The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. Old National Bancorp (NASDAQ:ONB) is a small-cap bank with a market capitalisation of US$2.7b. Its profit and value are directly impacted by its borrowers’ ability to pay which is driven by the level of economic growth. This is because growth determines the stability of a borrower’s salary as well as the level of interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting Old National Bancorp’s bottom line. Today we will analyse Old National Bancorp’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
Does Old National Bancorp Understand Its Own Risks?
Old National Bancorp’s understanding of its risk level can be estimated by its ability to forecast and provision for its bad loans. The bank has poorly anticipated the factors contributing to higher bad loan levels if it writes off more than 100% of the bad debt it provisioned for. This begs the question – does Old National Bancorp understand the risks it has taken on? Given Old National Bancorp’s bad loan to bad debt ratio is 34.35%, the bank has extremely under-provisioned by -65.65% which well below the sensible margin of error. This may be due to a one-off bad debt occurence or a constant underestimation of the factors contributing to its bad loan levels.
How Much Risk Is Too Much?
Old National Bancorp’s operations expose it 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. Loans are written off as expenses when they are not repaid, which comes directly out of Old National Bancorp’s profit. Since bad loans make up a relatively small 1.37% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
Is There Enough Safe Form Of Borrowing?
Old National Bancorp 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 Old National Bancorp’s total deposit to total liabilities is very high at 82% which is well-above the prudent level of 50% for banks, Old National Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
The recent acquisition is expected to bring more opportunities for ONB, which in turn should lead to stronger growth. I would stay up-to-date on how this decision will affect the future of the business in terms of earnings growth and financial health. I’ve bookmarked ONB’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 ONB’s future growth? Take a look at our free research report of analyst consensus for ONB’s outlook.
- Valuation: What is ONB 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 ONB 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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