ING - Dutch Bank ING Groep Roars With Strong Buy Rating And 5.4% Dividend Yield

2023-11-20 22:44:32 ET

Summary

• ING and its ADR trading in the US gets Strong Buy rating, in line with Wall Street consensus.
• Some positives include 5.4% dividend yield and growth, earnings and revenue growth, and a price return beating the S&P 500 index.
• The risk of loan loss provisions is on the decline.
• The firm is a global banking sector leader with 37MM customers.

Stock Overview

Of the dozens of stocks I have covered on Seeking Alpha this year, this week I came across a rare pick for a strong buy rating, and it happens to be a Dutch bank trading on the NYSE as an ADR.

Amsterdam-based ING Groep ( ING ), whose brand is known for its iconic orange lion, has a few fun facts from its website :

37MM customers, over 40 countries, shares trade in Europe as well as in the US markets, in the business of both retail banking as well as wholesale.

In the US region , ING serves corporate and institutional clients essentially. For instance, one area of their expertise is in structured finance .

Rating Methodology

The stock's rating is based on its WholeScore , which is my approach to holistically rate a stock by considering 13 metrics of equal weight I think are relevant to investors and analysts. Key financial data presented is sourced from Seeking Alpha as well as the company's recent fiscal 2023 Q3 earnings release that came out on November 2nd.

Revenue Growth vs Peers

In the first category I looked at, I put together the table below to compare 5 banking-sector peers. These were picked due to their global position and scale, primarily banks based in the US, Canada, and Europe. Of this group, three can be traded on the NYSE as a foreign stock ADR, while two are listed outright on the NYSE.

In this group, the peer average for YoY revenue growth was 17.72%, and my subject stock ING actually achieved 28.27%, beating the average but also beating my own target of a 5% growth, thereby earning a rating point here.

Consider that this firm is winning on both revenue growth as well as revenue diversification, which has benefitted from the higher interest rate environment but also has been able to drive non-interest income as well:

Revenue Growth (YoY)

From its most recent income statement , we can see that top-line revenue saw 51% YoY growth , easily beating my 5% goal and earning a rating point.

The firm laid out a positive outlook in this regard, driven by demand and expected fee growth, according to comments in the Q3 presentation:

Return of loan demand and improved asset margins will be a catalyst for future income growth ? Continued focus on income diversification and a 5-10% annual fee growth target.

Earnings Growth (YoY)

Also from that same income statement, we can see that YoY net income grew 118.4% , also beating my target and scoring a point.

A positive sign for net income is the following graphic which shows the company's expenses have declined from their peak in Q1:

Cash flow Growth (YoY)

For this category I turned to the cash flow statement , however the most recent data available from Seeking Alpha seems to be the TTM by Quarter, so that is what is being used, the results as of June 2023.

From this data, we can see a 140% decline in free cash flow per share , which came short of my 5% target for YoY growth and lost a potential point here.

Equity Growth (YoY)

Turning to the balance sheet , another rating point was scored from me here because of the nearly 10% YoY growth in equity , whereas my target was for a 5% growth.

It should also be mentioned that a key metric tracked in banking is the CET1 ratio, as a gauge of capital strength. This particularly became relevant after the 2008 financial meltdown, and eventually new regulatory standards for risk and stress testing. ING boasts of a really strong capital ratio in their Q3 presentation:

CET1 ratio increased to 15.2% , driven by strong capital generation and lower RWA (risk weighted assets) ? CET1 capital grew by €0.8 bln, mainly due to the addition of 50% of 3Q2023 resilient net profit.

3 Year Dividend Growth

As a dividend-oriented investor looking for the cashflow opportunity that brings to a portfolio, I also look at whether the dividends are growing, a sign of returning capital back to shareholders.

This stock happens to pay dividends on a semiannual basis rather than quarterly, in addition to paying an "other" dividend as well.

The following table compares the semiannual dividend from August 2023 with that of August 2019, showing a nearly 41% growth over 3 years.

The downside of many ADRs I come across is that they do not pay a quarterly dividend but usually annually or semiannually, and it seems for this year they have already paid out in May and August, and a special dividend in January, according to their dividend history .

Just something to consider, if I were a new buyer of this stock, I would probably have to wait until 2024 for their next dividend.

Dividend Yield vs Sector

When comparing the dividend yield vs the sector average, we can see it is nearly 46% above the average .

Although I would not include them in my dividend quick picks of the week, for lack of a quarterly dividend, I do like the 5.4% yield I would be getting from this ADR.

In comparison to some of its peers, the ADR for Barclays ( BCS ) seems to have a forward dividend yield of 3.74%, while that of HSBC ( HSBC ) is coming close with its yield of 5.18%

I don't expect the yield for ING to go much higher since I expect the share price to continue a steady upward climb from here on.

Share Price vs Moving Average

In this section, I am looking for a great buying opportunity at the current share price, by comparing it to the 200-day simple moving average.

As of the writing of this article, the share price is slightly above the 200-day SMA, as the chart shows, after rebounding from a small dip recently:

Although I would have preferred to snatch it up at the recent dip, I think that while it is only about 5% above the moving average it still may present a buying opportunity, particularly since so many other factors (revenue, earnings, etc.) I have shown are quite impressive and for that reason, I think the market may continue to be bullish on this stock.

If I were adding to my portfolio, I would do so to gain exposure to European-based banks, in addition to diversification across US and Canada-based banks as well, particularly some of those in the peer group I listed earlier.

So yes I think the price is still a decent buy before it climbs even higher. Otherwise, the other strategy could be waiting on the next dip, but when that will come is hard to say considering such great financial fundamentals from this firm.

Price Return vs S&P 500

Next, let's mention something about the market momentum of this stock. From my table below, you can see it had achieved a 1-year price return of 20.4%, whereas the S&P500 index did 14.3% in that same period. So, ING outperformed the index by 42.4%, beating my target of 5% and earning another point here.

However, it is worth noting that its peer HSBC had a 1 year price return of about 35%, even stronger than ING, and seems to have outperformed the index for most of the year. Barclay's did not fare so well, with a 1 year price return of -4.51%, so in this selection of peers, I think ING has shown consistent outperformance vs the S&P.

P/E Ratio

In the valuation category, we are first looking at the forward P/E ratio. The story it tells us is that of undervaluation, with the P/E being just 6.68 while the sector average is close to 10x earnings.

I gave it another rating point here as I am looking for undervaluation opportunities.

As to what I think is driving this undervaluation, clearly, it is tied to my earlier metrics of significant earnings growth combined with only a slight uptick in share price, thereby creating what I consider a great valuation.

P/B Ratio

The other valuation metric I care about is P/B ratio. In this case, we have the trailing twelve-month metric only, but it shows that the market has been valuing this stock at just 0.89x book value, while the sector average is over 1x book value.

Again, tying this to my earlier talk on financials, I would say this undervaluation is driven by the increase in equity/book value, while the share price did not increase enormously.

Another rating point here is scored, as it met my undervaluation target for this stock.

Return on Equity

If you look at the section on profitability in Seeking Alpha, you can see that there is a metric I think is relevant, called return on common equity, showing how much of a return common shareholders are getting for their investment.

The ROE of nearly 30% easily beat the sector average hovering near 12%, a nearly 154% difference. Yet again, I gave it a rating point here since my goal was a 5% or better outperformance.

What I think is driving this, tying the discussion to my earlier fundamentals, is the earnings growth strength.

Risk Score

In this type of business, banking, a key risk I care about is something called loan loss provisions, which is like money a bank sets aside to cover potential loan losses it anticipates, to put it simply. As this is a European-based bank, they have indicated various loan loss stages.

For those readers less familiar with the EU standard, the European Central Bank (ECB) describes it as follows:

Loans are sorted into stages, where Stage1 comprises performing loans, Stage2 underperforming loans that have seen a significant increase in credit risk and Stage3 credit-impaired loans.

With that said, what I am looking for is trends showing increasing or decreasing loan loss provisions. In the case of ING, you can see from their Q3 presentation that there has been a downward trend in all three stages of loan loss provisioning, comparing 3Q2022 with 3Q2023, indicating an improvement trend.

Based on that evidence, I have determined in my table below that the risk impact of this is only moderate as is the probability, and the total risk score is acceptable. Therefore, the stock gets another rating point here from me.

WholeScore Rating

This stock got a WholeScore of 12 today, missing a perfect score only because of cashflow declines. So, I am giving it a strong buy rating today.

In comparing my rating to the consensus shown on Seeking Alpha for this stock, I am definitely agreeing with the sentiment from Wall Street this time.

Summary and Forward Outlook

This ADR presents an opportunity to add exposure to a foreign bank stock to one's portfolio without having to trade directly on that underlying stock's home market.

It is my first strong buy rating of the month, and you can hear the strong lion's roar of earnings, revenue, and dividend growth, among other things.

The offsetting factor is a decline in cash flow growth, but also consider that this company pays out a lot in dividends.

A key risk of loan loss provisions has proven to be on the decline, which is another positive.

Bullish on ING, expecting additional share price growth above the 200-day SMA.

For further details see:

Dutch Bank ING Groep Roars With Strong Buy Rating And 5.4% Dividend Yield