An upstart bank that made a name for itself by running ads that slammed its more established rivals for charging too many fees and advised customers to “save your money” is being bought one of the country’s biggest lenders.
Bank of Nova Scotia on Wednesday said it has agreed to buy ING Bank of Canada, popularly known as ING Direct, for $3.1-billion in cash.
According to Scotiabank, ING customers will barely notice the change in ownership. Canada’s third largest bank vowed to run it as a stand-alone business, maintaining ING’s “unique and successful” Internet business model and offering the same online experience.
Owned by Dutch financial services giant ING Groep, the Canadian operation was launched in 1997, just as the Internet was gaining ground, as a branchless bank that offered products such as savings accounts promising high interest and low fees.
For years ING’s television commercials criticizing the common practices of the big banks were ubiquitous. In one ad that ran in heavy rotation, two actresses list the banks’ perceived sins, express mock outrage and suggest the bigger competitors are “bad apples” for imitating the Dutch lender’s better practices.
Over the past 15 years we have successfully built ING Direct into the leading direct bank in Canada,” said ING Groep chief executive Jan Hommen. “I am very pleased that in Scotiabank we have found a complementary owner with the ambition to further grow the business, which is a testament to the quality of our local management and employees as well as to the strength and potential of the business model.”
ING Direct has about 1.8-million customers and $40-billion in assets, making it Canada’s eighth largest bank. The company also has about $1.2-billion of excess capital, or money that it holds on its balance sheet above regulatory requirements. Scotiabank plans to use that capital to cover part of the cost of the deal, lowering the final price to about $1.9-billion.
The proposed deal, subject to regulatory approvals and various closing conditions, is expected to close by December.
The transaction is garnering a lot of attention because it would be one of the largest acquisitions in Canadian banking in decades. The domestic industry is notoriously concentrated, with just six large players making up for the lion’s share of lending and deposits, compared to markets such as the United States where thousands of banks fight over business.
Critics say that concentration is the main reason that bank fees are high in Canada and why the big players enjoy a level of profitability that their international peers can only dream about.
ING Groep has operations around the world but it’s been struggling to recover from losses in the financial crisis and more recently the turmoil around European sovereign debt. It’s had to replenish its capital buffer, and it’s been doing that by selling off parts of its operations. Last year it divested part of its Latin American insurance operation for US$3.85-billion.
Experts have been speculating about the sale of the Canadian subsidiary for several months, predicting possible bids from several of the big banks including Toronto-Dominion Bank, National Bank of Canada as well as Scotia.
The deal comes as players are pushing hard to grab more customers in the coveted domestic market as a way to make up for shrinking profits and declining interest in home loans, one of the most profitable bank businesses.
Scotia officials declined to talk about whether there were other potential buyers at the table, but analysts praised the transaction, saying the addition of ING Direct will boost Scotia’s Canadian retail operation, one of the “weaker” franchises among the big banks, according to Gabriel Dechaine, an analyst at Credit Suisse.
The challenge for Scotia will be to hang onto the online bank’s 1.8-million customers and to continue to grow the operation.
It may not be easy. ING Direct started off in the 1990s with all cylinders firing — Canadians liked the convenience of internet banking and they appreciated the high interest they were getting on deposits.
But the business has changed over the last several years. Nowadays, most of the banking industry offers Internet access to accounts.
But more important, interest rates have collapsed. In the early days ING had no trouble bringing in new customers with interest rates of 4 or 5%, often double the going rate. But in current zero-interest rate environment, such offers are no longer possible.
As a result, the company’s growth has slowed significantly.
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