ING : Credit Update; Buy ING Group Tier 2

ING continued in 2017 the successful execution of its “Accelerating Think Forward” strategy presented in 2016 and covering the years to 2020. Favourable conditions in the eurozone (where ING generates around 75% of overall group revenues) have further underpinned the group’s financial performance and the economic outlook (particularly in the Netherlands) is sound. ING’s earnings in the first three quarters of 2017 exceeded analysts’ consensus estimates, while key credit metrics improved. - For regulatory reasons and following the designation of ING Group (the holding company) as the group’s resolution entity, ING has changed its funding and capital strategy and since 2017 TLAC/MREL-eligible and subordinated debt securities have been issued from ING Group. We estimate residual TLAC/MREL eligible needs at around EUR10bn-15bn, a very manageable amount for ING which already issued EUR5.4bn of senior holdco debt in 2017 and has maintained strong access to debt capital markets, even in shaky times. The publication of the Basel rules in December 2017 lifted uncertainties on banks’ capital requirements and ING is expected to update market participants in 1H18 on its capital management (targeted ROE and capital ratios). We do not expect a substantial lowering in ING's capital from current levels (CET1 ratio of 14.5%). The P2R for 2018 has been maintained at 1.75% and the CET1 minimum requirement from 2019 is 11.8%, above which ING intends to keep a “comfortable management buffer’’ which should result in a CET1 target in the 13%-14% range. - Reflecting ING’s strong credit profile, yields are not particularly generous. In our view, ING Group’s Tier 2 securities (Baa2/BBB) still offer investment opportunities based on current yields and some spread tightening potential as they appear somewhat cheap relative to senior holdco and peers. We maintain our Neutral recommendation on other debt issued by ING Bank and ING Group as they offer yields in line with those of bonds issued by similar rated banks and for which no outperformance is expected. - >Support factors - - ING’s geographical and business diversification underpins its solid credit profile reducing the bank dependence on any single jurisdiction or activity and giving it access to a broad customer base. Challenger positions in mature markets and presence in emerging countries provide growth engines adequately supplementing dominant positions in Benelux.- The economic outlook is healthy in ING’s main markets, which should support business and earnings growth, as well as a solid asset quality (NPL ratio of 2%). Economic prospects are particularly good for the Netherlands where ING has a relatively smaller share of business than ABN AMRO or Rabobank, the flip side of its healthy diversification.Points to watch - - We would turn cautious if ING were to consider/execute a more aggressive organic and/or external growth strategy, which we do not expect. Similarly not expected, relaxed capital management would be detrimental to ING’s fundamental and relative strengths.- Large stress in ING’s exposures to volatile sectors (shipping, energy) and geographies (Turkey, Russia) would result in spreads widening, but given their respective size, are not a significant threat to ING’s fundamentals.