Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. Old National Bancorp (NASDAQ:ONB)is a small-cap bank with a market capitalisation of USD $2.36B. 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 Old National Bancorp’s bottom line. Today we will analyse Old National Bancorp’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 Old National Bancorp
Does Old National Bancorp Understand Its Own Risks?
The ability for Old National Bancorp to forecast and provision for its bad loans accurately serves as an indication for the bank’s understanding of its own level of risk. If it writes off more than 100% of the bad debt it provisioned for, then it has inadequately estimated the factors that may have added to a higher bad loan level which begs the question – does Old National Bancorp understand its own risk? Given Old National Bancorp’s bad loan to bad debt ratio is 36.58%, the bank has extremely under-provisioned by -63.42% which well below the sensible margin of error. This may be due to a one-off bad debt occurence or a constant underestimation of the factors contributing to its bad loan levels.
How Much Risk Is Too Much?
By nature, Old National Bancorp is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes directly out of the bank’s profit. A ratio of 1.44% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.Is There Enough Safe Form Of Borrowing?
Old National 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Old National Bancorp’s total deposit level of 80.61% 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.Conclusion
Old National Bancorp’s safer form of borrowing is appropriately high compared to the liabilities of the company. Conversely its cash flow could be negatively impacted by its below-average bad debt management.
Now that you know to keep in mind these risk factors when putting together your investment thesis, I recommend you check out our latest free analysis report on Old National Bancorp to see its growth prospects and whether it could be considered an undervalued opportunity.
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