Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. As a small-cap bank with a market capitalisation of US$183m, Spirit of Texas Bancshares Inc’s (NASDAQ:STXB) profit and value are directly affected by economic growth. This is because borrowers’ demand for, and ability to repay, their loans depend on the stability of their salaries and interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting Spirit of Texas Bancshares’s bottom line. Today we will analyse Spirit of Texas Bancshares’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
Does Spirit of Texas Bancshares Understand Its Own Risks?
Spirit of Texas Bancshares’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. 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. With a bad loan to bad debt ratio of 164.42%, the bank has cautiously over-provisioned by 64.42%, 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. Loans that cannot be recuperated by the bank, also known as bad loans, should typically form 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 0.39% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
Is There Enough Safe Form Of Borrowing?Spirit of Texas Bancshares 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. Spirit of Texas Bancshares’s total deposit level of 92% 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 STXB’s recent acquisition impact the business going forward? Should you be concerned about the future of STXB and the sustainability of its financial health? Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for STXB. I’ve also used this site as a source of data for my article.
- 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.