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$234m, Select Bancorp Inc’s (NASDAQ:SLCT) 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 Select Bancorp’s bottom line. Today we will analyse Select Bancorp’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is Select Bancorp At Forecasting Its Risks?
Select Bancorp’s ability to forecast and provision for its bad loans relatively accurately indicates it has a good understanding of the level of risk it is taking on. The bank has poorly anticipated the factors contributing to higher bad loan levels if it writes off more than 100% of the bad debt it provisioned for. This begs the question – does Select Bancorp understand the risks it has taken on? With a bad loan to bad debt ratio of 81.43%, Select Bancorp has under-provisioned by -18.57% which is below the sensible margin of error, illustrating room for improvement in the bank’s forecasting methodology.
How Much Risk Is Too Much?
Select Bancorp’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. 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 as expenses when loans are not repaid which directly impacts Select Bancorp’s bottom line. A ratio of 1.12% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
How Big Is Select Bancorp’s Safety Net?
Select Bancorp makes money by lending out its various forms of borrowings. Deposits from customers tend to bear the lowest risk given the relatively stable amount available and interest rate. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since Select Bancorp’s total deposit to total liabilities is very high at 93% which is well-above the prudent level of 50% for banks, Select Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
How will SLCT’s recent acquisition impact the business going forward? Should you be concerned about the future of SLCT and the sustainability of its financial health? The list below is my go-to checks for SLCT. 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 SLCT’s future growth? Take a look at our free research report of analyst consensus for SLCT’s outlook.
- Valuation: What is SLCT 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 SLCT 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.