Moody's downgrades ING Bank of Canada, cites increased competition & questions business model | Tangerine Bank | Discussion forum

In a particularly scathing rebuke, for a credit ratings agency and arguably the more conservative of the "Big Three" (S&P, Moody's and Fitch Ratings), Moody's announced yesterday that they are formally downgrading ING Bank of Canada's "senior deposit ratings", "deposit ratings" and "subordinated bonds" by four notches while maintaining a "negative outlook" or "negative bias". They further said this concludes the exhaustive review that they first announced in mid-February 2012.

Among the downgrades, the "senior deposit ratings" (presumably that's like their issued GICs, term deposits and maybe debentures and bankers acceptances?) from A2 to Baa1. Its "deposit ratings" go from Prime-1 to Prime-2. Further, its "subordinated bonds", which are "unconditionally guaranteed" by parent ING Groep NV, received a downgrade from A1 to Baaa2. ING Bank of Canada's "bank financial strength rating" with Moody's went from C/a3 to C-1, which doesn't appear to be good. ING Groep received separate downgrades from Moody's.

Further and more importantly, Moody's writes: "The downgrade of ING Bank of Canada's BFSR follows a reassessment of the transition risk associated with its narrow business model in the context of an increasingly competitive operating environment. Relative to peers, ING Bank of Canada has elevated interest rate risk because of its reliance on interest revenues and the product options embedded in the core Canadian residential mortgage product. Moody's believes that ING Bank of Canada manages these exposures carefully, but in a stress environment they could still result in material losses.

The negative outlook on ING Bank of Canada's BFSR reflects Moody's expectation that low rates and intensifying competition will put pressure on the bank's net interest margin. A slowdown in consumer credit growth has led to aggressive mortgage pricing by Canadian banks, and the advent of Basel III liquidity rules is likely to lead to continued pressure on deposit rates. The outlook is also in line with the negative outlook assigned to ING Bank N.V.'s ratings. A further downgrade of the parent would lead to downward pressure on ING Bank of Canada's ratings because of the indirect exposures resulting from the use of a shared brand."

The one bright spot, according to Moody's: "Notwithstanding these challenges, ING Bank of Canada's ratings are supported by its franchise strengths, including healthy efficiency metrics, strong capital, and excellent asset quality."

Separately, I also find this interesting article in a May issue of Maclean's titled, "ING Direct scrambles to reinvent itself: The company is caught between growing competition in internet banking and the power of the big six". It does call ING Canada's seventh-largest bank, which used to be HSBC, but that's probably more to do with HSBC's weakness and shedding of market share than ING's growth, which is flat to nil.

Finally, I would also point you to this Canadian Press article that summarizes the Moody's ratings actions in plain language: "TORONTO - Moody's Investors Service downgraded ING Bank of Canada on Friday after a two-notch downgrade of its Dutch corporate parent ING Bank N.V.

The debt rating agency cut its senior deposit ratings of ING Bank of Canada to Baa1 from A2 on Friday after a two-notch downgrade of Dutch parent ING Bank N.V.'s financial strength rating to C-.

``Today's actions reflect the potential adverse effects of ING Bank N.V.'s lower capacity to support its Canadian subsidiary, as captured by its lower standalone credit assessment,'' Moody's said.

``Moody's expectation of the willingness or likelihood that ING would provide support to ING Bank of Canada if needed has not changed.''

The agency also raised concerns about ING's narrow business model in Canada in an increasingly more competitive market.

ING offers basic banking services in Canada including high-interest savings and no-fee chequing accounts as well as mutual funds and mortgage lending.

``Relative to peers, ING Bank of Canada has elevated interest rate risk because of its reliance on interest revenues and the product options embedded in the core Canadian residential mortgage product,'' Moody's said.

``Moody's believes that ING Bank of Canada manages these exposures carefully, but in a stress environment they could still result in material losses.''

Moody's cut the Canadian banks' standalone bank financial strength rating to C- and its short-term deposit ratings were downgraded to Prime-2 from Prime-1.

ING Bank of Canada's outstanding subordinated bonds, which are unconditionally and irrevocably guaranteed by ING Bank N.V., were downgraded by four notches to Baa2 from A1.

All the ratings carried a negative outlook."

Sorry to be the bearer of such depressing news!

Cheers,
Doug