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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$481m, The First Bancshares, Inc.’s (NASDAQ:FBMS) 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 Bancshares’s bottom line. Today we will analyse First Bancshares’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is First Bancshares At Forecasting Its Risks?
First Bancshares’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 Bancshares understand the risks it has taken on? With an extremely low bad loan to bad debt ratio of 43.35%, First Bancshares has significantly under-provisioned by -56.65% 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.
How Much Risk Is Too Much?
By nature, First Bancshares is 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. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts First Bancshares’s bottom line. A ratio of 1.13% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
Is There Enough Safe Form Of Borrowing?
First Bancshares 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. First Bancshares’s total deposit level of 93% 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.
How will FBMS’s recent acquisition impact the business going forward? Should you be concerned about the future of FBMS and the sustainability of its financial health? I’ve bookmarked FBMS’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 FBMS’s future growth? Take a look at our free research report of analyst consensus for FBMS’s outlook.
Valuation: What is FBMS 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 FBMS 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.