Post-GFC recovery has strengthened economic growth and credit quality, benefiting large banks such as ING Groep NV (AMS:INGA), with a market capitalisation of €47.17b. A borrower’s demand for, and ability to repay, loans is driven by economic growth which directly impacts the level of risk ING Groep takes on. With stricter regulations as a result of the GFC, banks are more conservative in their lending practices, leading to more prudent levels of risky assets on the balance sheet. The level of risky assets a bank holds on its accounts affects the attractiveness of the company as an investment. So today we will focus on three important metrics that are insightful proxies for risk.
How Much Risk Is Too Much?By nature, ING Groep is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Generally, loans that are “bad” and cannot be recovered by the bank should make up 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. With a ratio of 1.77%, the bank faces an appropriate level of bad loan, indicating prudent management and 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. 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 ING Groep understand the risks it has taken on? Given ING Groep’s bad loan to bad debt ratio is 45.13%, the bank has extremely under-provisioned by -54.87% which well below the sensible 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since ING Groep’s total deposit to total liabilities is within the sensible margin at 69.62% 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.
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