Dutch bancassurer ING will split in two, transforming itself into a smaller European lender in the most striking example yet of the deep changes that EU policymakers want to force on banks that received state aid.
The company also said it would pay back early 50 percent of the bailout funds granted by the Dutch state and launch a 7.5 billion euro ($11.25 billion) rights issue, as it unwinds much of an 18-year expansion drive and returns to its retail savings bank roots.
The move by Chief Executive Jan Hommen - who has espoused an intense work ethic and an austere view on pay since taking the reins at ING earlier this year - strips the firm of much of its global profile.
It also potentially sets up a blockbuster insurance sale in a sector already ripe for consolidation, with companies such as Aviva and Clive Cowdery's Resolution having previously declared themselves on the lookout for acquisitions.
Most European governments stepped in to subsidize their banking sectors during the credit crunch and the EU executive wants to force lenders that took state aid to restructure. It is trying to push through as many rulings as possible before Competition Commissioner Neelie Kroes bows out at the end of this year.
ING shares fell 12.7 percent to 10.185 euros at 1434 GMT as investors factored in the impact of a rights issue for nearly 30 percent of the firm's market value.
SNS Reaal , one of the last major bancassurers along with ING, was down almost 4 percent.
This is still a difficult environment and ING may be running ahead of themselves with the rights issue but capital markets have shown they can be quite forgiving to ING, said Fred Huibers, a fund manager at Het Haags Effektenkantoor.
The split will leave ING's balance sheet 30 percent smaller than before its bailout. The downsized entity would focus on Benelux, eastern Europe and Turkey, the firm said, with options in India and Thailand and the fate of its stake in the Bank of Beijing still uncertain.
Commissioner Kroes gave the go-ahead for a rescue plan for Germany's second-largest bank, Commerzbank , in May on the understanding that it divest about 45 percent of its balance sheet.
Belgium's KBC and Franco-Belgian Dexia are awaiting European Commission rulings, and Royal Bank of Scotland and Lloyds Bank Group -- 70 percent and 43 percent respectively owned by Britain -- are expected to be ordered into disposals too.
British opposition finance spokesman George Osborne told a Reuters Newsmaker event on Monday that British retail banks should stop paying big cash bonuses and use the money to support new lending and contribute to economic recovery.
Since taking over from Michel Tilmant in April, ING CEO Hommen has led a regime of austerity in compensation, drawing no salary himself thus far.
ING said the divestment of the insurance operations would be completed by 2013, through IPOs and or sales. Hommen said it would be quite interesting to launch one IPO for the entire global insurance business as a whole.
ING will also split off some Dutch mortgage operations into a new company that would have about a 6 percent market share.
Pursuant to the restructuring agreement with the EU, ING will also have to sell ING Direct USA, its American online banking business.
British insurer Standard Life Plc said on Monday it sold its banking arm to Barclays Plc for 226 million pounds ($369 million), in a move that will build up the bank's UK mortgage and savings business.
TIER 1 BUYBACK
ING, which received 10 billion euros from the state in October 2008 to bolster its balance sheet amid a crisis in the Dutch banking sector, said it would repurchase 5 billion euros in core Tier 1 securities in December.
It would also pay an additional 1.3 billion euros under an asset guarantee scheme from January. The EU had extended a review on that deal, saying it appeared the state paid too much for the assets.
In a separate statement, ING said it expected to report an underlying net profit of 750 million euros for the third quarter, adding that a moderate stabilization of operating conditions that started in the second quarter continued into the third quarter.
In France, Credit Agricole denied considering a merger that would see it combine banking and insurance businesses, saying it had no plans for talks with Societe Generale and Groupama. Daily Le Monde had reported Credit Agricole was studying such a deal.
For a graphic showing ING performance and key events, click here: http://graphics.thomsonreuters.com/109/NL_INGS1009.gif
(Additional reporting by Greg Roumeliotis and Gilbert Kreijger in Amsterdam and Philip Blenkinsop in Brussels; Editing by Jon Loades-Carter, John Stonestreet)