Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. As a small-cap bank with a market capitalisation of US$459.8m, Bar Harbor Bankshares’s (NYSEMKT:BHB) profit and value are directly affected by economic growth. This is because borrowers’ demand for, and ability to repay, their loans depend on the stability of their salaries and interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting Bar Harbor Bankshares’s bottom line. Today we will analyse Bar Harbor Bankshares’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is Bar Harbor Bankshares At Forecasting Its Risks?
Bar Harbor Bankshares’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 poorly anticipated the factors that may have contributed to a higher bad loan level which begs the question – does Bar Harbor Bankshares understand its own risk?. Bar Harbor Bankshares’s low bad loan to bad debt ratio of 59.65% means the bank has under-provisioned by -40.35%, indicating either an unexpected one-off occurence with defaults or poor bad debt provisioning.
How Much Risk Is Too Much?
Bar Harbor Bankshares is considered to be in a good financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risky? Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts Bar Harbor Bankshares’s bottom line. Since bad loans make up a relatively small 0.88% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
Is There Enough Safe Form Of Borrowing?
Bar Harbor Bankshares 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Bar Harbor Bankshares’s total deposit level of 74.6% of its total liabilities is within the sensible margin for for financial institutions which generally has a ratio of 50%. This indicates a prudent level of the bank’s safer form of borrowing and a prudent level of risk.
How will BHB’s recent acquisition impact the business going forward? Should you be concerned about the future of BHB and the sustainability of its financial health? The list below is my go-to checks for BHB. 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 BHB’s future growth? Take a look at our free research report of analyst consensus for BHB’s outlook.
- Valuation: What is BHB 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 BHB 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.
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