Let's try to understand ING's short-term strategy and its consequences.
Meet Basel III norms
Under the new Basel III regulations that took effect in 2012, ING will need to maintain a core tier 1 ratio of 10% in order to weather economic storms. Restrictions have been put on the number of risky investments as well. The need to raise a buffer will affect the bank's ability to utilize capital, generate returns, and improve margins.
Repay the government
During the 2008 crisis, ING received $12.8 billion in aid from the Dutch government. Though the bank has paid back a substantial portion of this debt, it still has another $3.8 billion remaining. It had earlier intended to repay the state by May this year, but those plans have been put on the back burner. Until ING manages to shore up its reserves, it won't be able to pay back the state. The bailout didn't come without riders.
One of the conditions set by the European Commission was that the bank will have to cut its balance sheet by almost half to ensure there are fewer risky investments on its books. As long as ING is tied to the government, it can't look at acquisitions as an avenue for growth. It also may not be able to take on risky investments, which otherwise could have garnered higher returns. Thus, the first thing it has to do is restructure its balance sheet.
Restructure the books
ING plans to do this by divesting its global insurance business and shrinking its exposure to debt-ridden countries. It recently concluded the divestment of its Latin American insurance wing for a net gain of nearly $1.26 billion. Next on the auction table could be its Asian insurance arm, which some analysts are valuing at a little more than $6 billion.
When it comes to reducing its exposure in debt-ridden countries, the bank reduced its exposure by some $5 billion last year, but it still has another $2.5 billion tied up in the troubled nations of Greece, Italy, Portugal, and Spain. So there is still a sizable portion of risk on its books.
2011 was a tough year for European banks, and there aren't too many indications that 2012 will be any better. Hommen expects markets to be "difficult" and "volatile" in 2012 as well. He thinks from 2013, ING will be able to maintain a core capital ratio of 10% and also use the excess capital in hand to repay the government. But 2013 is still a long way off and given the sovereign debt crisis, plenty could go wrong.
ING's earnings forecast doesn't look great, and it is also not paying out dividends. Shareholders may not enjoy it, but that may be the right move for the bank in the long term.
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