Real Risks To Know Before Investing In HarborOne Bancorp, Inc. (NASDAQ:HONE)
Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. HarborOne Bancorp, Inc. (NASDAQ:HONE) is a small-cap bank with a market capitalisation of US$514m. 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 HarborOne Bancorp’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 HarborOne Bancorp’s a stock investment.
See our latest analysis for HarborOne Bancorp
Want to help shape the future of investing tools and platforms? Take the survey and be part of one of the most advanced studies of stock market investors to date.
Does HarborOne Bancorp Understand Its Own Risks?
The ability for HarborOne Bancorp to accurately forecast and provision for its bad loans shows it has a strong 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 116.16%, the bank has cautiously over-provisioned by 16.16%, 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?
HarborOne Bancorp is considered to be in a good financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risky? Loans that cannot be recuperated by the bank, also known as bad loans, should typically form 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 0.75% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
Is There Enough Safe Form Of Borrowing?
HarborOne 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. HarborOne Bancorp’s total deposit level of 87% 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.
Next Steps:
The recent acquisition is expected to bring more opportunities for HONE, 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. The list below is my go-to checks for HONE. 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 HONE’s future growth? Take a look at our free research report of analyst consensus for HONE’s outlook.
Valuation: What is HONE 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 HONE 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 editorial-team@simplywallst.com.
