Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. Eagle Bancorp, Inc. (NASDAQ:EGBN) is a small-cap bank with a market capitalisation of US$1.6b. 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 Eagle Bancorp’s bottom line. Today we will analyse Eagle Bancorp’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is Eagle Bancorp At Forecasting Its Risks?
The ability for Eagle Bancorp 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 level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then it is relatively accurate and prudent in its bad debt provisioning. Given its large bad loan to bad debt ratio of 452.27%, Eagle Bancorp excessively over-provisioned by 352.27% above the appropriate minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
What Is An Appropriate Level Of Risk?
Eagle Bancorp 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. Loans are written off as expenses when they are not repaid, which comes directly out of Eagle Bancorp’s profit. Since bad loans only make up a very insignificant 0.22% 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 Eagle Bancorp’s Safety Net?
Eagle Bancorp 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. Since Eagle Bancorp’s total deposit to total liabilities is very high at 91% which is well-above the prudent level of 50% for banks, Eagle Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
How will EGBN’s recent acquisition impact the business going forward? Should you be concerned about the future of EGBN 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 EGBN. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for EGBN’s future growth? Take a look at our free research report of analyst consensus for EGBN’s outlook.
- Valuation: What is EGBN 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 EGBN 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 email@example.com.