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$4.3b, IBERIABANK Corporation’s (NASDAQ:IBKC) 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 IBERIABANK’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 IBERIABANK Understand Its Own Risks?
IBERIABANK’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. If the level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then the bank may be relatively accurate and prudent in its bad debt provisioning. Given its high non-performing loan allowance to non-performing loan ratio of 100.9% IBERIABANK has cautiously over-provisioned 0.90% above its current level of non-performing loans. This could indicate a prudent forecasting methodology, or indicate that further bad loans are expected.
How Much Risk Is Too Much?
IBERIABANK’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Ideally, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes out directly from IBERIABANK’s profit. Since bad loans make up a relatively small 0.61% of total assets, the bank may have stricter risk management, or its risks may not have had time to materialise yet.
Is There Enough Safe Form Of Borrowing?
IBERIABANK makes money by lending out its various forms of borrowings. Deposits from customers tend to bear the lowest risk given the relatively stable amount available and interest rate. As a rule, a bank is considered less risky if it holds a higher level of deposits. IBERIABANK’s total deposit level of 89% 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.
IBKC’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 IBKC. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for IBKC’s future growth? Take a look at our free research report of analyst consensus for IBKC’s outlook.
- Valuation: What is IBKC 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 IBKC 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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