Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. As a small-cap bank with a market capitalisation of øre2.9b, Sparebanken Møre’s (OB:MORG) 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 Sparebanken Møre’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 Sparebanken Møre At Forecasting Its Risks?
Sparebanken Møre’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 Sparebanken Møre understand its own risk?. With a non-performing loan allowance to non-performing loan ratio of 70.29%, Sparebanken Møre has under-provisioned by -29.71% which leaves relatively little margin for error. 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?Sparebanken Møre’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. Bad debt is written off as expenses when loans are not repaid which directly impacts Sparebanken Møre’s bottom line. A ratio of 0.57% may indicate the bank faces relatively low chance of default and exhibits strong bad debt management – or it could indicate risks in the portfolio have not fully matured.
Is There Enough Safe Form Of Borrowing?Sparebanken Møre 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. Sparebanken Møre’s total deposit level of 53% 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.
The recent acquisition is expected to bring more opportunities for MORG, 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 MORG. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for MORG’s future growth? Take a look at our free research report of analyst consensus for MORG’s outlook.
- Valuation: What is MORG 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 MORG 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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