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Go Dutch

4 November 2015 By George Hay

ING is one of the few European banks doing its job. The Dutch bank on Nov. 4 said it had made an 11.6 percent return on equity in the first nine months of the year – a result that puts most big European peers to shame. More interestingly, it is succeeding under a regulator-imposed pay regime that would leave the same rivals hopping mad.

ING’s ability to beat its cost of equity compares favourably with the likes of Barclays, which posted a 7 percent RoE in the first nine months. Yet Holland’s regulator has imposed a super-tough version of the pan-European bonus cap. In most places, the rule is that variable compensation can’t exceed 100 percent of fixed salary. The Dutch level, implemented in February, is 20 percent.

OK, so ING’s main business is lending to homeowners and businesses, rather than investment bank trading currently weighed down by new capital requirements. ING has also already paid back its 2008-era state aid and isn’t burdened by legacy costs.

If London-based banks such as Barclays had to cap bonuses at 20 percent, the argument goes, they’d be even further behind as investment bankers would head abroad. But while it’s early days, few Dutch bankers are heading to Schiphol airport, according to a person familiar with the situation.

Nor is it safe to assume ING’s handsome return on equity comes because it is getting an easy ride on capital. New “Basel 4” risk-weighting rules could knock 200 basis points off its core Tier 1 capital if strictly interpreted, Morgan Stanley analysts estimate. That is why ING is keeping something in reserve – its underlying core Tier 1 capital position is 13.5 percent.

ING investors like what they see. Shares are up 20 percent over the last year, against a 12.3 percent dip for European banks on average, Eikon data shows. ING also trades above its estimated book value and at a 20 percent premium to the market on a forecast earnings basis.

Remuneration accounts for the lion’s share of operating costs at most European investment banks. They might look at ING and ask whether their pay policies, and their strategies in general, need to be a bit more Dutch.


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