The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. Economic growth impacts the stability of salaries and interest rate level which in turn affects borrowers’ demand for, and ability to repay, their loans. As a small-cap bank with a market capitalisation of US$530m, Independent Bank Corporation’s (NASDAQ:IBCP) profit and value are directly affected by economic activity. Risk associate with repayment is measured by the level of bad debt which is an expense written off Independent Bank’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 Independent Bank’s a stock investment.
Does Independent Bank Understand Its Own Risks?
The ability for Independent Bank to accurately forecast and provision for its bad loans shows it has a strong understanding of the level of risk it is taking on. If the level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then it is relatively accurate and prudent in its bad debt provisioning. Given its large bad loan to bad debt ratio of 261.17%, Independent Bank excessively over-provisioned by 161.17% above the appropriate minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
What Is An Appropriate Level Of Risk?
Independent Bank’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Generally, loans that are “bad” and cannot be recovered by the bank should make up 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 Independent Bank’s bottom line. The bank’s bad debt only makes up a very small 0.36% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
How Big Is Independent Bank’s Safety Net?
Independent Bank 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since Independent Bank’s total deposit to total liabilities is very high at 95% which is well-above the prudent level of 50% for banks, Independent Bank 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 IBCP, 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. I’ve bookmarked IBCP’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 IBCP’s future growth? Take a look at our free research report of analyst consensus for IBCP’s outlook.
- Valuation: What is IBCP 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 IBCP 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 firstname.lastname@example.org.