ING: big bank thinks small

How rare. In little over half a decade, a huge, drooling St Bernard of a financial services group has turned itself into a greyhound of a bank. ING has put a torrid crisis and a state bailout behind it. Now the Dutch group just has to exit its remaining insurance unit, as required by the EU state aid rules. But can its now-lean bank keep up the pace set by Thursday's first-quarter results?

ING Bank's net profit shot up by 43 per cent from a year ago to €1.2bn, if last year's one-offs are stripped out - more than doubling the previous quarter's result. Yet it did nothing out of the ordinary, sticking to old-fashioned banking with a combination of branches and digital products, plus the usual seasonal fillip from its slimmed-down financial markets unit.

Retail and commercial lending grew strongly in the quarter, especially in its core Benelux markets, helping to lift net interest income by a punchy 7 per cent. And despite cutting deposit rates, it attracted €13.6bn of new deposits. That sounds like a bank that is doing something right.

Of course its ING Direct online bank is a big advantage when it comes to cost control, and it can keep cutting as physical branches go digital. Its overall cost-to-income ratio is not shabby, at 51.7 per cent. In Germany, where ING Direct has built a business with 8m customers without a single branch, the ratio is only 43 per cent. Being a low-cost disrupter is the way to grow.

ING's asset quality is better than a year ago, and it is broadly home and dry on capital, with a common equity tier one ratio of 11.4 per cent. That will improve to 13.5 per cent pro forma when ING sells its remaining 55 per cent stake in NN, its listed European insurer, in the next 12-18 months.

Given its technological savvy and cost discipline, its return on equity target of 10-13 per cent is credible. At 12.2 now, it is already above its likely cost of capital. If anything, its payout policy of at least 40 per cent of profit is conservative. But then ING is a big bank that likes to act small.

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