The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. Bancorp Of New Jersey, Inc. (NYSEMKT:BKJ) is a small-cap bank with a market capitalisation of US$98m. 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 Bancorp Of New Jersey’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.
How Good Is Bancorp Of New Jersey At Forecasting Its Risks?
Bancorp Of New Jersey’s understanding of its risk level can be estimated by its ability to forecast and provision for its bad loans. If it writes off more than 100% of the bad debt it provisioned for, then it has poorly anticipated the factors that may have contributed to a higher bad loan level which begs the question – does Bancorp Of New Jersey understand its own risk?. With a non-performing loan allowance to non-performing loan ratio of 70.3%, Bancorp Of New Jersey has under-provisioned by -29.7% which leaves relatively little margin for error. We do note though, that many banks don’t require 100% coverage of their non-performing loans, as banks often can seize collateral to cover their losses on bad loans.
What Is An Appropriate Level Of Risk?
Bancorp Of New Jersey is considered to be in better financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risk? Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which come directly out of the bank’s profit. With a ratio of 1.56%, the bank has a reasonable level of bad loans, which could suggest prudent management.
Is There Enough Safe Form Of Borrowing?
Bancorp Of New Jersey 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Bancorp Of New Jersey’s total deposit level of 96% 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.
How will BKJ’s recent acquisition impact the business going forward? Should you be concerned about the future of BKJ and the sustainability of its financial health? The list below is my go-to checks for BKJ. 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.
- Future Outlook: What are well-informed industry analysts predicting for BKJ’s future growth? Take a look at our free research report of analyst consensus for BKJ’s outlook.
- Valuation: What is BKJ 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 BKJ 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 email@example.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.