ING's Future in U.S. Commercial Lending Tied to Energy Boom

ING Bank NV exited consumer banking  in the United States a few years ago, but it stuck with — and now eyes an expansion in — the commercial market here.

The Dutch bank sold its ING Direct U.S. online-banking operations to Capital One in 2012 at the behest of the European Commission, but remains an active commercial lender stateside with more $15 billion in U.S. assets. And it is growing: the company just added a Chicago office, in addition to ones in New York, Atlanta, Houston, Dallas and Los Angeles.

One of its primary niches is lending to energy-related companies, which makes the U.S. particularly appealing given the revolution in production here over the last few years.

"What we do is very much focused on our sector knowledge and leveraging our international franchise, and this is where the U.S .comes in," said William Connelly, ING's head of commercial banking. "The areas that we specialize in … are tremendous opportunities in the U.S."

In a recent interview, Connelly talked about the company’s growing interest in the U.S., its interest in energy despite recent volatility and global banking trends. The following is a transcript of the conversation edited for brevity and clarity.

Why does the U.S. continue to be an attractive market given all the regulatory changes?
WILLIAM CONNELLY: It is huge. You don’t have to be top ten by market share to have a successful franchise here. You can have a much a much more modest market share and still have a good franchise. Also, the U.S. commercial code from a banking perspective is robust and very attractive. So when something goes wrong, there is a very efficient judicial structure to deal with difficult situations. You don’t see that in very many other countries. Because of the consolidation that has taken place, you don’t have the overcapacity that we see in many other markets where there are a lot of banks chasing the same deals.

So that combination — the risk-weights that you have to apply on U.S. lending because of the commercial code and the size and stability of the economy — makes it attractive. The ability to grow depends on how much appetite you have. Couple that with the demand in specific areas where we feel good in, and it makes it very attractive particularly for European banks. 

They see the same thing as we do, so we are not alone. The issue is do you have something that differentiates from all the other players. 

Energy is a big business for ING. How does the volatility over the last several months affect your plans here?
As a bank, we do not take commodity risk. We will finance energy products that are based on predictability and pricing and that can be done through a swap or a long-term offtake agreement at a fixed price. But we don’t take merchant risk, meaning that you’re taking a view on whether oil will go up or down and finance that. Certainly, the change that has taken place is truly incredible, frankly, in terms of what has happened to energy production in the U.S. It has gone from being one of the largest importers in the world to one of the largest exporters in a short period of time. That is real, and I think it will go for a long time. Will there be volatility along the way? Yes. What that means is that the marginal players will exit, but the fundamental change will continue. 

How is international commercial-line utilization?  Heads of the largest U.S. banks seem to be obsessed with monitoring its growth as a key marker of an economic rebound.
If you look at committed facilities and you look at it in Western Europe, the utilization has been very low. Roughly speaking, if in 2007, utilization may have been a third, although there is some seasonality there. In 2010 it may have been close to 20%. It has been bumping along 15% to 16% for the last five quarters. Only now, in the last month, have we seen some pickup taking place in Europe. 

What’s driving that recent change? 
As a result of the recession in Europe, companies have been very tight and much better managers of their working capital, so they minimize draws. There has been little long-term investment. It has been all about efficiency and minimizing borrowings. A lot of companies will only produce against firm orders, so they avoid the whole area of inventory and waiting to see what happens. But in places like Spain, we do see the green shoots of economic recovery. We do see new loan demand and new investments, which is encouraging. In the U.S., we don’t provide a lot of working capital; we mostly provide project-related financing.

Given the behavioral changes at companies you’ve described, how has the banking relationship changed? 
There is a fundamental change. Before the crisis, there was an assumption that banks would always be there and provide. As a result, they want to have less dependence on banks, but they also still want a small group of banks that they can be confident will be there when they need them. We very much focus on being one of those banks and that can be an area like working-capital solutions or supply-chain financing. These are areas where you use technology and innovation. Maybe the company doesn’t need financing, but its suppliers might. They also want more efficient balance sheets, so receivable-finance programs are an area where we’ve been focused on. We are keen to be part of the flows of what our customers need. That is valued by the client. 

Looking ahead three years, what are your goals in the U.S.?
We are not driven by market share. We are not driven by league-table positions. We want to do it organically, meaning we want to keep our culture in the way we manage risk. So it is combination of bringing in and hiring people and making sure that the resources that we provide grow with the opportunity that we have. Would I be surprised five years from now if we were twice the size we are today? No. The market is so big, and the opportunities are there. We see the changes that make us feel comfortable we can do more. There is no hesitation in putting more resources — people or capital — in building our business here. Our balance sheet is a trillion euros, and in the U.S. we have about $16 billion. If we grow to $30 billion, does it distort or create concentration risk for us? No.

There is no interest in reestablishing a retail presence in the U.S., right? 
I think we see plenty of opportunity in the wholesale banking. We’ve announced our strategy, and it is based upon where we are active now.

How has the Federal Reserve's leveraged-lending guidance affected your business here? 
Actually, positively. We were concerned that the leverage ratios were getting higher, and the fact that there has been intervention by the Fed in terms of guidelines means that the underwriting we do with new deals is more in line with what we feel comfortable doing. We welcome them. 

What about interest rates?
First thing, in the eurozone, we are dealing with negative interest rates, so the fact there is any interest rates at all in the U.S. makes me feel comfortable. Even if it is low, I’m not charging people for deposits or paying them to make a loan. Certainly, as an observer here, the Fed is sensitive in making sure there is a balance in increasing interest rates and not curtailing growth. At the same time, it doesn’t want growth going too fast. I’m confident in the case of the U.S., given the low rates, even if they increase as a result of continued economic recovery, I think it is quite healthy. 

What are the geopolitical risks that are worrying you right now? 
Certainly, the situation in Russia and the Ukraine. We are a European bank and we are active in central and eastern Europe, so we follow that closely. The situation in the Middle East with ISIS — it isn’t pleasant reading. There is uncertainty out there, much more from a European perspective — given that Russia and the Ukraine are in our backyard and the Middle East is close — that we are sensitive to. 

Is there anything else you’d like to add? 
Even in the difficult days, we were viewed as a safe haven for people with excess cash. The bank feels like it is poised for growth. We are investing in technology; we believe technology can make a difference. We’ve certainly done it before with ING Direct. We think that goes across all our activities, including wholesale banking. It is a global franchise and we do believe that specialized, good-old-fashioned lending has a place in the U.S. and there are tremendous opportunities. Our clients are receptive to it and they come back to us again. That gives us encouragement to grow.