Is HomeTrust Bancshares Inc (NASDAQ:HTBI) Over-Exposed To Risk?

The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. HomeTrust Bancshares Inc (NASDAQ:HTBI)is a small-cap bank with a market capitalisation of USD $489.93M. 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 HomeTrust Bancshares’s bottom line. Since the level of risky assets held by the bank impacts the attractiveness of it as an investment, I will take you through three metrics that are insightful proxies for risk. See our latest analysis for HomeTrust Bancshares

NasdaqGS:HTBI Historical Debt Jan 29th 18
NasdaqGS:HTBI Historical Debt Jan 29th 18

How Good Is HomeTrust Bancshares At Forecasting Its Risks?

HomeTrust 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 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. Given its high bad loan to bad debt ratio of 106.91% HomeTrust Bancshares has cautiously over-provisioned 6.91% above the appropriate minimum, indicating a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.

How Much Risk Is Too Much?

HomeTrust Bancshares is considered to be in a good financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risky? Typically, 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 HomeTrust Bancshares’s bottom line. Since bad loans make up a relatively small 0.86% of total assets, the bank exhibits strict bad debt management and faces low risk of default.

Is There Enough Safe Form Of Borrowing?

Handing Money Transparent HomeTrust Bancshares 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since HomeTrust Bancshares’s total deposit to total liabilities is within the sensible margin at 73.84% 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.

Final words

HomeTrust Bancshares shows prudent management of risky assets and lending behaviour. It has a strong understanding of how much it should provision for lower quality borrowers and has maintained a sensible level of deposits against its liabilities. The company’s sound and sensible lending strategy gives us more conviction in its ability to manage its operational risks which makes an investment in HomeTrust Bancshares a less risky one. Keep in mind that a stock investment requires research on more than just its operational side. Below, I’ve compiled three important aspects you should look at: