Deposit Surge And Green Finance Will Shape Banking Performance Ahead

Key Takeaways

• Digital banking investments, sustainable finance growth, and fee-based income expansion drive customer engagement, diversify revenues, and enhance resilience.
  
• Cost efficiencies from digitalization and market trends in Europe underpin stable expenses, stronger margins, and improved profitability.
  
• Persistent economic uncertainty, strict regulations, and margin pressures are constraining ING's revenue growth and limiting its ability to improve long-term profitability and returns.

Catalysts

Provides various banking products and services in the Netherlands, Belgium, Germany, rest of Europe, and internationally.

• ING's sustained investments in digital banking platforms and the expansion of its mobile primary customer base enable the bank to capture higher customer engagement, increase cross-selling, and achieve lower attrition rates, which position it for above-market growth in customer revenues and improved operating margins over time.
  
• Significant growth in green finance and sustainable lending, as evidenced by a 19% YoY increase in sustainable finance volumes, allows ING to benefit from regulatory support and access to new client segments, supporting long-term loan growth and improved risk-adjusted margins.
  
• Strong volume growth in retail lending (notably mortgages) and customer deposits, together with ongoing demographic shifts in Europe (such as increased affluence and generational wealth transfer), are set to fuel future growth in core revenues, partially offsetting current margin headwinds.
  
• Structural shift toward higher fee-based income-driven by fee income growth of 12% YoY and targeted expansion in payments, insurance, and wealth management-diversifies revenues and enhances earnings stability, leading to greater resilience and the potential for improved return on equity (ROE).
  
• Accelerated cost efficiencies from ongoing digitalization initiatives-including AI-powered customer support, centralized app platforms, and operational restructuring-support lower cost-to-serve and enable stable or declining expense guidance, contributing to higher net margins and stronger earnings growth.

ING Groep Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming ING Groep's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 34.2% today to 30.4% in 3 years time.
• Analysts expect earnings to remain at the same level they are now, that being €8.4 billion (with an earnings per share of €3.19). However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €9.5 billion in earnings, and the most bearish expecting €6.8 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 10.2x on those 2029 earnings, up from 9.3x today. This future PE is lower than the current PE for the GB Banks industry at 12.0x.
• Analysts expect the number of shares outstanding to decline by 4.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.37%, as per the Simply Wall St company report.

Risks

• Persistent macroeconomic and geopolitical uncertainty is suppressing long-term corporate loan demand, particularly in core European markets such as Germany, leading to subdued lending growth in Wholesale Banking and constraining overall revenue growth for ING.
  
• ING's commercial net interest income (NII) is highly sensitive to foreign exchange volatility-recent euro appreciation led to significant negative impacts on both NII and total revenue; ongoing FX headwinds could continue to weigh on net margins and earnings.
  
• Despite volume growth offsetting some margin pressure, ongoing margin compression in key products like mortgages (which have lower lending margins despite higher ROE) may limit future overall net interest margin expansion, capping profitability improvements.
  
• The ongoing reliance on deposit-gathering campaigns-particularly in competitive markets such as Germany-poses risks of elevated funding costs and non-sticky balances; a less favorable competitive or rate environment could erode liability margins and suppress returns.
  
• European banking regulation remains fragmented and non-harmonized, compelling ING to hold higher capital and pay higher taxes versus some cross-border peers; this not only raises structural costs but also limits its ability to fully optimize capital, putting longer-term pressure on returns and ROE.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €28.31 for ING Groep based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €34.0, and the most bearish reporting a price target of just €22.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be €27.7 billion, earnings will come to €8.4 billion, and it would be trading on a PE ratio of 10.2x, assuming you use a discount rate of 6.4%.
• Given the current share price of €27.46, the analyst price target of €28.31 is 3.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.