Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. Sbanken ASA (OB:SBANK) is a small-cap bank with a market capitalisation of øre8.95b. 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 Sbanken’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. Check out our latest analysis for Sbanken
How Good Is Sbanken At Forecasting Its Risks?
Sbanken’s ability to forecast and provision for its bad loans relatively accurately indicates it has a good understanding of the level of risk it is taking on. 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 Sbanken understand its own risk? Given Sbanken’s bad loan to bad debt ratio is 41.21%, the bank has extremely under-provisioned by -58.79% which well below the sensible margin of error. This may be due to a one-off bad debt occurence or a constant underestimation of the factors contributing to its bad loan levels.
What Is An Appropriate Level Of Risk?Sbanken is considered to be in a good financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risky? 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 when loans are not repaid. This is classified as an expense which directly impacts Sbanken’s bottom line. The bank’s bad debt only makes up a very small 0.48% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
Is There Enough Safe Form Of Borrowing?Sbanken 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since Sbanken’s total deposit to total liabilities is within the sensible margin at 59.87% 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.
The recent acquisition is expected to bring more opportunities for SBANK, 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 SBANK. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for SBANK’s future growth? Take a look at our free research report of analyst consensus for SBANK’s outlook.
- Valuation: What is SBANK 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 SBANK 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.