Being a US investor, you might not pay much attention this IPO. But as an ING Group (NYSE:ING) shareholder, it impacts your portfolio seriously. So you might want to know how to approach this.
A must-read is this press release with basic information regarding the offering. Most importantly 70 Million out of 350 million NN Group shares are planned to trade on the Amsterdam exchange on July 2. It is the last big step by ING to transform from an international bank-insurance business to a European bank. It's like transforming a Citigroup into a Wells Fargo.
What is also important to know is that, as an ING shareholder, you lose equity value in this IPO because the valuation range of NN is €6.5-7.7 billion while its shareholders equity stands at €14.7 billion. So let's say that's a loss of at least €7 billion to ING on a fully deconsolidated, cash-sale basis. This brings back ING Group equity to €38.4 billion, with 3840 million shares that's exactly €10 ($13.60) a share. This leads us to the surprising conclusion that ING bank currently trades at a premium to its book value.
The AQR (asset quality review) attached to the upcoming stress test pressures ING to turn its NN stake into cash as Dutch banks are nervous for risk weight assigned to their domestic mortgages by the ECB. The test is very extensive and failing it would cause a severe stigma. Normally European banks use a risk weight that is approved by their national central bank, which is 10% in the Netherlands versus 15% European average. A further concern is the average Dutch mortgage LTV (loan-to-value), which stands at 87%, against 74% European average.
NN Group valuation and business
The stock looks incredibly cheap at an approximate 50% of book value. The operating P/E of NN is 9. Also a dividend yield of 4% is expected as NN will return 40%-50% of earnings to shareholders. There must be a catch, as from just these numbers NN looks like an extremely attractive value play.
Here's the catch. The business is mainly focused on life insurance in the Netherlands. This is a shrinking line of business, but there are opportunities to save costs and this is what NN will do in the upcoming years. There Dutch market for all types of insurance is very competitive. But NN also has a presence in the growth market of Eastern Europe. The management is optimistic about cost cutting and growth opportunities and aims to increase operational earnings by 5%-7% a year.
Every potential NN-investor must know about the 'Woekerpolis affaire', roughly translated as the usurious insurance policy affair. This describes a practice of hiding costs and overpromising on unit-linked products by all insurance companies. The scale of this is massive; millions of these policies were sold during the 1990s and early 2000s. When the public discovered the malpractice, this obviously provided a lot of business to lawyers, and to this day claims linger on. NN had a large piece of the pie back then and could lose as much as $4 billion to claimants. NN group has virtually no cash reserved for this litigation risk, as it only recently suffered a setback in EU courts.
The stock is somewhat speculative, and therefore you might not want too much of it in your portfolio. But it's still fair business at a great price.
Analysts of UBS say that ING probably wants to spin-off the remaining shares. I find this very plausible, as ING explicitly mentioned it retains flexibility in future divestments of NN Group. Besides, it makes sense that ING wants liquidity just for the upcoming stress test and feels more comfortable about its capital next year.
A sensible strategy for the ING shareholder who does not want to share in the loss of book value, is to purchase his stake in NN back. There are 3840 million ING shares and 70 million NN shares to go public on July 2. So to retain your NN stake after the IPO, you should buy 18.2 NN shares per 1000 ING shares you own (70/3840). I see this as a neutral strategy, as what you actually do is handing over money to ING for something you that was yours to begin with. On the bright side: the money goes to the bank which trades above book value.
To sum it up, the options are:
A) Buy back your fair share of NN and wait for share spin-offs (I like this one).
B) Purchase more NN shares.
C) Do nothing, in that way ING sells 20% of your NN stake at discount to other investors.
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