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$1.3b, First Commonwealth Financial Corporation’s (NYSE:FCF) 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 First Commonwealth Financial’s bottom line. Today we will analyse First Commonwealth Financial’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is First Commonwealth Financial At Forecasting Its Risks?
First Commonwealth Financial’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. We generally prefer to see that a provisions covers close to 100% of what it actually writes off, as this could imply a sensible and conservative approach towards bad loans. Given its high non-performing loan allowance to non-performing loan ratio of 149.14% First Commonwealth Financial has cautiously over-provisioned 49.14% above its current level of non-performing loans. This could indicate a prudent forecasting methodology, or indicate that further bad loans are expected.
How Much Risk Is Too Much?First Commonwealth Financial may be taking on too many risky loans if it is over-exposed to bad debt. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debts. When these loans are not repaid, they are written off as expenses which come directly out of the bank’s profit. Since bad loans make up a relatively small 0.55% of total assets, the bank may have stricter risk management, or its risks may not have had time to materialise yet.
How Big Is First Commonwealth Financial’s Safety Net?First Commonwealth Financial 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since First Commonwealth Financial’s total deposit to total liabilities is very high at 86% which is well-above the prudent level of 50% for banks, First Commonwealth Financial may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
How will FCF’s recent acquisition impact the business going forward? Should you be concerned about the future of FCF and the sustainability of its financial health? The list below is my go-to checks for FCF. I use Simply Wall St’s platform to keep informed about any changes in the company and market sentiment, and also use their data as the basis for my articles.
- Future Outlook: What are well-informed industry analysts predicting for FCF’s future growth? Take a look at our free research report of analyst consensus for FCF’s outlook.
- Valuation: What is FCF 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 FCF 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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