Should You Be Concerned About Enterprise Financial Services Corp’s (NASDAQ:EFSC) Risk Exposure?

Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. As a small-cap bank with a market capitalisation of USD $1.10B, Enterprise Financial Services Corp (NASDAQ:EFSC)’s profit and value are directly affected by economic growth. This is because borrowers’ demand for, and ability to repay, their loans depend on the stability of their salaries and interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting Enterprise Financial Services’s bottom line. Today we will analyse Enterprise Financial Services’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank. Check out our latest analysis for Enterprise Financial Services

Does Enterprise Financial Services Understand Its Own Risks?

The ability for Enterprise Financial Services 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 bank provision covers more than 100% of what it actually writes off, then it is considered sensible and relatively accurate in its provisioning of bad debt. With a bad loan to bad debt ratio of 480.7%, the bank has extremely over-provisioned by 380.7% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.

How Much Risk Is Too Much?

If Enterprise Financial Services 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. Loans are written off as expenses when they are not repaid, which comes directly out of Enterprise Financial Services’s profit. Since bad loans only make up a very insignificant 0.22% 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 Enterprise Financial Services’s Safety Net?

Enterprise Financial Services 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. Since Enterprise Financial Services’s total deposit to total liabilities is very high at 86.64% which is well-above the prudent level of 50% for banks, Enterprise Financial Services may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.

Final words

Enterprise Financial Services exhibits prudent management of risky assets and lending behaviour with sensible levels for all three ratios. It seems to have a clear understanding of how much it needs to provision each year for lower quality borrowers and it has maintained a safe level of deposits against its liabilities. The company’s judicious lending strategy gives us higher conviction in its ability to manage its operational risks which makes Enterprise Financial Services a less risky investment. Keep in mind that a stock investment requires research on more than just its operational side. I've put together three essential factors you should look at:

1. Future Outlook: What are well-informed industry analysts predicting for EFSC’s future growth? Take a look at our free research report of analyst consensus for EFSC’s outlook.

2. Valuation: What is EFSC 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 EFSC is currently mispriced by the market.

3. 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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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.