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$2.3b, International Bancshares Corporation’s (NASDAQ:IBOC) 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 International Bancshares’s bottom line. Today we will analyse International Bancshares’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
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Does International Bancshares Understand Its Own Risks?
International Bancshares’s ability to forecast and provision for its bad loans indicates it has a good 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 249.6%, International Bancshares excessively over-provisioned by 149.6% above the appropriate minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
How Much Risk Is Too Much?
International Bancshares 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. When these loans are not repaid, they are written off as expenses which comes directly out of the bank’s profit. Since bad loans only make up a very insignificant 0.38% 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 International Bancshares’s Safety Net?
International Bancshares 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 International Bancshares’s total deposit to total liabilities is very high at 87% which is well-above the prudent level of 50% for banks, International Bancshares may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
IBOC’s acquisition will impact the business moving forward. Keep an eye on how this decision plays out in the future, especially on its financial health and earnings growth. I’ve bookmarked IBOC’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 IBOC’s future growth? Take a look at our free research report of analyst consensus for IBOC’s outlook.
- Valuation: What is IBOC 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 IBOC 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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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.