Risk Factors You Should Consider Before Investing In Wintrust Financial Corporation (NASDAQ:WTFC)

The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. As a small-cap bank with a market capitalisation of USD $4.61B, Wintrust Financial Corporation (NASDAQ:WTFC)’s 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 Wintrust Financial’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 Wintrust Financial's a stock investment. See our latest analysis for Wintrust Financial

How Good Is Wintrust Financial At Forecasting Its Risks?

Wintrust Financial’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 143.54%, the bank has cautiously over-provisioned by 43.54%, which illustrates a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.

What Is An Appropriate Level Of Risk?

Wintrust Financial is engaging in risking lending practices if it is over-exposed to bad debt. Typically, loans that are “bad” and cannot be recuperated by the bank should comprise 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 Wintrust Financial’s bottom line. Since bad loans only make up a very insignificant 0.44% 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.

Is There Enough Safe Form Of Borrowing?

Wintrust Financial 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Wintrust Financial’s total deposit level of 93.64% 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.

Final words

Wintrust Financial shows prudent management of risky assets and lending behaviour. It seems to have a clear understanding of how much it needs to provision each year for lower quality borrowers and it has maintained a safe level of deposits against its liabilities. Wintrust Financial is deemed a less risky investment given its sound and sensible lending strategy which gives us more confidence in its operational risk management.

Now that you know to keep in mind these risk factors when putting together your investment thesis, I recommend you check out our latest free analysis report on Wintrust Financial to see its growth prospects and whether it could be considered an undervalued opportunity.

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