The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. Summit Financial Group Inc (NASDAQ:SMMF) is a small-cap bank with a market capitalisation of US$317.87m. 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 Summit Financial Group’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 Summit Financial Group’s a stock investment.
Does Summit Financial Group Understand Its Own Risks?
Summit Financial Group’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. The bank has 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 Summit Financial Group understand the risks it has taken on? With a bad loan to bad debt ratio of 79.74%, Summit Financial Group has under-provisioned by -20.26% which is below the sensible margin of error, illustrating room for improvement in the bank’s forecasting methodology.
How Much Risk Is Too Much?
Summit Financial Group is engaging in risking lending practices if it is over-exposed to bad debt. Typically, loans that are “bad” and cannot be recuperated by the bank should comprise 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. A ratio of 0.97% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
How Big Is Summit Financial Group’s Safety Net?
Summit Financial Group makes money by lending out its various forms of borrowings. Deposits from customers tend to bear the lowest risk given the relatively stable amount available and interest rate. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Summit Financial Group’s total deposit level of 86.42% 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.
How will SMMF’s recent acquisition impact the business going forward? Should you be concerned about the future of SMMF and the sustainability of its financial health? The list below is my go-to checks for SMMF. I use Simply Wall St’s platform to keep informed about any changes in the company and market sentiment, and also use their data as the basis for my articles.
- Future Outlook: What are well-informed industry analysts predicting for SMMF’s future growth? Take a look at our free research report of analyst consensus for SMMF’s outlook.
- Valuation: What is SMMF 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 SMMF 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 email@example.com.