Yahoo Movies Have You Considered These Key Risks For Simmons First National Corporation (NASDAQ:SFNC)?
Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. As a small-cap bank with a market capitalisation of US$2.5b, Simmons First National Corporation’s (NASDAQ:SFNC) profit and value are directly affected by economic growth. This is because borrowers’ demand for, and ability to repay, their loans depend on the stability of their salaries and interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting Simmons First National’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.
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Does Simmons First National Understand Its Own Risks?
Simmons First National’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. 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 Simmons First National understand its own risk?. With a bad loan to bad debt ratio of 99.89%, Simmons First National has under-provisioned by -0.11% which is below the sensible margin of error, illustrating room for improvement in the bank’s forecasting methodology.
What Is An Appropriate Level Of Risk?
By nature, Simmons First National is exposed 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. When these loans are not repaid, they are written off as expenses which comes directly out of the bank’s profit. The bank’s bad debt only makes up a very small 0.48% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
How Big Is Simmons First National’s Safety Net?
Simmons First National 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since Simmons First National’s total deposit to total liabilities is very high at 86% which is well-above the prudent level of 50% for banks, Simmons First National may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
Next Steps:
How will SFNC’s recent acquisition impact the business going forward? Should you be concerned about the future of SFNC and the sustainability of its financial health? I’ve bookmarked SFNC’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 SFNC’s future growth? Take a look at our free research report of analyst consensus for SFNC’s outlook.
Valuation: What is SFNC 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 SFNC 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 editorial-team@simplywallst.com.
