Go Dutch

High-return, low-pay ING offers model for peers

ING is one of the few European banks doing its job. The Dutch bank on November 4 said it had made an 11.6 per cent return on equity in the first nine months of the year - a result that puts most big European peers to shame. More interestingly, it is succeeding under a regulator-imposed pay regime that would leave the same rivals hopping mad.

ING's ability to beat its cost of equity compares favourably with the likes of Barclays, which posted a seven per cent return on equity (RoE) in the first nine months. Yet Holland's regulator has imposed a super-tough version of the pan-European bonus cap. In most places, the rule is that variable compensation can't exceed 100 per cent of fixed salary. The Dutch level, implemented in February, is 20 per cent.

Okay, so ING's main business is lending to homeowners and businesses, rather than investment bank trading currently weighed down by new capital requirements. ING has also already paid back its 2008-era state aid and isn't burdened by legacy costs.

If London-based banks such as Barclays had to cap bonuses at 20 per cent, the argument goes, they'd be even further behind as investment bankers would head abroad. But while it's early days, few Dutch bankers are heading to Schiphol airport, according to a person familiar with the situation.

Nor is it safe to assume ING's handsome return on equity comes because it is getting an easy ride on capital. New "Basel 4" risk-weighting rules could knock 200 basis points off its core Tier 1 capital if strictly interpreted, Morgan Stanley analysts estimate. That is why ING is keeping something in reserve - its underlying core Tier 1 capital position is 13.5 per cent.

ING investors like what they see. Shares are up 20 per cent over the last year, against a 12.3 per cent dip for European banks on average, Eikon data shows. ING also trades above its estimated book value and at a 20 per cent premium to the market on a forecast earnings basis.

Remuneration accounts for the lion's share of operating costs at most European investment banks. They might look at ING and ask whether their pay policies, and their strategies in general, need to be a bit more Dutch.