Why Washington Trust Bancorp Inc’s (NASDAQ:WASH) Risk Control Makes It Attractive

Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. 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$962.48M, Washington Trust Bancorp Inc’s (NASDAQ:WASH) 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 Washington Trust Bancorp’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 Washington Trust Bancorp's a stock investment. See our latest analysis for Washington Trust Bancorp

How Good Is Washington Trust Bancorp At Forecasting Its Risks?

The ability for Washington Trust Bancorp to accurately forecast and provision for its bad loans shows it has a strong understanding of the level of risk it is taking on. 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. Given its high bad loan to bad debt ratio of 174.14% Washington Trust Bancorp has cautiously over-provisioned 74.14% above the appropriate minimum, indicating 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, Washington Trust Bancorp 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. Loans are written off as expenses when they are not repaid, which comes directly out of Washington Trust Bancorp’s profit. Since bad loans only make up a very insignificant 0.45% of its total assets, the bank exhibits very strict bad loan management and is exposed to a relatively insignificant level of risk in terms of default.

How Big Is Washington Trust Bancorp’s Safety Net?

Washington Trust 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. Since Washington Trust Bancorp’s total deposit to total liabilities is within the sensible margin at 78.77% compared to other banks' level of 50%, it shows a prudent level of the bank's safer form of borrowing and an appropriate level of risk.

Next Steps:

Washington Trust Bancorp shows prudent management of risky assets and lending behaviour. It has maintained a sufficient level of deposits against liabilities and reasonably provisioned for the level of bad debt. Washington Trust Bancorp is deemed a less risky investment given its sound and sensible lending strategy which gives us more confidence in its operational risk management. Today, we've only explored one aspect of Washington Trust Bancorp. However, as a potential stock investment, there are many more fundamentals you need to consider. There are three pertinent factors you should further research:

1. Future Outlook: What are well-informed industry analysts predicting for WASH’s future growth? Take a look at our free research report of analyst consensus for WASH’s outlook.
2. Valuation: What is WASH 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 WASH is currently mispriced by the market.
3. 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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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.