V. (ING or the Group), at A (high) / R-1 (middle). The trend on all ratings remains Stable. The Group’s support assessment is SA3, while the Bank’s Intrinsic Assessment (IA) is AA (low) and the Support Assessment is SA1. See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

The ratings reflect the ING’s well established retail and wholesale banking franchise in the Netherlands and Belgium, along with a presence in various other countries mostly in Europe, where ING has benefitted from its strong digital presence. The ratings also consider the Group’s solid earnings capacity, supported by a well-managed cost structure. ING’s asset quality metrics are generally strong. While the Group’s profits have been affected by factors such as charges related to its Russian exposure and the Polish mortgage moratorium as well as the Polish Swiss Franc loans, the risk is contained in our view due to the high degree of diversification. The Group’s sound liquidity and funding position is supported by a broad retail funding base and a well-managed funding structure. Capital ratios are solid and well above regulatory requirements.

The Stable trend considers that high rates will continue to support revenues, which should help offset the repercussions from an economic slowdown, inflationary pressures and the impact of higher interest rates on asset quality. The Stable trend also factors in some reduction in capital ratios, as the Bank returns capital to shareholders. However, we expect management to proceed in a prudent manner should the operating environment worsen.

RATING DRIVERS

A significant improvement in profitability metrics, while maintaining a conservative risk profile and prudent capital ratios would lead to an upgrade.

The ratings would be downgraded in the event of sustained downward pressure on revenues, a material deterioration in asset quality, or a significant reduction in capital cushions that are not consistent with the Bank’s risk position.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
ING Group N.V., with its main operating entity ING Bank N.V., is a large and global systemically important bank with total assets of EUR 1,022 million serving 37 million customers in more than 40 countries. The Group maintains a leading universal banking franchise in the Benelux (Netherlands, Belgium, Luxembourg) together with a growing meaningful market position in several countries primarily located in Europe (including a significant presence in Germany). In addition, the Group has a solid wholesale banking franchise in Asia, the Americas and Central & Eastern Europe. Revenues from Netherlands, Belgium and Germany accounted for 55% of total revenues at end-2022. ING’s strong online banking capabilities and customer orientation have helped ING grow and achieve solid profitability even in mature and competitive banking markets.

Earnings Combined Building Block (BB) Assessment: Strong/Good
ING has historically reported resilient revenues and sound profitability metrics underpinned by a loan book well-diversified by geography and economic sector, increasing fee revenues and disciplined cost management. Despite solid net interest income (NII) generation, 2022 results were adversely affected by a number of notable items and higher costs of risk due to direct exposure to Russia as well as higher management overlays. As a result, the Bank reported a net profit of EUR 3,674 million, down 23% year-on-year (YOY) and a return on equity (ROE) of 7.2% compared to 9.2% a year earlier. However, in Q1 2023 net profit increased to EUR 1,591 million, up from EUR 429 million in Q1 2022, mainly driven by significantly higher NII and lower cost of risk. Going forward, DBRS Morningstar expects that revenues will continue to benefit from the higher interest rate environment, partly offset by higher cost of risk amid weak economic growth in the Bank’s core markets and inflationary pressures. The Bank targets a ROE of 12% by 2025, which it aims to achieve through higher revenues and operational efficiencies, as well as lower regulatory costs and lower capital levels.

Risk Combined Building Block (BB) Assessment: Strong/Good
ING’s risk profile remains solid evidenced by strong asset quality metrics, which reflect the benign operating environment in the Bank’s core markets, the granular loan book, including a high proportion of residential mortgages, and prudent risk management. Asset quality metrics remained strong in Q1 2023 with the Group reporting a Stage 3 ratio of 1.4%, remaining flat quarter-on-quarter (QOQ) and YOY supported by post-COVID recovery. Stage 2 loans declined to 6.6% in Q1 2023 from 7.1% QOQ reflecting lower exposure to Russia as well as improved macro-economic indicators. However, DBRS Morningstar expects some pressure on asset quality amid the subdued economic environment, high interest rates and inflationary pressures. In our view, asset quality risks are likely to remain at manageable levels. The Group’s exposure to Russia has been declining, and the risks are already reflected in RWAs and loan loss reserves.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
In DBRS Morningstar’s view, ING has a strong and well-managed funding profile, underpinned by a large retail customer deposit base reflecting its strong market position in the Netherlands, Belgium and, to lesser extent, in Germany. The Group is mainly funded by customer deposits which accounted for 68% of the Group’s non-equity funding at Q1 2023. 70% of deposits are from private individual and of those 83% are insured (58% of total deposits). The Group reported a sound loan-to-deposit (LTD) ratio of 96% at end-March 2023, which could moderately increase going forward, as high inflation and higher yielding investment options could lead customers to draw down on their deposits. ING’s liquidity position is adequate. At end-2022, ING’s High Quality Liquid Assets (HQLA) stood at EUR 187 billion, representing 1.30 times the short-term wholesale funding repayments (i.e. interbank funding, securities, derivates) of nearly EUR 144 billion. Furthermore, the 12-month moving average Liquidity Coverage Ratio (LCR) and net stable funding ratio were at 134% and 132% at end-2022, respectively, well above the minimum regulatory ratios.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good
ING’s capitalisation is sound, supported by a good internal capital generation capacity and continued access to capital markets. The Common Equity Tier 1 (CET1) ratio rose slightly to 14.8% in Q1 2023 from 14.5% in Q4 2022 resulting from 50% profit retention in Q1 2023 and lower RWAs, mainly reflecting the reduction of Russia-linked exposure, improved credit quality and positive currency impact. The Group will distribute an additional EUR 1.5 billion between May and October 2023, which will lower the the CET1 ratio by 46 bps. We note that the CET1 ratio still remains well above 10.73% (phased in) regulatory minimum requirement and the Bank’s ambition of circa 12.5%. The fully-loaded regulatory CET1 minimum requirement is 10.98% and is expected decline to approximately 10.66% by 31 May 2024 based on Q1 2023 financial data.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/415223

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (17 May 2022) https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:

All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations (23 June 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings
in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies

The sources of information used for this rating include Morningstar Inc. and Company Documents, ING Group 2022 Annual Report, ING Group 4Q22 and 1Q23 Results Presentation, ING Group 4Q22 and 1Q23 Press Release, ING Group 4Q22 and 1Q23 Credit Update, ING Group 4Q22 and 1Q23 Historical Data, and ING Group 2022 Climate Report. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/415225

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Sonja Forster, Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of Global FIG
Initial Rating Date: 18 August 2010
Last Rating Date: 2 June 2022

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