ING's Higher NII Guidance and Share Buybacks Drive 20% Increase in Our FVE

What stood out for us from narrow-moat ING’s third-quarter 2022 results was higher guidance for the potential evolution of net interest income as well as the announcement of a EUR 1.5 billion (4% of ING’s market value) share buyback. In addition to the announced share buyback, we are now building in another EUR 6 billion of cumulative share buybacks into our valuation model. The buybacks are the main driver of our higher fair value estimate of EUR 17/share now compared with EUR 14.30/share previously. By far, the bulk of questions during ING’s results call centered on NII. The NII sensitivity to interest rates is a complex topic with multiple moving parts. We believe the key takeaway for investors should be that negative interest rates made deposit-taking a loss-making activity for European banks. The banks with substantial retail deposits like ING, in particular, suffered greatly. A substantial base of cheap, stable retail deposit funding underpins our moat rating for ING. Negative interest rates obscured this benefit and dragged ING’s return on equity below its cost of capital. A return to positive interest rates will make the cost benefit of cheap retail deposit funding much more evident.