ING Groep

SpaceX has filed for one of the largest IPOs in history, with Anthropic and OpenAI expected to follow in the most significant fundraising cycle in years. No European bank holds a lead equity arranger role; that honor belongs to five US banks. 

Why it matters: Market valuations are eyewatering, but the free float is small, and equity underwriting fee margins are thin on trophy deals. On SpaceX, the underwriting economics flow overwhelmingly to a handful of US banks. We expect the Anthropic and OpenAI listings to follow a similar pattern. Barclays, Deutsche Bank, and UBS sit in the second tier of the equity syndicate as joint bookrunners, below the five US lead managers. ING, Santander, and Société Générale appear in the third tier, which carries the lowest fee potential. BNP Paribas is the most noteworthy absentee.

The bottom line: Missing out on lead arranger roles for US tech listings should come as no surprise — this is not an area of strength for European banks. We think debt financing is a more durable and significant revenue opportunity. AI companies burn through capital fast and will keep on borrowing. European banks tend to be more competitive in debt capital markets, especially in servicing their deep bond-friendly home markets. Barclays, Deutsche Bank, and UBS appear in both the equity syndicate and the SpaceX credit facilities, giving them a head start in securing future mandates. As the debt program scales, the syndicate will widen — creating openings for other European banks.

Bears say: A calendar crowded with mega-cap roadshows will compress the midmarket pipeline, the deal tier where European banks do win lead mandates. Some issuers may rationally defer to 2027, which could reduce European banks' underwriting fees in 2026.

We estimate ING's fair value estimate at $29 per ADR, equal to 1.4 times ING's 2025 tangible book value and 11 times what we estimate ING will earn in 2026.

We believe ING has a cost advantage and its customers face switching costs; we therefore believe ING qualifies for a narrow economic moat rating. The highly concentrated Dutch banking system lends further support to our moat rating. According to Banken.nl, in 2023 ING held around 41% market share in the Netherlands, which increased by 2% since 2021. We find economic moats present primarily in ING's Dutch operations.

We believe ING benefits from a highly attractive funding mix advantage that comes primarily from its strong competitive position in Dutch retail banking. This provides ING with a high portion of low-cost, sticky deposits. We estimate that around 40% of the Dutch have their main personal current account with ING. This provides ING with an enviable source of free funding; additionally, ING has a 26% share of Dutch savings deposits. These high market shares provide ING with an attractive funding mix tilted toward cheap current and savings accounts as opposed to wholesale funding. On a groupwide basis, ING relies on the wholesale funding market for only 32% of its funding needs; this is among the lowest in our European coverage list. The median European bank relies on wholesale funding for 45% of its total funding. Maybe even more importantly, sticky cheap retail deposits make up 53% of ING's total funding.

ING's underwriting history suggests that it has been benefiting from general economic creditworthiness and managed credit costs better than some peers. ING has historically had a much lower NPL ratio than the average European bank. ING, in its capacity as a client's primary bank, has firsthand access to the cash flow information of the client; this allows ING to price better for risk and have advanced warning about clients who are experiencing cash flow difficulties. Structural support to lower credit costs comes from the Nationale Hypotheek Garantie. The NHG is a systemwide government guarantee for all mortgages below EUR 450,000. If borrowers default on their mortgages, a government-backed fund settles the mortgage with the bank and the borrower then owes money to the fund instead of the bank. Seeing that these mortgages are essentially risk-free from the bank's perspective, interest rates are lower than on standard mortgages. Interest rates on NHG mortgages, however, still comfortably exceed sovereign yields, so it remains profitable for Dutch banks to grant NHG mortgages.

Simple economies of scale drive an operating cost advantage for ING, as confirmed by its average cost/income ratio over the last three years of 55%, which is comfortably below the 65% average efficiency ratio of our European banking coverage list.

A study by the Dutch competition authority, the ACM, found that 73% of Dutch current account holders have never switched banks and that over the past year, only 5% have switched banks. The ACM study attributes this to consumer inertia. Inertia may seem an innocuous source for competitive advantages, but it is quite powerful for low-cost generic products and services, with current accounts being a great example. The limited cost savings do not outweigh the perceived hassle of switching accounts to motivate account holders to shop around. Economies of scope support switching costs. Fee income alone is not enough to cover the costs that banks incur to service current account clients. It is only by offering complementary savings and borrowing products that it becomes profitable.

We are not convinced that all of ING's operations outside of the Netherlands benefit from moats.

In Belgium, ING is a distant third to the market leaders KBC and BNP Paribas Fortis, and its high cost/income ratio and single-digit ROEs are evidence of its lack of a moat.

The other "growth and challenger market" banks across Europe and in Australia are largely savings-driven businesses where ING often needs to compete on price to attract deposits. While ING is expanding its lending offering in most of these markets, it seems that these banks are funding engines for ING's syndicated lending business, which makes up the bulk of ING's wholesale banking business.

ING DiBa, ING's digital German bank, however, has been a great success story with rapid growth and high current levels of profitability. Achieving this in what we view as one of Europe's least attractive banking markets—Germany—has been nothing short of phenomenal. However, it has low-single-digit market shares in most of the products it offers, and ING relied on aggressive pricing to attract customers in the past. While we acknowledge it has moved beyond competing solely on price toward competing on the quality of its service, we are not convinced that the quality and ease-of-use of its applications are a durable competitive advantage. Nothing prevents competitors from developing a similar offering. Its German competitors have been slow to develop competitive digital offerings, allowing ING to make hay while the sun shines, this will not continue unabated. First competitive threat comes from N26, a fintech "darling" for whom profitability is not an immediate concern. "...in the years to come, we won’t see profitability, we’re not aiming to reach profitability, the good news is we have a lot of investors that have very deep pockets and that share our deep vision and that are willing to support the company over many years to come.” Maximilian Thayenthal, CEO and co-founder, Financial Times, July 18, 2019. The larger threat, to our mind, will come when the sleepy giants of German retail banking, local savings banks, or Sparkassen improve their digital offerings. The Sparkassen are equally ambivalent toward profitability, and it is hard for us currently to see ING DiBa maintaining its excess profitability when faced by competitors who are willing to price subeconomically.

The system that a bank operates in can strengthen or detract from a bank's moat. Understanding the strengths and weaknesses of a country's banking system, in our view, is critical to understanding banking moats, as the more stable a given banking system is, the higher the confidence we have that excess returns will persist long enough for banks to earn narrow and wide economic moats.

In much of the eurozone, banking is highly fragmented, or there is significant involvement from the state or mutually owned banks, where the emphasis is not on profitability. This makes it difficult for listed banks to compete profitably. The Netherlands is an exception to this. The Dutch banking market is very highly concentrated. According to the Dutch central bank, the three largest banks hold around 80% of current and savings accounts of Dutch households. The oligopolistic nature of the market, coupled with local regulatory principles, supports a moaty operating environment for the three largest players. These banks benefit from scale, low-cost funding sourced largely from interest-free current accounts, and a sticky client base with little incentive to switch. Regulation further shields domestic, long-established banks from foreign competition, as favorable risk-pricing models can only be approved by regulators once a bank has demonstrated a track record across economic cycles. We believe ING benefits from most of the lucrative segments the Dutch market offers.

ING benefits from a very attractive funding structure dominated by cheap, sticky retail deposits.

It was ahead of the curve in developing digital channels. ING DiBa in Germany is one of the most successful digital banks in Europe.

ING continues to generate organic capital, which will provide support for ongoing high shareholder distributions.

ING relies on net interest income for the bulk of its revenue, and without the tailwind from higher interest rates, growing revenue will be challenging.

Outside of the Netherlands (32% of assets), ING is not a dominant player in any of the markets it operates in. This is reflected in the relatively low profitability of ING in Belgium (14% of assets).

ING is getting close to its target capital adequacy, and share buybacks will gradually decrease over time.