Risk Factors To Consider Before Investing In Banca Sistema S.p.A. (BIT:BST)
Credit risk is one of the biggest risk Banca Sistema S.p.A. (BIT:BST) faces as a small cap company operating in a heavily regulated financial services sector. Small banks are directly affected by macroeconomic events as the ability for borrowers to repay their loan depends on the stability of their salary and level of interest rates. Since bad debt is written off as an expense, it impacts Banca Sistema’s bottom line and shareholders’ value. Today we will analyse Banca Sistema’s level of bad debt and liabilities in order to understand the risk involved with investing in Banca Sistema
View our latest analysis for Banca Sistema
How Good Is Banca Sistema At Forecasting Its Risks?
Banca Sistema’s ability to forecast and provision for its bad loans relatively accurately suggests 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 Banca Sistema understand its own risk?. Given Banca Sistema’s non-performing loan allowance to non-performing loan ratio is 17.72%, the bank has under-provisioned by -82.28% which is fairly low. This may be due to a one-off bad debt occurrence or an underestimation of the factors contributing to its bad loan levels.
How Much Risk Is Too Much?
If bad loans comprise of more than 3% of Banca Sistema's total loans, it has likely been taking on more risky loans. Bad loans are those that cannot be recovered and are directly expensed from the bank’s bottom line. With a ratio of 8.08%, the bank exhibits significant levels of bad debt relative to many other lenders. This illustrates a poor approach to risk taking or loan concentration and potentially exposes the bank to a high risk of permanent loss on these loans.
Is There Enough Safe Form Of Borrowing?
Banca Sistema 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since Banca Sistema’s total deposit to total liabilities is within the sensible margin at 63% compared to other banks' level of 50%, it shows a prudent level of the bank's safer form of borrowing and an appropriate level of risk.
Next Steps:
While Banca Sistema has maintained a safe level of deposits against its liabilities, it has taken on excess levels of bad debt and poorly provisioned for these bad debt payments. This could lead to lower profits than may have been expected by the company. This possibility of an undesirable impact on cash flow lowers our conviction in Banca Sistema as an investment. We've only touched on operational risks for BST in this article. But as a stock investment, there are other fundamentals you need to understand. There are three essential aspects you should further examine:
Future Outlook: What are well-informed industry analysts predicting for BST’s future growth? Take a look at our free research report of analyst consensus for BST’s outlook.
Valuation: What is BST 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 BST 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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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
