The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. As a small-cap bank with a market capitalisation of CHF1.9b, Liechtensteinische Landesbank Aktiengesellschaft’s (VTX:LLBN) profit and value are directly affected by economic growth. This is because borrowers’ demand for, and ability to repay, their loans depend on the stability of their salaries and interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting Liechtensteinische Landesbank’s bottom line. Today we will analyse Liechtensteinische Landesbank’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
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Does Liechtensteinische Landesbank Understand Its Own Risks?
The ability for Liechtensteinische Landesbank to forecast and provision for its bad loans accurately serves as an indication for the bank’s understanding of its own level of risk. If it writes off more than 100% of the bad debt it provisioned for, then it has inadequately estimated the factors that may have added to a higher bad loan level which begs the question – does Liechtensteinische Landesbank understand its own risk? Given Liechtensteinische Landesbank’s bad loan to bad debt ratio is 39.07%, the bank has extremely under-provisioned by -60.93% 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.
How Much Risk Is Too Much?By nature, Liechtensteinische Landesbank is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Typically, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. Bad debt is written off as expenses when loans are not repaid which directly impacts Liechtensteinische Landesbank’s bottom line. Since bad loans only make up 1.63% of total assets for the bank, it exhibits prudent bad debt management and faces an industry-average risk of default.
How Big Is Liechtensteinische Landesbank’s Safety Net?Liechtensteinische Landesbank makes money by lending out its various forms of borrowings. Deposits from customers tend to bear the lowest risk given the relatively stable amount available and interest rate. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since Liechtensteinische Landesbank’s total deposit to total liabilities is very high at 84% which is well-above the prudent level of 50% for banks, Liechtensteinische Landesbank may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
LLBN’s acquisition will impact the business moving forward. Keep an eye on how this decision plays out in the future, especially on its financial health and earnings growth. The list below is my go-to checks for LLBN. 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.
- Valuation: What is LLBN 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 LLBN is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Liechtensteinische Landesbank’s board and the CEO’s back ground.
- 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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