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Risk Factors To Consider Before Investing In German American Bancorp Inc (NASDAQ:GABC)

Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. 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$777m, German American Bancorp Inc’s (NASDAQ:GABC) 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 German American Bancorp’s bottom line. Today we will analyse German American Bancorp’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.

View our latest analysis for German American Bancorp

NasdaqGS:GABC Historical Debt November 26th 18

How Good Is German American Bancorp At Forecasting Its Risks?

German American Bancorp’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 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. Given its high bad loan to bad debt ratio of 188.9% German American Bancorp has cautiously over-provisioned 88.9% above the appropriate minimum, indicating a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.

How Much Risk Is Too Much?

If German American Bancorp does not engage in overly risky lending practices, it is considered to be in good financial shape. Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes directly out of the bank’s profit. Since bad loans only make up a very insignificant 0.36% of its total assets, the bank exhibits very strict bad loan management and is exposed to a relatively insignificant level of risk in terms of default.

How Big Is German American Bancorp’s Safety Net?

Handing Money Transparent

German American 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since German American Bancorp’s total deposit to total liabilities is very high at 88% which is well-above the prudent level of 50% for banks, German American Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.

Next Steps:

How will GABC’s recent acquisition impact the business going forward? Should you be concerned about the future of GABC and the sustainability of its financial health? Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for GABC. I’ve also used this site as a source of data for my article.

  1. Future Outlook: What are well-informed industry analysts predicting for GABC’s future growth? Take a look at our free research report of analyst consensus for GABC’s outlook.
  2. Valuation: What is GABC 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 GABC is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.com.