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 US$538m, QCR Holdings Inc’s (NASDAQ:QCRH) 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 QCR Holdings’s bottom line. Today we will analyse QCR Holdings’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
Does QCR Holdings Understand Its Own Risks?
QCR Holdings’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. If the bank provisions for more than 100% of the bad debt it actually writes off, then it is considered to be relatively prudent and accurate in its bad debt provisioning. Given its high bad loan to bad debt ratio of 147.39% QCR Holdings has cautiously over-provisioned 47.39% above the appropriate minimum, indicating 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?
QCR Holdings is engaging in risking lending practices if it is over-exposed to bad debt. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. When these loans are not repaid, they are written off as expenses which comes directly out of the bank’s profit. A ratio of 0.80% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
Is There Enough Safe Form Of Borrowing?
QCR Holdings 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 QCR Holdings’s total deposit to total liabilities is very high at 87% which is well-above the prudent level of 50% for banks, QCR Holdings may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
QCRH’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 QCRH. 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 QCRH’s future growth? Take a look at our free research report of analyst consensus for QCRH’s outlook.
- Valuation: What is QCRH 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 QCRH 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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.