The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. Capital Bancorp Inc (NASDAQ:CBNK) is a small-cap bank with a market capitalisation of US$154.8m. 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 Capital Bancorp’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 Capital Bancorp’s a stock investment.
How Good Is Capital Bancorp At Forecasting Its Risks?
The ability for Capital Bancorp 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 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. With a bad loan to bad debt ratio of 320.75%, the bank has extremely over-provisioned by 220.75% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.
What Is An Appropriate Level Of Risk?
Capital Bancorp is engaging in risking lending practices if it is over-exposed to bad debt. 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 comes directly out of the bank’s profit. The bank’s bad debt only makes up a very small 0.35% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
How Big Is Capital Bancorp’s Safety Net?
Capital Bancorp operates by lending out its various forms of borrowings. Customers’ deposits tend to carry the smallest risk given 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. Capital Bancorp’s total deposit level of 95.7% 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 CBNK’s recent acquisition impact the business going forward? Should you be concerned about the future of CBNK 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 CBNK. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for CBNK’s future growth? Take a look at our free research report of analyst consensus for CBNK’s outlook.
- Valuation: What is CBNK 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 CBNK 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.
To help readers see past 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.