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$126m, Riverview Financial Corporation’s (NASDAQ:RIVE) 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 Riverview Financial’s bottom line. Today we will analyse Riverview Financial’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is Riverview Financial At Forecasting Its Risks?
Riverview Financial’s ability to forecast and provision for its bad loans relatively accurately indicates it has a good understanding of the level of risk it is taking on. If it writes off more than 100% of the bad debt it provisioned for, then it has inadequately estimated the factors that may have added to a higher bad loan level which begs the question – does Riverview Financial understand its own risk? With a bad loan to bad debt ratio of 84.4%, Riverview Financial has under-provisioned by -15.6% which is below the sensible margin of error, illustrating room for improvement in the bank’s forecasting methodology.
How Much Risk Is Too Much?
By nature, Riverview Financial is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Typically, 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 as expenses when loans are not repaid which directly impacts Riverview Financial’s bottom line. A ratio of 0.84% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
How Big Is Riverview Financial’s Safety Net?
Riverview Financial 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 Riverview Financial’s total deposit to total liabilities is very high at 98% which is well-above the prudent level of 50% for banks, Riverview Financial may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
How will RIVE’s recent acquisition impact the business going forward? Should you be concerned about the future of RIVE and the sustainability of its financial health? Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for RIVE. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for RIVE’s future growth? Take a look at our free research report of analyst consensus for RIVE’s outlook.
- Historical Performance: What has RIVE’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.
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 firstname.lastname@example.org.