AMSTERDAM — Dutch financial services company ING Groep NV Monday said it will spin off its insurance and investment-management businesses and repay half the EUR10 billion it owes the government in a bid to assuage E.U. concerns over the state-aid package it received last year.
The government injected money into ING at the height of the financial crisis and agreed to guarantee the risks on a EUR28 billion portfolio of Alt-A securities that are backed by mortgages rated between prime and subprime.
The E.U. had been concerned that ING was paying too little for the state guarantee, effectively giving the company a competitive advantage. The company said Monday that under terms agreed with the E.U. it will make an extra payment of EUR1.3 billion for the Alt-A guarantee scheme.
It now expects to win E.U. approval for the Dutch government's support measures next month.
ING plans to launch a EUR7.5 billion rights issue and use part of the proceeds to repay EUR5 billion of state funds in December. It aims to repay the remainder with cash from divestments and retained earnings before the end of 2011, said Chief Executive Jan Hommen.
To win E.U. approval, the company must divest ING Direct in the U.S. and some Dutch retail banking activities by the end of 2013. It will keep its ING Direct Internet banking operations in other countries and must refrain from making acquisitions.
"ING will be a dominant mortgage, savings and commercial bank in the Benelux and other parts of Europe, but also will keep its presence in growing Asian markets like India and Thailand," Hommen told reporters.
It is exploring several options to offload its insurance and investment management businesses, through initial public offerings, sales or a combination of such moves. The disposals should slash ING's balance sheet by about 45% or EUR600 billion to EUR760 billion, the company said.
The repayment of the first EUR5 billion tranche of state aid will generate a return for the government of 15% to 21.5%, or EUR593 million-EUR951 million, depending on the exact timing of the payback, Hommen told analysts.
ING also said Monday that it expects to post an underlying net profit in the third quarter of EUR750 million, climbing back from a loss of EUR568 million a year earlier. The net result after divestments and special items is about EUR500 million, or EUR0.24 a share, up from a loss of EUR478 million in the year-earlier period. ING will publish full third-quarter results Nov. 11.
Asked why ING was abandoning its bancassurance model, Hommen said the new ING would still be able to sell insurance products without having to own them. He said ING's insurance business could be broken up and sold off in parts and that the company will decide later about what to do with its real-estate business. "We are not in a hurry to make a decision. We know that we can't sell it for a good price in the current market," he said.
The European Commission Monday said that it had made "very good progress" with the Dutch government over ING and hopes to make a final decision in the matter over coming weeks.
Details of the rights issue, including the offer price, subscription ratio and the number of shares, will be released after a Nov. 25 shareholder meeting has voted on it, ING said.
Banks throughout the world have in recent months been maneuvering to shed state aid, hoping to resume operations without government intervention or undue oversight on strategy and operational decisions.
KBC Securities cut ING's target price to EUR8 from EUR11, saying there are still uncertainties for the firm's remaining banking activities and that the disappearance of the insurance business will weaken earnings, while the rights issue will result in share dilution.
KBC said the extra costs linked to ING's Alt-A portfolio were negative and that insufficient proceeds from selling its insurance business could lead to ING's banking operations being hit with further financial charges. It rates the stock at reduce.
Royal Bank of Scotland analysts described ING's divestment plan as a major surprise. They said the sale of Dutch, U.S. and Japanese variable annuities businesses will be extremely difficult to realize, which could pull down the price received. On balance, RBS said it expected a negative market reaction to the news.
At 1330 GMT, ING shares were down EUR1.14, or 9.8%, at EUR10.52, giving it a market value of about EUR24 billion, sharply underperforming the Stoxx Europe 600 financial services index, which was up 0.6%. ING shares have gained 46% so far this year.