For sheer deposit growth over the last three years, few U.S. banks can match the dollars collected here by the ING Direct operation, and fewer still can claim to be its peer in percentage growth.
What is still unclear is when, or whether, all those deposits will translate into meaningful profitability.
ING Direct is the brand name ING Group of the Netherlands uses around the world for its online banking operations. The U.S. subsidiary that does business under that name, ING Bank FSB of Wilmington, Del., reported second-quarter net income of $60.3 million.
Though that was 34% more than a year earlier, it was not much for a thrift ING Bank's size. It earned 0.53% on $47 billion of assets in the quarter, and just 5.8% on $4.2 billion of equity, and was ranked far below most of the industry by both measures.
The median ROA for all institutions insured by the Federal Deposit Insurance Corp. was 1.28% in the second quarter; ROE was 12.35%. ING Bank's net interest margin was 1.33% in the three months, compared with an industry median of 3.49%, and was down from 1.67% in the first quarter and 1.95% in the second quarter of 2004.
"The returns are appalling" and "the margins are hideously thin," said Christopher Whalen, a managing director at Institutional Risk Analytics. "In terms of shareholder value, this thing is not cranking enough returns to pay for the capital it uses."
Dick Harryvan, the general manager of ING Direct operations for ING Group, said the FDIC figures are not an accurate reflection of the unit's returns, because the unit is capitalized through an intermediate U.S. holding company that itself is capitalized by 50% equity and 50% subordinated debt.
That leverage effectively doubles the unit's return, and because the company has some flexibility with the capital, it calculates the unit's actual capital costs at much lower levels - which effectively boost returns above an internal hurdle of 18.5%.
There are clearly compelling aspects to ING's model, and its tremendous growth is difficult to ignore. Three years ago the thrift had $6.7 billion of deposits. As of June 30 it had $34.9 billion.
That kind of growth isn't unheard-of in the banking industry, but it's almost always accompanied by an addiction to acquisitions. ING achieved that growth by convincing depositors one at a time to put their money in the thrift.
The value proposition to customers is obvious. Right now its depositors earn 3.3% on a savings account, and there are no fees, no required minimum balances, and no penalties. The industry-average interest-checking account pays about 0.65%, according to Bankrate.com, and the average money market account with a specified minimum of $10,000 pays about 2.56%.
It's not hard to see why, in a period of historic liquidity, there are consumers who have found ING an extremely attractive option for their liquid funds, but some analysts say the value proposition for ING is less clear.
Simon Adamson, a senior analyst with CreditSights Inc. in London, said it's too early to determine just how profitable the model will be.
"Each of the countries ING has started up in has become gradually more profitable," he said. Whether the company has the same success in the United States "depends on threats to the business down the line, either from competitors or interest rates."
The hole in the model, as some analysts see it, is no different from the one that plagued Internet banks six years ago: asset generation. A popular bromide of banking strategists these days is that much of a bank's inherent value is on the liability side of its balance sheet, but that line has its limits.
ING Bank has "all these deposits, but it's pretty clear that they haven't yet come to an epiphany as far as what else they can do in terms of asset deployment to make the liabilities worth something," Mr. Whalen said.
Right now the thrift invests deposits in a fashion far less diverse than even a traditional thrift.
It offers account holders mortgage and home-equity products, but at midyear its $34.6 billion securities portfolio was 73% of assets. It had $11.7 billion of loans, almost all of which were single-family mortgages. Its $460 million portfolio of home equity loans has barely grown in the past couple of years.
That reliance on its securities portfolio is why Mr. Whalen calls ING Bank a "mortgage-backed hedge fund."
The flat yield curve has made spread lending a challenge for even the nimblest, and most diversified, lenders, but making a reasonable profit is a tough gig for anyone running a large securities book. In ING's case the relatively short maturities of the securities in the portfolio at least limit the risk, with maturities usually extending under a year, Mr. Whalen said.
"It is low-risk but a fairly low-return strategy," he said.
Mr. Harryvan said the company intends to boost its mortgage portfolio to 40% of assets by 2008. He said the yield curve in Australia has been flat for three years, and that the ING Direct operation there continues to generate good returns.
"A very big advantage we have compared to other competitors at this point is that we work in five different currencies," he said. "Interest rates don't move in the same direction everywhere."
Though the Fed continues to raise interest rates, the Bank of England recently reduced a key rate.
"We have this diversification between yield curves, which is a huge advantage," Mr. Harryvan said.
Chris Musto, the vice president of research for Watchfire GomezPro, an Internet research firm based in Waltham, Mass., said ING's model may be more profitable in the long run than it is right now.
"Given that they are still advertising aggressively, given that they have been able to grow deposits greatly, and given that they are turning a profit - albeit not an exciting one at this point - suggests that they have figured out how to make this operation work," Mr. Musto said.
The company's marketing costs are substantial; Mr. Harryvan said the company spent about $85 million in 2004 in the United States, and this year's tab will be closer to $100 million.
"There is a lot of noise and a lot of publicity and clearly a lot of marketing that has gone into ING Direct, and it's clear from looking at the numbers," Mr. Adamson said. The unit's cost/income ratio, which with lower fixed overhead ought to be vastly better than a traditional bank's, is still higher than the ratio of ING's own traditional banking operations, he said.
Deposits thus far have been sticky, primarily because there aren't many places depositors can go and get better rates. Analysts expect the money to disappear if the rates go down.
ING Bank's "ability to sustain these favorable rates is questionable; there is no magic," said Avivah Litan, a research vice president at Gartner Inc. ING Direct is "the biggest brand with the highest rate, and it's become a parking spot for money."
Mr. Musto said the biggest hindrance to better profitability at the thrift is competition, and that a number of large banks are contemplating online models to compete with ING, though he would not name them. They have been reluctant to launch them for fear of cannibalizing their traditional deposit base - and because of the spectacular collapse of the last wave of Internet banks - but ING's deposit-gathering success may force their hands.
HSBC Holdings and Emigrant Bancorp have already adopted similar strategies.
"Bankers aren't sure that ING is doing something that they couldn't do," Mr. Musto said. "There are well-known banking brands that could potentially make more money off this model because they have the greater brand recognition and wouldn't have to spend all the money that ING does to market an Internet-centric product."
Examples? "Pick your favorite big bank - Bank of America, Wachovia, Citi, Chase, U.S. Bank - they are all known by tens of millions more people than ING Direct was five years ago," he said. "If they are ready to bite that bullet, they don't need to do half of what ING Direct did to get people to know who they are."
But Mr. Harryvan said the "cannibalization cost" at the branch level would be substantial for large banks.
"One of the major reasons for our success is that we set up the direct banks outside of our home markets in Belgium and the Netherlands," he said. "We don't have any conflicts with the branch network and we can pass on the economics to our customers."
