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$3.0b, CVB Financial Corp.’s (NASDAQ:CVBF) 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 CVB 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 CVB Financial’s a stock investment.
Does CVB Financial Understand Its Own Risks?
CVB Financial’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. If the level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then the bank may be relatively accurate and prudent in its bad debt provisioning. Given its large non-performing loan allowance to non-performing loan ratio of 318.85%, CVB Financial over-provisioned by 218.85% above the minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
How Much Risk Is Too Much?
CVB Financial is considered to be in better financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risk? Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debts. When these loans are not repaid, they are written off as expenses which comes out directly from CVB Financial’s profit. The bank’s bad debt only makes up a very small 0.26% to total debt which suggests the bank either has strict risk management – or its loans haven’t started going bad yet.
Is There Enough Safe Form Of Borrowing?
CVB 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since CVB Financial’s total deposit to total liabilities is very high at 91% which is well-above the prudent level of 50% for banks, CVB Financial may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
The recent acquisition is expected to bring more opportunities for CVBF, which in turn should lead to stronger growth. I would stay up-to-date on how this decision will affect the future of the business in terms of earnings growth and financial health. Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for CVBF. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for CVBF’s future growth? Take a look at our free research report of analyst consensus for CVBF’s outlook.
- Valuation: What is CVBF 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 CVBF 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.
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