Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. As a small-cap bank with a market capitalisation of øre1.4b, Sandnes Sparebank’s (OB:SADG) 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 Sandnesrebank’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.
Does Sandnesrebank Understand Its Own Risks?
Sandnesrebank’s ability to forecast and provision for its bad loans indicates it has a good 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. With a non-performing loan allowance to non-performing loan ratio of 217.48%, the bank has extremely over-provisioned by 117.48% compared to the industry-average. We wonder if this might indicate the bank is expecting to incur further non-performing loans in the near future.
What Is An Appropriate Level Of Risk?Sandnesrebank is considered to be in better financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risk? 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 Sandnesrebank’s profit. A ratio of 0.73% 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?Sandnesrebank borrows money in many different forms to lend back out. Customer deposits are the least risky form of borrowing as they are less volatile in terms of interest rate paid and amount available. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since Sandnesrebank’s total deposit to total liabilities is below the sensible margin at 46% compared to other banks’ level of 50%, this means the bank should increase its deposit levels or lower its liabilities in order to meet the prudent minimum level. At the current level, the bank’s safer form of borrowing makes up less than half of its liabilities, making it a riskier investment.
How will SADG’s recent acquisition impact the business going forward? Should you be concerned about the future of SADG and the sustainability of its financial health? The list below is my go-to checks for SADG. 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 SADG’s future growth? Take a look at our free research report of analyst consensus for SADG’s outlook.
- Valuation: What is SADG 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 SADG 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.