Credit risk is one of the biggest risk Piraeus Bank SA (ATH:TPEIR) faces as a small cap company operating in a heavily regulated financial services sector. Small banks are directly affected by macroeconomic events as the ability for borrowers to repay their loan depends on the stability of their salary and level of interest rates. Since bad debt is written off as an expense, it impacts Piraeus Bank’s bottom line and shareholders’ value. Today we will analyse Piraeus Bank’s level of bad debt and liabilities in order to understand the risk involved with investing in Piraeus Bank
Does Piraeus Bank Understand Its Own Risks?
The ability for Piraeus Bank to forecast and provision for its bad loans accurately serves as an indication for the bank’s understanding of its own level of risk. 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 Piraeus Bank understand its own risk? With an extremely low bad loan to bad debt ratio of 40.87%, Piraeus Bank has significantly under-provisioned by -59.13% 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.
What Is An Appropriate Level Of Risk?
If bad loans comprise of more than 3% of Piraeus Bank’s total loans, it is seen as engaging in risky lending practices above the prudent level. Loans that are “bad” cannot be recovered by the bank and are written off as expenses which comes out directly from its profit. With a ratio of greater than 10%, the bank exhibits unsustainable and significant levels of bad debt relative to the industry-average of below 3%. This illustrates poor bad debt management and exposes the bank to a very high risk of default.
How Big Is Piraeus Bank’s Safety Net?
Piraeus 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Piraeus Bank’s total deposit level of 77.22% of its total liabilities is within the sensible margin for for financial institutions which generally has a ratio of 50%. This indicates a prudent level of the bank’s safer form of borrowing and a prudent level of risk.
Even though Piraeus 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. The potential for an adverse effect on Piraeus Bank’s cash flow diminishes our confidence in Piraeus Bank as a stock investment. Today, we’ve only explored one aspect of Piraeus Bank. However, as a potential stock investment, there are many more fundamentals you need to consider. I’ve put together three relevant aspects you should look at:
- Future Outlook: What are well-informed industry analysts predicting for TPEIR’s future growth? Take a look at our free research report of analyst consensus for TPEIR’s outlook.
- Historical Performance: What has TPEIR’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.
- 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 firstname.lastname@example.org.