Are You Considering All The Risks For Oak Valley Bancorp’s (NASDAQ:OVLY)?
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 USD $167.97M, Oak Valley Bancorp (NASDAQ:OVLY)’s 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 Oak Valley Bancorp’s bottom line. Today we will analyse Oak Valley Bancorp’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank. View our latest analysis for Oak Valley Bancorp
How Good Is Oak Valley Bancorp At Forecasting Its Risks?
Oak Valley Bancorp’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 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 large bad loan to bad debt ratio of over 500%, Oak Valley Bancorp has excessively over-provisioned above the appropriate minimum of 100%, indicating the bank is extremely cautious with their expectation of bad debt and should adjust their forecast moving forward.
How Much Risk Is Too Much?
Oak Valley Bancorp is considered to be in a good financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risky? 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 Oak Valley Bancorp’s profit. The bank’s bad debt only makes up a very small 0.21% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
Is There Enough Safe Form Of Borrowing?
Oak Valley 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Oak Valley Bancorp’s total deposit level of 99.41% of its total liabilities is very high and is well-above the sensible level of 50% for financial institutions. This may mean the bank is too cautious with its level of its safer form of borrowing and has plenty of headroom to take on risker forms of liability.
Final words
With positive measures for all three ratios, Oak Valley Bancorp shows a prudent level of managing its risky assets. It has maintained a sufficient level of deposits against liabilities and reasonably provisioned for the level of bad debt. The company’s sound and sensible lending strategy gives us more conviction in its ability to manage its operational risks which makes an investment in Oak Valley Bancorp a less risky one. Today, we’ve only explored one aspect of Oak Valley Bancorp. However, as a potential stock investment, there are many more fundamentals you need to consider. There are three important factors you should further research:
1. Valuation: What is OVLY 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 OVLY is currently mispriced by the market.
2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Oak Valley Bancorp’s board and the CEO’s back ground.
3. 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.
