Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. SpareBank 1 Østlandet (OB:SPOL) is a small-cap bank with a market capitalisation of øre9.0b. 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 Østlandet’s bottom line. Today I will take you through some bad debt and liability measures to analyse the level of risky assets held by the bank. Looking through a risk-lens is a useful way to assess the attractiveness of SpareBank 1 Østlandet’s a stock investment.
Does SpareBank 1 Østlandet Understand Its Own Risks?
The ability for SpareBank 1 Østlandet 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 Østlandet understand its own risk?. With a bad loan to bad debt ratio of 59.96%, SpareBank 1 Østlandet has under-provisioned by -40.04% 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?SpareBank 1 Østlandet is engaging in risking lending practices if it is over-exposed to bad debt. Typically, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of SpareBank 1 Østlandet’s profit. A ratio of 0.50% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
Is There Enough Safe Form Of Borrowing?SpareBank 1 Østlandet 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. SpareBank 1 Østlandet’s total deposit level of 65% 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.
How will SPOL’s recent acquisition impact the business going forward? Should you be concerned about the future of SPOL and the sustainability of its financial health? I’ve bookmarked SPOL’s company page on Simply Wall St to stay informed with changes in outlook and valuation. This is also the source of data for this article. The three main sections I’d recommend you check out are:
- Future Outlook: What are well-informed industry analysts predicting for SPOL’s future growth? Take a look at our free research report of analyst consensus for SPOL’s outlook.
- Valuation: What is SPOL 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 SPOL 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.