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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$2.4b, First Financial Bancorp.’s (NASDAQ:FFBC) 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 Financial Bancorp’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 Financial Bancorp's a stock investment.
Does First Financial Bancorp Understand Its Own Risks?
First Financial Bancorp’s ability to forecast and provision for its bad loans relatively accurately suggests 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 poorly anticipated the factors that may have contributed to a higher bad loan level which begs the question – does First Financial Bancorp understand its own risk?. First Financial Bancorp’s low non-performing loan allowance to non-performing loan ratio of 65.13% means the bank has under-provisioned by -34.87%, indicating either an unexpected one-off occurrence with defaults or poor bad debt provisioning. We do note though, that many banks don't require 100% coverage of their non-performing loans, as banks often can seize collateral to cover their losses on bad loans.
What Is An Appropriate Level Of Risk?
First Financial Bancorp’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. 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. When these loans are not repaid, they are written off as expenses which comes out directly from First Financial Bancorp’s profit. Since bad loans make up a relatively small 0.98% of total assets, the bank may have stricter risk management, or its risks may not have had time to materialise yet.
How Big Is First Financial Bancorp’s Safety Net?
First Financial 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. First Financial Bancorp’s total deposit level of 85% 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 FFBC, 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 FFBC. I've also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for FFBC’s future growth? Take a look at our free research report of analyst consensus for FFBC’s outlook.
- Valuation: What is FFBC 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 FFBC 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.