Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. As a small-cap bank with a market capitalisation of US$746m, Banc of California, Inc.’s (NYSE:BANC) 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 Banc of California’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 Banc of California's a stock investment.
Does Banc of California Understand Its Own Risks?
The ability for Banc of California 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 the bank may be relatively accurate and prudent in its bad debt provisioning. With a non-performing loan allowance to non-performing loan ratio of 224.39%, the bank has extremely over-provisioned by 124.39% compared to the industry-average. We wonder if this might indicate the bank is expecting to incur further non-performing loans in the near future.
What Is An Appropriate Level Of Risk?
By nature, banks like Banc of California are 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. When these loans are not repaid, they are written off as expenses which comes out directly from Banc of California’s profit. Since bad loans only make up an insignificant 0.38% of its total assets, the bank may have very strict risk management - or perhaps the risks in its portfolio have not eventuated yet.
How Big Is Banc of California’s Safety Net?
Banc of California makes money by lending out its various forms of borrowings. Deposits from customers tend to bear the lowest risk given the relatively stable amount available and interest rate. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since Banc of California’s total deposit to total liabilities is very high at 86% which is well-above the prudent level of 50% for banks, Banc of California may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
BANC'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. I’ve bookmarked BANC’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 BANC’s future growth? Take a look at our free research report of analyst consensus for BANC’s outlook.
- Valuation: What is BANC 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 BANC 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.