Have You Considered These Key Risks For Stewardship Financial Corporation (NASDAQ:SSFN)?
The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. 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$76m, Stewardship Financial Corporation’s (NASDAQ:SSFN) 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 Stewardship Financial’s bottom line. Today we will analyse Stewardship Financial’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
View our latest analysis for Stewardship Financial
Does Stewardship Financial Understand Its Own Risks?
Stewardship Financial’s ability to forecast and provision for its bad loans indicates it has a good understanding of the level of risk it is taking on. If the level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then it is relatively accurate and prudent in its bad debt provisioning. Given its large bad loan to bad debt ratio of over 500%, Stewardship Financial has excessively over-provisioned above the appropriate minimum of 100%, indicating the bank is extremely cautious with their expectation of bad debt and should adjust their forecast moving forward.
How Much Risk Is Too Much?
Stewardship Financial is engaging in risking lending practices if it is over-exposed to bad debt. 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 out directly from Stewardship Financial’s profit. Since bad loans only make up a very insignificant 0.17% of its total assets, the bank exhibits very strict bad loan management and is exposed to a relatively insignificant level of risk in terms of default.
Is There Enough Safe Form Of Borrowing?
Stewardship Financial profits from lending out its various forms of borrowings and charging interest rates. Deposits from customers tend to carry the lowest risk due to the relatively stable interest rate and amount available. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since Stewardship Financial’s total deposit to total liabilities is very high at 90% which is well-above the prudent level of 50% for banks, Stewardship Financial may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
Next Steps:
SSFN’s acquisition will impact the business moving forward. Keep an eye on how this decision plays out in the future, especially on its financial health and earnings growth. I’ve bookmarked SSFN’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 SSFN’s future growth? Take a look at our free research report of analyst consensus for SSFN’s outlook.
Valuation: What is SSFN 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 SSFN 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 editorial-team@simplywallst.com.
