Three Key Risks For MainSource Financial Group Inc (NASDAQ:MSFG) You Should Know
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$1.04B, MainSource Financial Group Inc’s (NASDAQ:MSFG) 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 MainSource Financial Group’s bottom line. Today we will analyse MainSource Financial Group’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank. View our latest analysis for MainSource Financial Group
Does MainSource Financial Group Understand Its Own Risks?
MainSource Financial Group’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 121.44% MainSource Financial Group has cautiously over-provisioned 21.44% above the appropriate minimum, indicating 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, MainSource Financial Group 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. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts MainSource Financial Group’s bottom line. Since bad loans make up a relatively small 0.61% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
Is There Enough Safe Form Of Borrowing?
MainSource Financial Group 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since MainSource Financial Group’s total deposit to total liabilities is very high at 85.24% which is well-above the prudent level of 50% for banks, MainSource Financial Group may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
Next Steps:
With positive measures for all three ratios, MainSource Financial Group 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. The company’s judicious lending strategy gives us higher conviction in its ability to manage its operational risks which makes MainSource Financial Group a less risky investment. We’ve only touched on operational risks for MSFG in this article. But as a stock investment, there are other fundamentals you need to understand. I’ve put together three pertinent factors you should look at:
Future Outlook: What are well-informed industry analysts predicting for MSFG’s future growth? Take a look at our free research report of analyst consensus for MSFG’s outlook.
Valuation: What is MSFG 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 MSFG 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.
