Three Key Risk For National Bank of Greece SA. (ATH:ETE) You Should Know

Credit risk is one of the biggest risk National Bank of Greece SA. (ATSE:ETE) faces as a small cap company operating in a heavily regulated financial services sector. Small banks are directly affected by macroeconomic events as the ability for borrowers to repay their loan depends on the stability of their salary and level of interest rates. Since bad debt is written off as an expense, it impacts National Bank of Greece’s bottom line and shareholders’ value. Today we will analyse National Bank of Greece’s level of bad debt and liabilities in order to understand the risk involved with investing in National Bank of Greece View our latest analysis for National Bank of Greece

How Good Is National Bank of Greece At Forecasting Its Risks?

The ability for National Bank of Greece to forecast and provision for its bad loans accurately serves as an indication for the bank's understanding of its own level of risk. The bank has poorly anticipated the factors contributing to higher bad loan levels if it writes off more than 100% of the bad debt it provisioned for. This begs the question – does National Bank of Greece understand the risks it has taken on? National Bank of Greece’s low bad loan to bad debt ratio of 58.8% means the bank has under-provisioned by -41.2%, indicating either an unexpected one-off occurence with defaults or poor bad debt provisioning.

How Much Risk Is Too Much?

National Bank of Greece is seen as engaging in imprudent risky lending practices if bad loans make up more than 3% of its total loans. Bad loans are those that cannot be recovered and are directly expensed from the bank’s bottom line. National Bank of Greece's bad debt ratio is greater than 10% which is unsustainably high and extremely risky, considering most banks exhibit ratios lower than the appropriate threshold of 3%. This means it shows very poor bad debt management and is exposed to a very chance of default.

Is There Enough Safe Form Of Borrowing?

National Bank of Greece profits from lending out its various forms of borrowings and charging interest rates. Deposits from customers tend to carry the lowest risk due to the relatively stable interest rate and amount available. As a rule, a bank is considered less risky if it holds a higher level of deposits. National Bank of Greece’s total deposit level of 70.50% of its total liabilities is within the sensible margin for for financial institutions which generally has a ratio of 50%. This indicates a prudent level of the bank's safer form of borrowing and a prudent level of risk.

Next Steps:

Although National Bank of Greece’s level of deposits to liabilities level is sufficient, it has taken on risk through high levels of bad debt and poor provisioning for their repayment. This may lead to lower than expected profits for National Bank of Greece. The potential for an adverse effect on National Bank of Greece’s cash flow diminishes our confidence in National Bank of Greece as a stock investment. Today, we've only explored one aspect of National Bank of Greece. However, as a potential stock investment, there are many more fundamentals you need to consider. I've put together three key factors you should look at:

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.