One of the biggest risk Komplett Bank ASA (OB:KOMP) faces as a bank is bad loans, also known as credit risk. As a small cap stock in the heavily regulated financial services sector, its stock has many factors to consider. As a small bank, Komplett Bank’s profits are directly affected by macroeconomic events as the ability for borrowers to repay their debt depends on the stability of their salary and interest rate levels. Bad debt is directly written off as an expense which impacts Komplett Bank’s bottom line and shareholders’ value. I will take you through some useful measures of bad debt and liabilities in order to properly analyse Komplett Bank’s risk level before you invest in the stock.
How Good Is Komplett Bank At Forecasting Its Risks?
Komplett Bank’s understanding of its risk level can be estimated by its ability to forecast and provision for its bad loans. If it writes off more than 100% of the bad debt it provisioned for, then it has poorly anticipated the factors that may have contributed to a higher bad loan level which begs the question – does Komplett Bank understand its own risk?. Komplett Bank’s low non-performing loan allowance to non-performing loan ratio of 56.16% means the bank has under-provisioned by -43.84%, indicating either an unexpected one-off occurrence with defaults or poor bad debt provisioning. We do note though, that many banks don’t require 100% coverage of their non-performing loans, as banks often can seize collateral to cover their losses on bad loans.
How Much Risk Is Too Much?If bad loans comprise of more than 3% of Komplett Bank’s total loans, it has likely been taking on more risky loans. The bank’s profit is impacted by bad loans as these cannot be recovered by the bank and are expensed directly from its bottom line. Komplett Bank’s bad debt ratio is greater than 10% which is unsustainably high and extremely risky, considering most banks exhibit ratios lower than the appropriate threshold of 3%. This suggests the company may have poor risk management it could be exposed to a higher chance of loan default.
How Big Is Komplett Bank’s Safety Net?Komplett Bank 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Komplett Bank’s total deposit level of 92% of its total liabilities is very high and is well-above the sensible level of 50% for financial institutions. This may mean the bank is too cautious with its level of its safer form of borrowing and has plenty of headroom to take on risker forms of liability.
While Komplett Bank has maintained a safe level of deposits against its liabilities, it has taken on excess levels of bad debt and poorly provisioned for these bad debt payments. This could lead to lower profits than may have been expected by the company. This possibility of an undesirable impact on cash flow lowers our conviction in Komplett Bank as an investment. Keep in mind that a stock investment requires research on more than just its operational side. I’ve put together three important factors you should further research:
- Valuation: What is KOMP 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 KOMP 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 Komplett Bank’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.
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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.