Want to participate in a research study? Help shape the future of investing tools and earn a $60 gift card!
The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. Economic growth impacts the stability of salaries and interest rate level which in turn affects borrowers’ demand for, and ability to repay, their loans. As a small-cap bank with a market capitalisation of US$231m, Chemung Financial Corporation’s (NASDAQ:CHMG) profit and value are directly affected by economic activity. Risk associate with repayment is measured by the level of bad debt which is an expense written off Chemung Financial’s bottom line. Today we will analyse Chemung Financial’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
Does Chemung Financial Understand Its Own Risks?
The ability for Chemung Financial 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 154.59%, the bank has cautiously over-provisioned by 54.59%, which may suggest the bank is anticipating additional non-performing loans.
What Is An Appropriate Level Of Risk?
Chemung Financial’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Ideally, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes out directly from Chemung Financial’s profit. A ratio of 0.93% may indicate the bank faces relatively low chance of default and exhibits strong bad debt management - or it could indicate risks in the portfolio have not fully matured.
How Big Is Chemung Financial’s Safety Net?
Chemung Financial 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since Chemung Financial’s total deposit to total liabilities is very high at 99% which is well-above the prudent level of 50% for banks, Chemung Financial may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
CHMG'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. Below, I've listed three fundamental areas on Simply Wall St's dashboard for a quick visualization on current trends for CHMG. I've also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for CHMG’s future growth? Take a look at our free research report of analyst consensus for CHMG’s outlook.
- Valuation: What is CHMG 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 CHMG 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.