Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. Great Western Bancorp Inc (NYSE:GWB) is a small-cap bank with a market capitalisation of US$2.2b. 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 Great Western Bancorp’s bottom line. Since the level of risky assets held by the bank impacts the attractiveness of it as an investment, I will take you through three metrics that are insightful proxies for risk.
Does Great Western Bancorp Understand Its Own Risks?
Great Western Bancorp’s ability to forecast and provision for its bad loans relatively accurately indicates it has a good understanding of the level of risk it is taking on. If it writes off more than 100% of the bad debt it provisioned for, then it has poorly anticipated the factors that may have contributed to a higher bad loan level which begs the question – does Great Western Bancorp understand its own risk?. With an extremely low bad loan to bad debt ratio of 45.07%, Great Western Bancorp has significantly under-provisioned by -54.93% which is well below the appropriate 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?
If Great Western Bancorp does not engage in overly risky lending practices, it is considered to be in good financial shape. 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 Great Western Bancorp’s bottom line. Since bad loans only make up 1.52% of total assets for the bank, it exhibits prudent bad debt management and faces an industry-average risk of default.
Is There Enough Safe Form Of Borrowing?
Great Western Bancorp 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. Since Great Western Bancorp’s total deposit to total liabilities is very high at 95% which is well-above the prudent level of 50% for banks, Great Western Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
How will GWB’s recent acquisition impact the business going forward? Should you be concerned about the future of GWB 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 GWB. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for GWB’s future growth? Take a look at our free research report of analyst consensus for GWB’s outlook.
- Valuation: What is GWB 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 GWB 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 firstname.lastname@example.org.