The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. As a small-cap bank with a market capitalisation of USD $389.20M, Capital City Bank Group Inc (NASDAQ:CCBG)’s 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 Capital City Bank Group’s bottom line. Today we will analyse Capital City Bank Group’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank. View our latest analysis for Capital City Bank Group
How Good Is Capital City Bank Group At Forecasting Its Risks?
Capital City Bank Group’s ability to forecast and provision for its bad loans indicates it has a good 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 203.4%, Capital City Bank Group excessively over-provisioned by 103.4% above the appropriate minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
What Is An Appropriate Level Of Risk?
Capital City Bank Group’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 Capital City Bank Group’s profit. Since bad loans only make up a very insignificant 0.4% of its total assets, the bank exhibits very strict bad loan management and is exposed to a relatively insignificant level of risk in terms of default.
How Big Is Capital City Bank Group’s Safety Net?
Capital City Bank Group 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since Capital City Bank Group’s total deposit to total liabilities is very high at 93.69% which is well-above the prudent level of 50% for banks, Capital City Bank Group may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
With positive measures for all three ratios, Capital City Bank Group shows a prudent level of managing its risky assets. It seems to have a clear understanding of how much it needs to provision each year for lower quality borrowers and it has maintained a safe level of deposits against its liabilities. The company’s sound and sensible lending strategy gives us more conviction in its ability to manage its operational risks which makes an investment in Capital City Bank Group a less risky one.
Now that you know to keep in mind these risk factors when putting together your investment thesis, I recommend you check out our latest free analysis report on Capital City Bank Group to see its growth prospects and whether it could be considered an undervalued opportunity.
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The author is an independent contributor and at the time of publication had no position in the stocks mentioned.