Post-GFC recovery has led to improving credit quality and a strong growth environment for 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$1.47B, Sandy Spring Bancorp Inc’s (NASDAQ:SASR) 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 Sandy Spring Bancorp’s bottom line. Since the level of risky assets held by the bank impacts the attractiveness of it as an investment, I will take you through three metrics that are insightful proxies for risk. See our latest analysis for Sandy Spring Bancorp
How Good Is Sandy Spring Bancorp At Forecasting Its Risks?
Sandy Spring Bancorp’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. If the bank provisions for more than 100% of the bad debt it actually writes off, then it is considered to be relatively prudent and accurate in its bad debt provisioning. With a bad loan to bad debt ratio of 159.67%, the bank has cautiously over-provisioned by 59.67%, which illustrates a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
What Is An Appropriate Level Of Risk?
By nature, Sandy Spring Bancorp is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Generally, loans that are “bad” and cannot be recovered by the bank should make up 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 0.48% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
How Big Is Sandy Spring Bancorp’s Safety Net?
Sandy Spring Bancorp 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Sandy Spring Bancorp’s total deposit level of 81.79% 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.
Sandy Spring Bancorp exhibits prudent management of risky assets and lending behaviour with sensible levels for all three ratios. It has maintained a sufficient level of deposits against liabilities and reasonably provisioned for the level of bad debt. The company’s sound and sensible lending strategy gives us more conviction in its ability to manage its operational risks which makes an investment in Sandy Spring Bancorp a less risky one. Today, we’ve only explored one aspect of Sandy Spring Bancorp. However, as a potential stock investment, there are many more fundamentals you need to consider. I’ve put together three relevant aspects you should further examine:
- Future Outlook: What are well-informed industry analysts predicting for SASR’s future growth? Take a look at our free research report of analyst consensus for SASR’s outlook.
- Valuation: What is SASR 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 SASR 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 pass 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.