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Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. Camden National Corporation (NASDAQ:CAC) is a small-cap bank with a market capitalisation of US$650m. 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 Camden National’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 Camden National’s a stock investment.
Does Camden National Understand Its Own Risks?
Camden National’s ability to forecast and provision for its bad loans indicates it has a good 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. Given its high bad loan to bad debt ratio of 171.17% Camden National has cautiously over-provisioned 71.17% 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?
If Camden National does not engage in overly risky lending practices, it is considered to be in good financial shape. 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. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts Camden National’s bottom line. The bank’s bad debt only makes up a very small 0.48% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
Is There Enough Safe Form Of Borrowing?
Camden National 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 Camden National’s total deposit to total liabilities is very high at 90% which is well-above the prudent level of 50% for banks, Camden National 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 CAC, 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 CAC. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for CAC’s future growth? Take a look at our free research report of analyst consensus for CAC’s outlook.
- Valuation: What is CAC 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 CAC 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.