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Risk Factors To Consider Before Investing In CBTX, Inc. (NASDAQ:CBTX)

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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$818m, CBTX, Inc.’s (NASDAQ:CBTX) 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 CBTX’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.

Check out our latest analysis for CBTX

NasdaqGS:CBTX Historical Debt, March 27th 2019
NasdaqGS:CBTX Historical Debt, March 27th 2019

Does CBTX Understand Its Own Risks?

CBTX’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. We generally prefer to see that a provisions covers close to 100% of what it actually writes off, as this could imply a sensible and conservative approach towards bad loans. Given its large non-performing loan allowance to non-performing loan ratio of over 500%, CBTX has over-provisioned relative to its current level of non-performing loans, which could indicate the bank is expecting to incur further bad loans in the near future.

How Much Risk Is Too Much?

CBTX is considered to be in better financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risk? Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of CBTX’s profit. Since bad loans only make up an insignificant 0.14% of its total assets, the bank may have very strict risk management - or perhaps the risks in its portfolio have not eventuated yet.

How Big Is CBTX’s Safety Net?

Handing Money Transparent
Handing Money Transparent

CBTX 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since CBTX’s total deposit to total liabilities is very high at 99% which is well-above the prudent level of 50% for banks, CBTX may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.

Next Steps:

CBTX'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. The list below is my go-to checks for CBTX. 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.

  1. Future Outlook: What are well-informed industry analysts predicting for CBTX’s future growth? Take a look at our free research report of analyst consensus for CBTX’s outlook.

  2. Valuation: What is CBTX 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 CBTX is currently mispriced by the market.

  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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