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As a kr186b market capitalisation company operating in the financial services sector, Skandinaviska Enskilda Banken AB (publ.) (STO:SEB A) has benefited from strong economic growth and improved credit quality as a result of post-GFC recovery. A borrower’s demand for, and ability to repay, loans is driven by economic growth which directly impacts the level of risk Skandinaviska Enskilda Banken AB (publ.) takes on. With stricter regulations as a result of the GFC, banks are more conservative in their lending practices, leading to more prudent levels of risky assets on the balance sheet. Since the level of risky assets held by a bank impacts its cash flow and therefore the attractiveness of its stock as an investment, I will take you through three metrics that are insightful proxies for risk.
What Is An Appropriate Level Of Risk?
By nature, banks like Skandinaviska Enskilda Banken AB (publ.) are exposed to risky assets, by lending to borrowers who may not be able to repay their loans. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debts. Loans are written off as expenses when they are not repaid, which comes directly out of Skandinaviska Enskilda Banken AB (publ.)’s profit. The bank's bad debt only makes up a very small 0.50% to total debt which suggests the bank either has strict risk management - or its loans haven't started going bad yet.
How Good Is Skandinaviska Enskilda Banken AB (publ.) At Forecasting Its Risks?
The ability for Skandinaviska Enskilda Banken AB (publ.) to forecast and provision for its bad loans accurately serves as an indication for the bank's understanding of its own level of risk. If it writes off more than 100% of the bad debt it provisioned for, then it may have underestimated the risks that may have led to a higher bad loan level which begs the question – does Skandinaviska Enskilda Banken AB (publ.) understand its own risk? Skandinaviska Enskilda Banken AB (publ.)’s low non-performing loan allowance to non-performing loan ratio of 53.3% means the bank has under-provisioned by -46.7%, indicating either an unexpected one-off occurrence with defaults or poor bad debt provisioning. We do note though, that many banks don't require 100% coverage of their non-performing loans, as banks often can seize collateral to cover their losses on bad loans.
How Big Is Skandinaviska Enskilda Banken AB (publ.)’s Safety Net?
Skandinaviska Enskilda Banken AB (publ.) 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. Since Skandinaviska Enskilda Banken AB (publ.)’s total deposit to total liabilities is within the sensible margin at 52% compared to other banks' level of 50%, it shows a prudent level of the bank's safer form of borrowing and an appropriate level of risk.
How will SEB A’s recent acquisition impact the business going forward? Should you be concerned about the future of SEB A and the sustainability of its financial health? I’ve bookmarked SEB A’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 SEB A’s future growth? Take a look at our free research report of analyst consensus for SEB A’s outlook.
- Valuation: What is SEB A 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 SEB A 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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.