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 AU$35.75M, Goldfields Money Limited’s (ASX:GMY) 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 Goldfields Money’s bottom line. Today we will analyse Goldfields Money’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank. See our latest analysis for Goldfields Money

How Good Is Goldfields Money At Forecasting Its Risks?

The ability for Goldfields Money to forecast and provision for its bad loans accurately serves as an indication for the bank’s understanding of its own level of risk. The bank has poorly anticipated the factors contributing to higher bad loan levels if it writes off more than 100% of the bad debt it provisioned for. This begs the question – does Goldfields Money understand the risks it has taken on? Goldfields Money’s low bad loan to bad debt ratio of 64.28% means the bank has under-provisioned by -35.72%, indicating either an unexpected one-off occurence with defaults or poor bad debt provisioning.

What Is An Appropriate Level Of Risk?

By nature, Goldfields Money is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of Goldfields Money’s profit. Since bad loans only make up a very insignificant 0.2% 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.

How Big Is Goldfields Money’s Safety Net?

Goldfields Money 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. Goldfields Money’s total deposit level of 99.43% of its total liabilities is very high and is well-above the sensible level of 50% for financial institutions. This may mean the bank is too cautious with its level of its safer form of borrowing and has plenty of headroom to take on risker forms of liability.

Next Steps:

Goldfields Money’s safer form of borrowing is appropriately high compared to the liabilities of the company. Conversely its cash flow could be negatively impacted by its below-average bad debt management. Today, we’ve only explored one aspect of Goldfields Money. However, as a potential stock investment, there are many more fundamentals you need to consider. There are three key aspects you should further examine:

1. Future Outlook: What are well-informed industry analysts predicting for GMY’s future growth? Take a look at our free research report of analyst consensus for GMY’s outlook.

2. Historical Performance: What has GMY’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

3. 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.