ING Groep NV announced a new dividend policy and long-term capital target, along with a refocusing of its main businesses, as it reported a year-over-year decline in its third-quarter results.
The Dutch bank's shares opened in the red on Nov. 5 and were trading at €5.93 apiece at midday in Amsterdam, more than 7% lower than the previous-day's closing price of €6.41 per share.
ING is now aiming to distribute more than 50% of its resilient net profit, or reported net profit excluding extraordinary items, as shareholder returns, either in cash or a combination of cash and share buybacks. If it is the latter option, the returns will still predominantly come in the form of cash.
In March, the bank suspended its previous policy following the ECB's recommendation for banks to conserve capital amid the COVID-19 crisis. It did not accrue dividends in the first half but kept a €1.8 billion dividend reserve in respect of its 2019 earnings.
The previous policy no longer fit with the procyclicality of the IFRS 9 accounting standard, CEO Steven van Rijswijk said in a presentation to analysts. The other factors include related volatility and the negative implication of a progressive dividend policy on regulatory stress testing.
ING's third-quarter net result of €788 million will not be added to its regulatory capital and will instead be used for future distributions, van Rijswijk said. The bank will also accrue into its 2020 dividend reserve whatever profit it makes in the fourth quarter that allows its to meet its target, CFO Tanate Phutrakul added.
Any dividend payout would be dependent upon regulatory recommendations.
Additionally, van Rijswijk said the bank will "periodically look at returning structural excess capital." Although the executives refused to comment on any specific buyback plans, he said any decision would be dependent on the bank's share price to intrinsic value.
"We have no comment on our own share price. But I can only say we're trading below book," the CEO said.
New CET1 target
ING also revised its common equity Tier 1 ratio target, aiming for roughly 12.5%, which is about 200 basis points higher than its fully loaded Supervisory Review and Evaluation Process, or SREP, requirement. In the continued presence of uncertainty because of the COVID-19 crisis, the bank will keep its CET1 ratio above the new target and gradually lower it as more clarity emerges.
The revision reflects, among other factors, a structural reduction of capital requirements and increased visibility of expected regulatory risk-weighted asset, or RWA, inflation, the bank said in its earnings release.
Phutrakul added that as ING moves to achieve the new target, there should be a "sustainable structural reduction in the capital needs of the company." The new 12.5% target also already takes into consideration any potential increase in the bank's countercyclical buffer in the future.
At the end of September, ING's CET1 ratio was 15.3%, up from 15.0% at the end of June and 14.6% at the end of September 2019.
Refocusing
The bank plans to amend how its business lines operate, a move that would have the wholesale banking business focus on core clients, simplifying its geographical footprint. This would mean shutting down three offices in South America — in Brazil, Argentina and Colombia — as well as smaller ones in Mongolia, Thailand, Kazakhstan and Malaysia.
Van Rijswijk said the closures would not affect the bank's RWAs as clients would continue to be served, but that transactions would no longer be done through offices but regional hubs like New York and Singapore. "It's basically an efficiency measure, if you will, to service those clients from hubs rather than from all kinds of different offices," he said.
The bank will also scale back the scope of Maggie, a program for a standardized customer experience, and implement job cuts of up to 1,000 through the end of 2021. In the third quarter, ING booked a €140 million impairment expense related to capitalized software development costs due to the Maggie changes.
Van Rijswijk said those affected by the job cuts include both external and internal employees. Some 600 of the cuts are from the wholesale banking business while the remaining 400 work on Maggie, he added.
ING will make redundancy-related provisions to be recognized in the fourth quarter but the executives declined to give an estimate of the provision. "The next step for us is to be in consultation with our various different workers councils and unions to basically inform the affected employees," van Rijswijk said.