The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. Trustmark Corporation (NASDAQ:TRMK) is a small-cap bank with a market capitalisation of US$2.1b. 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 Trustmark’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 Trustmark’s a stock investment.
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Does Trustmark Understand Its Own Risks?
Trustmark’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. With a bad loan to bad debt ratio of 130.67%, the bank has cautiously over-provisioned by 30.66%, which illustrates 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?
If Trustmark does not engage in overly risky lending practices, it is considered to be in good financial shape. Typically, loans that are “bad” and cannot be recuperated by the bank should comprise 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 Trustmark’s bottom line. Since bad loans make up a relatively small 0.69% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
How Big Is Trustmark’s Safety Net?
Trustmark 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since Trustmark’s total deposit to total liabilities is very high at 97% which is well-above the prudent level of 50% for banks, Trustmark 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 TRMK, 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 TRMK’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 TRMK’s future growth? Take a look at our free research report of analyst consensus for TRMK’s outlook.
- Valuation: What is TRMK 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 TRMK 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.