ING, the Dutch banking giant, has enjoyed a stellar year, riding the wave of rising interest rates to record profits and delighting investors with generous buybacks. But beneath the surface, a subtle shift in language during their recent earnings call hints at a potential storm brewing in their deposit base – a storm that could send ripples across the European banking landscape.

For the past few quarters, analysts have been grilling ING about the sustainability of their net interest income (NII) in the face of rising deposit betas. ING has consistently reassured the market, citing their robust replication strategy and diversified funding base. Yet, a change in phraseology during the Q3 2023 call suggests a newfound caution, perhaps even a hint of apprehension about the trajectory of their deposit betas.

Previously, ING assured investors of a "roughly equal step" approach to capital distribution. This quarter, that language vanished, replaced with a vaguer statement that future distributions would depend on "earnings outlook, risk-weighted levels...and also taking into account macro and geopolitical developments."

While on the surface this appears to be standard corporate hedging, the timing is curious. It coincides with an increasingly competitive deposit market in Germany, a key market for ING. The bank has acknowledged "intensified competition" in Germany, and while deposit growth remains positive year-to-date, outflows have begun, driven by rival banks launching their own attractive savings campaigns.

Adding to the intrigue, ING's CFO revealed that their deposit beta, a measure of how much deposit rates rise in response to benchmark rate increases, jumped from 28% in Q3 to a projected 31% by November 1st. This significant increase, largely driven by announced core rate increases in the Netherlands and Germany, suggests a growing sensitivity of ING's deposit base to rising rates, and could foreshadow even higher betas if competition intensifies further.

So far, ING's replication strategy has effectively offset the pressure from rising deposit betas, ensuring stability in their banking book NII. But what if this delicate balance starts to falter? Could we be on the verge of a deposit beta breakout, a scenario that would force ING to re-evaluate their replication strategy, potentially impacting NII and sending shockwaves through the market?

Potential Scenario: A Deposit Beta Breakout?

Deposit Beta Surge: If competition in Germany continues to escalate, and other European markets follow suit, ING's deposit beta could surpass 40% by the end of 2024.

Replication Strain: To maintain NII stability, ING might need to re-allocate a larger portion of their replicating portfolio to shorter durations, limiting the positive impact of repricing at higher rates.

NII Impact: This could result in a 5-10% decline in ING's NII compared to current consensus estimates, a development that would undoubtedly trigger a negative market reaction.

Deposit Beta Trend

The chart below illustrates ING's deposit beta trend as revealed in earnings calls:

Key Financial Data

Reference: Seeking Alpha

ING Q3 2023 Earnings Call Transcript

Seeking Alpha

While this is just one hypothetical scenario, it highlights the potential vulnerability hidden within ING's deposit base. The bank's change in language around capital distribution and the significant jump in deposit beta warrant closer scrutiny. Could this be a mere blip on the radar, or is ING quietly whispering a warning about a potential deposit beta bombshell?

Only time will tell. But one thing is clear: ING's upcoming earnings calls will be under even greater scrutiny, as analysts and investors alike search for clues to decipher the whispers within.

"Fun Fact: ING stands for "Internationale Nederlanden Groep." The name reflects the bank's origins as a merger between two Dutch insurance companies and its subsequent expansion into a global financial institution."

Reference: ING