Should You Be Concerned About Mercantile Bank Corporation’s (NASDAQ:MBWM) Risks?
Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. Mercantile Bank Corporation (NASDAQ:MBWM) is a small-cap bank with a market capitalisation of US$544m. 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 Mercantile Bank’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 Mercantile Bank’s a stock investment.
View our latest analysis for Mercantile Bank
Does Mercantile Bank Understand Its Own Risks?
The ability for Mercantile Bank 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 level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then it is relatively accurate and prudent in its bad debt provisioning. Given its large bad loan to bad debt ratio of 426.32%, Mercantile Bank excessively over-provisioned by 326.32% above the appropriate minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
What Is An Appropriate Level Of Risk?
Mercantile Bank is engaging in risking lending practices if it is over-exposed to bad debt. Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes directly out of the bank’s profit. The bank’s bad debt only makes up a very small 0.19% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
How Big Is Mercantile Bank’s Safety Net?
Mercantile Bank 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since Mercantile Bank’s total deposit to total liabilities is very high at 87% which is well-above the prudent level of 50% for banks, Mercantile Bank may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
Next Steps:
The recent acquisition is expected to bring more opportunities for MBWM, 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. I’ve bookmarked MBWM’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 MBWM’s future growth? Take a look at our free research report of analyst consensus for MBWM’s outlook.
Valuation: What is MBWM 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 MBWM 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 editorial-team@simplywallst.com.
