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$673m, Horizon Bancorp, Inc.’s (NASDAQ:HBNC) 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 Horizon Bancorp’s bottom line. Today we will analyse Horizon Bancorp’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is Horizon Bancorp At Forecasting Its Risks?
The ability for Horizon 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. If the bank provisions for more than 100% of the bad debt it actually writes off, then could be considered to be relatively prudent and accurate in its bad debt provisioning. Given its high non-performing loan allowance to non-performing loan ratio of 117.43% Horizon Bancorp has cautiously over-provisioned 17.43% above its current level of non-performing loans. This could indicate a prudent forecasting methodology, or indicate that further bad loans are expected.
What Is An Appropriate Level Of Risk?Horizon Bancorp is considered to be in better financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risk? Ideally, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts Horizon Bancorp’s bottom line. Since bad loans make up a relatively small 0.50% of total assets, the bank may have stricter risk management, or its risks may not have had time to materialise yet.
Is There Enough Safe Form Of Borrowing?Horizon Bancorp operates by lending out its various forms of borrowings. Customers’ deposits tend to carry the smallest risk given 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. Horizon Bancorp’s total deposit level of 84% 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.
How will HBNC’s recent acquisition impact the business going forward? Should you be concerned about the future of HBNC and the sustainability of its financial health? The list below is my go-to checks for HBNC. I use Simply Wall St’s platform to keep informed about any changes in the company and market sentiment, and also use their data as the basis for my articles.
- Future Outlook: What are well-informed industry analysts predicting for HBNC’s future growth? Take a look at our free research report of analyst consensus for HBNC’s outlook.
- Valuation: What is HBNC 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 HBNC 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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