ING’s Single Most Dangerous Exposure
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No, I’m not talking about the exposure to the PIIGS and their troubles. ING’s (NYSE: ING) exposure to the PIIGS is mainly a portfolio of covered bonds issued by Spanish banks. The collateral is worth at least 125% of the nominal amount of each of those bonds. Besides that, the Spanish banks who issued those bonds will most likely be supported by the Spanish government or the ECB/Euro-countries when in distress. The next big exposure is the residential mortgages which ING has outstanding in Spain and Italy. These mortgages have a LTV (Loan To Value) of respectively 61% and 52% (2011), which is better than the bank total of 75%. This information fits perfectly in the low risk profile of ING’s banking unit. Keeping all of this in mind, the Euro crisis doesn't look like a big threat to ING anymore, does it?
Residential mortgages
ING’s largest exposure is the Netherlands, which is the source of about 39% of its revenue. The risk here, however, is the Dutch residential mortgages on ING’s balance sheet. The total Dutch mortgage debt is unusually high at 106% of GDP (US is 65%). This would not be a problem if it were a certainty that this debt will be repaid. With a rising unemployment rate and fragile economy it isn’t.
The housing prices are artificially inflated by approximately 15% (according to internal memos of the ministry of housing) through home mortgage interest deduction. This tax cut on home debt is on its way back after the Dutch parliamentary elections on September 12th, as most parties stated they want to reduce it. Also, because of the mortgage interest reduction many mortgages are on an interest-only basis; for 30 years homeowners enjoy the maximum tax benefit. This is why the LTV of ING’s mortgage portfolio in the Netherlands is 92% (2011) based on foreclosure values. Imagine what will happen to the LTV when housing prices plummet. Not a very convenient thought is it?
In the Netherlands, many people expect the housing prices to decline further as more people realize it's overvalued. Today, homes cost 2.5 times what they did in 1995 while the average family income only rose 42% since then. One month ago, the credit agencies S&P and Moody's (NYSE: MCO) stated that a price decline is likely and consider a large exposure to the Dutch mortgages a potential dangerous liability. This situation can't go on for much longer. The reality is slowly being accepted even by the many home sellers who were unwilling to sell their house for less than they paid for it.
The NPL (non-performing loans) ratio of ING on the Dutch mortgage portfolio has recently increased from 1% to 1.2%. This number will rise significantly when housing prices continue to decline and unemployment goes up. A further increase of unemployment is likely on the short term, as the Dutch central budget authority predicts.
And here comes the scariest part: ING has €142 bln in residential Dutch mortgages outstanding. So be sure to watch the NPL ratio in the upcoming Q2 earnings.
Investor89 owns shares of ING Groep N.V. (ADR). The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Moody's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
