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The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. Economic growth impacts the stability of salaries and interest rate level which in turn affects borrowers’ demand for, and ability to repay, their loans. As a small-cap bank with a market capitalisation of US$99m, Eagle Bancorp Montana, Inc.’s (NASDAQ:EBMT) profit and value are directly affected by economic activity. Risk associate with repayment is measured by the level of bad debt which is an expense written off Eagle Bancorp Montana’s bottom line. Since the level of risky assets held by the bank impacts the attractiveness of it as an investment, I will take you through three metrics that are insightful proxies for risk.
Does Eagle Bancorp Montana Understand Its Own Risks?
Eagle Bancorp Montana’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 level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then it is relatively accurate and prudent in its bad debt provisioning. Given its high bad loan to bad debt ratio of 175.21% Eagle Bancorp Montana has cautiously over-provisioned 75.21% above the appropriate minimum, indicating a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
How Much Risk Is Too Much?
Eagle Bancorp Montana is considered to be in a good financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risky? Typically, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts Eagle Bancorp Montana’s bottom line. Since bad loans make up a relatively small 0.61% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
How Big Is Eagle Bancorp Montana’s Safety Net?
Eagle Bancorp Montana 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Eagle Bancorp Montana’s total deposit level of 83% 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.
EBMT’s acquisition will impact the business moving forward. Keep an eye on how this decision plays out in the future, especially on its financial health and earnings growth. The list below is my go-to checks for EBMT. 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 EBMT’s future growth? Take a look at our free research report of analyst consensus for EBMT’s outlook.
- Valuation: What is EBMT 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 EBMT 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 firstname.lastname@example.org.