Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. Cathay General Bancorp (NASDAQ:CATY) is a small-cap bank with a market capitalisation of US$3.0b. 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 Cathay General Bancorp’s bottom line. Today we will analyse Cathay General Bancorp’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
Does Cathay General Bancorp Understand Its Own Risks?
The ability for Cathay General 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 provisions for more than 100% of the bad debt it actually writes off, then it is considered to be relatively prudent and accurate in its bad debt provisioning. Given its large bad loan to bad debt ratio of 251.48%, Cathay General Bancorp excessively over-provisioned by 151.48% above the appropriate minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
What Is An Appropriate Level Of Risk?
By nature, Cathay General Bancorp is exposed 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. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts Cathay General Bancorp’s bottom line. 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.
Is There Enough Safe Form Of Borrowing?
Cathay General 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 Cathay General Bancorp’s total deposit to total liabilities is very high at 95% which is well-above the prudent level of 50% for banks, Cathay General Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
How will CATY’s recent acquisition impact the business going forward? Should you be concerned about the future of CATY and the sustainability of its financial health? The list below is my go-to checks for CATY. 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 CATY’s future growth? Take a look at our free research report of analyst consensus for CATY’s outlook.
- Valuation: What is CATY 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 CATY 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.