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Risk Factors To Consider Before Investing In West Bancorporation Inc (NASDAQ:WTBA)

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$347m, West Bancorporation Inc’s (NASDAQ:WTBA) 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 West Bancorporation’s bottom line. Today we will analyse West Bancorporation’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.

See our latest analysis for West Bancorporation

NasdaqGS:WTBA Historical Debt October 26th 18

How Good Is West Bancorporation At Forecasting Its Risks?

West Bancorporation’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. Given its large bad loan to bad debt ratio of over 500%, West Bancorporation has excessively over-provisioned above the appropriate minimum of 100%, indicating the bank is extremely cautious with their expectation of bad debt and should adjust their forecast moving forward.

What Is An Appropriate Level Of Risk?

By nature, West Bancorporation 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 as expenses when loans are not repaid which directly impacts West Bancorporation’s bottom line. Since bad loans only make up a very insignificant 0.14% 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.

Is There Enough Safe Form Of Borrowing?

Handing Money Transparent

West Bancorporation 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since West Bancorporation’s total deposit to total liabilities is very high at 94% which is well-above the prudent level of 50% for banks, West Bancorporation may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.

Next Steps:

The recent acquisition is expected to bring more opportunities for WTBA, 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. The list below is my go-to checks for WTBA. 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.

  1. Future Outlook: What are well-informed industry analysts predicting for WTBA’s future growth? Take a look at our free research report of analyst consensus for WTBA’s outlook.
  2. Valuation: What is WTBA 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 WTBA 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.