Equity: Financial institutions weigh up IPOs

By:
Helen Avery
Published on:

ING IPO ‘eye opener’ for other European FIs; RBS Citizens sell-off might be advanced.

In May, ING Group undertook an IPO of 25% of its US insurance and retirement plan business as part of its restructuring to pay back state aid. ING received a €10 billion bailout in 2008 and had agreed to sell off assets to recompense the Dutch government. The US insurance business was one such. The Dutch group achieved proceeds of $700 million from its sale of secondary shares from a $1.3 billion IPO that also included a large tranche of primary shares yielding a $600 million capital-raising for the business.

The head of ECM at a US bank says he expects the large size of ING’s US IPO of the insurance business to "open up the eyes" of a number of European financial institutions with US standalone or potential standalone assets. "Depending on regulation, European institutions will be selling off assets or taking them public and the depth and liquidity of the US market is a natural place," he says.

number of financials ipos, US listed ipo volume

Disappointment


However, this was a disappointing deal for the vendor, pricing at $19.50 a share, below the initial expected price range of $21 to $24. The lower-than-expected price was partly a result of the overhang from plans to divest yet more of the US business. In line with its agreement with the Dutch government, ING will be reducing its stake in the US insurance company to below 50% in 2014, with full divestment later.

In its annual meeting in mid-May, ING chief executive Jan Hommen said the sale of the US insurance business at 50% of its book value was a "significant destruction of capital", but added that the lower price enabled the firm to attract longer-term investors. At least these buyers of the stock benefited when the price bounced up in the first weeks of trading.

There are several IPOs of bank or bank assets in the pipeline as a result of bank bailouts or pressure to sell off foreign assets. Santander, for example, will be undertaking an IPO of its US consumer banking business next year, and Ally Bank is expected to use an IPO to pay back the US Treasury.

RBS’s chief executive, Stephen Hester, has announced that the majority state-owned UK group will be selling a 25% stake in its US retail bank, Citizens Financial, through a US IPO. This was expected to be in the next two years, but the appointment of a new CEO at Citizens in May suggests that it might come sooner. Bruce Van Saun, who managed RBS’s IPO of Direct Line last autumn, was made CEO and chairman.

RBS has been under pressure from the UK government to sell assets ever since it was bailed out at a cost of £45 billion ($67.8 billion) in 2008. Citizens is said to be worth between $12 billion and $20 billion, yet analysts say RBS is reluctant to jettison the northeastern US bank at present valuations, given the strength of the recovery in the US market and this promise of earnings growth. If forced, it would rather find an outright buyer to pay a control premium than float a minority stake.

Brian Reilly, head of Americas ECM at Barclays, says the ING deal is unlikely to speed up other transactions already in the pipeline. "Recent financial sector issuance has performed relatively well in the secondary markets, but this is more a testament to the strength of the US IPO market in general than of any one deal," he says.

That said, more IPOs from financials are expected in the US. According to Dealogic, there have already been 12 this year. "The performance of financials is tied to economic recovery," says an ECM banker. "In a rising market, financials tend to outperform and in a falling market they underperform. So we’ve seen very strong performance this year from banks and life insurance companies."

Wider universe

Reilly points out that the IPO market has opened up to many more sectors in 2013. "Over the last couple of years, the IPO market has been open to a relatively narrow universe of companies, in particular growth companies in the technology and retail sectors, and yield from natural resources and real estate. This year, participation has broadened out to all sectors, and provided IPOs come at the right price, deals generally are oversubscribed and perform very well."

Scott Sweet, founder of IPO Boutique, says tech and financial IPOs are the most sought after and that he expects many more in the remainder of 2013. "The small regional banks are making money and have moved back into the mortgage area. They aren’t taking on too much risk relative to their larger peers because they want their balance sheets to remain clean. That is appealing to investors."