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$284m, Howard Bancorp Inc’s (NASDAQ:HBMD) 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 Howard Bancorp’s bottom line. Today we will analyse Howard Bancorp’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is Howard Bancorp At Forecasting Its Risks?
Howard Bancorp’s ability to forecast and provision for its bad loans relatively accurately indicates it has a good understanding of the level of risk it is taking on. If it writes off more than 100% of the bad debt it provisioned for, then it has poorly anticipated the factors that may have contributed to a higher bad loan level which begs the question – does Howard Bancorp understand its own risk?. With an extremely low bad loan to bad debt ratio of 26.33%, Howard Bancorp has significantly under-provisioned by -73.67% which is well below the appropriate margin of error. This may be due to a one-off bad debt occurence or a constant underestimation of the factors contributing to its bad loan levels.
How Much Risk Is Too Much?
Howard Bancorp is engaging in risking lending practices if it is over-exposed to bad debt. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts Howard Bancorp’s bottom line. Since bad loans only make up 1.69% of total assets for the bank, it exhibits prudent bad debt management and faces an industry-average risk of default.
How Big Is Howard Bancorp’s Safety Net?
Howard Bancorp 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Howard Bancorp’s total deposit level of 87% 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.
How will HBMD’s recent acquisition impact the business going forward? Should you be concerned about the future of HBMD and the sustainability of its financial health? The list below is my go-to checks for HBMD. 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 HBMD’s future growth? Take a look at our free research report of analyst consensus for HBMD’s outlook.
- Valuation: What is HBMD 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 HBMD 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 firstname.lastname@example.org.