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Reguly in Europe

ING breakup a sign of things to come Add to ...

The European banking industry's second great overhaul within a year is under way.

The first, launched after the collapse of Lehman Brothers 13 months ago, saw European Union (EU) governments prop up dozens of banks that faced imminent collapse. The second will require many of the bailed-out banks to undergo radical restructurings to reduce their risk exposure and ensure the state aid doesn't give them an unfair competitive advantage.

ING Groep NV , the Dutch banking and insurance giant, started the overhaul with a bang yesterday with the announcement that it will raise €7.5-billion ($11.9-billion) in a rights offering and sell its insurance businesses. The split marks the end of ING's grand bancassurance model, launched in the early 1990s, that assumed bankers and insurers could create value by cross-selling each other's products in a new financial services supermarket.

While ING had already made it known its bancassurance model would not survive, the restructuring ordered by the EU competition commission goes further than expected, sending the shares down 18 per cent, to €9.56, in Amsterdam trading.

ING is also required to sell ING Direct USA, its branchless direct bank, and some Dutch retail banking businesses. ING Direct's banking operations in other countries, including Canada, do not have to be sold.

In addition, ING must make a payment of about €1.3-billion for state guarantees on risky, mortgage-backed securities. The EU was concerned that ING, whose bailout required a €10-billion cash injection and another €21.6-billion in mortgage asset guarantees, was paying too little for the guarantees, effectively giving it an unfair advantage.

In a note to investors, Chris Hitchings of Keefe Bruyette & Woods said "ING's settlement with the EU competition commission is less favourable than we had hoped." The rights offering is about €2-billion more than he had expected.

Shares of other partly nationalized banks, including Lloyds Banking Group and Royal Bank of Scotland, dropped by single-digit rates as investors took the view that the two British banks may also face tough demands from regulators. RBS is 70-per-cent owned by the British government. The figure at Lloyds is 43 per cent.

Asset disposals are considered inevitable at both banks to reduce their sizes (ING's split will leave its balance sheet about 30 per cent smaller than it was before the bailout). Lloyds is thought to be on the verge of launching a £23-billion ($40-billion) rights issue to help reduce its exposure to the British government's asset protection scheme.

The pace of bank restructurings in the EU is expected to pick up momentum before Neelie Kroes, 68, ends her term as EU competition commissioner by the new year. Known for her blunt style, Ms. Kroes said at a conference last month that while some banks are too big to fail, none is too big to restructure.

EU regulators approved more than 50 bank bailouts after the Lehman collapse. Many of them, including the Franco-Belgian bank Dexia, and Britain's RBS and Lloyds, await competition commission rulings. Britain's Northern Rock, an early casualty of the financial crisis, may be split into a retail lender and a holding company for its loan portfolio.

The CEO of ING, Jan Hommen, did not resist the competition commission's effort to break the company in two. When he took over earlier this year, the split was part of his "back to basics" and austerity plan. More than 10,000 jobs were eliminated, about 8 per cent of its work force, by the end of the third quarter. Mr. Hommen has drawn no salary.

ING plans to sell its insurance business, with a book value of €13-billion, by 2013, through sales or initial public offerings. Mr. Hommen is not ruling out launching a single IPO for the entire global insurance business. The efforts might provide a once-in-a-lifetime opportunity for rival insurers, such as Aviva PLC of Britain, to bulk up in a hurry.

Some investment firms think ING's split will benefit its banking business. Analysts have said banking operations were hard to value in the complicated bancassurance model, with its double capital and leverage structure.

Follow on Twitter: @ereguly


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