Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. As a small-cap bank with a market capitalisation of US$81m, Community West Bancshares’s (NASDAQ:CWBC) 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 Community West Bancshares’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 Community West Bancshares’s a stock investment.
Does Community West Bancshares Understand Its Own Risks?
Community West Bancshares’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. If the level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then it is relatively accurate and prudent in its bad debt provisioning. With a bad loan to bad debt ratio of 226.87%, the bank has extremely over-provisioned by 126.87% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.
What Is An Appropriate Level Of Risk?
Community West Bancshares’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts Community West Bancshares’s bottom line. A ratio of 0.53% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
How Big Is Community West Bancshares’s Safety Net?
Community West Bancshares 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 Community West Bancshares’s total deposit to total liabilities is very high at 92% which is well-above the prudent level of 50% for banks, Community West Bancshares may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
How will CWBC’s recent acquisition impact the business going forward? Should you be concerned about the future of CWBC and the sustainability of its financial health? I’ve bookmarked CWBC’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 CWBC’s future growth? Take a look at our free research report of analyst consensus for CWBC’s outlook.
- Valuation: What is CWBC 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 CWBC 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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