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Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. Commerce Bancshares, Inc. (NASDAQ:CBSH) is a small-cap bank with a market capitalisation of US$7.0b. 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 Commerce Bancshares’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 Commerce Bancshares’s a stock investment.
Does Commerce Bancshares Understand Its Own Risks?
Commerce Bancshares’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%, Commerce Bancshares 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?
If Commerce Bancshares does not engage in overly risky lending practices, it is considered to be in relatively better financial shape. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debts. Loans are written off as expenses when they are not repaid, which comes directly out of Commerce Bancshares’s profit. Since bad loans only make up an insignificant 0.089% 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 Commerce Bancshares’s Safety Net?
Commerce Bancshares 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. Commerce Bancshares’s total deposit level of 90% 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.
The recent acquisition is expected to bring more opportunities for CBSH, 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. I’ve bookmarked CBSH’s company page on Simply Wall St to stay informed with changes in outlook and valuation. This is also the source of data for this article. The three main sections I’d recommend you check out are:
- Future Outlook: What are well-informed industry analysts predicting for CBSH’s future growth? Take a look at our free research report of analyst consensus for CBSH’s outlook.
- Valuation: What is CBSH 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 CBSH 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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.