Risk Factors To Consider Before Investing In National Commerce Corporation (NASDAQ:NCOM)
Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. National Commerce Corporation (NASDAQ:NCOM) is a small-cap bank with a market capitalisation of US$822.70m. 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 National Commerce’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 National Commerce
How Good Is National Commerce At Forecasting Its Risks?
The ability for National Commerce to accurately forecast and provision for its bad loans shows it has a strong 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. With a bad loan to bad debt ratio of 452.28%, the bank has extremely over-provisioned by 352.28% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.
What Is An Appropriate Level Of Risk?
National Commerce is considered to be in a good financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risky? Typically, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes out directly from National Commerce’s profit. The bank’s bad debt only makes up a very small 0.14% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
How Big Is National Commerce’s Safety Net?
National Commerce 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 National Commerce’s total deposit to total liabilities is very high at 97.83% which is well-above the prudent level of 50% for banks, National Commerce may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
Next Steps:
How will NCOM’s recent acquisition impact the business going forward? Should you be concerned about the future of NCOM and the sustainability of its financial health? Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for NCOM. I’ve also used this site as a source of data for my article.
Future Outlook: What are well-informed industry analysts predicting for NCOM’s future growth? Take a look at our free research report of analyst consensus for NCOM’s outlook.
Historical Performance: What has NCOM’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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 pass 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.
