ING And KBC To Complete Restructuring, May Increase Payout Ratios

ING And KBC To Complete Restructuring, May Increase Payout Ratios

ING Groep NV (ADR) (NYSE:ING) and KBC Groep NV (EBR:KBC) (OTCMKTS:KBCSF) are finally coming to the end of five years’ worth of restructuring and divestments, with strong balance sheets and the potential to increase payouts significantly over the next few years.

“By the end of this year we expect the vast majority of divestments to be completed and state aid to have been fully repaid, ahead of schedule. We therefore expect both sets of management to outline new strategic plans, as the investment proposition in both stocks shifts away from restructuring towards the next stage: growth and capital return,” write Citi analysts Andrew Coombs and Yafei Tian.

Divestments nearly complete

While ING Groep NV (ADR) (NYSE:ING) still has €4.8 billion in double-leverage, it recently sold a 15% stake in VOYA and an 11% stake in Sul America SA (BVMF:SULA11) (BVMF:SULA3) that will reduce double leverage to €3.7 billion. Coombs expects ING to sell its remaining 57% stake in Voya and 10% stake in SulAmerica this year, almost completely eliminating its double leverage. The banks remaining €1.5 billion in state aid is also expected to be paid off this year. KBC Groep NV (EBR:KBC) (OTCMKTS:KBCSF) has already completed its outlined divestiture program and it should also be able to pay off its remaining €2.0 billion in state aid this year.

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ING, KBC ready for ECB stress tests

Both banks did well on the 2011 European Central Bank stress tests, and since year-end 2013 financial data is going to be used, Citi can estimate with some certainty that ING Groep and KBC Groep NV (EBR:KBC) (OTCMKTS:KBCSF) should both perform well on this year’s stress test and asset quality review (AQR). Using their own internal metrics (exact details of this year’s stress tests haven’t been released) Coombs and Tian estimate that ING has a stressed CT1 ratio of 9.4% and KBC has 8.4%, both well above the 5.5% minimum requirement.

“We believe ING Groep NV (ADR) (NYSE:ING) and KBC Groep NV (EBR:KBC) (OTCMKTS:KBCSF) are in good shape going into the AQR and the risk of further reclassifications is not meaningful,” they write.

With strong balance sheets and restructuring essentially finished, Coombs and Tian expect target payouts to be 40% – 50% by 2015 in line with the payout ratios the banks ran before the crisis (2002 – 2007). “This corresponds to a dividend yield of 4.0% at ING Groep and 4.6% at KBC Groep NV (EBR:KBC) (OTCMKTS:KBCSF) in 2015, rising to 5.5% at ING and 5.7% at KBC in 2016, which would place both banks towards the middle to upper end of European peers,” they write.

ING Groep is hosting an investor day on March 31, which should fill in many of these details, and KBC Groep NV (EBR:KBC) (OTCMKTS:KBCSF) is expected to hold one in the near future.

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Michael has a Bachelor's Degree in mathematics and physics from Boston University and Master's Degree in physics from University of California, San Diego. He has worked as an editor and writer for several magazines. Prior to his career in journalism, Michael Worked in the Peace Corps teaching math and science in South Africa.
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