Large banks such as ING Groep NV (AMS:INGA), with a market capitalisation of €42b, have benefited from improving credit quality as a result of post-GFC recovery, leading to a strong growth environment. Economic growth fuels demand for loans and affects a borrower’s ability to repay which directly impacts the level of risk ING Groep takes on. As a consequence of the GFC, tighter regulations have led to more conservative lending practices by banks, leading to more prudent levels of risky assets on their balance sheets. It is relevant to understand a bank’s level of risky assets on its accounts as it affects the attractiveness of its stock as an investment. Today I will be taking you through three metrics that are useful proxies for risk.
What Is An Appropriate Level Of Risk?ING Groep’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. Bad debt is written off as expenses when loans are not repaid which directly impacts ING Groep’s bottom line. Since bad loans only make up 1.66% of total assets for the bank, it exhibits prudent bad debt management and faces an industry-average risk of default.
How Good Is ING Groep At Forecasting Its Risks?
ING Groep’s understanding of its risk level can be estimated by its ability to forecast and provision for its bad loans. If it writes off more than 100% of the bad debt it provisioned for, then it has poorly anticipated the factors that may have contributed to a higher bad loan level which begs the question – does ING Groep understand its own risk?. With an extremely low bad loan to bad debt ratio of 46.49%, ING Groep has significantly under-provisioned by -53.51% which is well below the appropriate margin of error. This may be due to a one-off bad debt occurence or a constant underestimation of the factors contributing to its bad loan levels.
Is There Enough Safe Form Of Borrowing?ING Groep operates by lending out its various forms of borrowings. Customers’ deposits tend to carry the smallest risk given the relatively stable interest rate and amount available. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since ING Groep’s total deposit to total liabilities is within the sensible margin at 69% compared to other banks’ level of 50%, it shows a prudent level of the bank’s safer form of borrowing and an appropriate level of risk.
The recent acquisition is expected to bring more opportunities for INGA, which in turn should lead to stronger growth. I would stay up-to-date on how this decision will affect the future of the business in terms of earnings growth and financial health. The list below is my go-to checks for INGA. I use Simply Wall St’s platform to keep informed about any changes in the company and market sentiment, and also use their data as the basis for my articles.
- Future Outlook: What are well-informed industry analysts predicting for INGA’s future growth? Take a look at our free research report of analyst consensus for INGA’s outlook.
- Valuation: What is INGA 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 INGA is currently mispriced by the market.
- 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.
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