Wednesday 18 September 2019

Dutch bank ING is rare beast with a stock price offering good value


Ralph Hamers, ceo of ING, helped create a well-capitalised and profitable bank. Photo: Bloomberg
Ralph Hamers, ceo of ING, helped create a well-capitalised and profitable bank. Photo: Bloomberg

Des Doyle

European financials have been recovering of late, and ING continues to be our preferred European bank.

ING is a major Dutch bank with an international presence. The majority of its business is retail-focused within the Benelux region. Its wholesale bank provides industry lending and financial markets products to corporate clients across 40 countries. Following a chastening experience in 2008, where capital was injected by the Dutch government, ING has spent the last decade repairing its balance sheet and re-focusing on its core businesses.

Management has succeeded in simplifying the business model, delivering a well-capitalised and profitable bank. Its strategy includes an ambitious cost-reduction plan - which aims to reduce the cost base by €900m a year by 2021. It plans to do this by increasing cost efficiency in its retail banking branches, Retail Benelux. ING is also investing €800m over five years to enhance its digital offering.

It is a rare beast in the sector in that it is growing loans relatively rapidly. It reported 4pc loan growth in 2017 - compared with a sector average of 2pc. Furthermore, its valuation is not stretched: at its current price/earnings ratio, the stock price is good value. ING shares also have a dividend yield of around 4pc, which we expect will comfortably grow over the next number of years. Returns are good (and ahead of the cost of capital) and should improve over time - particularly if interest rates start to rise. We therefore believe ING represents an attractive investment within a diversified equity portfolio. A company which also merits attention, but which operates in a very different space, is Celgene.

Celgene is a global integrated biopharmaceutical company which is engaged in the discovery, development and commercialisation of therapies used to treat cancer and immune-inflammatory related diseases. Celgene has a strong pipeline of investigational compounds being studied for patients with haematological and solid tumour cancers - such as pancreatic cancer and melanoma. Inflammatory diseases being investigated include psoriasis and psoriatic arthritis.

Celgene is present in more than 60 countries, employs more than 7,000 people, and has a market capitalisation of $112bn (€95bn). The company operates in niche markets, where it tends to be market leader, with products exhibiting high margins, strong pricing power, high barriers to entry and structural growth.

Celgene made significant investments in drug development in recent years, which were funded through strong internal cash flows. In addition, Celgene has engaged in a number of exciting collaborations with companies at the frontier of biotechnology. Looking two years from now, its valuation is appealing, as this is when many of the company's pipeline assets will potentially start coming to the market. In the meantime, it has a strong core portfolio, which is growing. Its balance sheet is also very strong.

Of course, biopharmaceutical companies are not without risk, and Celgene generates about two-thirds of its revenue from one drug (Revlimid), which is an obvious concern.

Success is far from guaranteed and investors need to be aware that Celgene is a higher-risk stock. Investors in the sector must also be conscious of the risk of drug-development failure and regulatory risks.

Des Doyle is an investment manager at Investec Wealth and Investment. See disclosures at

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