The impact of a persistently low-interest-rate environment will continue to weigh on ING Groep NV in the coming years and hinder its ability to reach its return-on-equity target in the coming years, analysts said.
In May 2018, the Amsterdam-headquartered bank said it aimed to achieve an ROE of 10% to 12% in the medium term. But since setting the goal, ING has only met it once: in 2018 when its full-year ROE hit 11.2%.
Meeting the target has proved difficult as lower-for-longer interest rates drag on the bank's net interest income, or NII, ultimately impacting its net result. In the second quarter, the bank's ROE was 7.7%, a figure that CEO Steven van Rijswijk said was "below our ambitions."
Nevertheless, analysts say the bank is among the best capitalized in Europe and has options when it comes to improving returns, which goes some way to explaining van Rijswijk's optimism. "With more efficiency on cost and capital and with growth returning, we maintain our ambition and very much intend to continue to provide an attractive total return," he said during the bank's latest earnings presentation.
Low rates to persist
Recent estimates by analysts suggest that the bank will miss its ROE target in the coming years. As of Aug. 17, the S&P Capital IQ mean consensus estimate was 8.03% in 2022 and 8.41% in 2023, based on 15 analysts reporting. Berenberg estimates 8.1% in 2022 and 8.9% in 2023, while UBS Research forecasts 8.2% in 2024 and 8.8% in 2025.
Headwinds from low rates, lower-than-expected loan growth and weak demand for banking services amid the COVID-19 pandemic means ING will struggle to meet the target over the next two years, CFRA Research said in an Aug. 7 note.
UBS Research echoed the projection, with analyst Johan Ekblom telling S&P Global Market Intelligence that low rates will "continue to weigh on revenues for the next couple of years."
NII amounted to €6.85 billion in the first half, declining from €6.93 million a year ago. In 2020 it fell to €13.60 billion from €14.08 billion in 2019. The figure has also been on a downward trend over the past four years. ING's total income dropped to €17.64 billion in 2020 from €17.70 billion in 2017.
NII in the second quarter included an €83 million benefit from the ECB's targeted long-term refinancing operations, or TLTRO, but still fell 2.6% year over year. Absent of the TLTRO benefit, NII in the quarter would have dropped by €173 million.
The effects of the TLTRO III program, which offers banks long-term funding at attractive rates in order to ensure continued lending, are expected to be diluted in the coming periods, ING said in an emailed response to questions. The effect in the next four quarters is anticipated to be at the same level as in the second.
Levers to pull
Despite the threat of low rates, Berenberg said ING has "levers to pull on revenues," including reducing the threshold for charging negative rates on retail deposits.
"More negative deposit charging on a larger deposit base, wholesale funding cost management, higher rates in non-eurozone countries and loan repricing as Basel IV kicks in for most banks should mostly start to offset declining deposit margin pressures from 2022 onwards," said Stefan Nedialkov, director at Citigroup Global Markets.
ING said it lowered the threshold for negative charging in the Netherlands and Belgium at the beginning of July, the effects of which will be visible in the third quarter. In 2021, negative charging should offer a cushion against NII pressure by roughly €200 million and around €230 million in 2022, it added.
The bank has set a fee income growth target of 5% to 10% per annum, anchored on further recovery of international payment transactions and new product propositions in investment, insurance and lending. In recent quarters it has been outperforming this target, with net fee and commission income rising 18.3% year over year in the second quarter and 13.5% in the first half.
Customers line up at an ING Bank ATM in Amsterdam.
Nedialkov added that ING's fee execution, boosted by non-digital and digital initiatives, has been "great and should continue to deliver." UBS Research also said stronger fee income and cost reductions can materially offset the impact of low rates.
"Overall, I'm pleased with the strong performance of our fee business, keeping in mind that this reflects that especially international payments are still at lower levels with upside potential as we return to more normal circumstances," van Rijswijk said during the presentation.
Where ING stands out from many of its European rivals is its significant level of excess capital, which UBS Research estimates at roughly €9 billion, or more than 20% of its current market capitalization.
The bank plans to hand back €3.62 billion to shareholders in October plus and additional €1.74 billion from its 2019 earnings, to be paid out in cash or through share buybacks. Through these distributions it intends to cut its common equity Tier 1 ratio to 12.5% from 15.7% at the end of June.
If it manages to achieve the CET1 ratio target, Ekblom said ROE could hit 9.8% by 2025. Citigroup has a more favorable view, with Nedialkov saying the figure could reach 10.5% by 2024.
CFRA Research also expressed confidence in the CET1 ratio plan over the next two years but noted that this is expected to only gain traction in 2022, when more clarity over the overall economic recovery emerges.
All in all, analysts still view ING as an attractive bank that, according to UBS Research, has a best-in-class capital position and a reasonable valuation. Berenberg sees the outlook on capital returns as "superior to peers" and believes "investors overestimate the revenue pressures from low interest rates for ING relative to other eurozone banks."
"I am pleased that we show such a stable financial performance," van Rijswijk said during his presentation. "Looking at the results, you wouldn't think we are in a crisis."