Yahoo Finance Are You Considering All The Risks For Norwegian Finans Holding ASA’s (OB:NOFI)?
Norwegian Finans Holding ASA (OB:NOFI) is a small cap stock with a market capitalisation of øre17.08b. As a company operating in the financial services sector, it faces the risk of bad loans, also formally known as credit risk. The ability for borrowers to repay their loans depends on the stability of their salary and interest rate levels which is impacted by macroeconomic events and in turn impacts the profitability of small banks. This is because bad debt is written off as an expense and impacts Norwegian Finans Holding’s bottom line and shareholders’ value. Today we’re going to assess the level of bad debt and liabilities Norwegian Finans Holding currently has in order to properly analyse the risk involved with investing in Norwegian Finans Holding. See our latest analysis for Norwegian Finans Holding
Does Norwegian Finans Holding Understand Its Own Risks?
Norwegian Finans Holding’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 inadequately estimated the factors that may have added to a higher bad loan level which begs the question – does Norwegian Finans Holding understand its own risk? Given Norwegian Finans Holding’s bad loan to bad debt ratio is 39.31%, the bank has extremely under-provisioned by -60.69% which well below the sensible margin of error. This may be due to a one-off bad debt occurence or a constant underestimation of the factors contributing to its bad loan levels.
How Much Risk Is Too Much?
Norwegian Finans Holding is seen as engaging in imprudent risky lending practices if bad loans make up more than 3% of its total loans. Bad loans are those that cannot be recovered and are directly expensed from the bank’s bottom line. With a ratio of 9.01%, the bank exhibits significant levels of bad debt relative to the industry-average of below 3%. This illustrates poor bad debt management and exposes the bank to a high risk of default.
How Big Is Norwegian Finans Holding’s Safety Net?
Norwegian Finans Holding 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 Norwegian Finans Holding’s total deposit to total liabilities is very high at 91.30% which is well-above the prudent level of 50% for banks, Norwegian Finans Holding may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
Next Steps:
Even though Norwegian Finans Holding’s level of deposits is sensible relative to its liabilities, it carries risk on the bad debt front by carrying a high level of the risky asset as well as exhibiting poor provisioning. Moving forward, this may mean its profits could be lower than expected. This potential negative impact on cash flows lowers our conviction of Norwegian Finans Holding as an investment. We’ve only touched on operational risks for NOFI in this article. But as a stock investment, there are other fundamentals you need to understand. I’ve put together three relevant aspects you should look at:
Future Outlook: What are well-informed industry analysts predicting for NOFI’s future growth? Take a look at our free research report of analyst consensus for NOFI’s outlook.
Valuation: What is NOFI 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 NOFI 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 pass 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.
