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Post-GFC recovery has led to improving credit quality and a strong growth environment for 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$642.67M, Peapack-Gladstone Financial Corporation’s (NASDAQ:PGC) 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 Peapack-Gladstone Financial’s bottom line. Today we will analyse Peapack-Gladstone Financial’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank. View our latest analysis for Peapack-Gladstone Financial
Does Peapack-Gladstone Financial Understand Its Own Risks?
Peapack-Gladstone 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 283.13%, the bank has extremely over-provisioned by 183.13% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.
How Much Risk Is Too Much?
Peapack-Gladstone Financial’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. 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 out directly from Peapack-Gladstone Financial’s profit. Since bad loans only make up a very insignificant 0.36% 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.
How Big Is Peapack-Gladstone Financial’s Safety Net?
Peapack-Gladstone Financial 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 Peapack-Gladstone Financial’s total deposit to total liabilities is very high at 90.75% which is well-above the prudent level of 50% for banks, Peapack-Gladstone Financial may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.