The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. As a small-cap bank with a market capitalisation of US$856m, Origin Bancorp, Inc.’s (NASDAQ:OBNK) profit and value are directly affected by economic growth. This is because borrowers’ demand for, and ability to repay, their loans depend on the stability of their salaries and interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting Origin 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.
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How Good Is Origin Bancorp At Forecasting Its Risks?
Origin Bancorp’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. 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. With a bad loan to bad debt ratio of 127.85%, the bank has cautiously over-provisioned by 27.85%, which illustrates 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?
By nature, Origin Bancorp is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts Origin Bancorp’s bottom line. Since bad loans make up a relatively small 0.78% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
Is There Enough Safe Form Of Borrowing?
Origin Bancorp 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 Origin Bancorp’s total deposit to total liabilities is very high at 90% which is well-above the prudent level of 50% for banks, Origin Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
How will OBNK’s recent acquisition impact the business going forward? Should you be concerned about the future of OBNK and the sustainability of its financial health? I’ve bookmarked OBNK’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 OBNK’s future growth? Take a look at our free research report of analyst consensus for OBNK’s outlook.
- Valuation: What is OBNK 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 OBNK 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.