The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. 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$209.92M, Spirit of Texas Bancshares Inc’s (NASDAQ:STXB) 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 Spirit of Texas 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 Spirit of Texas Bancshares
Does Spirit of Texas Bancshares Understand Its Own Risks?
Spirit of Texas 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 provisions for more than 100% of the bad debt it actually writes off, then it is considered to be relatively prudent and accurate in its bad debt provisioning. With a bad loan to bad debt ratio of 157.22%, the bank has cautiously over-provisioned by 57.22%, which illustrates 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?By nature, Spirit of Texas Bancshares 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. Bad debt is written off as expenses when loans are not repaid which directly impacts Spirit of Texas Bancshares’s bottom line. The bank’s bad debt only makes up a very small 0.41% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
How Big Is Spirit of Texas Bancshares’s Safety Net?Spirit of Texas 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Spirit of Texas Bancshares’s total deposit level of 89.71% 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.
Spirit of Texas 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 judicious lending strategy gives us higher conviction in its ability to manage its operational risks which makes Spirit of Texas Bancshares a less risky investment. 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:
- Future Outlook: What are well-informed industry analysts predicting for STXB’s future growth? Take a look at our free research report of analyst consensus for STXB’s outlook.
- Valuation: What is STXB 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 STXB 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.