The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. Arrow Financial Corporation (NASDAQ:AROW) is a small-cap bank with a market capitalisation of US$540.9m. 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 Arrow Financial’s bottom line. Today we will analyse Arrow Financial’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is Arrow Financial At Forecasting Its Risks?
The ability for Arrow Financial to accurately forecast and provision for its bad loans shows it has a strong 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 it is considered to be relatively prudent and accurate in its bad debt provisioning. Given its large bad loan to bad debt ratio of 472.57%, Arrow Financial excessively over-provisioned by 372.57% above the appropriate minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
What Is An Appropriate Level Of Risk?
If Arrow Financial does not engage in overly risky lending practices, it is considered to be in good financial shape. Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes out directly from Arrow Financial’s profit. Since bad loans only make up a very insignificant 0.20% of its total assets, the bank exhibits very strict bad loan management and is exposed to a relatively insignificant level of risk in terms of default.
Is There Enough Safe Form Of Borrowing?
Arrow 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. Arrow Financial’s total deposit level of 89.1% 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.
The recent acquisition is expected to bring more opportunities for AROW, 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. The list below is my go-to checks for AROW. I use Simply Wall St’s platform to keep informed about any changes in the company and market sentiment, and also use their data as the basis for my articles.
- Future Outlook: What are well-informed industry analysts predicting for AROW’s future growth? Take a look at our free research report of analyst consensus for AROW’s outlook.
- Valuation: What is AROW 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 AROW 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.
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