By Reed Stevenson
AMSTERDAM (Reuters) - Dutch financial services group ING Groep reported a bigger-than-expected 19 percent drop in quarterly net profit, hit by weaker returns from real estate, private equity and market investments.
First-quarter net profit was 1.54 billion euros ($2.4 billion), compared with 1.89 billion euros a year earlier, ING said on Wednesday. The average expectation of 12 analysts polled by Reuters was 1.66 billion euros.
ING blamed the bulk of the decline on weaker valuations in ING's real estate and private equity investments, as well as lower stock investment gains, all of which pushed profit down 436 million euros from a year earlier.
Falling equity prices in the first three months of the year, during which the S&P 500 declined 10 percent, have also hurt other groups with insurance businesses in the Benelux region, including Fortis and Aegon .
"The downturn in financial markets in the first quarter led to a decline in earnings, despite strong commercial growth momentum across the group," ING Chief Executive Michel Tilmant said in a statement.
ING also took a charge of 55 million euros on its subprime-related investments, while weaker global currencies relative to the euro also accounted for a 55 million euro fall in profit. There was also a 94 million euro charge on the restructuring of ING's Dutch business, but a 62 million euro gain on the sale of its Chilean health business.
ING shares rose 1.2 percent to 24.77 euros, and analysts said that the relatively small 55 million euros subprime charge reassured the market. On Tuesday, Fortis announced that it took a 380 million euros charge against similar investments in the same period.
"We were particularly pleased that pressurized assets had a limited negative impact on first-quarter earnings," said KBC Securities analyst Dirk Peeters.
ING shares are up 14 percent since the financial group last reported earnings and are valued at 7.3 times projected 2008 earnings, compared with a forecast price-earnings multiple of 7.9 for Aegon and 7.5 for Fortis.
ING, like its European counterparts, has suffered from the credit crunch and subprime crisis, triggered last year when large numbers of less creditworthy U.S. borrowers began to default on mortgages. But ING has managed to preserve enough capital to cushion it from severe blows and to fund acquisitions.
Much of the charges spilled into insurance income, which fell 31 percent to 722 million euros. Analysts had forecast first-quarter underlying insurance income of 1 billion euros.
On the banking side, underlying income was 1.4 billion euros, up from 1.38 billion euros a year earlier and compared with analysts' forecasts for 1.06 billion euros.
ING booked 2.3 billion euros as a charge to shareholders' equity, related to its investments in residential mortgage-backed securities (RMBS) in subprime mortgages made to risky borrowers and "Alt-A" loans, made to borrowers with a slightly better credit profile, as well as from collateralized debt obligations (CDOs). In 2007, ING had provided 1.38 billion euros in similar provisions.
ING said the fair value of its U.S. subprime RMBS portfolio now stands a 81.4 percent, down from 90.1 percent at end-2007. The fair value of ING's Alt-A RMBS portfolio was reduced to 84.3 percent from 96.7 percent.
ING said it had a core Tier 1 ratio of 8.3 percent at the end of March under Basel II guideline, which requires assets to be weighed according to their risks, well above guidelines and stronger than many other European banks.
ING added that it could generate 6.2 billion euros in cash if needed, and, with debt, deploy up to 9 billion euros.
"This has given us substantial flexibility," ING CEO Tilmant told reporters, though he added that such capital would be used "with prudence and care." Tilmant reiterated that ING was not looking for large acquisitions but bolt-on buys, such as the 578 million euros purchase of benefit plan services firm Citistreet earlier this month from Citigroup and State Street .
ABN AMRO analyst Thomas Nagtegaal said ING's risk profile remained low and that the spare cash and leverage would "allow it to benefit from growth opportunities or to do share buybacks."
(Reporting by Reed Stevenson, editing by Will Waterman)