Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. MBT Financial Corp (NASDAQ:MBTF) is a small-cap bank with a market capitalisation of US$254.0m. 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 MBT 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 MBT Financial’s a stock investment.
How Good Is MBT Financial At Forecasting Its Risks?
MBT Financial’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. The bank has poorly anticipated the factors contributing to higher bad loan levels if it writes off more than 100% of the bad debt it provisioned for. This begs the question – does MBT Financial understand the risks it has taken on? With a bad loan to bad debt ratio of 68.78%, MBT Financial has under-provisioned by -31.22% which is below the sensible margin of error, illustrating room for improvement in the bank’s forecasting methodology.
How Much Risk Is Too Much?MBT Financial is engaging in risking lending practices if it is over-exposed to bad debt. Loans that cannot be recovered by the bank are known as bad loans and typically should make up less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes out directly from MBT Financial’s profit. With a ratio of 1.56%, the bank faces an appropriate level of bad loan, indicating prudent management and an industry-average risk of default.
Is There Enough Safe Form Of Borrowing?MBT Financial 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. MBT Financial’s total deposit level of 95.5% 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.
MBTF’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 MBTF. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for MBTF’s future growth? Take a look at our free research report of analyst consensus for MBTF’s outlook.
- Valuation: What is MBTF 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 MBTF 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.