The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. Seacoast Banking Corporation of Florida (NASDAQ:SBCF) is a small-cap bank with a market capitalisation of US$1.4b. 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 Seacoast Banking of Florida’s bottom line. Today I will take you through some bad debt and liability measures to analyse the level of risky assets held by the bank. Looking through a risk-lens is a useful way to assess the attractiveness of Seacoast Banking of Florida’s a stock investment.
Does Seacoast Banking of Florida Understand Its Own Risks?
Seacoast Banking of Florida’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. 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. With a non-performing loan allowance to non-performing loan ratio of 122.46%, the bank has cautiously over-provisioned by 22.46%, which may suggest the bank is anticipating additional non-performing loans.
What Is An Appropriate Level Of Risk?Seacoast Banking of Florida 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. When these loans are not repaid, they are written off as expenses which come directly out of the bank’s profit. Since bad loans make up a relatively small 0.55% of total assets, the bank may have stricter risk management, or its risks may not have had time to materialise yet.
How Big Is Seacoast Banking of Florida’s Safety Net?Seacoast Banking of Florida 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Seacoast Banking of Florida’s total deposit level of 88% 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.
SBCF’s acquisition will impact the business moving forward. Keep an eye on how this decision plays out in the future, especially on its financial health and earnings growth. The list below is my go-to checks for SBCF. 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 SBCF’s future growth? Take a look at our free research report of analyst consensus for SBCF’s outlook.
- Valuation: What is SBCF 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 SBCF 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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