(Bloomberg) -- ING Groep NV Chief Executive Officer Ralph Hamers is asking investors to pay today to benefit from greater cost savings tomorrow.
The group's cost-to-income ratio rose to 59.9 percent in the fourth quarter, the biggest Dutch bank said in a statement on Wednesday. That's higher than consensus estimates and well above ING's target range for 2020. Increased investment in technology will bear fruit in terms of savings between 2019 and 2021, the CEO said on a conference call.
“We have stepped up our investments and accelerated that in the fourth quarter,” Hamers said on a conference call. “Overall, the ratio was expected to increase because the investment comes before the savings.”
The Amsterdam-based lender is cutting thousands of Dutch jobs and expanding abroad to help counter growing competition at home from insurance companies and other non-bank mortgage lenders. Some of that pressure is now easing as the Dutch economy accelerates, boosting demand for loans and mortgages.
The bank invested about 800 million euros ($996 million) on its digital transformation last year, and spending increases were in line with the company's expectations, the CEO said. Adding jobs in ING's expansion abroad also caused costs to rise in 2017, he said.
ING fell as much as 2.8 percent in Amsterdam trading and was down 1 percent as of 3:25 p.m. The stock is little changed over the last six months, giving the company a market value of 61.8 billion euros.
“The earnings were a bit of a disappointment on the cost side,” said Benoit Petrarque, an analyst at Kepler Cheuvreux. “We see that it's due to higher investment in IT but it's higher than consensus.” He said he expects the bank to reach its 2020 cost-to-income targets, which call for a ratio of 50 percent to 52 percent.
Costs Rise
The cost-to-income ratio average for the full year climbed to 55.5 percent from 54.2 percent a year earlier. The consensus estimate was 56 percent for the fourth quarter and 54.7 percent for 2017, according to data compiled by the bank.
ING is considering how to attract more capital to meet the higher requirements coming into force under Basel IV in 2027 while it maintains its “progressive” dividend policy for now, Hamers said in a press conference.
“Some people say Basel creates a level playing field; It doesn't,” the CEO said, stressing that most U.S. lenders don't hold mortgages on their balance sheets as they do in Europe. “Just because some products are called mortgages doesn't mean they're treated the same everywhere.”
After contracting in the aftermath of the financial crisis, ING again has international ambitions. The bank identifies itself as having a market-leading position in the Netherlands, Belgium and Luxembourg, a so-called “challenger” position in countries including Germany, Austria, France and Australia and is present in growth markets such as Poland and Turkey.
The bank gets about two-thirds of its revenue from consumer banking and is on a push to win customers through further digitalization. The bank for example has created a mobile banking app that allows small business clients to use their phone's camera to scan receipts and bills, then link them directly to transactions to help them track income, expenses and tax payments in real time. The app so far has about 42,000 users in the Netherlands.
Earlier this week the bank acquired a majority stake in Payvision, an international card acquirer and payments platform that has offices in 10 cities in the U.S., Europe, Asia and the Pacific. The bank also recently worked with ABN Amro Group NV, Societe Generale SA and Louis Dreyfus to complete the agricultural sector's first blockchain commodity transaction.
Underlying pretax profit was 1.56 billion euros, compared with 1.69 billion euros, the average of eight analyst estimates compiled by Bloomberg. Net income rose to 1.02 billion euros in the fourth quarter from 705 million euros a year earlier, ING said. Net interest income was little changed at 3.51 billion euros.
Banks in the Netherlands come up 14 billion euros short in core capital under newly agreed rules that will take effect in 2027, according to calculations from the Dutch central bank. The bank's CET1 capital ratio, a measure of financial strength rose to 14.7 percent. ING said Wednesday that it will meet the final requirements of the Basel IV treaty.
To contact the reporter on this story: Ruben Munsterman in Amsterdam at rmunsterman1@bloomberg.net.
To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Ross Larsen, Paul Armstrong
©2018 Bloomberg L.P.
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