Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. As a small-cap bank with a market capitalisation of US$188m, C&F Financial Corporation’s (NASDAQ:CFFI) profit and value are directly affected by economic growth. This is because borrowers’ demand for, and ability to repay, their loans depend on the stability of their salaries and interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting C&F Financial’s bottom line. Today we will analyse C&F Financial’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is C&F Financial At Forecasting Its Risks?
The ability for C&F Financial 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 provision covers more than 100% of what it actually writes off, then it is considered sensible and relatively accurate in its provisioning of bad debt. Given its large bad loan to bad debt ratio of over 500%, C&F Financial 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?
C&F Financial’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. Loans are written off as expenses when they are not repaid, which comes directly out of C&F Financial’s profit. The bank’s bad debt only makes up a very small 0.36% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
How Big Is C&F Financial’s Safety Net?
C&F Financial 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 C&F Financial’s total deposit to total liabilities is very high at 86% which is well-above the prudent level of 50% for banks, C&F Financial may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
CFFI’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. The list below is my go-to checks for CFFI. 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 CFFI’s future growth? Take a look at our free research report of analyst consensus for CFFI’s outlook.
- Valuation: What is CFFI 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 CFFI 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.
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