ING's Rising Compliance Costs Cast Shadow Over Client Growth

(Bloomberg) -- ING Group NV wins hundreds of thousands of new customers every quarter but that's still not enough to overcome the effects of lower interest rates and increased costs to tackle money laundering.

The Amsterdam-based lender added almost a million primary clients in the last 12 months to reach 12.9 million in the second quarter, according to its financial results on Thursday. But net income rose just 0.6% as earnings from fees and lending were little changed from a year earlier, while staffing expenses climbed.

ING's rapid expansion through its digital banking platform has landed it in trouble with various regulators, prompting Chief Executive Officer Ralph Hamers to expand checks on customers. That resulted in the company dropping its medium-term target for cost-to-income ratio.

The results are “somewhat disappointing” when excluding one-time items, Degroof analyst Bart Jooris wrote in a note. “Even excluding restructuring provisions, there was a year-on-year cost increase as cost savings could not compensate for higher salaries.”

One-offs

ING's second-quarter profit was boosted by a 79 million-euro ($87 million) receivable linked to an insolvency of a financial institution and an 85 million-euro hedging result. Without those items, profit would have been lower than a year earlier.

ING fell as much as 3.4% in Amsterdam trading and was down 2.9% at 9.78 euros as of 12:45 p.m. The stock is up about 5% this year.

While ING is “pretty good” at adding customers, that only partially compensates for pressure on interest margins, KBC analyst Jason Kalamboussis said by phone. The bank has little room to lower the interest rate on deposits without going into negative territory. “Asking retail customers money for storing their deposits, would probably mean they would leave the bank.”

Italy Ban

The Bank of Italy in March ordered ING to stop taking on new clients in the country after finding shortcomings in its screening of clients. That ban remains in place and Chief Financial Officer Tanate Phutrakul said on Thursday that the bank is in regular contact with Italian authorities to resolve the situation.

“We are re-evaluating clients with activities in ultra high risk countries, that is an issue,” Chief Risk Officer Steven van Rijswijk said on a conference call. “we are currently also reviewing a number of relationships in correspondent banking.”

Cuba, Iran, North Korea, Sudan and Syria are designated by ING as ultra high risk countries. Those countries are also being subject to sanctions from the EU, the U.S. or both.

The compliance staff is monitoring an ever growing number of clients. ING added more than 300,000 customers in the second quarter, boosting net core lending by 7.4 billion euros. Net income rose to 1.44 billion euros, exceeding the 1.34 billion euros company-compiled estimate.

Other details from the earnings:

• Fee income fell 0.8% to 711 million euros. Hamers has said he wants to make more money from commissions and fees as low interest rates prompt the banks to reduce their reliance on income from lending.
• Net interest income rose 0.8% to 3.47 billion euros in the second quarter
• Revenue in the first quarter climbed 4% to 4.67 billion euros
• Link to statement

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, Christian Baumgaertel

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