Understated Factors To Consider Before Investing In NIBC Holding N.V. (AMS:NIBC)
As a small-cap finance stock with a market capitalisation of €1.3b, the risk and profitability of NIBC Holding N.V. (AMS:NIBC) are largely tied to the underlying economic growth of the region it operates in NL. Given that banks operate by reinvesting deposits in the form of loans, negative economic growth may lower the level of saving deposits and demand for loans, directly affecting those banks’ levels of cash flows. 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. The Basel III reforms are aimed at banking regulations to improve financial institutions’ ability to absorb shocks caused by economic stress which could expose banks like NIBC Holding 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. Sufficient liquidity and low levels of leverage could place the bank in a safe place in case of unexpected macro headwinds. Today we will be measuring NIBC Holding’s financial risk position by looking at three leverage and liquidity metrics.
View our latest analysis for NIBC Holding
Want to help shape the future of investing tools and platforms? Take the survey and be part of one of the most advanced studies of stock market investors to date.
Is NIBC’s Leverage Level Appropriate?
Banks with low leverage are exposed to lower risks around their ability to repay debt. A bank’s leverage can be thought of as the amount of assets it holds compared to its own shareholders’ funds. While financial companies will always have some leverage for a sufficient capital buffer, NIBC Holding’s leverage ratio of less than the suitable maximum level of 20x, at 11.64x, 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.
What Is NIBC’s Level of Liquidity?
Due to its illiquid nature, loans are an important asset class we should learn more about. Generally, they should make up less than 70% of total assets, however its current level of 78% means the bank has lent out 7.88% above the sensible threshold. This level implies dependency on this particular asset class as a source of revenue which makes the bank more exposed to defaulting relative to banks with less loans.
What is NIBC’s Liquidity Discrepancy?
Banks profit by lending out its customers’ deposits as loans and charge an interest on the principle. 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. Compared to the appropriate industry loan to deposit level of 90%, NIBC Holding’s ratio of over 150% is unsustainable higher which positions the bank in a risky spot given the significantly high liquidity disparity between loan and deposit levels. Basically, for €1 of deposits with the bank, it lends out over €1.5 which is unjustifiable.
Next Steps:
Today, we’ve only explored one aspect of NIBC Holding. However, as a potential stock investment, there are many more fundamentals you need to consider. There are three essential factors you should look at:
Future Outlook: What are well-informed industry analysts predicting for NIBC’s future growth? Take a look at our free research report of analyst consensus for NIBC’s outlook.
Valuation: What is NIBC 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 NIBC 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
