Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. Home Bancshares Inc (Conway AR) (NASDAQ:HOMB)is a small-cap bank with a market capitalisation of USD $4.28B. 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 Home Bancshares (Conway AR)’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 Home Bancshares (Conway AR)’s a stock investment. See our latest analysis for Home Bancshares (Conway AR)
NasdaqGS:HOMB Historical Debt Jan 18th 18
Home Bancshares (Conway AR)’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. If the level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then it is relatively accurate and prudent in its bad debt provisioning. With a bad loan to bad debt ratio of 174.47%, the bank has cautiously over-provisioned by 74.47%, which illustrates a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
If Home Bancshares (Conway AR) does not engage in overly risky lending practices, it is considered to be in good financial shape. Typically, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of Home Bancshares (Conway AR)’s profit. Since bad loans make up a relatively small 0.62% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
Handing Money Transparent
Home Bancshares (Conway AR) 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Home Bancshares (Conway AR)’s total deposit level of 86.72% 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.
With positive measures for all three ratios, Home Bancshares (Conway AR) shows a prudent level of managing its risky assets. 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. The company’s sound and sensible lending strategy gives us more conviction in its ability to manage its operational risks which makes an investment in Home Bancshares (Conway AR) a less risky one. Keep in mind that a stock investment requires research on more than just its operational side. Below, I’ve compiled three key aspects you should further research:
1. Future Outlook: What are well-informed industry analysts predicting for HOMB’s future growth? Take a look at our free research report of analyst consensus for HOMB’s outlook.
2. Valuation: What is HOMB 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 HOMB 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.
To help readers see pass 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.