August 3, 2012 / 8:08 PM / 5 years ago

Analysis: ING Direct may appeal to Canada banks but fit not ideal

TORONTO (Reuters) - Canadian banks looking to grab a big chunk of market share will likely relish the chance to bid for ING Groep’s local online unit, should it go on sale, but the business would be a less-than-perfect fit for the country’s bricks-and-mortar banks.

ING said on Thursday it was “reviewing strategic options” regarding its Canadian online bank, which offers discounted mortgages and high-yields savings accounts.

It is estimated to hold just under C$30 billion ($30 billion) in deposits and about the same in residential mortgages, a bit more than 3 percent of the Canadian market.

The expected sale is part of a series of asset divestments by ING, which must raise funds to repay a bailout form the Dutch government during the 2008 financial crisis.

For Canada’s six biggest banks, which control nearly all of the country’s consumer and business lending industry, the takeover represents a rare chance to add a sizeable chunk of deposits and customers.

The Canadian banks have not commented on whether they would be interested in the ING business, but there is likely to be no shortage of domestic suitors, said Barry Schwartz, a portfolio manager at Toronto’s Baskin Financial Services.

“Let’s face it, the growth in Canada is limited. It’s now just a fight for market share,” he said. “I would imagine this will be a hot commodity.”

PROFITABLE DOMESTIC FRANCHISES

With limited growth avenues at home, Canadian banks have looked abroad to expand.

But their domestic retail banking franchises - essentially deposit-taking, mortgage and business lending - remain their most profitable businesses, and fund both their wholesale operations and international expansion.

The opportunity for quick growth is a rare one, and comes as a slowing mortgage market and sluggish business growth has analysts predicting weaker retail banking revenue growth ahead.

The banks also have the financial wherewithal to make sizeable acquisitions - ING Direct Canada is seen fetching somewhere between C$1 billion ($1 billion) and C$2 billion - after escaping the 2008 financial crisis relatively unscathed.

Foreign bidders are unlikely, as they have traditionally struggled to find growth avenues in the Canadian market, lacking the critical mass of the domestic banks, says Schwartz.

Indeed, the Canadian ING Direct business is merely the largest and latest in a series of Canadian assets that have been sold off by cash-poor foreign players over the last two years.

Bank of America last year sold its $8.6 billion Canadian credit card portfolio to TD, while earlier this year the Canadian arm of HSBC Bank said it would wind down its consumer finance business.

NOT A PERFECT FIT

Does that mean the Canadian lenders will start a bidding war for the online business? Perhaps, but not necessarily, say analysts.

As an online lender, ING has traditionally competed on a slightly different playing field than the big banks, says National Bank Financial’s Peter Routledge, with clients attracted by its cheap lending rates and high-yield savings accounts.

While the big banks aim to draw in customers and cross-sell them on such products as loans and mutual funds, ING’s customers tend to be a-la-carte shoppers who may not stick around when it is sold to a more traditional bank.

“I think the people who deposit money at ING Canada are looking for convenience and a little extra yield, and I don’t think they’re looking for a mutual fund,” Routledge said.

If the purchasing bank changed the unit’s pricing structure, that could drive clients away.

Essentially, the benefit of buying ING Canada would be adding the billions in deposits, which would lower funding costs for the purchasing bank, Routledge said.

Brad Smith of Stonecap Securities also doubts if the banks will be able to cross-sell ING customers on other products, but he believes there will be strong interest with an eventual selling price of around C$2 billion.

“While difficult to justify on a purely financial basis, strategic/growth considerations, which are at the root of current efforts to pursue comparable profit levels from U.S. retail banking” may influence the outcome of the sale, he said in a note.

Reporting By Cameron French

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