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 €238m, Banco di Desio e della Brianza SpA’s (BIT:BDB) 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 Banco di Desio e della Brianza’s bottom line. Today we will analyse Banco di Desio e della Brianza’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
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Does Banco di Desio e della Brianza Understand Its Own Risks?
Banco di Desio e della Brianza’s ability to forecast and provision for its bad loans indicates it has a good understanding of the level of risk it is taking on. If the level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then it is relatively accurate and prudent in its bad debt provisioning. Given its high bad loan to bad debt ratio of 118.52% Banco di Desio e della Brianza has cautiously over-provisioned 18.52% above the appropriate minimum, indicating a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
What Is An Appropriate Level Of Risk?
If bad loans comprise of more than 3% of Banco di Desio e della Brianza’s total loans, it is seen as engaging in risky lending practices above the prudent level. Bad loans are those that cannot be recovered and are directly expensed from the bank’s bottom line. With a ratio of 5.97%, the bank exhibits significant levels of bad debt relative to the industry-average of below 3%. This illustrates poor bad debt management and exposes the bank to a high risk of default.How Big Is Banco di Desio e della Brianza’s Safety Net?
Banco di Desio e della Brianza profits from lending out its various forms of borrowings and charging interest rates. Deposits from customers tend to carry the lowest risk due to 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.
Banco di Desio e della Brianza’s total deposit level of 72% 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.
Next Steps:
The recent acquisition is expected to bring more opportunities for BDB, which in turn should lead to stronger growth. I would stay up-to-date on how this decision will affect the future of the business in terms of earnings growth and financial health. Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for BDB. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for BDB’s future growth? Take a look at our free research report of analyst consensus for BDB’s outlook.
- Valuation: What is BDB 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 BDB 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.