As a small cap company operating in a heavily regulated financial services sector, an investment in Bancorp Of New Jersey Inc (NYSEMKT:BKJ) has many factors to consider. One of the biggest risk it faces as a bank is bad loans, also known as credit risk. The ability for borrowers to repay their loans depends on the stability of their salary and interest rate levels which is impacted by macroeconomic events and in turn impacts the profitability of small banks. This is because bad debt is written off as an expense and impacts Bancorp Of New Jersey’s bottom line and shareholders’ value. Today we will analyse Bancorp Of New Jersey’s level of bad debt and liabilities in order to understand the risk involved with investing in Bancorp Of New Jersey
Does Bancorp Of New Jersey Understand Its Own Risks?
The ability for Bancorp Of New Jersey to forecast and provision for its bad loans accurately serves as an indication for the bank’s understanding of its own level of risk. If it writes off more than 100% of the bad debt it provisioned for, then it has inadequately estimated the factors that may have added to a higher bad loan level which begs the question – does Bancorp Of New Jersey understand its own risk? With a bad loan to bad debt ratio of 52.2%, Bancorp Of New Jersey has under-provisioned by -47.8% which is below the sensible margin of error, illustrating room for improvement in the bank’s forecasting methodology.
What Is An Appropriate Level Of Risk?
If Bancorp Of New Jersey does not engage in overly risky lending practices, it is considered to be in good financial shape. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. When these loans are not repaid, they are written off as expenses which comes directly out of the bank’s profit. With a ratio of 2.12%, the bank faces an appropriate level of bad loan, indicating prudent management and an industry-average risk of default.
How Big Is Bancorp Of New Jersey’s Safety Net?
Bancorp Of New Jersey 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. Since Bancorp Of New Jersey’s total deposit to total liabilities is very high at 95.9% which is well-above the prudent level of 50% for banks, Bancorp Of New Jersey may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
Keep in mind that a stock investment requires research on more than just its operational side. I’ve put together three pertinent factors you should further research:
- Future Outlook: What are well-informed industry analysts predicting for BKJ’s future growth? Take a look at our free research report of analyst consensus for BKJ’s outlook.
- Valuation: What is BKJ 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 BKJ 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 firstname.lastname@example.org.