The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. First Internet Bancorp (NASDAQ:INBK) is a small-cap bank with a market capitalisation of US$214m. 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 First Internet Bancorp’s bottom line. Since the level of risky assets held by the bank impacts the attractiveness of it as an investment, I will take you through three metrics that are insightful proxies for risk.
Does First Internet Bancorp Understand Its Own Risks?
First Internet Bancorp’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. We generally prefer to see that a provisions covers close to 100% of what it actually writes off, as this could imply a sensible and conservative approach towards bad loans. Given its large non-performing loan allowance to non-performing loan ratio of over 500%, First Internet Bancorp has over-provisioned relative to its current level of non-performing loans, which could indicate the bank is expecting to incur further bad loans in the near future.
What Is An Appropriate Level Of Risk?
By nature, banks like First Internet Bancorp are exposed to risky assets, by lending to borrowers who may not be able to repay their loans. Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes out directly from First Internet Bancorp’s profit. The bank's bad debt only makes up a very small 0.033% to total debt which suggests the bank either has strict risk management - or its loans haven't started going bad yet.
Is There Enough Safe Form Of Borrowing?
First Internet 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. Since First Internet Bancorp’s total deposit to total liabilities is very high at 82% which is well-above the prudent level of 50% for banks, First Internet Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
How will INBK’s recent acquisition impact the business going forward? Should you be concerned about the future of INBK and the sustainability of its financial health? I’ve bookmarked INBK’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 INBK’s future growth? Take a look at our free research report of analyst consensus for INBK’s outlook.
- Valuation: What is INBK 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 INBK 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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