Three Key Risks For First Financial Corporation (NASDAQ:THFF) You Should Know
The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. 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$617.7m, First Financial Corporation’s (NASDAQ:THFF) 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 First Financial’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 First Financial’s a stock investment.
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How Good Is First Financial At Forecasting Its Risks?
The ability for First 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 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. With a bad loan to bad debt ratio of 106.39%, the bank has cautiously over-provisioned by 6.39%, 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, First Financial is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Loans that cannot be recovered by the bank are known as bad loans and typically should make up 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. A ratio of 0.98% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
How Big Is First Financial’s Safety Net?
First 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since First Financial’s total deposit to total liabilities is very high at 96.3% which is well-above the prudent level of 50% for banks, First Financial 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 THFF’s recent acquisition impact the business going forward? Should you be concerned about the future of THFF 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 THFF. I’ve also used this site as a source of data for my article.
Future Outlook: What are well-informed industry analysts predicting for THFF’s future growth? Take a look at our free research report of analyst consensus for THFF’s outlook.
Valuation: What is THFF 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 THFF 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 editorial-team@simplywallst.com.
