Why RBB Bancorp’s (NASDAQ:RBB) Risk Control Makes It Attractive
Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. Economic growth impacts the stability of salaries and interest rate level which in turn affects borrowers’ demand for, and ability to repay, their loans. As a small-cap bank with a market capitalisation of US$478.1m, RBB Bancorp’s (NASDAQ:RBB) profit and value are directly affected by economic activity. Risk associate with repayment is measured by the level of bad debt which is an expense written off RBB Bancorp’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 RBB Bancorp’s a stock investment.
View our latest analysis for RBB Bancorp
Does RBB Bancorp Understand Its Own Risks?
RBB Bancorp’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. 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. With a bad loan to bad debt ratio of 223.67%, the bank has extremely over-provisioned by 123.67% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.
How Much Risk Is Too Much?
RBB Bancorp 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. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts RBB Bancorp’s bottom line. A ratio of 0.51% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
Is There Enough Safe Form Of Borrowing?
RBB Bancorp 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. RBB Bancorp’s total deposit level of 93.1% of its total liabilities is very high and is well-above the sensible level of 50% for financial institutions. This may mean the bank is too cautious with its level of its safer form of borrowing and has plenty of headroom to take on risker forms of liability.
Next Steps:
How will RBB’s recent acquisition impact the business going forward? Should you be concerned about the future of RBB and the sustainability of its financial health? The list below is my go-to checks for RBB. 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 RBB’s future growth? Take a look at our free research report of analyst consensus for RBB’s outlook.
Valuation: What is RBB 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 RBB 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 editorial-team@simplywallst.com.
