Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. Bank of Commerce Holdings (NASDAQ:BOCH) is a small-cap bank with a market capitalisation of US$208m. Its profit and value are directly impacted by its borrowers’ ability to pay which is driven by the level of economic growth. This is because growth determines the stability of a borrower’s salary as well as the level of interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting Bank of Commerce Holdings’s bottom line. Since the level of risky assets held by the bank impacts the attractiveness of it as an investment, I will take you through three metrics that are insightful proxies for risk.
Does Bank of Commerce Holdings Understand Its Own Risks?
The ability for Bank of Commerce 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 provision covers more than 100% of what it actually writes off, then it is considered sensible and relatively accurate in its provisioning of bad debt. With a bad loan to bad debt ratio of 333.39%, the bank has extremely over-provisioned by 233.39% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.
What Is An Appropriate Level Of Risk?
Bank of Commerce Holdings 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. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts Bank of Commerce Holdings’s bottom line. Since bad loans only make up a very insignificant 0.40% of its total assets, the bank exhibits very strict bad loan management and is exposed to a relatively insignificant level of risk in terms of default.
Is There Enough Safe Form Of Borrowing?
Bank of Commerce 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since Bank of Commerce Holdings’s total deposit to total liabilities is very high at 97% which is well-above the prudent level of 50% for banks, Bank of Commerce Holdings may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
BOCH’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 BOCH. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for BOCH’s future growth? Take a look at our free research report of analyst consensus for BOCH’s outlook.
- Valuation: What is BOCH 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 BOCH 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.