Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. SpareBank 1 SMN (OB:MING) is a small-cap bank with a market capitalisation of øre12b. Its profit and value are directly impacted by its borrowers’ ability to pay which is driven by the level of economic growth. This is because growth determines the stability of a borrower’s salary as well as the level of interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting SpareBank 1 SMN’s bottom line. Since the level of risky assets held by the bank impacts the attractiveness of it as an investment, I will take you through three metrics that are insightful proxies for risk.
How Good Is SpareBank 1 SMN At Forecasting Its Risks?
The ability for SpareBank 1 SMN to accurately forecast and provision for its bad loans shows it has a strong understanding of the level of risk it is taking on. If the bank provisions for more than 100% of the bad debt it actually writes off, then could be considered to be relatively prudent and accurate in its bad debt provisioning. Given its large non-performing loan allowance to non-performing loan ratio of 240%, SpareBank 1 SMN over-provisioned by 140% above the minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
What Is An Appropriate Level Of Risk?SpareBank 1 SMN’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debts. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts SpareBank 1 SMN’s bottom line. Since bad loans only make up an insignificant 0.25% of its total assets, the bank may have very strict risk management – or perhaps the risks in its portfolio have not eventuated yet.
Is There Enough Safe Form Of Borrowing?SpareBank 1 SMN 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. SpareBank 1 SMN’s total deposit level of 63% 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 MING’s recent acquisition impact the business going forward? Should you be concerned about the future of MING and the sustainability of its financial health? Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for MING. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for MING’s future growth? Take a look at our free research report of analyst consensus for MING’s outlook.
- Valuation: What is MING 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 MING 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.
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