Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. As a small-cap bank with a market capitalisation of US$619.36M, QCR Holdings Inc’s (NASDAQ:QCRH) 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 QCR Holdings’s bottom line. Today we will analyse QCR Holdings’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank. Check out our latest analysis for QCR Holdings
How Good Is QCR Holdings At Forecasting Its Risks?
The ability for QCR Holdings 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. With a bad loan to bad debt ratio of 184.28%, the bank has cautiously over-provisioned by 84.28%, which illustrates 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?
QCR Holdings’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. 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 QCR Holdings’s bottom line. Since bad loans make up a relatively small 0.63% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
How Big Is QCR Holdings’s Safety Net?
QCR Holdings 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. QCR Holdings’s total deposit level of 90.01% 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.
QCR Holdings shows prudent management of risky assets and lending behaviour. It has a strong understanding of how much it should provision for lower quality borrowers and has maintained a sensible level of deposits against its liabilities. 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 QCR Holdings a less risky one. Today, we’ve only explored one aspect of QCR Holdings. However, as a potential stock investment, there are many more fundamentals you need to consider. Below, I’ve compiled three key factors you should further examine:
- Future Outlook: What are well-informed industry analysts predicting for QCRH’s future growth? Take a look at our free research report of analyst consensus for QCRH’s outlook.
- Valuation: What is QCRH 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 QCRH 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.