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$2.05B, Independent Bank Corp’s (NASDAQ:INDB) 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 Independent Bank’s bottom line. Today we will analyse Independent Bank’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank. View our latest analysis for Independent Bank
How Good Is Independent Bank At Forecasting Its Risks?
Independent Bank’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. If the bank provisions for more than 100% of the bad debt it actually writes off, then it is considered to be relatively prudent and accurate in its bad debt provisioning. Given its high bad loan to bad debt ratio of 122.17% Independent Bank has cautiously over-provisioned 22.17% above the appropriate minimum, indicating a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
What Is An Appropriate Level Of Risk?
Independent Bank is considered to be in a good financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risky? Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts Independent Bank’s bottom line. A ratio of 0.78% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
How Big Is Independent Bank’s Safety Net?
Independent Bank 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. Independent Bank’s total deposit level of 94.27% 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.
With positive measures for all three ratios, Independent Bank shows a prudent level of managing its risky assets. It has maintained a sufficient level of deposits against liabilities and reasonably provisioned for the level of bad debt. Independent Bank is deemed a less risky investment given its sound and sensible lending strategy which gives us more confidence in its operational risk management. Today, we’ve only explored one aspect of Independent Bank. However, as a potential stock investment, there are many more fundamentals you need to consider. There are three essential aspects you should further research:
- Future Outlook: What are well-informed industry analysts predicting for INDB’s future growth? Take a look at our free research report of analyst consensus for INDB’s outlook.
- Valuation: What is INDB 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 INDB 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 pass 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.