The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. 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$767m, Preferred Bank’s ( NASDAQ:PFBC ) 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 Preferred 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 Preferred Bank’s a stock investment.
How Good Is Preferred Bank At Forecasting Its Risks?
Preferred Bank’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. With a bad loan to bad debt ratio of 492.85%, the bank has extremely over-provisioned by 392.85% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.
What Is An Appropriate Level Of Risk?
Preferred Bank’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of Preferred Bank’s profit. Since bad loans only make up a very insignificant 0.20% 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.
Is There Enough Safe Form Of Borrowing?
Preferred 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. Preferred Bank’s total deposit level of 96% 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.
The recent acquisition is expected to bring more opportunities for PFBC, which in turn should lead to stronger growth. I would stay up-to-date on how this decision will affect the future of the business in terms of earnings growth and financial health. I’ve bookmarked PFBC’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 PFBC’s future growth? Take a look at our free research report of analyst consensus for PFBC’s outlook.
- Valuation : What is PFBC 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 PFBC 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 email@example.com .