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$2.0b, Banner Corporation’s (NASDAQ:BANR) 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 Banner’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 Banner’s a stock investment.
Does Banner Understand Its Own Risks?
The ability for Banner to accurately forecast and provision for its bad loans shows it has a strong understanding of the level of risk it is taking on. If the bank provisions for more than 100% of the bad debt it actually writes off, then could be considered to be relatively prudent and accurate in its bad debt provisioning. Given its large non-performing loan allowance to non-performing loan ratio of over 500%, Banner has over-provisioned relative to its current level of non-performing loans, which could indicate the bank is expecting to incur further bad loans in the near future.
How Much Risk Is Too Much?
Banner’s operations expose it 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 debts. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts Banner’s bottom line. Since bad loans only make up an insignificant 0.18% of its total assets, the bank may have very strict risk management – or perhaps the risks in its portfolio have not eventuated yet.
Is There Enough Safe Form Of Borrowing?
Banner 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Banner’s total deposit level of 91% of its total liabilities is very high and is well-above the sensible level of 50% for financial institutions. This may mean the bank is too cautious with its level of its safer form of borrowing and has plenty of headroom to take on risker forms of liability.
How will BANR’s recent acquisition impact the business going forward? Should you be concerned about the future of BANR and the sustainability of its financial health? I’ve bookmarked BANR’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 BANR’s future growth? Take a look at our free research report of analyst consensus for BANR’s outlook.
- Valuation: What is BANR 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 BANR 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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