What You Should Know About The Bank of Princeton’s (NASDAQ:BPRN) Risks
Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. 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$196.33M, The Bank of Princeton’s (NASDAQ:BPRN) 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 Bank of Princeton’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. View our latest analysis for Bank of Princeton
How Good Is Bank of Princeton At Forecasting Its Risks?
The ability for Bank of Princeton 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. Given its high bad loan to bad debt ratio of 126% Bank of Princeton has cautiously over-provisioned 26% above the appropriate minimum, indicating a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
How Much Risk Is Too Much?
By nature, Bank of Princeton is exposed to risky assets by lending to borrowers who may not be able to repay their loans. 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 Bank of Princeton’s profit. A ratio of 0.95% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
How Big Is Bank of Princeton’s Safety Net?
Bank of Princeton 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Bank of Princeton’s total deposit level of 99.65% 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.
Next Steps:
With positive measures for all three ratios, Bank of Princeton shows a prudent level of managing its risky assets. It seems to have a clear understanding of how much it needs to provision each year for lower quality borrowers and it has maintained a safe 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 Bank of Princeton a less risky one. Today, we’ve only explored one aspect of Bank of Princeton. However, as a potential stock investment, there are many more fundamentals you need to consider. Below, I’ve compiled three key factors you should look at:
Future Outlook: What are well-informed industry analysts predicting for BPRN’s future growth? Take a look at our free research report of analyst consensus for BPRN’s outlook.
Valuation: What is BPRN 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 BPRN 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.
