Large banks such as Credicorp Ltd (NYSE:BAP), with a market capitalisation of US$18.0b, have benefited from improving credit quality as a result of post-GFC recovery, leading to a strong growth environment. Growth stimulates demand for loans and impacts a borrower’s ability to repay which directly affects the level of risk Credicorp takes on. With stricter regulations as a consequence of the recession, banks are more conservative in their lending practices, leading to more prudent levels of risky assets on the balance sheet. The level of risky assets a bank holds on its accounts affects the attractiveness of the company as an investment. So today we will focus on three important metrics that are insightful proxies for risk.
How Much Risk Is Too Much?
If Credicorp’s total loans are made up of more than 3% of bad debt, it may be engaging in risky lending practices above the judicious level. The bank’s profit is impacted by bad loans as these cannot be recovered by the bank and are expensed directly from its bottom line. Bad debt makes up 4.09% of the bank’s total assets which is above the appropriate level of 3%. Given that most banks are generally well-below this threshold, Credicorp faces a much higher level of risk and exhibits below-average bad debt management.
Does Credicorp Understand Its Own Risks?
The ability for Credicorp 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 level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then it is relatively accurate and prudent in its bad debt provisioning. With a bad loan to bad debt ratio of 114.78%, the bank has cautiously over-provisioned by 14.78%, which illustrates a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
Is There Enough Safe Form Of Borrowing?
Credicorp 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 Credicorp’s total deposit to total liabilities is within the sensible margin at 67% compared to other banks’ level of 50%, it shows a prudent level of the bank’s safer form of borrowing and an appropriate level of risk.
The recent acquisition is expected to bring more opportunities for BAP, 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 BAP’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 BAP’s future growth? Take a look at our free research report of analyst consensus for BAP’s outlook.
- Valuation: What is BAP 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 BAP 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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