Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. As a small-cap bank with a market capitalisation of US$52m, Southwest Georgia Financial Corporation’s (NYSEMKT:SGB) 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 Southwest Georgia Financial’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.
How Good Is Southwest Georgia Financial At Forecasting Its Risks?
Southwest Georgia Financial’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 could be considered to be relatively prudent and accurate in its bad debt provisioning. Given its large non-performing loan allowance to non-performing loan ratio of 284.56%, Southwest Georgia Financial over-provisioned by 184.56% above the minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
How Much Risk Is Too Much?
If Southwest Georgia Financial does not engage in overly risky lending practices, it is considered to be in relatively better financial shape. 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 Southwest Georgia Financial’s profit. The bank’s bad debt only makes up a very small 0.32% to total debt which suggests the bank either has strict risk management – or its loans haven’t started going bad yet.
How Big Is Southwest Georgia Financial’s Safety Net?
Southwest Georgia Financial 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. Since Southwest Georgia Financial’s total deposit to total liabilities is very high at 93% which is well-above the prudent level of 50% for banks, Southwest Georgia Financial may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
How will SGB’s recent acquisition impact the business going forward? Should you be concerned about the future of SGB 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 SGB. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for SGB’s future growth? Take a look at our free research report of analyst consensus for SGB’s outlook.
- Valuation: What is SGB 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 SGB 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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.