ING Group

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

ING Group is a global financial institution offering a range of banking, insurance, and investment services, with a strong presence in Europe and increasing exposure in Asia and other international markets.

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The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

ING’s moat is relatively weak, scoring a 2 out of 5. The justifications are:

  • Limited Intangible Assets: While ING possesses a recognized brand, it doesn’t translate into significant pricing power or customer lock-in. Unlike luxury brands or companies with a strong network effect, ING’s services, particularly in retail banking, are largely commoditized and therefore easily substituted.
  • Low Switching Costs: Switching banks or insurance providers is relatively easy for consumers and small businesses. Although there are some minor inconveniences when doing so, these are not as high as, say, switching a critical software provider. As a result, ING has to compete directly on pricing and product features, which erodes its ability to sustain a profitability premium.
  • Limited Scale Advantages: While ING is a large bank, there are other behemoths in the industry that have similar scale and geographic reach, negating some of its potential competitive advantage. Large scale does confer some cost advantages, but they are not exceptional. Moreover, most banking and insurance products can be rolled out without large incremental investment, so their value is limited.
  • Few Unique Assets: Unlike companies with exclusive resources or specialized knowledge, ING does not seem to have any significant unique and difficult-to-replicate resources. While it has a long history of operation, the experience can be used by competitors too.
  • Regulatory Moats: While regulations in banking and insurance can help to limit competition in specific geographies, they can also create some instability. For example, if regulations become more onerous, ING’s operating margins can be impacted.

Legitimate risks that could harm the moat and business resilience:

  • Increased Regulation: Banks are subject to intense regulatory scrutiny, as evidenced by the Basel accords and other global regulatory actions. Increasing capital requirements, restrictions on lending practices, and tighter controls on business conduct may create additional operating costs and threaten the ability to generate income. Any change to these regulations could significantly change the future prospects of ING.
  • Increased Competition: Banking and insurance markets are constantly changing. New entrants and fintech companies are always trying to disrupt the traditional financial services model. ING has to keep up with the pace or risk being left behind.
  • Economic Downturns: Banks are highly sensitive to the macro-economic environment. Economic downturns, recessions, or credit crises severely impact the revenues, profits and liquidity of banks. These events can also affect the ability to collect debts or secure appropriate financing at lower cost.
  • Technology Disruption: With the growth in fintech and the speed of digitization, banks are constantly being pushed to adopt new technologies to retain its customers. A failure to innovate or adopt appropriate technologies could cause ING to lag behind its competitors.
  • Cybersecurity threats: Banking has been more and more affected by cyber crime, which could severely affect their operational results. These attacks are ever increasing, and it’s important to see how well they have adapted. Also, fraud from inside can occur if internal controls are not up to par.
  • Global Crisis and Geopolitical risk: ING’s global operations are increasingly at risk from unforeseen events such as pandemics, supply chain disruptions, and geopolitical risks. These events can suddenly and greatly affect performance.

Recent concerns: In ING’s latest quarterly results, there is a drop in net interest income that is expected to persist for the next few quarters. The management has stated that this will be partially offset by higher commissions and reduced operating costs, but they are yet to show that such measures will be enough to offset the negative impact of net interest income on the results.

Business Overview: ING’s business model is diversified across banking and insurance operations, with a geographical footprint extending throughout Europe and into Asia and other emerging markets.

  • Revenue Distribution: ING generates revenues primarily from interest income on loans, commissions on banking and brokerage services, and premiums and investment income from insurance. The geographic distribution is primarily centered in Europe, but ING is actively expanding into other markets, such as China and Australia.
  • Industry Trends:
    • Digitization: The financial industry is going through a digital transformation, with rising usage of mobile banking, online trading, and payment systems. This trend demands constant adaptation from ING.
    • Regulatory pressure: Banks are under increasing regulatory pressure to enhance controls, increase capital requirements, and improve business conduct. These factors may increase the cost of compliance and reduce operating margins.
    • Increased competition: New entrants and fintech firms continue to disrupt the financial services industry, pressuring traditional banks.
    • Consolidation: There is also an increase in consolidation in some of the banking sectors, as traditional banks struggle to remain competitive against these new players.
    • Inflation and interest rates: With the global economy facing higher interest rates and inflation, banks can increase the yields it charges on loans. However, such an environment may negatively affect their deposits. Banks also tend to over-allocate their assets to fixed-rate instruments, meaning that they may underperform when short-term rates quickly increase.
  • Margins: ING’s operating margins have varied as a result of these industry and company specific factors. There has also been a trend that banks have been increasingly required to diversify their operations, in order to reduce their dependency on interest rates and generate revenues from a variety of sources.
  • Competitive Landscape: In the banking sector, ING has a number of major European competitors. The banking market has become more concentrated over the last 20 years, with a number of players. At the same time, ING is also competing with upstart financial services firms, which leverage technology. The insurance market is less consolidated. Still, ING faces competition from a number of international competitors. The financial industry is highly interconnected and competitive.
  • What Makes the Company Different: There isn’t too much that sets ING apart from its major competitors. The only way it tries to differentiate itself is by being more digital-oriented and trying to push online channels over in-person operations. Its operations are highly geared toward Europe and the main client base there, while competitors may be more internationally located. This provides some specialization and is slightly unique.

Financials:

  • Profitability: After a bad 2020, ING has managed to recover profitability. However, the recent slowdown in the market has resulted in a decline of the net interest income.
  • Capital: ING has a CET1 ratio of above 14 percent, which is significantly above the regulatory guidelines. However, there have also been a sharp decline in the value of investment assets, due to interest rate volatility.
  • Leverage: ING carries a leverage ratio of about 20 (which is above the average banking leverage of 15) and relies more on debt than equity.
  • Liquidity: ING has a sizable amount of cash at hand that can be readily turned into other assets. However, the liquidity levels are only okay, because as a bank it needs to have significant levels of cash on its books.
  • Solvency: ING is a solvent company but with the present volatility in the market and concerns of recession, there could be more downward pressure on the firm. So, there is a need to monitor closely its balance sheet.

ING’s financials are complicated, but the basics remain consistent and in good shape. Hence, its understandability is given a 3/5 rating.

Based on what has been said, ING has a healthy balance sheet, getting a rating of 4/5. ING has a good capital level, good liquidity, but higher levels of debt than the average bank. Still, it remains in a good financial standing.

ING Group (ING) | Moat: 2 / 5 | Understandability: 3 / 5 | Balance Sheet Health: 4 / 5

ING Group is a global financial institution offering a range of banking, insurance, and investment services, with a strong presence in Europe and increasing exposure in Asia and other international markets.