Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. SpareBank 1 Nord-Norge (OB:NONG) is a small-cap bank with a market capitalisation of ØRE5.89B. 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 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. See our latest analysis for SpareBank 1 Nord-Norge
Does SpareBank 1 Nord-Norge Understand Its Own Risks?
SpareBank 1 Nord-Norge’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 inadequately estimated the factors that may have added 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 56.77%, SpareBank 1 Nord-Norge has under-provisioned by -43.23% which is below the sensible margin of error, illustrating room for improvement in the bank’s forecasting methodology.
What Is An Appropriate Level Of Risk?By nature, SpareBank 1 Nord-Norge is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Loans that cannot be recovered by the bank are known as bad loans and typically should make up less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes out directly from SpareBank 1 Nord-Norge’s profit. Since bad loans make up a relatively small 1.21% 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 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since SpareBank 1 Nord-Norge’s total deposit to total liabilities is within the sensible margin at 68.15% compared to other banks’ level of 50%, it shows a prudent level of the bank’s safer form of borrowing and an appropriate level of risk.
SpareBank 1 Nord-Norge has maintained a safe level of deposits against its liabilities. Nevertheless, its imprudent bad debt management could negatively impact its cash flows. Keep in mind that a stock investment requires research on more than just its operational side. Below, I’ve compiled three important factors you should further research:
- 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.