ING: Steady And Underappreciated, Or Boring And Underwhelming?

The best I can say about ING Groep (ING) and its performance over the past eight months or so is that the shares have at least beaten its European peers … albeit only by a few percentage points and the shares are still down over that time period. For better or worse, the story remains the same – steady execution, but uninspiring growth in a low-rate environment where credit costs probably can’t get much better.

There are certainly areas where ING could look to improve, including fee income, but I think the company’s credit and capital position are healthy, and while I don’t expect ING to be a scintillating growth name, I think its underlying growth potential is still undervalued by the market. I’ve cut back my growth expectations on a weaker overall outlook for Europe and the banking cycle, but if 3% to 4% long-term core growth is still a credible target, these shares should trade in the mid-to-high teens.

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ING: Steady And Underappreciated, Or Boring And Underwhelming?

ING Putting Investors Through Dutch Water Torture

This has been a tough year for European bank stock investors, with very few banks showing much if any gains so far this year (Swedbank's (OTCPK:SWDBY) meager 5% return makes it one of the outperformers) and the Benelux banks continuing to do fairly poorly, and ING Groep (ING) underperforming in particularly with a year-to-date 20%-plus fall. There are a lot of reasons for the weakness, including relatively modest rate leverage, worries about economic growth, and concerns about capital, but in the case of ING, I believe the primary concern remains the slow pace of growth, with issues regarding capital and Turkey cropping up more recently.

I admit some concerns that ING is slipping into a Societe Generale-like (OTCPK:SCGLY) morass of being unable to hit its earnings, capital, and return goals, but in fairness to ING, there have to be quite a few additional disappointments before they get there. Still, I think the point stands that for the value that there appears to be in ING shares today, investors have to at least consider the risk that growth will come in meaningfully below already-low expectations.

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ING Putting Investors Through Dutch Water Torture

Can The ING Tortoise Grow Into A Hare?

Comparing the performance of ING Groep (ING) to watching paint dry over the last six months is unfair … to paint. At least when you watch paint dry, you’ll have something to show for it sooner or later. But with ING Groep, weak growth and overall inhospitable market towards bank stocks have combined for a nearly 20% drop since my mid-December update. Although there are plenty of poor banking performances over that time (including fellow Benelux banks ABN Amro (OTCPK:ABNRY) and KBC (OTCPK:KBCSY)), ING’s performance has been pretty weak as investors are no longer so willing to pay a premium for a bank with lackluster growth prospects and trouble meeting its return targets.

I’m still relatively bullish on ING Groep, given that I believe it is a high-quality bank that is well-managed with respect to risk and investing in some markets that can spur better growth. I don’t expect scintillating performance, but I think that if ING Groep can get long-term earnings growth into the mid-single-digits (with a 10% to 12% ROE range in line with management’s target), there is worthwhile upside in addition to a respectable dividend.

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Can The ING Tortoise Grow Into A Hare?

Seeking Alpha: ING Feeling An Uncomfortable Squeeze

About nine months ago, I wrote the following in reference to Netherlands-based bank ING (NYSE:ING), "... the potential here appears to be among the best in Europe right now."

I was wrong.

While others certainly have done worse (including Unicredit (OTCPK:UNCFF), Deutsche Bank (NYSE:DB), and Santander (NYSE:SAN)), and European banks have performed poorly in general, ING's nearly 25% decline in local terms since that article is quite weak and notably worse than the performance of French banks like BNP Paribas (OTCQX:BNPQY) and Societe Generale (OTCPK:SCGLY) and Austria's Erste (OTCPK:EBKDY), not to mention fellow Dutch (but state-owned) bank ABN AMRO.

ING has taken hits on multiple fronts. Loan growth and spreads in its core Benelux markets haven't been great, and the prospect for rate increases (and higher lending margins) has faded across the banking sector. Investors have also grown more concerned with ING's energy loan book, while more stringent capital ratio rules are going to reduce prospective capital returns (as well as returns on capital).

The conditions in which ING operates are certainly less than ideal, but I do not believe that the book should trade for less than tangible book value. My base case estimates value of the bank at around $15/ADR on long-term earnings growth in the 5% to 6% range (a long-term ROE of 10% to 11%), but if lower-for-long rates, higher loan losses, and weaker returns on capital drive ROEs persistently below 10% for the future, today's price is pretty close to the mark on value.

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ING Feeling An Uncomfortable Squeeze