The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. 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$693m, Carolina Financial Corporation’s (NASDAQ:CARO) 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 Carolina Financial’s bottom line. Today I will take you through some bad debt and liability measures to analyse the level of risky assets held by the bank. Looking through a risk-lens is a useful way to assess the attractiveness of Carolina Financial’s a stock investment.
Does Carolina Financial Understand Its Own Risks?
Carolina Financial’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. 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 129.26%, the bank has cautiously over-provisioned by 29.26%, 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?
By nature, Carolina Financial is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Loans that cannot be recovered by the bank are known as bad loans and typically should make up less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of Carolina Financial’s profit. Since bad loans only make up a very insignificant 0.43% 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.
How Big Is Carolina Financial’s Safety Net?
Carolina Financial 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. Since Carolina Financial’s total deposit to total liabilities is very high at 87% which is well-above the prudent level of 50% for banks, Carolina Financial may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
How will CARO’s recent acquisition impact the business going forward? Should you be concerned about the future of CARO and the sustainability of its financial health? The list below is my go-to checks for CARO. 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 CARO’s future growth? Take a look at our free research report of analyst consensus for CARO’s outlook.
- Valuation: What is CARO 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 CARO 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.