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$72m, Summit State Bank’s (NASDAQ:SSBI) 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 Summit State Bank’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.
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How Good Is Summit State Bank At Forecasting Its Risks?
Summit State Bank’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 269.22%, the bank has extremely over-provisioned by 169.22% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.
How Much Risk Is Too Much?
If Summit State Bank does not engage in overly risky lending practices, it is considered to be in good financial shape. Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of Summit State Bank’s profit. Since bad loans only make up a very insignificant 0.37% 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?
Summit State Bank 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since Summit State Bank’s total deposit to total liabilities is very high at 94% which is well-above the prudent level of 50% for banks, Summit State Bank may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
SSBI’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 SSBI’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 SSBI’s future growth? Take a look at our free research report of analyst consensus for SSBI’s outlook.
- Valuation: What is SSBI 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 SSBI 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 email@example.com.