By Steven Levine

Dutch bank ING Groep (NYSE: ING) surfaced Tuesday with a new senior unsecured note sale in two-parts, amid further weakness in the Netherlands’ business conditions.

ING took advantage of still ultra-low U.S. interest rates and good demand in the U.S. bond market to sell high-quality financial sector debt.

The yield on the 10-year U.S. Treasury note was last quoted bid at around 2.487%, with the three-month bill moving further into positive territory on the yield curve at 2.428%.

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The bank also entered the U.S. dollar-denominated primary market after recently posting a better-than-expected fourth quarter of 2018 earnings and following ING Bank’s credit rating upgrade.

The Amsterdam-headquartered financial services firm said it generated a little more than €1.69bn in Q4 2018, a 4.5% rise over the prior year, increased its lending by €3.2bn, as well as grew its customer base despite a money laundering-related scandal.

In early September 2018, ING noted that it agreed to settle a corrupt practice case with the Dutch Public Prosecution Service (DPPS), centered on its anti-money laundering program, for €675m in fines and €100m for disgorgement. 

ING Group CEO Ralph Hamers said that following the settlement, the bank continues to implement its know your customer (KYC) enhancement program, emphasizing regulatory compliance as the key priority. He added that the organization “continues to work hard on enhancing our customer due diligence files and on a number of structural solutions to bring our anti-money laundering activities to a sustainably better level.”

Meanwhile, ING’s global customer base grew by one million over the year to reach 38.4 million, and the number of primary customers increased 9.9% to 12.5 million. 

ING Group’s latest two-part debt issuance, comprised of tranches due in 2024 and 2029, were recently quoted priced at spreads in the areas of 150bps and 180bps more than comparable U.S. Treasuries, respectively, according to Bloomberg.

The offering, which was rated ‘A-’ by Standard & Poor’s and ‘Baa1’ by Moody’s Investors Service, was being co-managed by Citigroup, HSBC, ING, J.P. Morgan, RBC Capital Markets and UBS Investment Bank.

The deal follows hot on the heels of ING Bank’s €3bn three-part issuance priced Monday.

ING, which touts itself as a market leader in the Netherlands, Belgium, and Luxembourg, has wholesale banking operations that span more than 40 countries and considers Poland, Romania, Turkey and its stakes in certain Asian countries such as China as growth markets. 

Credit rating lift

Against this backdrop, Fitch Ratings in early February upgraded ING Bank N.V.'s long-term issuer default rating (IDR) to 'AA-' from 'A+', with a stable outlook.

Fitch analysts Olivia Perney Guillot and Konstantin Yakimovich noted that the upward revision of ING Bank’s credit profile reflected “the build-up of a significant and sustainable buffer of junior debt” that it may deploy to help protect itself in the event of default.

Fitch said that at end-2018, the combined junior debt buffer, including senior debt issued by ING Group and down-streamed into the bank in a subordinated manner, stood at 10% of group's risk-weighted assets (RWAs). The ratings agency added that a buffer in excess of around 10% of RWAs would “most likely be sufficient to restore the bank's viability without hitting senior third-party creditors.”

Investors have also been generally optimistic about ING Groep’s ability to honor its debt obligations. Spreads on the bank’s five-year credit default swaps (CDS) were recently quoted about 5bps wider over the past three months to just north of 83.65bps. ING Bank’s five-year CDS was last quoted around 4bps tighter intraday Tuesday to a little more than 31.75bps.

Slowdown

Looking ahead, investors may be somewhat wary about ING Group’s growth prospects, amid ongoing Brexit uncertainties, slowing global growth, and weaker domestic business conditions.

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Improvements in Dutch manufacturing conditions, for example, decelerated in March to the slowest pace since June 2016, according to the latest PMI survey data from NEVI and IHS Markit.

The PMI fell to a 33-month low of 52.5 in March, from 52.7 in February, signaling a weaker improvement in business conditions. 

The volume of incoming new business received by Dutch manufacturers nearly stalled in March, posting the slowest increase in the current 37-month expansionary period. Moreover, new business in the intermediate goods sector declined at a faster pace during the month, and while new export orders rebounded following February's stagnation, total new work increased at the slowest rate in over three years.

Still, IHS Markit director Trevor Balchin said the Netherlands continues to outperform the eurozone as a whole, “which saw the strongest manufacturing contraction in nearly six years in March.”

In fact, the European Central Bank (ECB) thinks real GDP will rise by 1.1% in 2019, 1.6% in 2020 and 1.5% in 2021, down from December’s outlook of 1.7% in 2019 and 2020.

Euro area real GDP increased by 0.2% quarter-on-quarter in the fourth quarter of 2018, following growth of 0.1% in the third quarter on the back of a sharply weaker manufacturing sector.

Investors will likely be watching the trajectory of the Netherlands’ manufacturing sector and inflation rate, as growth across the broader euro area continues to stall.