The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. TowneBank (NASDAQ:TOWN) is a small-cap bank with a market capitalisation of US$2.0b. 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 TowneBank’s bottom line. Today we will analyse TowneBank’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is TowneBank At Forecasting Its Risks?
TowneBank’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 could be considered to be relatively prudent and accurate in its bad debt provisioning. Given its large non-performing loan allowance to non-performing loan ratio of over 500%, TowneBank has over-provisioned relative to its current level of non-performing loans, which could indicate the bank is expecting to incur further bad loans in the near future.
What Is An Appropriate Level Of Risk?If TowneBank does not engage in overly risky lending practices, it is considered to be in relatively better financial shape. Loans that cannot be recovered by the bank are known as bad loans and typically should make up 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 TowneBank’s bottom line. The bank’s bad debt only makes up a very small 0.059% to total debt which suggests the bank either has strict risk management – or its loans haven’t started going bad yet.
Is There Enough Safe Form Of Borrowing?TowneBank 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 TowneBank’s total deposit to total liabilities is very high at 87% which is well-above the prudent level of 50% for banks, TowneBank may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
TOWN’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. I’ve bookmarked TOWN’s company page on Simply Wall St to stay informed with changes in outlook and valuation. This is also the source of data for this article. The three main sections I’d recommend you check out are:
- Future Outlook: What are well-informed industry analysts predicting for TOWN’s future growth? Take a look at our free research report of analyst consensus for TOWN’s outlook.
- Valuation: What is TOWN 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 TOWN 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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