On Wednesday, Deutsche Bank adjusted its stance on shares of ING Group (NYSE:INGA:NA) (NYSE: ING), downgrading the stock from Buy to Hold. The financial institution's price target was also revised downward to EUR17.00 from the previous EUR18.50. The change in rating marks the first such move in eight years for ING.
The rationale behind this adjustment stems from the projection that ING's profits have likely reached their peak and the anticipation of a decline in capital returns. The bank's large but relatively short replicating portfolio is expected to offer less support going forward, especially as net interest income remains a significant revenue component for ING. Fees, despite an increase this year, contribute to less than 20% of total revenues, which is notably below the sector average.
Deutsche Bank forecasts a drop in revenues for the next year for ING, while cost inflation is likely to stay high. This combination is predicted to lead to a substantial decline in efficiency by 2025. Moreover, ING, known for its robust capital return narrative within the banking sector, is predicted to see a peak in capital returns and share buybacks in 2024.
Currently, ING's shares are trading at 8.3 times the estimated earnings per share (EPS) for 2025, which represents a modest but justified premium compared to the sector. Nonetheless, with expectations of diminishing momentum in both profit and loss (P&L) and capital returns, Deutsche Bank has opted to downgrade the stock to Hold.
In other recent news, ING Groep (AS:INGA) NV displayed a strong performance in the second quarter of 2024, with significant customer growth and robust financial results. The company's fee income reached nearly EUR 1 billion, keeping it on track to meet its EUR 4 billion fee income goal for the year. An interim dividend of EUR 0.35 per share was announced, contributing to a year-to-date yield of over 13%.
Despite a 3% increase in total expenses due to inflationary pressures and business investments, risk costs remained below average, indicating the strength of the loan book. The company's core tier 1 ratio stood at 14%, with an update on the target ratio of around 12.5% expected in the third-quarter results.
In parallel, Berenberg raised the price target for ING Groep NV to €20.00 from €19.50, maintaining a Buy rating on the stock. This adjustment reflects a positive outlook on the bank's potential for medium-term growth, particularly in its retail challenger and growth (C&G) markets.
The firm emphasized that these markets could significantly contribute to ING's objectives for loan and deposit expansion, fee growth, and efficiency, supporting the bank in achieving a 15% return on equity (ROE) for the full year 2027.
According to Berenberg, the C&G business segment of ING is currently undervalued, presenting an opportunity for ING's price-to-earnings (P/E) premium over the sector to widen. These are among the recent developments concerning ING Groep NV.
InvestingPro Insights
Recent data from InvestingPro provides additional context to Deutsche Bank's downgrade of ING Group. Despite the downgrade, ING's financial metrics reveal a mixed picture. The company's P/E ratio of 9.83 and P/B ratio of 0.9 suggest that the stock may be undervalued relative to its earnings and book value. This could indicate that the market has already priced in some of the concerns raised by Deutsche Bank.
InvestingPro Tips highlight that ING has been aggressively buying back shares and has raised its dividend for 4 consecutive years, aligning with Deutsche Bank's observation of ING's strong capital return narrative. However, the tip that ING is "quickly burning through cash" may support Deutsche Bank's prediction of declining capital returns in the future.
The company's dividend yield of 3.68% is significant, as noted in another InvestingPro Tip, which could be attractive to income-focused investors despite the downgrade. It's worth noting that ING's revenue growth was -15.03% over the last twelve months, which may contribute to Deutsche Bank's concerns about future profitability.
For investors seeking a more comprehensive analysis, InvestingPro offers 5 additional tips that could provide further insights into ING's financial health and market position.
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