Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. BancFirst Corporation (NASDAQ:BANF) is a small-cap bank with a market capitalisation of US$1.8b. 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 BancFirst’s bottom line. Today we will analyse BancFirst’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
Does BancFirst Understand Its Own Risks?
The ability for BancFirst to accurately forecast and provision for its bad loans shows it has a strong 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 the bank may be relatively accurate and prudent in its bad debt provisioning. With a non-performing loan allowance to non-performing loan ratio of 136.29%, the bank has cautiously over-provisioned by 36.29%, which may suggest the bank is anticipating additional non-performing loans.
How Much Risk Is Too Much?If BancFirst does not engage in overly risky lending practices, it is considered to be in relatively better financial shape. Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of BancFirst’s profit. A ratio of 0.76% 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.
How Big Is BancFirst’s Safety Net?BancFirst 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 BancFirst’s total deposit to total liabilities is very high at 99% which is well-above the prudent level of 50% for banks, BancFirst may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
The recent acquisition is expected to bring more opportunities for BANF, 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. Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for BANF. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for BANF’s future growth? Take a look at our free research report of analyst consensus for BANF’s outlook.
- Valuation: What is BANF 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 BANF 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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.