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Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. Bank of the James Financial Group, Inc. (NASDAQ:BOTJ) is a small-cap bank with a market capitalisation of US$65m. 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 Bank of the James Financial Group’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 Bank of the James Financial Group Understand Its Own Risks?
The ability for Bank of the James Financial Group 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 high bad loan to bad debt ratio of 155.87% Bank of the James Financial Group has cautiously over-provisioned 55.87% above the appropriate minimum, indicating a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
What Is An Appropriate Level Of Risk?
If Bank of the James Financial Group does not engage in overly risky lending practices, it is considered to be in good financial shape. 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 as expenses when loans are not repaid which directly impacts Bank of the James Financial Group’s bottom line. A ratio of 0.55% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
Is There Enough Safe Form Of Borrowing?
Bank of the James Financial Group 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 Bank of the James Financial Group’s total deposit to total liabilities is very high at 99% which is well-above the prudent level of 50% for banks, Bank of the James Financial Group may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
BOTJ’s acquisition will impact the business moving forward. Keep an eye on how this decision plays out in the future, especially on its financial health and earnings growth. The list below is my go-to checks for BOTJ. 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 BOTJ’s future growth? Take a look at our free research report of analyst consensus for BOTJ’s outlook.
- Valuation: What is BOTJ 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 BOTJ 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.