Risk Factors To Consider Before Investing In South State Corporation (NASDAQ:SSB)
The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. South State Corporation (NASDAQ:SSB) is a small-cap bank with a market capitalisation of US$2.5b. 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 South State’s bottom line. Today I will take you through some bad debt and liability measures to analyse the level of risky assets held by the bank. Looking through a risk-lens is a useful way to assess the attractiveness of South State’s a stock investment.
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Does South State Understand Its Own Risks?
The ability for South State to accurately forecast and provision for its bad loans shows it has a strong understanding of the level of risk it is taking on. If the level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then it is relatively accurate and prudent in its bad debt provisioning. With a bad loan to bad debt ratio of 206.15%, the bank has extremely over-provisioned by 106.15% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.
How Much Risk Is Too Much?
South State is engaging in risking lending practices if it is over-exposed to bad debt. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. When these loans are not repaid, they are written off as expenses which comes out directly from South State’s profit. Since bad loans only make up a very insignificant 0.24% of its total assets, the bank exhibits very strict bad loan management and is exposed to a relatively insignificant level of risk in terms of default.
Is There Enough Safe Form Of Borrowing?
South State 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 South State’s total deposit to total liabilities is very high at 96% which is well-above the prudent level of 50% for banks, South State may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
Next Steps:
The recent acquisition is expected to bring more opportunities for SSB, 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. The list below is my go-to checks for SSB. 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 SSB’s future growth? Take a look at our free research report of analyst consensus for SSB’s outlook.
Valuation: What is SSB 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 SSB 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.
