Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. Economic growth impacts the stability of salaries and interest rate level which in turn affects borrowers’ demand for, and ability to repay, their loans. As a small-cap bank with a market capitalisation of US$262.89m, Ohio Valley Banc Corp’s (NASDAQ:OVBC) profit and value are directly affected by economic activity. Risk associate with repayment is measured by the level of bad debt which is an expense written off Ohio Valley Banc’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 Ohio Valley Banc
How Good Is Ohio Valley Banc At Forecasting Its Risks?
Ohio Valley Banc’s ability to forecast and provision for its bad loans relatively accurately indicates it has a good understanding of the level of risk it is taking on. If it writes off more than 100% of the bad debt it provisioned for, then it has inadequately estimated the factors that may have added to a higher bad loan level which begs the question – does Ohio Valley Banc understand its own risk? Ohio Valley Banc’s low bad loan to bad debt ratio of 63.84% means the bank has under-provisioned by -36.16%, indicating either an unexpected one-off occurence with defaults or poor bad debt provisioning.
How Much Risk Is Too Much?
Ohio Valley Banc’s operations expose it 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. When these loans are not repaid, they are written off as expenses which comes out directly from Ohio Valley Banc’s profit. With a ratio of 1.63%, the bank faces an appropriate level of bad loan, indicating prudent management and an industry-average risk of default.
Is There Enough Safe Form Of Borrowing?
Ohio Valley Banc 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since Ohio Valley Banc’s total deposit to total liabilities is very high at 93.33% which is well-above the prudent level of 50% for banks, Ohio Valley Banc may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
OVBC’s acquisition will impact the business moving forward. Keep an eye on how this decision plays out in the future, especially on its financial health and earnings growth. I’ve bookmarked OVBC’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 OVBC’s future growth? Take a look at our free research report of analyst consensus for OVBC’s outlook.
- Historical Performance: What has OVBC’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.