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$2.62b, Great Western Bancorp Inc’s (NYSE:GWB) 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 Great Western Bancorp’s bottom line. Today we will analyse Great Western Bancorp’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank. View out our latest analysis for Great Western Bancorp
Does Great Western Bancorp Understand Its Own Risks?
Great Western 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. 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 Great Western Bancorp understand the risks it has taken on? With an extremely low bad loan to bad debt ratio of 49.62%, Great Western Bancorp has significantly under-provisioned by -50.38% which is well below the appropriate 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.
What Is An Appropriate Level Of Risk?
If Great Western Bancorp does not engage in overly risky lending practices, it is considered to be in good financial shape. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. Loans are written off as expenses when they are not repaid, which comes directly out of Great Western Bancorp’s profit. Since bad loans make up a relatively small 1.4% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
How Big Is Great Western Bancorp’s Safety Net?
Great Western 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. Great Western Bancorp’s total deposit level of 92.00% 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.
The recent acquisition is expected to bring more opportunities for GWB, which in turn should lead to stronger growth. I would stay up-to-date on how this decision will affect the future of the business in terms of earnings growth and financial health. Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for GWB. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for GWB’s future growth? Take a look at our free research report of analyst consensus for GWB’s outlook.
- Valuation: What is GWB 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 GWB 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 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.