ING Group Annual Report 2009
|October 13 2010|
ING and the financial environment
After the unprecedented shockwave that hit financial markets in 2008, we initiated transactions with the Dutch State to strengthen our capital base and reduce our risk exposure, while redefining our strategic course. Hence, it was clear from the
ING's first priorities were to stabilise the Company, restore credibility and regain trust. We thus introduced Back to Basics, a change programme comprising a series of measures to decrease costs, reduce risk and capital exposures, and deleverage the balance sheet, with the ultimate objective of increasing focus on the essence of financial services and creating a more coherent set of activities.
We simplified the governance structure by operationally separating the Bank and the Insurer under the umbrella of the Group, and carried out a portfolio review, which led to a number of divestments.
Meanwhile, we managed to turn around our commercial performance. Above anything, however, 2009 will be remembered as the year in which we took the most far-reaching decisions in the history of the Company. First of all, we set a clear course for the future by announcing an independent future for our Bank and our Insurer. In addition, we closed an early repayment agreement with the Dutch State on 50% of the capital provided in October 2008.
GLOBAL ECONOMY SHOWING SIGNS OF RECOVERY AFTER STEEP DOWNTURN
As a consequence, even a repetition of the Great Depression was considered a plausible scenario. In contrast to the 1930s, however, policy makers around the world acted swiftly and firmly, by providing significant economic stimuli and loosening monetary conditions. Governments took exceptional measures to reinvigorate financial institutions and stabilise the financial system. As a result, an increasing number of countries were able to report positive economic growth in the second half of the year.
World trade seems to have picked up firmly and in many countries the rise in unemployment seems to have a less adverse impact on the economy than expected. Nevertheless, the recovery of the global economy remains fragile. Companies have rebuilt inventories despite a strengthening consumer and investor demand.
However, as a result of the market interventions to cushion the impact of the crisis, public finances have been thrown off-balance. Our Economics Department¡¯s forecasts for 2010 and 2011 indicate that the global economy will return to growth, albeit at a slower pace than before the crisis.
Notwithstanding the negative impact of the financial crisis on the overall economic climate, which clearly weakens the growth
ING ENTERING INTO TRANSACTIONS WITH TH E DUTCH STATE
Under the terms of the agreement we obtained the right to buy back all or some of the securities at any time at 150% of the issue price. In addition, we obtained the right to convert all or some of the securities into (depositary receipts for) ordinary shares on a one-for-one basis, from three years after the issuance onwards.
It was also agreed that should ING choose to do so, the Dutch State would be able to opt for repayment of the securities at
This transaction enabled ING to strengthen its capital position significantly.
In the fourth quarter of 2008 market conditions deteriorated even further, making it the worst quarter for equity and credit markets in over half a century. Market prices for residential mortgage-backed securities (RMBS, including Alt-A classified RMBS), collateralised debt obligations (CDOs) and collateralised loan obligations (CLOs) fell sharply as liquidity dried up. This eventually affected ING’s results and equity more than expected, in particular due to ING’s portfolio of Alt-A RMBS. We therefore entered into an agreement with the Dutch State on an Illiquid Assets Back-up Facility (IABF) covering 80% of our Alt-A RMBS.
Under the terms of the IABF, a full risk transfer to the Dutch State was realised on 80% of our approximately EUR 30 billion par value portfolio of Alt-A RMBS at ING Direct USA and ING Insurance Americas. As a consequence, the Dutch State now participates in 80% of any results of the portfolio. The risk transfer took place at a discount of 10% of par value. In exchange, the Dutch State was to pay a funding fee and principal payments on two Government receivables to ING.
The first receivable initially had a funding fee of 3.5%, the second receivable initially had a funding fee of Libor +50 basis points (please note that these fees were revised following discussions with the European Commission, which will be discussed below). ING remained the legal owner of 100% of the securities with an exposure of 20% to the portfolio’s results. The transaction significantly strengthened ING’s capital and balance sheet as it resulted in a reduction of equity volatility.
Moreover, it had a positive impact on shareholders’ equity amounting to EUR 5 billion through a reduction of the negative revaluation reserve. ...
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