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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$754m, Univest Financial Corporation’s (NASDAQ:UVSP) 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 Univest Financial’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 Univest Financial's a stock investment.
Does Univest Financial Understand Its Own Risks?
The ability for Univest Financial to accurately forecast and provision for its bad loans shows it has a strong understanding of the level of risk it is taking on. We generally prefer to see that a provisions covers close to 100% of what it actually writes off, as this could imply a sensible and conservative approach towards bad loans. Given its high non-performing loan allowance to non-performing loan ratio of 117.66% Univest Financial has cautiously over-provisioned 17.66% above its current level of non-performing loans. This could indicate a prudent forecasting methodology, or indicate that further bad loans are expected.
How Much Risk Is Too Much?
Univest Financial is considered to be in better financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risk? Ideally, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes out directly from Univest Financial’s profit. A ratio of 0.66% may indicate the bank faces relatively low chance of default and exhibits strong bad debt management - or it could indicate risks in the portfolio have not fully matured.
Is There Enough Safe Form Of Borrowing?
Univest Financial 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. Univest Financial’s total deposit level of 91% 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.
UVSP'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. Below, I've listed three fundamental areas on Simply Wall St's dashboard for a quick visualization on current trends for UVSP. I've also used this site as a source of data for my article.
Future Outlook: What are well-informed industry analysts predicting for UVSP’s future growth? Take a look at our free research report of analyst consensus for UVSP’s outlook.
Valuation: What is UVSP 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 UVSP 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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.