The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. Economic growth impacts the stability of salaries and interest rate level which in turn affects borrowers’ demand for, and ability to repay, their loans. As a small-cap bank with a market capitalisation of US$62m, United Bancshares, Inc.’s (NASDAQ:UBOH) profit and value are directly affected by economic activity. Risk associate with repayment is measured by the level of bad debt which is an expense written off United Bancshares’s bottom line. Today we will analyse United Bancshares’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
Does United Bancshares Understand Its Own Risks?
The ability for United Bancshares 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 bank provision covers more than 100% of what it actually writes off, then it is considered sensible and relatively accurate in its provisioning of bad debt. With a bad loan to bad debt ratio of 140.96%, the bank has cautiously over-provisioned by 40.96%, which illustrates 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, United Bancshares is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Loans that cannot be recovered by the bank are known as bad loans and typically should make up less than 3% of its total loans. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts United Bancshares’s bottom line. The bank’s bad debt only makes up a very small 0.43% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
How Big Is United Bancshares’s Safety Net?
United Bancshares 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. United Bancshares’s total deposit level of 89% 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.
How will UBOH’s recent acquisition impact the business going forward? Should you be concerned about the future of UBOH and the sustainability of its financial health? Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for UBOH. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for UBOH’s future growth? Take a look at our free research report of analyst consensus for UBOH’s outlook.
- Valuation: What is UBOH 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 UBOH 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.