Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. Bank of South Carolina Corporation (NASDAQ:BKSC) is a small-cap bank with a market capitalisation of US$102m. 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 Bank of South Carolina’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 Bank of South Carolina Understand Its Own Risks?
Bank of South Carolina’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. Given its large non-performing loan allowance to non-performing loan ratio of over 500%, Bank of South Carolina has over-provisioned relative to its current level of non-performing loans, which could indicate the bank is expecting to incur further bad loans in the near future.
How Much Risk Is Too Much?If Bank of South Carolina does not engage in overly risky lending practices, it is considered to be in relatively better financial shape. Loans that cannot be recuperated by the bank, also known as bad loans, should typically form 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 Bank of South Carolina’s bottom line. Since bad loans only make up an insignificant 0.30% of its total assets, the bank may have very strict risk management – or perhaps the risks in its portfolio have not eventuated yet.
How Big Is Bank of South Carolina’s Safety Net?Bank of South Carolina 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Bank of South Carolina’s total deposit level of 100% of its total liabilities is very high and is well-above the sensible level of 50% for financial institutions. This may mean the bank is too cautious with its level of its safer form of borrowing and has plenty of headroom to take on risker forms of liability.
BKSC’s acquisition will impact the business moving forward. Keep an eye on how this decision plays out in the future, especially on its financial health and earnings growth. Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for BKSC. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for BKSC’s future growth? Take a look at our free research report of analyst consensus for BKSC’s outlook.
- Valuation: What is BKSC 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 BKSC 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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