As a small cap company operating in a heavily regulated financial services sector, an investment in Attica Bank SA (ATH:TATT) has many factors to consider. One of the biggest risk it faces as a bank is bad loans, also known as credit risk. The ability for borrowers to repay their loans depends on the stability of their salary and interest rate levels which is impacted by macroeconomic events and in turn impacts the profitability of small banks. This is because bad debt is written off as an expense and impacts Attica Bank’s bottom line and shareholders’ value. Today we will analyse Attica Bank’s level of bad debt and liabilities in order to understand the risk involved with investing in Attica Bank
Does Attica Bank Understand Its Own Risks?
Attica Bank’s understanding of its risk level can be estimated by its ability to forecast and provision for its bad loans. If it writes off more than 100% of the bad debt it provisioned for, then it has inadequately estimated the factors that may have added to a higher bad loan level which begs the question – does Attica Bank understand its own risk? With an extremely low bad loan to bad debt ratio of 46.91%, Attica Bank has significantly under-provisioned by -53.09% which is well below the appropriate margin of error. This may be due to a one-off bad debt occurence or a constant underestimation of the factors contributing to its bad loan levels.
How Much Risk Is Too Much?
If Attica Bank’s total loans are made up of more than 3% of bad debt, it may be engaging in risky lending practices above the judicious level. Bad loans are those that cannot be recovered and are directly expensed from the bank’s bottom line. Attica Bank’s bad debt ratio is greater than 10% which is unsustainably high and extremely risky, considering most banks exhibit ratios lower than the appropriate threshold of 3%. This means it shows very poor bad debt management and is exposed to a very chance of default.
How Big Is Attica Bank’s Safety Net?
Attica Bank 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. Attica Bank’s total deposit level of 97% of its total liabilities is very high and is well-above the sensible level of 50% for financial institutions. This may mean the bank is too cautious with its level of its safer form of borrowing and has plenty of headroom to take on risker forms of liability.
Even though Attica Bank’s level of deposits is sensible relative to its liabilities, it carries risk on the bad debt front by carrying a high level of the risky asset as well as exhibiting poor provisioning. Moving forward, this may mean its profits could be lower than expected. This possibility of an undesirable impact on cash flow lowers our conviction in Attica Bank as an investment. Keep in mind that a stock investment requires research on more than just its operational side. There are three pertinent aspects you should look at:
- Historical Performance: What has TATT’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Attica Bank’s board and the CEO’s back ground.
- 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.