Netherlands-based ING has followed in the footsteps of US and UK counterparts and returned to profitability in the second quarter, posting a net profit of €71m on Wednesday, down from €1.92bn a year earlier. That follows €5bn worth of losses in the previous three quarters.
Nevertheless, all is not what it first appears.
First, analysts had been expecting a profit of some €275m. The knockdown in profits comes on a very unexpected loss in the group’s banking operations based around real-estate revaluations, impairments on US mortgage-backed securities and fair value changes on debt and higher risk costs. Given the above, ING has now scrapped its interim dividend.
Overall loan losses, meanwhile, came in at €852m versus €776m expected by analysts.
And then there was the performance of its Polish subsidiary ING Bank Slaski, where second-quarter profits fell 22 per cent on guess what — that’s right, increased provisions for bad loans. Also adding pressure were forex fluctuations. As parent ING noted in its results (our emphasis):
Central Europe posted an underlying result before tax of EUR 47 million, down 41.3% compared with the same quarter last year. In Poland, the result before tax declined to EUR 3 million from EUR 46 million in the second quarter of 2008. The decline is explained by continuing pressure on margins, lower volumes in asset management related products and a negative impact on hedging schemes for mid-corporate clients due to a decline in the Polish zloty against the euro.
Although to be fair, the net profit figure of €182.7m was better than the €120.8m expected by analysts. However, the way the bank went about assuring that bottom line rested greatly on standing on the sidelines of a competitive market space by upping its net interest income by 29 per cent– that’s the difference between what the bank pays on deposits and what it earns on loans — and hiking fees and commissions by 8.4 per cent.
Another big area of concern should be the performance of ING Groep’s real estate division, which saw losses multiply to 580m in the second quarter versus 190m the previous quarter. Total exposure remains about €14.9bn, of which €8.8bn is still subject to revaluation.
Commercial mortgage-backed securities (CMBS) exposure, meanwhile, is some €7.7bn for the group. And although ING states there have been no impairments to date, and that the majority of the exposure remains senior AAA tranches, it admits to significant credit enhancement on the assets.
Overall, it looks like the wizzardy of enhancements in methodology and economic capital drivers saw the group’s economic capital — the amount of capital that a firm needs to ensure that the company stays solvent — fall by 1.4 per cent versus the previous quarter to €4bn– although that’s still 22.8 per cent higher than the previous year.
Meanwhile, there’s also the hit the group took on its monoline exposure:
Two CLO positions within ING Commercial Banking had credit protection via credit default swaps with a monoline insurer. The CLO positions have a nominal value of EUR 560 million. Negative movements in their fair value were fully offset by positive movements on the credit default swaps up until the end of the fi rst quarter of 2009. In the second quarter, the credit rating of the monoliner was downgraded signifi cantly. As a result, the two CLO positions were no longer credit protected, causing a EUR 58 million writedown on the credit default swaps through the P&L.
And lastly, the fair-value knock on a decline in ING’s own Tier 2 debt credit spreads, which amounted to €168m.
Unsurprisingly, shares were down as much as 15 per cent first thing Wednesday:
Related links:
Barclays’ monoline burn – FT Alphaville
Own credit conundrum at the IASB - FT Alphaville
S&P’s CMBS flip-flop - FT Alphaville