Real Risks You Need To Know Before Investing In BB&T Corporation (NYSE:BBT)
As a $ 41.94B market capitalisation bank, BB&T Corporation (NYSE:BBT) is well-positioned to benefit from the improving credit quality as a result of post-GFC recovery. A borrower’s demand for, and ability to repay, loans is driven by economic growth which directly impacts the level of risk BB&T takes on. With stricter regulations as a result of the GFC, banks are more conservative in their lending practices, leading to more prudent levels of risky assets on the balance sheet. It is relevant to understand a bank’s level of risky assets on its accounts as it affects the attractiveness of its stock as an investment. Today I will be taking you through three metrics that are useful proxies for risk. View our latest analysis for BB&T
How Much Risk Is Too Much?
BB&T is considered to be in a good financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risky? Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. When these loans are not repaid, they are written off as expenses which comes directly out of the bank’s profit. The bank’s bad debt only makes up a very small 0.42% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
How Good Is BB&T At Forecasting Its Risks?
BB&T’s ability to forecast and provision for its bad loans indicates it has a good understanding of the level of risk it is taking on. If the bank provisions for more than 100% of the bad debt it actually writes off, then it is considered to be relatively prudent and accurate in its bad debt provisioning. With a bad loan to bad debt ratio of 248.84%, the bank has extremely over-provisioned by 148.84% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.
How Big Is BB&T’s Safety Net?
BB&T 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. BB&T’s total deposit level of 82.80% 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.
Next Steps:
BB&T exhibits prudent management of risky assets and lending behaviour with sensible levels for all three ratios. It has a strong understanding of how much it should provision for lower quality borrowers and has maintained a sensible level of deposits against its liabilities. The company’s sound and sensible lending strategy gives us more conviction in its ability to manage its operational risks which makes an investment in BB&T a less risky one. Today, we’ve only explored one aspect of BB&T. However, as a potential stock investment, there are many more fundamentals you need to consider. Below, I’ve compiled three important aspects you should further research:
Future Outlook: What are well-informed industry analysts predicting for BBT’s future growth? Take a look at our free research report of analyst consensus for BBT’s outlook.
Valuation: What is BBT 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 BBT 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.
