European financial services giant ING Groep NV's (ING) has decided to split itself in two. It's going to divest its insurance and asset management divisions as part of a settlement for receiving European taxpayers' money that allowed it to avoid bankruptcy. The company will also issue additional shares to raise capital to help pay back bailout funds.

Under pressure from European antitrust regulators, ING agreed to use a combination of asset sales and initial public offerings to split itself up by 2013, plus pay back the EUR 10 billion cash infusion it received from the Dutch state in 2008. The moves are part of a restructuring plan required for approval of a European Commission taxpayer-funded bailout.
In a statement, ING said it would maintain its commercial and retail banking operations in Europe with key operations in Benelux, Central Europe, the U.S., Latin America and Asia. The company expects to sell some of its Dutch banking operations as well as its asset management arm, which controls EUR 500 billion in assets. ING will also sell ING Direct, its U.S. internet-only banking operations, by 2013. And its insurance operations, valued at EUR 22 billion, will be spun off in an IPO by 2013 as well.

To repay its loan from the Dutch government, ING plans to issue $11 billion (EUR 7.5 billion) in new shares.

"This is a momentous day for us: splitting bank and insurance is not a decision to be taken lightly," Chief Executive Jan Hommen was quoted in an Associated Press report. The former ING board chairman, who became CEO in January, said the move was necessary because economic pressures created by the great recession "have changed the environment in which we operate, and the complexity of ING didn't help us during the crisis."

Simplifying ING's structure should help stabilize the bank's profitable businesses, mitigating the damage caused by toxic mortgage-backed securities that remain on the books. In January, the Dutch assumed the risk for 80 percent of ING's EUR 28 billion portfolio of mortgaged-backed securities, but the portfolio's value has been reassessed much lower since then. ING agreed to make a one-time payment of EUR 1.3 billion to make up for the loss.

Ultimately, ING will be able to continue its banking operations with a smaller balance sheet that doesn't contain the more risky businesses of asset management and insurance. The company gets much-needed guarantees on its mortgaged-backed securities portfolio from the government and could benefit from cash raised by one or more of its insurance business IPOs.

"ING is showing progress in strengthening its financials," Luis Maglanoc, a Munich-based bank and insurance analyst at UniCredit SpA said in a Bloomberg report, adding, "ING's balance sheet remains sound."

That is, as sound as a company that has already received bailout funds can be. Finding the right price for its best assets will be the next challenge for ING. For instance, ING Direct USA should generate great interest since it's considered to be a profitable venture, but in this environment, how many companies have the financial resources to buy it at what might be considered fair value? That's just one of the questions ING will have to answer soon.

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