Three Key Risks For FB Financial Corporation (NYSE:FBK) You Should Know
Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. As a small-cap bank with a market capitalisation of US$1.1b, FB Financial Corporation’s (NYSE:FBK) 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 FB Financial’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 FB Financial At Forecasting Its Risks?
The ability for FB Financial 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 level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then the bank may be relatively accurate and prudent in its bad debt provisioning. Given its high non-performing loan allowance to non-performing loan ratio of 172.98% FB Financial has cautiously over-provisioned 72.98% above its current level of non-performing loans. This could indicate a prudent forecasting methodology, or indicate that further bad loans are expected.
What Is An Appropriate Level Of Risk?
If FB Financial does not engage in overly risky lending practices, it is considered to be in relatively better financial shape. Ideally, 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 as expenses when loans are not repaid which directly impacts FB Financial’s bottom line. The bank’s bad debt only makes up a very small 0.46% to total debt which suggests the bank either has strict risk management – or its loans haven’t started going bad yet.
How Big Is FB Financial’s Safety Net?
FB Financial 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. FB Financial’s total deposit level of 93% 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.
Next Steps:
FBK’s acquisition will impact the business moving forward. Keep an eye on how this decision plays out in the future, especially on its financial health and earnings growth. Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for FBK. I’ve also used this site as a source of data for my article.
Future Outlook: What are well-informed industry analysts predicting for FBK’s future growth? Take a look at our free research report of analyst consensus for FBK’s outlook.
Valuation: What is FBK 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 FBK 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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