Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. As a small-cap bank with a market capitalisation of US$4.1b, Sterling Bancorp’s (NYSE:STL) 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 Sterling Bancorp’s bottom line. Today we will analyse Sterling Bancorp’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is Sterling Bancorp At Forecasting Its Risks?
Sterling Bancorp’s ability to forecast and provision for its bad loans relatively accurately indicates 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 inadequately estimated the factors that may have added to a higher bad loan level which begs the question – does Sterling Bancorp understand its own risk? Given Sterling Bancorp’s bad loan to bad debt ratio is 49.33%, the bank has extremely under-provisioned by -50.67% which well below the sensible margin of error. This may be due to a one-off bad debt occurence or a constant underestimation of the factors contributing to its bad loan levels.
How Much Risk Is Too Much?
Sterling Bancorp is considered to be in a good financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risky? 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 as expenses when loans are not repaid which directly impacts Sterling Bancorp’s bottom line. Since bad loans make up a relatively small 0.90% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
How Big Is Sterling Bancorp’s Safety Net?
Sterling Bancorp operates by lending out its various forms of borrowings. Customers’ deposits tend to carry the smallest risk given 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 Sterling Bancorp’s total deposit to total liabilities is within the sensible margin at 80% compared to other banks’ level of 50%, it shows a prudent level of the bank’s safer form of borrowing and an appropriate level of risk.
STL’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. Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for STL. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for STL’s future growth? Take a look at our free research report of analyst consensus for STL’s outlook.
- Valuation: What is STL 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 STL is currently mispriced by the market.
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