Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. OptimumBank Holdings Inc (NASDAQ:OPHC) is a small-cap bank with a market capitalisation of US$7.35M. 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 OptimumBank Holdings’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. View our latest analysis for OptimumBank Holdings
Does OptimumBank Holdings Understand Its Own Risks?
OptimumBank Holdings’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. If the bank provisions for more than 100% of the bad debt it actually writes off, then it is considered to be relatively prudent and accurate in its bad debt provisioning. Given its large bad loan to bad debt ratio of over 500%, OptimumBank Holdings has excessively over-provisioned above the appropriate minimum of 100%, indicating the bank is extremely cautious with their expectation of bad debt and should adjust their forecast moving forward.
What Is An Appropriate Level Of Risk?
By nature, OptimumBank Holdings is exposed to risky assets by lending to borrowers who may not be able to repay their loans. 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 OptimumBank Holdings’s bottom line. The bank’s bad debt only makes up a very small 0.46% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
How Big Is OptimumBank Holdings’s Safety Net?
OptimumBank Holdings 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. OptimumBank Holdings’s total deposit level of 64.09% of its total liabilities is within the sensible margin for for financial institutions which generally has a ratio of 50%. This indicates a prudent level of the bank’s safer form of borrowing and a prudent level of risk.
OptimumBank Holdings shows prudent management of risky assets and lending behaviour. It has maintained a sufficient level of deposits against liabilities and reasonably provisioned for the level of bad debt. OptimumBank Holdings is deemed a less risky investment given its sound and sensible lending strategy which gives us more confidence in its operational risk management. Keep in mind that a stock investment requires research on more than just its operational side. There are three relevant factors you should look at:
- Historical Performance: What has OPHC’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.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on OptimumBank Holdings’s board and the CEO’s back ground.
- 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.