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The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. Peapack-Gladstone Financial Corporation (NASDAQ:PGC) is a small-cap bank with a market capitalisation of US$493m. 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 Peapack-Gladstone Financial’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 Peapack-Gladstone Financial’s a stock investment.
Does Peapack-Gladstone Financial Understand Its Own Risks?
Peapack-Gladstone Financial’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. We generally prefer to see that a provisions covers close to 100% of what it actually writes off, as this could imply a sensible and conservative approach towards bad loans. Given its high non-performing loan allowance to non-performing loan ratio of 149.73% Peapack-Gladstone Financial has cautiously over-provisioned 49.73% 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?
Peapack-Gladstone Financial may be taking on too many risky loans if it is over-exposed to bad debt. 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. Loans are written off as expenses when they are not repaid, which comes directly out of Peapack-Gladstone Financial’s profit. Since bad loans make up a relatively small 0.65% 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?
Peapack-Gladstone Financial operates by lending out its various forms of borrowings. Customers’ deposits tend to carry the smallest risk given 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 Peapack-Gladstone Financial’s total deposit to total liabilities is very high at 94% which is well-above the prudent level of 50% for banks, Peapack-Gladstone Financial 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 PGC, 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 PGC’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 PGC’s future growth? Take a look at our free research report of analyst consensus for PGC’s outlook.
Valuation: What is PGC 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 PGC 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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.