Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. Sandnes Sparebank (OB:SADG) is a small-cap bank with a market capitalisation of øre1.33b. 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 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.
See our latest analysis for Sandnesrebank
How Good Is Sandnesrebank At Forecasting Its Risks?
The ability for Sandnesrebank to accurately forecast and provision for its bad loans shows it has a strong 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 it is considered to be relatively prudent and accurate in its bad debt provisioning. With a bad loan to bad debt ratio of 217.48%, the bank has extremely over-provisioned by 117.48% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.
How Much Risk Is Too Much?
If Sandnesrebank does not engage in overly risky lending practices, it is considered to be in good financial shape. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts Sandnesrebank’s bottom line. A ratio of 0.73% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
Is There Enough Safe Form Of Borrowing?
Sandnesrebank makes money by lending out its various forms of borrowings. Deposits from its customers tends to bear the lowest risk since the amount available and interest rate paid are less volatile. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Sandnesrebank’s total deposit level of 47.8% of its total liabilities is below the sensible margin for for financial institutions which generally has a ratio of 50%. This means the bank’s safer form of borrowing makes up less than half of its liabilities, indicating riskier operational activity.
Next Steps:
The recent acquisition is expected to bring more opportunities for SADG, 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 SADG. I’ve also used this site as a source of data for my article.