Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Post-GFC recovery has led to improving credit quality and a strong growth environment for 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$472m, Atlantic Capital Bancshares, Inc.’s (NASDAQ:ACBI) 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 Atlantic Capital Bancshares’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 Atlantic Capital Bancshares’s a stock investment.
How Good Is Atlantic Capital Bancshares At Forecasting Its Risks?
Atlantic Capital 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. With a bad loan to bad debt ratio of 344.88%, the bank has extremely over-provisioned by 244.88% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.
What Is An Appropriate Level Of Risk?If Atlantic Capital Bancshares does not engage in overly risky lending practices, it is considered to be in good financial shape. 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 out directly from Atlantic Capital Bancshares’s profit. The bank’s bad debt only makes up a very small 0.30% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
How Big Is Atlantic Capital Bancshares’s Safety Net?Atlantic Capital Bancshares 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since Atlantic Capital Bancshares’s total deposit to total liabilities is within the sensible margin at 74% compared to other banks’ level of 50%, it shows a prudent level of the bank’s safer form of borrowing and an appropriate level of risk.
The recent acquisition is expected to bring more opportunities for ACBI, which in turn should lead to stronger growth. I would stay up-to-date on how this decision will affect the future of the business in terms of earnings growth and financial health. I’ve bookmarked ACBI’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 ACBI’s future growth? Take a look at our free research report of analyst consensus for ACBI’s outlook.
- Valuation: What is ACBI 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 ACBI 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.