As a €42b market capitalisation company operating in the financial services sector, ING Groep NV (AMS:INGA) has benefited from strong economic growth and improved credit quality as a result of post-GFC recovery. Growth stimulates demand for loans and impacts a borrower’s ability to repay which directly affects the level of risk ING Groep takes on. With stricter regulations as a consequence of the recession, 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.
What Is An Appropriate Level Of Risk?
If ING Groep does not engage in overly risky lending practices, it is considered to be in good financial shape. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. Bad debt is written off when loans are not repaid. This is classified as an expense 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.
Does ING Groep Understand Its Own Risks?
ING Groep’s ability to forecast and provision for its bad loans relatively accurately indicates it has a good understanding of the level of risk it is taking on. 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 46.49%, the bank has extremely under-provisioned by -53.51% 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. ING Groep’s total deposit level of 69% 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.
How will INGA’s recent acquisition impact the business going forward? Should you be concerned about the future of INGA and the sustainability of its 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.
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.
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