Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. Economic growth impacts the stability of salaries and interest rate level which in turn affects borrowers’ demand for, and ability to repay, their loans. As a small-cap bank with a market capitalisation of US$114m, Salisbury Bancorp, Inc.’s (NASDAQ:SAL) profit and value are directly affected by economic activity. Risk associate with repayment is measured by the level of bad debt which is an expense written off Salisbury Bancorp’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 Salisbury Bancorp’s a stock investment.
Does Salisbury Bancorp Understand Its Own Risks?
Salisbury Bancorp’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. If the level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then the bank may be relatively accurate and prudent in its bad debt provisioning. With a non-performing loan allowance to non-performing loan ratio of 120.22%, the bank has cautiously over-provisioned by 20.22%, which may suggest the bank is anticipating additional non-performing loans.
What Is An Appropriate Level Of Risk?Salisbury Bancorp is considered to be in better financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risk? Ideally, loans that are “bad” and cannot be recuperated by the bank should comprise 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 Salisbury Bancorp’s bottom line. A ratio of 0.71% 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?Salisbury Bancorp 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Salisbury Bancorp’s total deposit level of 91% 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.
SAL’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. I’ve bookmarked SAL’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 SAL’s future growth? Take a look at our free research report of analyst consensus for SAL’s outlook.
- Valuation: What is SAL 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 SAL 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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