Want to participate in a research study? Help shape the future of investing tools and earn a $60 gift card!
The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. As a small-cap bank with a market capitalisation of US$84m, Emclaire Financial Corp.’s (NASDAQ:EMCF) 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 Emclaire Financial’s bottom line. Today we will analyse Emclaire Financial’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is Emclaire Financial At Forecasting Its Risks?
Emclaire Financial’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 provisions for more than 100% of the bad debt it actually writes off, then could be considered to be relatively prudent and accurate in its bad debt provisioning. Given its large non-performing loan allowance to non-performing loan ratio of 214.93%, Emclaire Financial over-provisioned by 114.93% above the minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
What Is An Appropriate Level Of Risk?
Emclaire Financial may be taking on too many risky loans if it is over-exposed to bad debt. Ideally, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which come directly out of the bank’s profit. Since bad loans only make up an insignificant 0.42% of its total assets, the bank may have very strict risk management - or perhaps the risks in its portfolio have not eventuated yet.
Is There Enough Safe Form Of Borrowing?
Emclaire Financial 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since Emclaire Financial’s total deposit to total liabilities is very high at 93% which is well-above the prudent level of 50% for banks, Emclaire Financial may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
How will EMCF’s recent acquisition impact the business going forward? Should you be concerned about the future of EMCF 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 EMCF. I've also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for EMCF’s future growth? Take a look at our free research report of analyst consensus for EMCF’s outlook.
- Valuation: What is EMCF 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 EMCF 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.