Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. Bridge Bancorp, Inc. (NASDAQ:BDGE) is a small-cap bank with a market capitalisation of US$491m. 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 Bridge 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 Bridge Bancorp Understand Its Own Risks?
The ability for Bridge 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 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. Given its large bad loan to bad debt ratio of over 500%, Bridge Bancorp has excessively over-provisioned above the appropriate minimum of 100%, indicating the bank is extremely cautious with their expectation of bad debt and should adjust their forecast moving forward.
How Much Risk Is Too Much?
By nature, Bridge Bancorp is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Typically, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts Bridge Bancorp’s bottom line. The bank’s bad debt only makes up a very small 0.061% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
How Big Is Bridge Bancorp’s Safety Net?
Bridge Bancorp 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since Bridge Bancorp’s total deposit to total liabilities is very high at 90% which is well-above the prudent level of 50% for banks, Bridge Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
How will BDGE’s recent acquisition impact the business going forward? Should you be concerned about the future of BDGE and the sustainability of its financial health? I’ve bookmarked BDGE’s company page on Simply Wall St to stay informed with changes in outlook and valuation. This is also the source of data for this article. The three main sections I’d recommend you check out are:
- Future Outlook: What are well-informed industry analysts predicting for BDGE’s future growth? Take a look at our free research report of analyst consensus for BDGE’s outlook.
- Valuation: What is BDGE 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 BDGE 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 email@example.com.