European services giant ING Groep NV said Monday it will split itself in two, spinning off its insurance arm to simplify its business and issuing $11.3 billion in new shares to repay state bailout money.
The dramatic change in strategy caps a year of cutting costs and selling operations since the financial crisis struck, when ING was kept afloat only with with two major rounds of assistance from the Dutch state.
The insurance operations have a book value of euro22 billion, and the company said it will likely seek an initial public offering for them within four years.
"This is a momentous day for us: splitting the bank and insurance is not a decision to be taken lightly," said Chief Executive Jan Hommen, a former board chairman who took the executive job in January after his predecessor was fired.
"We're making a decisive move to turn ourself into a simple organization."
Shares slid 8.5 percent to euro10.67 in Amsterdam as investors reacted to the prospect of the share issue.
ING has been an leading advocate in Europe of the advantages of combining banking and insurance, and historically the two arms have generated about equal shares of the company's earnings.
But Hommen said the events of the past year "have changed the environment in which we operate, and the complexity of ING didn't help us during the crisis."
He said ING bank, which will remain within the holding company, will benefit more from transparency and a smaller balance sheet than it did from cost savings on related businesses.
ING issued a series of related announcements Monday: it will also sell or float its asset management arm, which does not now report its earnings separately but oversees euro500 billion in investments; will sell its U.S. Internet banking arm, ING Direct, by 2013; and will sell some of its Dutch banking operations.
With these and earlier disposals, the bank's balance sheet will shrink by some 45 percent from euro1.3 trillion in September 2008.
The disposal of ING Direct, considered one of ING's most attractive businesses, was made under pressure from the EU's competition authority, which is also investigating whether parts of ING's bailout amounted to improper state aid.
"The Commission hopes to be able to take a decision within the next few weeks," spokesman Jonathan Todd said.
Earnings preview
Along with the structural changes, ING gave a preview of its third-quarter earnings, saying it made a profit of euro750 million, compared to a loss of euro568 million in the same period a year ago. Banking profits were around euro250 million and insurance earnings around euro500 million.
It said in a statement Monday that profits were helped by 10,400 job cuts so far this year, 8.3 percent of its total. However, losses on investments, especially in real estate and derivatives linked to the U.S. housing market, continue to weigh on results.
Analysts from SNS Securities said in a note that the earnings were better than expected, with smaller losses on bad loans. They praised the company's strategic moves, saying they were considering changing their "reduce" advice on shares.
In addition, "ING seems to have negotiated the best deal by far" with the Dutch state among companies that received aid, they wrote.
ING received a euro10 billion direct investment lifeline from the Dutch state last October.
The company said Monday it will use euro5.9 billion of the money raised in the share issue to pay back half of that euro10 billion, plus interest and premiums. "We're not planning to come back for any more: this is it," Hommen said.
The company will also pay the state euro1.3 billion in a compromise to appease the EU. In January the Netherlands assumed the risks for an 80 percent stake in ING's euro28 billion portfolio of mortgage-backed securities. The sweetheart deal assumed the securities were worth 90 percent of their face value when the real value was much lower.
The company will book the payment as a one-time charge in the fourth quarter.