Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. Community Trust Bancorp Inc (NASDAQ:CTBI) is a small-cap bank with a market capitalisation of US$808m. 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 Community Trust Bancorp’s bottom line. Today I will take you through some bad debt and liability measures to analyse the level of risky assets held by the bank. Looking through a risk-lens is a useful way to assess the attractiveness of Community Trust Bancorp’s a stock investment.
How Good Is Community Trust Bancorp At Forecasting Its Risks?
The ability for Community Trust Bancorp 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 provisions for more than 100% of the bad debt it actually writes off, then it is considered to be relatively prudent and accurate in its bad debt provisioning. With a bad loan to bad debt ratio of 170.13%, the bank has cautiously over-provisioned by 70.13%, which illustrates a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
How Much Risk Is Too Much?
Community Trust Bancorp is engaging in risking lending practices if it is over-exposed to bad debt. 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 Community Trust Bancorp’s profit. A ratio of 0.66% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
Is There Enough Safe Form Of Borrowing?
Community Trust 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since Community Trust Bancorp’s total deposit to total liabilities is very high at 90% which is well-above the prudent level of 50% for banks, Community Trust Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
CTBI’s acquisition will impact the business moving forward. Keep an eye on how this decision plays out in the future, especially on its financial health and earnings growth. The list below is my go-to checks for CTBI. 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 CTBI’s future growth? Take a look at our free research report of analyst consensus for CTBI’s outlook.
- Valuation: What is CTBI 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 CTBI 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.