Post-GFC recovery has driven major financial institutions’ return to health, increasing market confidence in these “too-big-to-fail” banks. As a large-cap stock with market capitalization of €48.05b, ING Groep NV (AMS:INGA) falls into this category. A set of reforms called Basel III was imposed in order to strengthen regulation, supervision and risk management in the banking sector. These reforms target banking regulations and intends to enhance financial institutions’ ability to absorb shocks resulting from economic stress which could expose banks to vulnerabilities. INGA operates predominantly in EUR and is held to stringent regulation around the type and level of risk it can take on, exposing it to higher scrutiny on its risk-taking behaviour. Investors are viewing INGA with a more cautious lens and analysing these stocks using bank-specific metrics such as liquidity and leverage. Today we’re going to take a look at these metrics to gain more confidence investing in the stock. See our latest analysis for ING Groep
Why Does INGA’s Leverage Matter?A low level of leverage subjects a bank to less risk and enhances its ability to pay back its debtors. Leverage can be thought of as the amount of assets a bank owns relative to its shareholders’ funds. Though banks are required to have a certain level of buffer to meet its capital requirements, ING Groep’s leverage level of 17.43x is significantly below the appropriate ceiling of 20x. This means the bank exhibits very strong leverage management and is well-positioned to repay its debtors in the case of any adverse events since it has an appropriately high level of equity relative to the debt it has taken on to remain in business. If the bank needs to increase its debt levels to firm up its capital cushion, there is plenty of headroom to do so without deteriorating its financial position.
How Should We Measure INGA’s Liquidity?Due to its illiquid nature, loans are an important asset class we should learn more about. Normally, they should not exceed 70% of total assets, consistent with ING Groep’s case with a ratio of 67.93%. At this level of loan, the bank has preserved a sensible level between maintaining liquidity and generating interest income from the loan.
What is INGA’s Liquidity Discrepancy?Banks operate by lending out its customers’ deposits as loans and charge a higher interest rate. These loans tend to be 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 discrepancy between loan assets and deposit liabilities threatens the bank’s financial position. If an adverse event occurs, it may not be well-placed to repay its depositors immediately. Since ING Groep’s loan to deposit ratio of 102.58% is higher than the appropriate level of 90%, this level positions the bank in a risky spot given the adverse liquidity disparity between loan and deposit levels. Basically, for €1 of deposits with the bank, it lends out over €1 which is imprudent.
The bank’s liquidity and leverage ratios suggest its sensible operational risk management. 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. Today, we’ve only explored one aspect of ING Groep. However, as a potential stock investment, there are many more fundamentals you need to consider. There are three essential aspects you should further research:
- 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.