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$253m, American National Bankshares Inc.’s (NASDAQ:AMNB) 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 American National Bankshares’s bottom line. Today we will analyse American National Bankshares’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
Does American National Bankshares Understand Its Own Risks?
American National Bankshares’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. If the bank provision covers more than 100% of what it actually writes off, then it is considered sensible and relatively accurate in its provisioning of bad debt. Given its large bad loan to bad debt ratio of over 500%, American National Bankshares 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.
What Is An Appropriate Level Of Risk?
American National Bankshares’s operations expose it 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 debt. Bad debt is written off as expenses when loans are not repaid which directly impacts American National Bankshares’s bottom line. The bank’s bad debt only makes up a very small 0.17% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
Is There Enough Safe Form Of Borrowing?
American National Bankshares 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since American National Bankshares’s total deposit to total liabilities is very high at 96% which is well-above the prudent level of 50% for banks, American National Bankshares may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
How will AMNB’s recent acquisition impact the business going forward? Should you be concerned about the future of AMNB 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 AMNB. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for AMNB’s future growth? Take a look at our free research report of analyst consensus for AMNB’s outlook.
- Valuation: What is AMNB 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 AMNB 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.