Should You Be Concerned About Hope Bancorp Inc’s (NASDAQ:HOPE) Risks?
Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. As a small-cap bank with a market capitalisation of US$2.45B, Hope Bancorp Inc’s (NASDAQ:HOPE) 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 Hope 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 Hope Bancorp’s a stock investment. View our latest analysis for Hope Bancorp
How Good Is Hope Bancorp At Forecasting Its Risks?
Hope Bancorp’s ability to forecast and provision for its bad loans relatively accurately indicates it has a good understanding of the level of risk it is taking on. The bank has poorly anticipated the factors contributing to higher bad loan levels if it writes off more than 100% of the bad debt it provisioned for. This begs the question – does Hope Bancorp understand the risks it has taken on? With a bad loan to bad debt ratio of 73.88%, Hope Bancorp has under-provisioned by -26.12% which is below the sensible margin of error, illustrating room for improvement in the bank’s forecasting methodology.
How Much Risk Is Too Much?
Hope Bancorp is engaging in risking lending practices if it is over-exposed to bad debt. 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 out directly from Hope Bancorp’s profit. Since bad loans make up a relatively small 1.03% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
Is There Enough Safe Form Of Borrowing?
Hope 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. Since Hope Bancorp’s total deposit to total liabilities is very high at 88.34% which is well-above the prudent level of 50% for banks, Hope Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
Next Steps:
Hope Bancorp’s level of deposits is sensible relative to its liabilities. However, its mediocre management of bad debt could negatively impact its cash flows. We’ve only touched on operational risks for HOPE in this article. But as a stock investment, there are other fundamentals you need to understand. I’ve put together three relevant factors you should look at:
Future Outlook: What are well-informed industry analysts predicting for HOPE’s future growth? Take a look at our free research report of analyst consensus for HOPE’s outlook.
Valuation: What is HOPE 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 HOPE 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 pass 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.
