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$241.07m, Shore Bancshares Inc’s (NASDAQ:SHBI) 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 Shore Bancshares’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 Shore Bancshares Understand Its Own Risks?
Shore Bancshares’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. If the bank provision covers more than 100% of what it actually writes off, then it is considered sensible and relatively accurate in its provisioning of bad debt. Given its high bad loan to bad debt ratio of 149.79% Shore Bancshares has cautiously over-provisioned 49.79% above the appropriate minimum, indicating a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
What Is An Appropriate Level Of Risk?
Shore Bancshares 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 as expenses when loans are not repaid which directly impacts Shore Bancshares’s bottom line. A ratio of 0.58% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
Is There Enough Safe Form Of Borrowing?
Shore Bancshares 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since Shore Bancshares’s total deposit to total liabilities is very high at 91.55% which is well-above the prudent level of 50% for banks, Shore Bancshares may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
The recent acquisition is expected to bring more opportunities for SHBI, 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. Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for SHBI. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for SHBI’s future growth? Take a look at our free research report of analyst consensus for SHBI’s outlook.
- Valuation: What is SHBI 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 SHBI 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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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.