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ING is perhaps best known outside of the Netherlands for buying the failed British merchant bank Barings in 1995. Not much of interest has happened since.
This year, however, with a surfeit of regulatory capital, it has promised billions of euros to investors via dividends and share buybacks. Its share price has shot up, ahead of European banks that have already outrun their global peers.
This playbook is hardly original. After years of constraint, mostly due to regulatory restrictions during the Covid period, European and UK lenders are picking up the pace on payouts.
In the five years through 2022 shareholder payouts provided a roughly 6 per cent yield. Dividends made up almost all of this, according to Citi. Between 2023-25 that total yield will touch 10 per cent, of which a third will come via buybacks. That shift comes partly because many banks trade below their book values.
But even among this group, ING stands out. By mid-2027, the Dutch bank has promised to hand out €12bn of dividends — a quarter of its market capitalisation. Before then, the lender says it will buy back nearly the same amount of shares. That explains why ING’s share price is up 30 per cent since early February, following some disappointing full-year results.
ING, and banks such as Italy’s UniCredit, can afford to dole out capital. Its common equity tier one ratio at over 14 per cent of risk weighted assets is well beyond its 12.5 per cent target. As important, its mid-teens return on equity is already keeping pace with its cost of equity. As a result, the bank trades close to its tangible book value.
This is a rarity in European banking, where poor returns have eroded shareholder value in recent years. Deutsche Bank, Société Générale and Barclays are notable offenders. Investors have accordingly priced these three at half (or less) of their respective book values.
This makes ING’s performance look more sustainable than most. True, just rerouting excess capital does not expand its business. It also risks serious flak from Dutch politicians and regulators who worry about threats to the banking sector, especially after the travails of America’s regional lenders a year ago.
One idea for growth is to squeeze more capital efficiency from its international wholesale banking business. This makes up a third of profits but almost half its capital requirements. Bringing the two in line could release €44bn of capital to recycle elsewhere in the group.
Even partial success should lift ING’s share price, already at five-year highs. Now that would certainly be interesting to investors.
