ING Bank of Canada built its name by presenting itself as an alternative to the country's biggest banks. Now, it's likely to be swallowed by one of them.
The online bank, which has gathered $30-billion in deposits from Canadians by offering higher interest rates than rivals, is being cut loose by its Dutch parent. The major domestic banks are now circling, sensing a rare opportunity to bulk up their retail banking businesses in one fell swoop.
The unit on the auction block is profitable, but is being discarded as part of a global restructuring effort that already saw ING Groep NV of the Netherlands sell its U.S. online banking operation for $9-billion (U.S.) in 2011. Much of the shuffling is the indirect result of ING Groep's €10-billion bailout from the Dutch government in 2008, but the new quest to sell both the Canadian and U.K. operations is part of a rejuvenated effort to streamline its operations.
The auction for the Canadian division is already well under way, according to a source familiar with the negotiations, and a number of big Canadian banks are vying for the prized asset. One analyst suggested ING Canada would be of particular interest to National Bank of Canada, which has been aggressively pushing a national retail strategy, or Bank of Nova Scotia, which is trying to catch up to bigger rivals Royal Bank of Canada and Toronto-Dominion Bank in the retail market.
ING Bank of Canada is an especially unique asset, however, because its business model is so straightforward. The bank's balance sheet is comprised mostly of deposits and mortgages, and both of these are easy to value in a takeover. The majority of ING's Canadian mortgages are insured by Canada Mortgage and Housing Corporation, which means they are low-risk – and therefore highly-coveted banking assets.
But while a sale will benefit the buyer, it will also reshape the Canadian banking landscape. For years, some observers have argued that the country's financial institutions hold too much power – and some of ING's marketing attempted to seize on that by positioning the bank as an underdog. Removing one of the Big Six's biggest rivals will only make the market more concentrated. ING was also a rare independent option for customers who wanted both an alternative to the big banks, as well as low-fee chequing accounts and higher rates for products like guaranteed investment certificates (GICs) and high-interest savings accounts.
"Material domestic acquisition opportunities are rare in Canada and have been historically highly accretive for the big banks [to their earnings]… as a result, we would expect significant interest in this asset," noted BMO Nesbitt Burns analyst John Reucassel.
In his analysis, Mr. Reucassel predicted that a purchase price would likely be no higher than $1.7-billion, ING Canada's book value (that is, its assets minus its liabilities). Capital One Financial Corp. bought ING Direct, the U.S. operation, for roughly its book value in 2011.
None of the large banks reached for comment on Thursday would comment publicly on whether they are interested. But a person familiar with the sale process said that many buyers are looking at it. Some non-bank financial institutions, such as life insurer Manulife Financial Corp., could also take a look.
Any bank that acquires ING Canada will hope to retain not only the deposits but the 1.8-million customers, to whom they could sell other products such as mutual funds. However, there's no guarantee that ING's business would be a risk-free deal. Since its entrance into the Canadian market in 1997, ING has marketed itself as a better option than the Big Six's high retail banking fees. Earlier this year, the bank also unleashed an intense marketing effort to court new customers by offering them $100 to switch banks and try out its no-fee chequing accounts.
If the sale goes through, customers who flocked to ING for these very reasons may not put up with higher fees.
A final announcement on the sale is expected to come in the fall, according to a person familiar with the process, and the deal could close by year end if everything goes according to plan.