ING Bites the Bullet

GOOD MORNING. Stocks in Asia closed higher today; U.S. futures are pointing to a higher open.

One of the great debates among U.S. bank regulators is whether large, ailing firms should be broken up to pose less risk to the financial system. But in Europe, the debate already seems settled: just do it. At least that’s the message traders heard from ING (ING), the Dutch financial giant that announced details of a sweeping reorganization plan today.

Under pressure from European antitrust regulators, ING said it plans to divest its large insurance division over the next four years, effectively dismantling the financial supermarket it had spent 18 years creating. The company also said it would pay back 50% of aid from the Dutch government earlier than anticipated (a positive move), and launch a 7.5 billion euro ($11.25 billion) “rights issue” to raise cash in the stock market. The firm announced other steps as part of its “back to basics” restructuring plan too: it will divest ING Direct USA by the end of 2013 and plans to refocus on retail banking in Europe. “Splitting the company is not a decision we took lightly,” said Jan Hommen, CEO of ING, in a statement. However, he added, “the widespread demand for greater simplicity, reliability and transparency has made a split the optimal course of action.”

ING may be one of the largest firms dismantling itself, but it’s not the only one. In England, Royal Bank of Scotland (RBS) and Lloyds Bank Group (LYG), are expected to be ordered by the European Commission to dispose assets. Germany’s Commerzbank may have to divest about 45% of its balance sheet under pressure from regulators. And Belgium’s KBC and the French-Belgian firm Dexia are waiting for rulings from the European Union on whether they’ll have to sell assets too.

The European Commission has cracked down harder on antitrust issues than regulators in the U.S., says Jaap Meijer, a bank analyst with Evolution Securities in London. “It’s all very drastic,” he says. But ING is “solving its weak capital base” by taking these steps. And other banks should ultimately emerge in a healthier state after they also raise capital and divest assets. Still, some bank analysts said ING’s settlement with regulators looks less favorable than they’d expected. And the news hit European bank stocks hard today, with ING falling over 7% in Amsterdam trading.

IN OTHER NEWS:

Investors will be hoping for a win this afternoon when gaming machine company WMS Industries (WMS) reports earnings after the market closes. It’s been a tough year for casinos, but analysts expect this slot machine maker to announce earnings of 36 cents a share, up from 27 cents a share in the year-ago quarter. Analysts expect revenue of $168.04 million, also up from last year’s results.

Gambling revenue in Nevada is down about 10% this year compared to last year, according to the state's Gaming Commission. Casinos in Las Vegas and around the country have sharply reduced their capital expenditures, and casinos are replacing their gaming machines at less than half their usual rate, says Brian McGill, an analyst with Janney Montgomery Scott, LLC. Over the next year, purchases of new machines should start picking up, McGill says.

WMS Industries is well positioned to take advantage of a pickup in casinos’ replacement cycle, says Stephen Altebrando, an analyst with Sidoti & Company, LLC. The company has been gaining market share over the past several years because its games are well-designed and popular with consumers, Altebrando says. Casinos are likely setting their 2010 budgets now, so WMS management should be able to comment today on how strong they expect the year’s replacement cycle to be, he says.

In addition to selling new machines, the company also has some arrangements in which they own a machine and share its revenue with the casino where it’s placed. “They have been doing an excellent job of managing their yield” on those games by limiting supply to keep consumer demand for popular titles high, says David Katz, an analyst with Oppenheimer & Co.

On the call this afternoon, investors will be listening for commentary on how much casino spending is expected to pick up, as well as updates on any new games WMS Industries plans to debut at the Global Gaming Expo in mid-November, McGill says.