The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. OFG Bancorp (NYSE:OFG) is a small-cap bank with a market capitalisation of US$1.0b. 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 OFG Bancorp’s bottom line. Since the level of risky assets held by the bank impacts the attractiveness of it as an investment, I will take you through three metrics that are insightful proxies for risk.
Does OFG Bancorp Understand Its Own Risks?
OFG Bancorp’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. With a non-performing loan allowance to non-performing loan ratio of 131.84%, the bank has cautiously over-provisioned by 31.84%, which may suggest the bank is anticipating additional non-performing loans.
What Is An Appropriate Level Of Risk?
By nature, banks like OFG Bancorp are exposed to risky assets, by lending to borrowers who may not be able to repay their loans. Loans that cannot be recovered by the bank are known as bad loans and typically should make up less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes out directly from OFG Bancorp’s profit. Since bad loans only make up 2.72% of total assets for the bank, it may be taking an appropriate approach to risk management.
How Big Is OFG Bancorp’s Safety Net?
OFG 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 OFG Bancorp’s total deposit to total liabilities is very high at 88% which is well-above the prudent level of 50% for banks, OFG Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
The recent acquisition is expected to bring more opportunities for OFG, which in turn should lead to stronger growth. I would stay up-to-date on how this decision will affect the future of the business in terms of earnings growth and financial health. Below, I've listed three fundamental areas on Simply Wall St's dashboard for a quick visualization on current trends for OFG. I've also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for OFG’s future growth? Take a look at our free research report of analyst consensus for OFG’s outlook.
- Valuation: What is OFG 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 OFG 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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