Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. Economic growth impacts the stability of salaries and interest rate level which in turn affects borrowers’ demand for, and ability to repay, their loans. As a small-cap bank with a market capitalisation of øre6.15b, SpareBank 1 Nord-Norge’s (OB:NONG) profit and value are directly affected by economic activity. Risk associate with repayment is measured by the level of bad debt which is an expense written off SpareBank 1 Nord-Norge’s bottom line. Today we will analyse SpareBank 1 Nord-Norge’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
Does SpareBank 1 Nord-Norge Understand Its Own Risks?
The ability for SpareBank 1 Nord-Norge 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 poorly anticipated the factors that may have contributed to a higher bad loan level which begs the question – does SpareBank 1 Nord-Norge understand its own risk?. With a bad loan to bad debt ratio of 52.39%, SpareBank 1 Nord-Norge has under-provisioned by -47.61% which is below the sensible margin of error, illustrating room for improvement in the bank’s forecasting methodology.
How Much Risk Is Too Much?By nature, SpareBank 1 Nord-Norge 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. When these loans are not repaid, they are written off as expenses which comes directly out of the bank’s profit. Since bad loans make up a relatively small 1.38% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
How Big Is SpareBank 1 Nord-Norge’s Safety Net?SpareBank 1 Nord-Norge 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. SpareBank 1 Nord-Norge’s total deposit level of 68.32% 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 NONG, 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. The list below is my go-to checks for NONG. 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.
- Future Outlook: What are well-informed industry analysts predicting for NONG’s future growth? Take a look at our free research report of analyst consensus for NONG’s outlook.
- Valuation: What is NONG 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 NONG 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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