* ING owes state 10 billion euros
* Faces 50 percent penalty if repaid in next 2 years
* EU review of loan guarantee deal may raise costs
* Share issue possible to boost capital - investors
By Gilbert Kreijger and Ben Berkowitz
AMSTERDAM, Sept 30 (Reuters) - A stiff prepayment penalty and the risk of higher costs for a state loan guarantee deal mean that ING is likely to be a prominent exception to the trend of banks rushing to return state aid.
While the Dutch financial group has raised billions of euros this year from asset sales and could probably push through a share issue if needed, analysts said it may be better off waiting until a 50 percent repayment penalty expires in two years' time.
"They won't pay off the aid if they can't do it on favourable terms," said Corne van Zeijl from SNS Asset Management. "There's no point in paying it off with a 50 percent premium."
An ING spokesman declined to comment other than to reiterate what the company has said in past: that it wants to pay the government back, the sooner it can do so the better and that it has not excluded any potential source of funding.
The company was first in line among Dutch financial institutions that received bailouts, and got different and harsher terms than its peers. It has tried to renegotiate with the state for better terms but has said its efforts failed.
As part of the state aid, ING has to pay an 8.5 percent coupon on the 10 billion euro injection if it pays dividends. ING also had to give the state two supervisory board seats.
On top of all this, ING also faces an EU review of its 22 billion euro asset guarantee deal with the Dutch state. Earlier this month, the EU said the state may have overpaid to guarantee the bulk of ING's bad U.S. mortgage debt.
If ING does decide to swallow the penalty and repay the state, or if the EU review of the Alt-A loan guarantee deal goes against it, it may need a share issue of its own.
"If there would be a substantial negative EU ruling, there could be more pressure on ING's bank capital ratio, pushing it below 7 percent and then ING may have to issue shares for a whole different purpose," said SNS Securities analyst Maarten Altena.
As of June 30 the Amsterdam-based financial group's core Tier I ratio stood at 7.3 percent, just above the 7 percent threshold that many banks in Europe are trying to maintain.
ING may need up to 1.7 billion euros in capital to offset potential Alt-A loan losses in Altena's darkest scenario.
SHARE RALLY SAVING GRACE
ING stands alone among Dutch institutions in not having announced a firm plan to repay some of its aid, and it may stand in a small group globally if trends continue.
France's BNP Paribas announced a 4.3 billion euro rights issue on Tuesday to pay off state aid, while Italy's UniCredit set a 4 billion euro issue to avoid state assistance entirely. A number of British banks are also looking at massive share issues to lessen state intervention.
If ING does issue shares it would be able to take advantage of a sharp rise in its stock in recent weeks to minimise dilution. Since hitting a low of 7.75 euros after its earnings report on Aug. 12, ING shares are up 50 percent. The European bank stocks index is up 12 percent over the same time.
Under Dutch rules, ING has the option to issue up to 10 percent of its outstanding shares without shareholder approval, an option Aegon and SNS Reaal exercised and which is more likely than a rights issue.
"A rights issue usually has a hint of desperation. That is not the case currently for ING, the shares have performed well in the last few months," said Fred Huibers, asset manager at Dutch Het Haags Effektenkantoor.
There was also still a chance ING could get favourable conditions to pay back part of the state aid because other banks had got cheaper repayment terms, analysts said. In that case, they predicted ING would make a partial repayment.
"If they can pay back a third without a penalty, ING can save about 1.5 billion euros, translating theoretically in a 6 percent stock value increase," said asset manager Van Zeijl.
But as things stand, even after three years, the terms of the repayment deal are complex. ING has the right to convert the securities issued by the state into receipts for shares on a 1-for-1 basis -- but the state can then demand repayment at 10 euros per receipt.
(Editing by Sitaraman Shankar)