Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. Fulton Financial Corporation (NASDAQ:FULT) is a small-cap bank with a market capitalisation of US$3.0b. 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 Fulton Financial’s bottom line. Today we will analyse Fulton Financial’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is Fulton Financial At Forecasting Its Risks?
Fulton Financial’s ability to forecast and provision for its bad loans indicates it has a good 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. Given its high bad loan to bad debt ratio of 126.11% Fulton Financial has cautiously over-provisioned 26.11% above the appropriate minimum, indicating a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
What Is An Appropriate Level Of Risk?
By nature, Fulton Financial is exposed to risky assets by lending to borrowers who may not be able to repay their loans. 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 directly out of the bank’s profit. A ratio of 0.78% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
How Big Is Fulton Financial’s Safety Net?
Fulton Financial 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 Fulton Financial’s total deposit to total liabilities is very high at 87% which is well-above the prudent level of 50% for banks, Fulton Financial may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
How will FULT’s recent acquisition impact the business going forward? Should you be concerned about the future of FULT and the sustainability of its financial health? The list below is my go-to checks for FULT. 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 FULT’s future growth? Take a look at our free research report of analyst consensus for FULT’s outlook.
- Valuation: What is FULT 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 FULT 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 firstname.lastname@example.org.