One of the biggest risk Attica Bank S.A. (ATH:TATT) faces as a bank is bad loans, also known as credit risk. As a small cap stock in the heavily regulated financial services sector, its stock has many factors to consider. Small banks are directly affected by macroeconomic events as the ability for borrowers to repay their loan depends on the stability of their salary and level of interest rates. Since bad debt is written off as an expense, it impacts Attica Bank’s bottom line and shareholders’ value. Today we will analyse Attica Bank’s level of bad debt and liabilities in order to understand the risk involved with investing in Attica Bank
Does Attica Bank Understand Its Own Risks?
The ability for Attica Bank to forecast and provision for its bad loans accurately serves as an indication for the bank's understanding of its own level of risk. The bank may have poorly anticipated the factors contributing to higher bad loan levels if it writes off more than 100% of the bad debt it provisioned for. This begs the question – does Attica Bank understand the risks it has taken on? With a relatively low non-performing loan allowance to non-performing loan ratio of 42.6%, Attica Bank has under-provisioned by -57.4% which is a bit low for our liking. This may be due to a one-off bad debt occurrence or an underestimation of the factors contributing to its bad loan levels.
What Is An Appropriate Level Of Risk?
Attica Bank may have been lending imprudently if bad loans make up more than 3% of its total loans. Bad loans are those that cannot be recovered and are directly expensed from the bank’s bottom line. With a ratio of greater than 10%, the bank exhibits unsustainable and significant levels of bad debt relative to the industry-average of below 3%. This could indicate poor lending management and may expose the bank to a very high risk of default.
Is There Enough Safe Form Of Borrowing?
Attica Bank 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. Attica Bank’s total deposit level of 97% 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.
Even though Attica Bank’s level of deposits is sensible relative to its liabilities, it carries risk on the bad debt front by carrying a high level of the risky asset as well as exhibiting poor provisioning. Moving forward, this may mean its profits could be lower than expected. This potential negative impact on cash flows lowers our conviction of Attica Bank as an investment. Keep in mind that a stock investment requires research on more than just its operational side. Below, I've compiled three key factors you should further examine:
- Future Outlook: What are well-informed industry analysts predicting for TATT’s future growth? Take a look at our free research report of analyst consensus for TATT’s outlook.
- Historical Performance: What has TATT's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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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