Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. National Bankshares, Inc. (NASDAQ:NKSH) is a small-cap bank with a market capitalisation of US$277m. 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 National Bankshares’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.
How Good Is National Bankshares At Forecasting Its Risks?
National Bankshares’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 bank provisions for more than 100% of the bad debt it actually writes off, then could be considered to be relatively prudent and accurate in its bad debt provisioning. Given its large non-performing loan allowance to non-performing loan ratio of 216.08%, National Bankshares over-provisioned by 116.08% above the minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
What Is An Appropriate Level Of Risk?
If National Bankshares does not engage in overly risky lending practices, it is considered to be in relatively better 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. Loans are written off as expenses when they are not repaid, which comes directly out of National Bankshares’s profit. The bank’s bad debt only makes up a very small 0.48% to total debt which suggests the bank either has strict risk management – or its loans haven’t started going bad yet.
Is There Enough Safe Form Of Borrowing?
National Bankshares 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since National Bankshares’s total deposit to total liabilities is very high at 99% which is well-above the prudent level of 50% for banks, National Bankshares 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 NKSH, 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. I’ve bookmarked NKSH’s company page on Simply Wall St to stay informed with changes in outlook and valuation. This is also the source of data for this article. The three main sections I’d recommend you check out are:
- Future Outlook: What are well-informed industry analysts predicting for NKSH’s future growth? Take a look at our free research report of analyst consensus for NKSH’s outlook.
- Valuation: What is NKSH 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 NKSH 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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