Forced by U.S. laws to give up its banking license a year ago, Holland's ING group has converted its U.S. operations into an investment bank and is moving back into its old specialty: trading emerging market debt.
With emerging markets crashing around the world, ING's new U.S. investment bank is back in the fray, bottom fishing, buying, selling, and swapping.
"It's an area in which we have a competitive advantage, " says Lane Grijns, president of ING (U.S.) Capital Holdings, the group's newly licensed securities unit. "We see ourselves as an emerging market investment bank, both in the United States and offshore."
Analysts tend to agree with ING's strategy, though some have reservations about the risks.
"We have a buy on ING, and the Mexico crisis did not affect our recommendation," said Matthew Czepliewicz, a bank analyst with CS First Boston in London.
He estimated that although ING did lose money on its existing portfolio as a result of the fall in prices for emerging market debt, those losses have been minimal.
Other analysts say ING has little choice but to expand in developing markets, despite the risks involved.
"ING's always been the elephant in the backyard," says Angus Runciman, an analyst with Barclays de Zoete Wedd in London. "The Dutch market is really too small to satisfy the group's appetite."
Adds Phillip van den Berg, of Goldman, Sachs & Co.'s London office: "Their home market is saturated, so it makes sense for them to move into fast-growing markets elsewhere."
As the company that pioneered trading in Third World bank loans back in 1985, ING is well equipped to redevelop the same business that got its New York operation going.
"We've got our entire trading team still in place," Mr. Grijns points out. He adds that there is little difference between trading bank loans, ING's original forte, and the bonds that many developing countries issued in exchange for their original borrowings.
ING's hallmark is its tendency to move into troubled markets faster than anyone else, mainly to get a head start on the competition and take advantage of low prices. And, like combat reporters, ING tends to go places everyone else is trying to get out of.
As recently as the early 1980s the group was almost unknown outside Holland, where it operated under the name Nederlandsche Middenstandsbank and catered mainly to small and medium-size companies. At that time, ING limited its international activities to trade finance.
After Mexico defaulted in 1982 and other developing-world borrowers followed suit, the Dutch bank saw its opportunity.
Unhampered by problem Third World loans and not under capital pressures, ING began arranging swaps. A typical trade set up by ING would match a German bank that wanted out of Mexican debt and into Polish debt with a U.S. bank that was willing to swap Polish debt for Mexican bonds.
Within a few years, the bank had become the biggest trader in the market, buying and selling billions of dollars in discounted bank loans and arranging debt-for-equity swaps.
ING subsequently moved into other areas such as distressed corporate loans and real estate as bigger players, mainly U.S. banks, came into the emerging debt market and margins grew thinner.
But with prices for emerging market bonds now down sharply as a result of financial turmoil in Mexico, the Dutch group is again on the move.
"A lot of people are rearranging their portfolios, and there's going to be a lot of restructuring in this market," says Mr. Grijns.
He adds that the crash in prices for emerging market securities means "going back to techniques that were in vogue before we did the Brady debt restructurings."
Mr. Grijns says the most immediate item on the agenda is pricing or, as he prefers to put it, assessing the quality of emerging market assets and finding out "who's going to pay their bills."
Longer term, the question will be how to assess the creditworthiness of companies from emerging markets and their ability to access international capital markets.
"Mexico was sort of the Rolls-Royce of the emerging market, and there's been a lot of damage done," Mr. Grijns observes. "It's a major crisis of confidence, and once you damage investor confidence it can last for a long time."
ING Capital is also pursuing some of its other old specialties, such as distressed real estate, and within the past 21 months has acquired over $850 million in real estate securities and problem U.S. and Canadian real estate. Last Friday, the group announced it had broadened its activity in this domain by acquiring FN Realty Advisors, Inc., a partnership set up by the Resolution Trust Corp. to sell off commercial real estate assets belonging to failed thrifts.
Forced by U.S. laws to shut down its U.S. branches in November 1993 after its parent company, NMB Postbank Groep, was acquired by the Dutch insurance giant Nationale Nederlanden Group NV, ING Capital has both lost and gained advantages.
On the one hand, it can no longer rely on low-cost funding from its parent company to the extent it could in the past.
On the other, it has more freedom to develop its securities-related activities and can also count on the ING group's rapidly growing international banking network to develop underwriting and advisory mandates.
The two activities tend to support each other, since trading in emerging market debt has helped familiarize the bank with opportunities elsewhere and develop a broader base of operations outside Holland.
"There is a pure banking and insurance side in which they are extremely good and which has become much more important to them than trading," says Mr. Czepliewicz. "That's an area they will continue to expand in."
Outside the United States, where banks are not constrained by the Bank Holding Company Act, Internationale Nederlanden is rapidly opening offices. Since earnings from banking tend to be higher in developing countries where the existing financial infrastructure is still poorly developed, ING has concentrated on Latin America, Asia, and Eastern Eyurope.
"That's where there's a real need for services like foreign exchange, hedging, mergers and acquisition," says Mr. Grijns. "Actually, it's rather amazing how quickly even basic operations can become profitable."
In fact, hardly a month goes by without the $200 billion-asset group opening another office. Over the last few years, ING bank branches or subsidiaries have been set up in locations ranging from Caracas to Kiev to Shanghai. Most recently, the financial group has added branches in Bucharest and Sofia. A Mexican subsidiary is in the process of being set up and the bank said last week that it has just opened a subsidiary in North Korea.
Still, the transition from commercial bank to investment bank in the United States has not been easy.
ING's entire structure had to be readjusted. In addition to converting the New York office to an investment bank, ING set up an affiliated securities unit in London to handle market making and proprietary trading. Then it transferred five staff members, including the bank's top trader, Peter Geraghty, to London. A Tokyo office is also being set up.
Changing licenses meant ING had to get approval from the Securities and Exchange Commission and have its staff pass SEC-required exams. SEC- approved software had to be installed, and research, sales, and distribution teams had to be built. A broker-dealer unit also had to be assembled.
So far, ING Capital has hired around 100 people, bringing total staff to more than 600. Eventually, says Mr. Grijns, the staff could reach 900.
Hardest of all was building the company's distribution network, he notes. "We're building this thing gradually, but we've had some difficulty getting the top guys," he admits.
The main drawback is that ING is still a relatively small operation that has yet to make its name and mark in the market. "Becoming an investment bank is no small thing," says Mr. Grijns. "And becoming an investment bank that counts is going to take God knows how many years."
