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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 US$693m, Byline Bancorp, Inc.’s (NYSE:BY) 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 Byline Bancorp’s bottom line. Today we will analyse Byline Bancorp’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
Does Byline Bancorp Understand Its Own Risks?
Byline Bancorp’s ability to forecast and provision for its bad loans relatively accurately suggests 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 poorly anticipated the factors that may have contributed to a higher bad loan level which begs the question – does Byline Bancorp understand its own risk?. Byline Bancorp’s low non-performing loan allowance to non-performing loan ratio of 91.15% means the bank has under-provisioned by -8.85%, indicating either an unexpected one-off occurrence with defaults or poor bad debt provisioning. We do note though, that many banks don't require 100% coverage of their non-performing loans, as banks often can seize collateral to cover their losses on bad loans.
How Much Risk Is Too Much?
If Byline Bancorp does not engage in overly risky lending practices, it is considered to be in relatively better financial shape. 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 Byline Bancorp’s bottom line. A ratio of 0.79% may indicate the bank faces relatively low chance of default and exhibits strong bad debt management - or it could indicate risks in the portfolio have not fully matured.
Is There Enough Safe Form Of Borrowing?
Byline Bancorp profits from lending out its various forms of borrowings and charging interest rates. Deposits from customers tend to carry the lowest risk due to the relatively stable interest rate and amount available. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Byline Bancorp’s total deposit level of 87% 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 BY’s recent acquisition impact the business going forward? Should you be concerned about the future of BY and the sustainability of its financial health? The list below is my go-to checks for BY. 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 BY’s future growth? Take a look at our free research report of analyst consensus for BY’s outlook.
Valuation: What is BY 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 BY 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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.