Kill ING Direct?

That ING Direct has a valuable brand is not under debate. That it deserves to exist is.

Yesterday, the Dutch government read ING the riot act — that government has been plying ING with financial assistance for some time now — and the upshot was ING Direct must be sold. The sale is to take place before 2013, according to the Netherlands government mandate. There is no indication how much ING Direct will go for. (It should be noted that the Dutch government has instructed ING to sell ING Direct USA; it is unclear whether the ING Direct operations in other countries are to be sold, too.)

ING Direct was launched in 1997 in Canada. ING had high hopes for its revolutionary online-only bank. By 2000, ING Direct said it planned to open in two new nations every year. It never got there.

Last year, ING Direct bled money for its parent, losing nearly EUR 1.2 billion. Revenue fell 60% compared to 2007. The unit actually made EUR 530 million in 2007.

ING Direct did something right. It had a deposit base of EUR 322.7 billion last year. That’s a massive number. It also is a big reason why ING Groep’s brand is ranked 58th in the world among financial services firms. ING says ING Direct’s “aided brand awareness” is now 73% to 95% in all markets in which it operates.

But banking is a numbers game, and the numbers are tough for ING Direct. Sure, ING Direct had more than 22 million customers at the end of 2008. But it is also forced to offer relatively high deposit rates (currently, 3.99% in the US) and spend mightily on marketing. As long as its credit quality remains strong, ING Direct’s model works. Unfortunately, credit performance has bitten ING Direct in the you-know-where.

From the company’s more recent annual report:

In 2008, ING Direct continued to invest in building the business and expanding its product offering, with investment costs amounting to EUR 331 million. Given the current priorities of preserving ING’s capital position and the worsening economic outlook, ING Direct is strictly managing its risks, capital and expense base. In line with these priorities, it was decided early 2009 not to launch ING Direct operations in Japan. ING Direct will reduce expenses in 2009 by about EUR 150 million through lower operating and marketing expenses, and a headcount reduction of around 600 FTEs.

So what went wrong? ING Direct apparently decided to buy Alt-A Residential MBS. Not a good decision:

Rising delinquencies, falls in house prices and a revision to the ultimate loss outlook led to an estimated credit loss of EUR 384 million, primarily on ING Direct’s Alt-A RMBS portfolio. This triggered a EUR 1,891 million impairment through the profit and loss account as IFRS requires a write-down to market value at reporting date.

To lose EUR 1.2 billion smarts. A recognizable brand will only get you so far in banking. Both sides of the balance sheet need to be managed, and obviously ING fell far short on this account at ING DIrect. Does this mean an internet-only bank cannot succeed? I wouldn’t go that far. But when it comes to ING Direct, the brand certainly succumbed to poor underwriting.

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One Comment

  1. Jeffry is completely correct, as was your reading of the annual report. Like so many players, ING Direct was grabbing for spread vs. other similarly rated fixed income products, and MBS – especially Alt-A – ended up contributing to their undoing. As a former ING employee, it’s not my place to comment directly on anything, but the same show was playing at any number of institutions worldwide. I believe that ING Direct’s model was one of the more successful online banks (anyone remember WingSpanBank?) and deserved to be. The tough conflagration hit them hard and now they’re paying for taking the European equivalent of TARP money. For them, it’s no longer what they deserve, but what they can be told to do.

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