DBRS Morningstar Confirms ING Bank’s Long-Term 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 confirmation of the Bank’s ratings reflects ING’s leading retail and wholesale banking franchise in its core markets of the Netherlands and Belgium, along with its growing presence in select countries, predominantly Germany. The ratings also take into account the Group’s resilient earnings generation ability, despite the low interest rate environment, its good asset quality metrics to date, its strong funding and liquidity position along with a solid capital position, supported by a sound internal capital generation and good access to capital markets.

Nevertheless, DBRS Morningstar considers that the wide and growing scale of economic disruption caused by the coronavirus (COVID-19) pandemic is negatively affecting the Group’s operating environment, and as a result the Group’ earnings generation and risk profile are likely to be adversely affected in the coming quarters. Therefore, we will continue to monitor the developing situation and its impact on ING’ overall credit profile. Downward rating pressure would increase should the crisis be prolonged.

RATING DRIVERS
Given ING’s high rating level and the current economic environment, an upgrade of the ratings is unlikely.

A downgrade of ING’s ratings could arise if there is a prolonged adverse impact from the COVID-19 pandemic resulting in a sustained deterioration in asset quality, especially due to deficiencies in risk management. Additionally, a downgrade of ratings could be driven by a sustained weakening of profitability metrics, or if there is any further evidence that deficiencies in risk controls or policies negatively impact the Group’s reputation and franchise.

RATING RATIONALE
ING has a strong retail and wholesale banking franchise across the Netherlands and Belgium, as well as an increasingly meaningful position in various countries in Europe, with a growing footprint in Germany. In these countries, the Group aims to further strengthen its franchise, and its products are predominantly offered through low-cost online platforms, reflecting ING’s ambition to be a dynamic digital player. The Group also has a solid wholesale banking franchise in Asia, the Americas and Central & Eastern Europe.

While we acknowledge that ING has a strong track record in resilient earnings generation ability, supported by its geographical and business diversification, we are also taking into account the growing scale of economic disruption potentially negatively affecting the Group’s operating environment beyond the Netherlands. Overall, we expect the economic consequence of COVID-19 will likely translate into weaker revenue generation as well as higher loan loss provisions in the coming quarters. In Q1 2020, ING reported net profit of EUR 670 million, down 40% on Q1 2019. The decline was primarily driven by increased loan loss provisions and negative valuation adjustments, as a result of market volatility and the deterioration in the economic conditions due to COVID-19. The Group’s net interest income was resilient, and net fee income increased, but lower investment and other income (due to negative mark-to-market fair value adjustments, negative model valuations adjustments, and the absence of a significant one-off gain of EUR 119 million recorded in Q1 2019) resulted in lower revenues (-1.4% yoy).

Cost control remains a key focus for ING, given the significant investments undertaken in digitalisation and platform infrastructure, the ongoing pressure from regulatory costs, and compliance investments. The Group reported a cost/income ratio in the low 60% range in Q1 2020, albeit this is largely affected by the seasonality of regulatory costs (the four-quarter rolling average was 57% in Q1 2020), and this compares to a medium-term ambition of 50-52%.

ING has a conservative risk profile, supported by its relatively good diversification and sound asset quality to date. The latter has historically benefitted from good economic conditions in the Group’s core operating markets, however we anticipate that the COVID-19 pandemic will impact the Group's asset quality indicators. At end-Q1 2020, the Group reported a Stage 3 ratio of 1.6% (1.5% at end-Q1 2019). DBRS Morningstar notes that the Dutch property markets have been showing signs of overheating in certain segments over the past few months. However, ING’s exposure to residential mortgages in the Netherlands represents about 10.5% of the total loan book and credit performance has been strong historically. DBRS Morningstar estimates the Group’s exposure to industries that are most affected by COVID-19 and the low oil price accounts for around 11.6% of the total credit outstanding at end-Q1 2020. This includes agriculture, retail business lending, aviation and hospitality (2.5% of loan book), commercial real-estate (7.3%), oil and gas with direct exposure to oil prices (0.6%), and leverage finance (1.2%). In response to COVID-19, the Group has been offering moratorium programmes, although at around 100,000 cases this remains low compared to the 13.4 million retail primary customers at Group level.

We view ING’s funding profile as solid, supported by the Group’s broad deposit base in the Netherlands, Belgium and Germany, with the Group reporting an overall loan-to-deposit ratio of 107% at end-Q1 2020. The Group’s liquidity position is also strong, with the 12-month moving average Liquidity Coverage Ratio (LCR) at 127% in Q1 2020, while ING’s high-quality liquid assets covered 1.46x the short-term wholesale and institutional funding outstanding (interbank funding, certificates of deposits, and commercial paper) at end-Q1 2020.

DBRS Morningstar considers ING’s capital position as strong. This is supported by the Group’s solid track record of generating capital internally and good access to capital markets. At end-Q1 2020, the Group reported a fully-loaded Common Equity Tier 1 (CET1) ratio of 14.0%, which implies a buffer of approximately 347 basis points over the minimum regulatory requirement set under the SREP (Supervisory Review and Evaluation Process) and does not include the final 2019 dividend, which has not been paid out according to ECB guidance. We note ING maintains its ambition for a CET1 ratio of around 13.5% in the medium term, on a post-Basel IV implementation basis (post 2023).

ESG CONSIDERATIONS
DBRS Morningstar views the Product Governance and Business Ethics ESG subfactors as significant to the credit rating. These are included in the Social and Governance categories. We note some risk and control deficiencies, particularly in relation to anti-money laundering. However, the Group seems to be working towards improving controls and resolving these issues by strengthening its compliance function and global know-your-customer programme.

In 2018, ING paid EUR 775 million related to the settlement agreed with the Dutch authorities for shortcomings in the execution of customer due diligence policies during 2010-2016 to prevent financial and economic crime at ING Netherlands. ING also announced in March 2019 that Banca d’Italia, the Italian Central Bank, had identified shortcomings in AML processes at ING Italy, following an inspection conducted from October 2018 to January 2019. ING has now come to an agreement with Banca d' Italia and the Italian judiciary authorities, with the Group paying an administrative fine and disgorgement of profit to the Italian courts and an administrative fine to Banca d’Italia (both amounts had been provided for).

The Grid Summary Grades for ING Bank N.V. are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Strong; Risk Profile – Strong/Good; Funding & Liquidity – Strong; Capitalisation – Strong.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodologies are the Global Methodology for Rating Banks and Banking Organisations (8 June 2020) https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The sources of information used for this rating include ING Group Presentation and Press Release Q1 2020 results, ING Group 2016-2019 Annual Reports, Dutch Central Bank website, and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited 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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are 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: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

The sensitivity analysis of the relevant key rating assumptions can be found at: http://dbrsmorningstar.com/research/362676

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Sonja Förster, Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: August 18, 2010
Last Rating Date: June 17, 2019

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