Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. Ames National Corporation (NASDAQ:ATLO) is a small-cap bank with a market capitalisation of US$258m. Its profit and value are directly impacted by its borrowers’ ability to pay which is driven by the level of economic growth. This is because growth determines the stability of a borrower’s salary as well as the level of interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting Ames National’s bottom line. Today I will take you through some bad debt and liability measures to analyse the level of risky assets held by the bank. Looking through a risk-lens is a useful way to assess the attractiveness of Ames National’s a stock investment.
Does Ames National Understand Its Own Risks?
Ames National’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 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 310.2%, Ames National excessively over-provisioned by 210.2% above the appropriate minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
How Much Risk Is Too Much?
Ames National 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 directly out of the bank’s profit. The bank’s bad debt only makes up a very small 0.42% 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?
Ames National 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 Ames National’s total deposit to total liabilities is very high at 95% which is well-above the prudent level of 50% for banks, Ames National may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
The recent acquisition is expected to bring more opportunities for ATLO, which in turn should lead to stronger growth. I would stay up-to-date on how this decision will affect the future of the business in terms of earnings growth and financial health. I’ve bookmarked ATLO’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 ATLO’s future growth? Take a look at our free research report of analyst consensus for ATLO’s outlook.
- Valuation: What is ATLO 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 ATLO 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.