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February 6, 2009updated 13 Apr 2017 8:57am

ING comes to terms with reality

Dutch bancassurer ING Group is to make sweeping changes to its organisational structure in an attempt to slash costs and adapt to what it terms the new business environment ING will be led into this era of change by its chairman Jan Hommen, who will assume the additional role of CEO from Michel Tilmant who stepped down with immediate effect on 26 January. Revelation of changes at ING accompanied the announcement of its preliminary, unaudited fourth quarter results which were mauled by the worst quarter for equity and credit markets in over half a century

By LII editorial

Dutch bancassurer ING Group is to make sweeping changes to its organisational structure in an attempt to slash costs and adapt to what it terms “the new business environment”.

ING will be led into this era of change by its chairman Jan Hommen, who will assume the additional role of CEO from Michel Tilmant who stepped down with immediate effect on 26 January.

Revelation of changes at ING accompanied the announcement of its preliminary, unaudited fourth quarter results which were mauled by the worst quarter for equity and credit markets in over half a century. ING group. Abridged income statement 2008

Weighed down by asset impairments, revaluations and other negative market-related adjustments totaling €4.8 billion ($6.2 billion) fourth quarter results reflected a net loss of €3.9 billion, up from a loss of €585 million in the third quarter and a massive reversal compared with the €2.48 billion net profit reported in the fourth quarter of 2007.

The dismal fourth quarter result left ING with a net loss of €1 billion for the full 2008 financial year, down from a net profit of €9.17 billion in 2007.

The biggest damage was done by ING’s insurance operations, which in the fourth quarter limped in with a net loss of €2.5 billion, down from a €1.61 billion net profit in the corresponding quarter of 2007.

Asset impairments and other negative market related adjustments wiped €2.8 billion off results which encountered further strain from factors including declining sales, sale of ING’s Taiwan insurance unit ING Antai Life (see LII 229) and the ending of pension operations in Argentina (see LII 230).

Decimated fourth quarter results left insurance operations reflecting a full year loss of €1.2 billion compared with a net profit of €5.6 billion in 2007. Life insurance contributed 83 percent of insurance net profits in 2007.

Expressing disappointment with the results, Hommen announced that structural changes at the company had become unavoidable.

“With the continuing challenging outlook, we feel it is important to take additional action to decrease our risks and expenses,” said Hommen.

On the cost reduction front, ING announced plans to cut operating expenses by €1 billion in 2009 and by €1.1 billion annually from 2010. Some 35 percent of cost savings will come from a reduction of about 7,000 in ING’s full-time workforce, with insurance bearing the heaviest brunt. In total there will be 4,200 redundancies in insurance operations of which 1,400 will be among field staff.

Risk reduction on a broad front

The remainder of the expense reduction will come from decreasing head office, marketing, consultancy and third-party staff costs, and the renegotiating of certain contracts with technology vendors and the Formula 1 racing organisation, with which ING sponsors the Renault team.

Of the total expense reduction, ING anticipates that €650 million will be realised in banking and €350 million in insurance. In insurance savings of €175 million are anticipated from operations in the America’s, €100 million from Europe and €75 million from the Asia-Pacific region.

From a risk reduction perspective ING is to receive a big helping hand from the Dutch government, which has agreed to assume the risk on 80 percent of €27.7 billion US Alt-A residential mortgage backed securities (RMBS) held by ING Direct USA and ING Insurance Americas.

ING group. Listed equity portfolioThis risk transfer, which is expected to close in the first quarter of 2009, will be at a discount of 10 percent of the par value of the securities of which ING will remain the legal owner and remain exposed to 20 percent of results on the portfolio. The effects of the transaction on ING include reducing its risk weighted assets by about €15 billion and increasing shareholders’ equity of €5 billion through reduction of the negative revaluation reserve.

At the end of 2008 ING’s shareholders’ equity was €28.6 billion, up from €25.6 billion at the end of the third quarter. The increase was made possible by the issue of €10 billion Tier 1 securities to the Dutch State in October 2008.

In addition to the RMBS risk transfer agreement with the Dutch government ING has taken additional steps to reduce risk, including a drastic reduction in equity exposure.

At the end of 2008, equity exposure stood at €5.8 billion, down from €15.8 billion a year earlier. Of the total, at the end of 2008 €1.9 billion was represented by strategic stakes in banks, including Bank of Beijing in China and Kookmin Bank in Korea. The remaining €3.9 billion equity exposure is partially hedged, noted ING.

In addition to lower equity exposure, ING is taking steps to lower risk by reducing the size of its banking balance sheet by 10 percent by reducing the non-lending part of the balance sheet by 25 percent, or some €110 billion.

Specifically, this will entail reducing the available for sale portfolio, trading activities, deposits at other banks and reverse- repos. At the end of 2008 some €40 billion of the €110 billion target had been achieved.

In an effort to preserve capital ING is also pulling in the horns on new developments and has scrapped a plan announced in July 2008 to establish a new life insurance operation in Ukraine.

The unit was set to launch operations in the first half of 2009.

Also scrapped is a plan to launch online bank ING Direct in Japan. Further disposals are also on the cards with ING noting that it has identified several businesses for divestment.

Tough task ahead

Undoubtedly, Hommen takes over as ING CEO at a critical juncture in the history of a company, with 85 million clients in more than 50 countries and a workforce of about 130,000 people. The 65-year-old Hommen comes with considerable financial management experience rather than in bancassurance.

Hommen was appointed to ING’s supervisory board in June 2005 and became chairman in January this year.

Until May 2005, Hommen was vice-chairman and chief financial officer (CFO) of the board of management of Royal Philips Electronics (Phillips).

Prior to Phillips, from 1975 to 1997 Hommen worked for the Aluminium Company of America (Alcoa), from 1978 at Alcoa’s head office in the US, becoming CFO in 1991.

By contrast, 56-year-old Tilmant’s entire working life has been spent in the financial services industry. He began his career with Morgan Guaranty Company of New York. In 1992, Tilmant joined Bank Brussels Lambert (BBL) and went on to become its CEO in 1997.

Following ING’s acquisition of BBL in 1998, Tilmant became ING Group’s vice-chairman and in 2000 CEO of ING Europe. In April 2004 he succeeded Ewald Kist as ING Group CEO.

In a statement, ING said Tilmant had “in light of the extraordinary developments over the past few months and given his personal condition” stepped down as group CEO. Tilmant will be an adviser to ING until his retirement on 1 August, added the statement.

Until Hommen’s formal appointment at the annual general meeting of shareholders scheduled for April, Eric Boyer, current chairman of ING Group’s supervisory board, will act as CEO.

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