The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. Opus Bank (NASDAQ:OPB) is a small-cap bank with a market capitalisation of US$650m. 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 Opus Bank’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 Opus Bank’s a stock investment.
How Good Is Opus Bank At Forecasting Its Risks?
The ability for Opus Bank 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 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 130.78%, the bank has cautiously over-provisioned by 30.78%, which illustrates a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
How Much Risk Is Too Much?
Opus Bank is engaging in risking lending practices if it is over-exposed to bad debt. 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 Opus Bank’s bottom line. Since bad loans make up a relatively small 0.87% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
How Big Is Opus Bank’s Safety Net?
Opus Bank 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since Opus Bank’s total deposit to total liabilities is very high at 97% which is well-above the prudent level of 50% for banks, Opus Bank may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
OPB’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 OPB’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 OPB’s future growth? Take a look at our free research report of analyst consensus for OPB’s outlook.
- Valuation: What is OPB 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 OPB 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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