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$1.9b, Eagle Bancorp, Inc.’s (NASDAQ:EGBN) 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 Eagle Bancorp’s bottom line. Today we will analyse Eagle Bancorp’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is Eagle Bancorp At Forecasting Its Risks?
The ability for Eagle Bancorp 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 large non-performing loan allowance to non-performing loan ratio of 429.71%, Eagle Bancorp over-provisioned by 329.71% above the minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
How Much Risk Is Too Much?Eagle Bancorp’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes out directly from Eagle Bancorp’s profit. Since bad loans only make up an insignificant 0.23% of its total assets, the bank may have very strict risk management – or perhaps the risks in its portfolio have not eventuated yet.
How Big Is Eagle Bancorp’s Safety Net?Eagle Bancorp 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since Eagle Bancorp’s total deposit to total liabilities is very high at 96% which is well-above the prudent level of 50% for banks, Eagle Bancorp 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 EGBN, 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 EGBN’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 EGBN’s future growth? Take a look at our free research report of analyst consensus for EGBN’s outlook.
- Valuation: What is EGBN 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 EGBN 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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