Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. As a small-cap bank with a market capitalisation of US$3.2b, Community Bank System, Inc.’s (NYSE:CBU) profit and value are directly affected by economic growth. This is because borrowers’ demand for, and ability to repay, their loans depend on the stability of their salaries and interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting Community Bank System’s bottom line. Today we will analyse Community Bank System’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
Does Community Bank System Understand Its Own Risks?
Community Bank System’s ability to forecast and provision for its bad loans indicates it has a good 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 the bank may be relatively accurate and prudent in its bad debt provisioning. Given its high non-performing loan allowance to non-performing loan ratio of 197.14% Community Bank System has cautiously over-provisioned 97.14% above its current level of non-performing loans. This could indicate a prudent forecasting methodology, or indicate that further bad loans are expected.
How Much Risk Is Too Much?
By nature, banks like Community Bank System are exposed to risky assets, by lending to borrowers who may not be able to repay their loans. 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 out directly from Community Bank System’s profit. The bank's bad debt only makes up a very small 0.40% to total debt which suggests the bank either has strict risk management - or its loans haven't started going bad yet.
How Big Is Community Bank System’s Safety Net?
Community Bank System 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 Community Bank System’s total deposit to total liabilities is very high at 94% which is well-above the prudent level of 50% for banks, Community Bank System may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
How will CBU’s recent acquisition impact the business going forward? Should you be concerned about the future of CBU and the sustainability of its financial health? The list below is my go-to checks for CBU. 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 CBU’s future growth? Take a look at our free research report of analyst consensus for CBU’s outlook.
- Valuation: What is CBU 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 CBU 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.
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