The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. As a small-cap bank with a market capitalisation of US$1.63b, First Commonwealth Financial Corporation’s (NYSE:FCF) 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 First Commonwealth Financial’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 First Commonwealth Financial’s a stock investment. View out our latest analysis for First Commonwealth Financial
Does First Commonwealth Financial Understand Its Own Risks?
First Commonwealth Financial’s understanding of its risk level can be estimated by its ability to forecast and provision for its bad loans. 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 First Commonwealth Financial understand the risks it has taken on? First Commonwealth Financial’s low bad loan to bad debt ratio of 93.84% means the bank has under-provisioned by -6.16%, indicating either an unexpected one-off occurence with defaults or poor bad debt provisioning.
How Much Risk Is Too Much?
If First Commonwealth Financial does not engage in overly risky lending practices, it is considered to be in good financial shape. Typically, loans that are “bad” and cannot be recuperated by the bank should comprise 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 First Commonwealth Financial’s bottom line. Since bad loans make up a relatively small 1.06% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
How Big Is First Commonwealth Financial’s Safety Net?
First Commonwealth Financial 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 First Commonwealth Financial’s total deposit to total liabilities is very high at 88.82% which is well-above the prudent level of 50% for banks, First Commonwealth Financial may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
How will FCF’s recent acquisition impact the business going forward? Should you be concerned about the future of FCF and the sustainability of its financial health? I’ve bookmarked FCF’s company page on Simply Wall St to stay informed with changes in outlook and valuation. This is also the source of data for this article. The three main sections I’d recommend you check out are:
- Future Outlook: What are well-informed industry analysts predicting for FCF’s future growth? Take a look at our free research report of analyst consensus for FCF’s outlook.
- Historical Performance: What has FCF’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.
- 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.