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 USD $146.85M, DNB Financial Corporation (NASDAQ:DNBF)’s 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 DNB Financial’s bottom line. Today we will analyse DNB Financial’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank. See our latest analysis for DNB Financial
How Good Is DNB Financial At Forecasting Its Risks?
DNB Financial’s understanding of its risk level can be estimated by its ability to forecast and provision for its bad loans. The bank has poorly anticipated the factors contributing to higher bad loan levels if it writes off more than 100% of the bad debt it provisioned for. This begs the question – does DNB Financial understand the risks it has taken on? DNB Financial’s low bad loan to bad debt ratio of 78.68% means the bank has under-provisioned by -21.32%, indicating either an unexpected one-off occurence with defaults or poor bad debt provisioning.
What Is An Appropriate Level Of Risk?
If DNB Financial does not engage in overly risky lending practices, it is considered to be in good financial shape. Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. Bad debt is written off as expenses when loans are not repaid which directly impacts DNB Financial’s bottom line. A ratio of 0.87% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
How Big Is DNB Financial’s Safety Net?
DNB Financial 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since DNB Financial’s total deposit to total liabilities is very high at 90.41% which is well-above the prudent level of 50% for banks, DNB Financial may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
DNB Financial’s level of deposits is sensible relative to its liabilities. Nevertheless, its imprudent bad debt management could negatively impact its cash flows. Keep in mind that a stock investment requires research on more than just its operational side. Below, I’ve compiled three important factors you should further research:
1. Future Outlook: What are well-informed industry analysts predicting for DNBF’s future growth? Take a look at our free research report of analyst consensus for DNBF’s outlook.
2. Valuation: What is DNBF 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 DNBF is currently mispriced by the market.
3. 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.