The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. Union Bankshares Corporation (NASDAQ:UBSH) is a small-cap bank with a market capitalisation of US$2.39B. 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 Union Bankshares’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 Union Bankshares’s a stock investment. View our latest analysis for Union Bankshares
Does Union Bankshares Understand Its Own Risks?
The ability for Union Bankshares 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 175.73%, the bank has cautiously over-provisioned by 75.73%, which illustrates 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?
Union Bankshares 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? Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. Loans are written off as expenses when they are not repaid, which comes directly out of Union Bankshares’s profit. Since bad loans only make up a very insignificant 0.3% of its total assets, the bank exhibits very strict bad loan management and is exposed to a relatively insignificant level of risk in terms of default.
How Big Is Union Bankshares’s Safety Net?
Union Bankshares makes money by lending out its various forms of borrowings. Deposits from customers tend to bear the lowest risk given the relatively stable amount available and interest rate. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Union Bankshares’s total deposit level of 84.56% 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.
Union Bankshares exhibits prudent management of risky assets and lending behaviour with sensible levels for all three ratios. 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 Union Bankshares a less risky investment. We’ve only touched on operational risks for UBSH in this article. But as a stock investment, there are other fundamentals you need to understand. Below, I’ve compiled three essential aspects you should further research:
- Future Outlook: What are well-informed industry analysts predicting for UBSH’s future growth? Take a look at our free research report of analyst consensus for UBSH’s outlook.
- Valuation: What is UBSH 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 UBSH 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.