ING now owns both Kaupthing Edge and Heritable Bank. We tell you why it is safer than both RBS and HBOS.
In an unprecedented move on Wednesday, Dutch bank ING agreed to move £2.5 billion in UK deposits from Kaupthing Edge and £538 million from Landsbanki owned Heritable bank over to Dutch shores.
So, it’s almost business as usual on all sides, and when the remaining creases are ironed out, all 182,000 customers will be able to transact through their respective websites as normal.
Some may argue that this game of happy families could prove dangerous for new and old customers alike.
However, I believe Darling wouldn’t let anyone jump out of the frying pan and into the fire, and whether you’re an ING veteran or Kaupthing refugee, I think ING is a pretty safe haven. Here’s why:
A brief history
ING Direct launched in 2003, and was one of the pioneers of the no-frills savings account market. An absence of high street branches meant the bank could offer higher interest rates, and thousands of customers quickly poured in their money to take advantage.
However, ING was later criticised for failing to keep up with several interest rate rises, with disgruntled customers soon fleeing the bank as quickly as they flocked in.
Ironically, those same savers who pulled their cash out of ING to chase higher rates offered by Icelandic banks could now be back where they started, after being unceremoniously dumped back with the bank.
Weighing up the scales
Admittedly, ING is no stranger to losses. Back in August, the bank reported a €44 million (£35 million) writedown on bad investments such as sub-prime mortgages. Quarterly profits were also down from €2.56 billion (£2 billion) to €1.92 billion (£1.5 billion), all contributing to a share price which has fallen 50% this year, and now at its lowest level since 2003.
The real thorn in ING’s side is the €22 billion it holds in ‘Alt-A’ mortgages, which sit somewhere between prime and sub-prime, and could still prove a rather sore point for the bank in times to come.
However, ING says that its potential credit losses are unlikely to provide the drama seen by other banks. In addition, losses reported were actually better than expected, and ING remains a strong player in the short term money markets.
Its credit default swap (CDS) rate, which measures how risky a bank is, is low, measuring 137.8 basis points as at 12.30pm this afternoon. Although this is deemed more risky than Barclays (129.2) and Lloyds TSB (104.2), it is still safer than RBS (205.0) and HBOS (235.4).
Just to put these figures in perspective, the three dissolved Icelandic banks were trading upwards of 2,400 basis points before they went bust.
In addition, ratings agency Moody’s has given ING an Aa1 rating for long term bank deposits, one below the top possible rating, while its financial strength is rated as ‘B’ (on a scale of A to E), which Moody’s says offers ‘good financial fundamentals, and a predictable and stable operating environment’.
Standard and Poor’s assessment of ING is similar, and gives the bank an AA rating, which it says means, ‘The obligor's capacity to meet its financial commitment on the obligation is very strong.’
Its latest dividend was also up 12%, and although its share price has tumbled this year, in Europe it has still fared better than Lloyds TSB, Alliance and Leicester, RBS and HBOS.
Of course, there are a few things readers should be aware of. Firstly, ratings agencies themselves have come under fire for failing to reflect early enough the worsening market conditions.
In addition, some argue that CDS prices have been distorted by fear, and do not reflect the true situation. This is somewhat true, but I still think both measures provide an excellent indicator of how robust a company is.
In short, I think ING is safe. After all, the bank made £1.5 billion last quarter.
Motives for mergers
For those still left wondering why the bank has made this bold move, if you think that ING was playing the Good Samaritan, you may want to think again. Back in September, the bank announced it was planning to double its retail balances of €318 billion (£254 billion) within five years.
The Icelandic takeover was perhaps just an easy way of acquiring new money. The total sum of £3 billion from Iceland may be a drop in the ocean for ING’s ambitious targets, but it’s a start.
Of course, there is still one potential problem. This week, the threshold for the Dutch deposit guarantee scheme was increased to €100,000 (approx. £77,700), providing greater peace of mind for savers with all three banks.
But, with the scheme offering more protection than the FSCS in the UK – if (and this is a very big if) ING did go bust and customers needed to claim, they would have to seek all of their money from the Dutch scheme.
Potentially, this could create a problem if Holland decided to ‘do an Iceland’ and refuse to pay out to customers outside its shores.
However, you have to remember that Iceland is in a unique situation, facing debts 12 times larger than its GDP. With the country itself facing bankruptcy, it’s hard to imagine how the Icelandic government plan to pay its own customers back, let alone anyone else.
In addition, it’s worth remembering that if you have savings with more than one of these institutions, your total savings cannot exceed €100,000 in order to qualify for full compensation.
However, with Darling doing everything bar don a Lycra suit this week in his attempts to play the superhero, you could also argue that all compensation schemes are redundant anyway and the Treasury would save the day regardless of any guarantees.
Running for safety
At the end of the day, it is a question of risk. ING currently offers 6.5% to new customers, including a bonus of 1.66% for one year. If you’re more interested in safety, you should take a look at the options outlined in this article, all of which provide 100% protection for your money.
Perhaps lessons ought to be learnt from all this. Rates aren’t always everything, and as we have seen, while the Icelandic Goliaths were pushing hard to attract new customers, ING’s David was able to maintain reasonable growth while managing to plug the leak of defecting customers.
And we all know who won that battle…
More: Darling Backs Icesave / Big Banks For Safe Savings
