Financial Metrics For National Bank of Greece SA. (ATH:ETE)

As a small-cap bank stock with a market capitalisation of €2.58B, National Bank of Greece SA.’s (ATSE:ETE) risk and profitability are largely determined by the underlying economic growth of the GR regions in which it operates. Since a bank profits from reinvesting its clients’ deposits in the form of loans, negative economic growth may lower deposit levels and demand for loan, adversely impacting its cash flow. Post-GFC recovery brought about a new set of reforms, Basel III, which was created to improve regulation, supervision and risk management in the financial services industry. Basel III target banking regulations to improve the sector’s ability to absorb shocks resulting from economic stress which may expose financial institutions like National Bank of Greece to vulnerabilities. Since its financial standing can unexpectedly decline in the case of an adverse macro event such as political instability, it is important to understand how prudent the bank is at managing its risk levels. Strong management of leverage and liquidity could place the bank in a protected position at the face of macro headwinds. We can gauge National Bank of Greece’s risk-taking behaviour by analysing three metrics for leverage and liquidity which I will take you through now. View our latest analysis for National Bank of Greece

Is ETE's Leverage Level Appropriate?

Banks with low leverage are better positioned to weather adverse headwinds as they have less debt to pay off. A bank’s leverage may be thought of as the level of assets it owns compared to its own shareholders’ equity. While financial companies will always have some leverage for a sufficient capital buffer, National Bank of Greece’s leverage ratio of less than the suitable maximum level of 20x, at 9x, is considered to be very cautious and prudent. This means the bank has a sensibly high level of equity compared to the level of debt it has taken on to maintain operations which places it in a strong position to pay back its debt in unforeseen circumstances. Should the bank need to increase its debt levels to meet capital requirements, it will have abundant headroom to do so.

How Should We Measure ETE's Liquidity?

As I eluded to above, loans are relatively illiquid. It’s helpful to understand how much of this illiquid asset makes up the bank’s total asset. Usually, they should not be higher than 70% of total assets, consistent with National Bank of Greece’s case with a ratio of 58.58%. This is a reasonable ratio and suggests that slightly over half of the bank’s total assets are tied up in the form of illiquid loans, striking an appropriate balance between liquidity and interest income.

What is ETE's Liquidity Discrepancy?

Banks operate by lending out its customers’ deposits as loans and charge a higher interest rate. Loans are generally fixed term which means they cannot be readily realized, conversely, on the liability side, customer deposits must be paid in very short notice and on-demand. The disparity between the immediacy of deposits compared to the illiquid nature of loans puts pressure on the bank’s financial position if an adverse event requires the bank to repay its depositors. Relative to the prudent industry loan to deposit level of 90%, National Bank of Greece’s ratio of over 93.77% is higher, which places the bank in a relatively dangerous territory to go into negative discrepancy in liquidity. Essentially, for €1 of deposits with the bank, it lends out more than € 0.9 which is risky.

Next Steps:

The bank’s prudent management of its risk levels is reflected in its sensible leverage and liquidity ratios. Its high liquidity and low leverage levels mean it is well-positioned to meet its financial obligations in the case of any adverse and unpredictable macro events. We've only touched on operational risks for ETE in this article. But as a stock investment, there are other fundamentals you need to understand. I've put together three relevant aspects you should further research:

1. Future Outlook: What are well-informed industry analysts predicting for ETE’s future growth? Take a look at our free research report of analyst consensus for ETE’s outlook.
2. Valuation: What is ETE worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether ETE is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.