Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. 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$400m, Sierra Bancorp’s (NASDAQ:BSRR) 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 Sierra Bancorp’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 Sierra Bancorp Understand Its Own Risks?
The ability for Sierra Bancorp 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 poorly anticipated the factors that may have contributed to a higher bad loan level which begs the question – does Sierra Bancorp understand its own risk?. With a bad loan to bad debt ratio of 86.34%, Sierra Bancorp has under-provisioned by -13.66% which is below the sensible margin of error, illustrating room for improvement in the bank’s forecasting methodology.
How Much Risk Is Too Much?
By nature, Sierra Bancorp is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes directly out of the bank’s profit. Since bad loans make up a relatively small 0.65% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
Is There Enough Safe Form Of Borrowing?
Sierra Bancorp 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. Since Sierra Bancorp’s total deposit to total liabilities is very high at 94% which is well-above the prudent level of 50% for banks, Sierra Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
BSRR’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 BSRR. 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 BSRR’s future growth? Take a look at our free research report of analyst consensus for BSRR’s outlook.
- Valuation: What is BSRR 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 BSRR 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 email@example.com.