Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in 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$1.3b, First Busey Corporation’s (NASDAQ:BUSE) 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 First Busey’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 First Busey’s a stock investment.
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How Good Is First Busey At Forecasting Its Risks?
First Busey’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 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 129.4%, the bank has cautiously over-provisioned by 29.4%, 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?
First Busey is engaging in risking lending practices if it is over-exposed to bad debt. Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes directly out of the bank’s profit. Since bad loans make up a relatively small 0.72% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
Is There Enough Safe Form Of Borrowing?
First Busey 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 First Busey’s total deposit to total liabilities is very high at 90% which is well-above the prudent level of 50% for banks, First Busey may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
BUSE’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. Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for BUSE. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for BUSE’s future growth? Take a look at our free research report of analyst consensus for BUSE’s outlook.
- Valuation: What is BUSE 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 BUSE 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 email@example.com.