Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. Union Bankshares Corporation (NASDAQ:UBSH) is a small-cap bank with a market capitalisation of US$2.78b. Its profit and value are directly impacted by its borrowers’ ability to pay which is driven by the level of economic growth. This is because growth determines the stability of a borrower’s salary as well as the level of interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting Union Bankshares’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 Union Bankshares Understand Its Own Risks?
Union Bankshares’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. If the bank provision covers more than 100% of what it actually writes off, then it is considered sensible and relatively accurate in its provisioning of bad debt. Given its high bad loan to bad debt ratio of 160.82% Union Bankshares has cautiously over-provisioned 60.82% above the appropriate minimum, indicating a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
What Is An Appropriate Level Of Risk?
By nature, Union Bankshares is exposed 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. Bad debt is written off as expenses when loans are not repaid which directly impacts Union Bankshares’s bottom line. The bank’s bad debt only makes up a very small 0.28% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
How Big Is Union Bankshares’s Safety Net?
Union Bankshares 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. Since Union Bankshares’s total deposit to total liabilities is very high at 87.5% which is well-above the prudent level of 50% for banks, Union Bankshares may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
The recent acquisition is expected to bring more opportunities for UBSH, 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 UBSH. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for UBSH’s future growth? Take a look at our free research report of analyst consensus for UBSH’s outlook.
- Valuation: What is UBSH 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 UBSH 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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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 email@example.com.