The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. Midland States Bancorp, Inc. (NASDAQ:MSBI) is a small-cap bank with a market capitalisation of US$550m. 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 Midland States Bancorp’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.
How Good Is Midland States Bancorp At Forecasting Its Risks?
The ability for Midland States Bancorp to forecast and provision for its bad loans accurately serves as an indication for the bank’s understanding of its own level of risk. The bank has poorly anticipated the factors contributing to higher bad loan levels if it writes off more than 100% of the bad debt it provisioned for. This begs the question – does Midland States Bancorp understand the risks it has taken on? Midland States Bancorp’s low bad loan to bad debt ratio of 50.91% means the bank has under-provisioned by -49.09%, indicating either an unexpected one-off occurence with defaults or poor bad debt provisioning.
How Much Risk Is Too Much?
Midland States Bancorp 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. Since bad loans make up a relatively small 0.92% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
How Big Is Midland States Bancorp’s Safety Net?
Midland States Bancorp 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since Midland States Bancorp’s total deposit to total liabilities is very high at 81% which is well-above the prudent level of 50% for banks, Midland States Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
MSBI’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. The list below is my go-to checks for MSBI. I use Simply Wall St’s platform to keep informed about any changes in the company and market sentiment, and also use their data as the basis for my articles.
- Future Outlook: What are well-informed industry analysts predicting for MSBI’s future growth? Take a look at our free research report of analyst consensus for MSBI’s outlook.
- Valuation: What is MSBI 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 MSBI 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 past 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. For errors that warrant correction please contact the editor at email@example.com.