Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. Customers Bancorp, Inc. ( NYSE:CUBI ) is a small-cap bank with a market capitalisation of US$681m. 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 Customers Bancorp’s bottom line. Since the level of risky assets held by the bank impacts the attractiveness of it as an investment, I will take you through three metrics that are insightful proxies for risk.
How Good Is Customers Bancorp At Forecasting Its Risks?
Customers Bancorp’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. We generally prefer to see that a provisions covers close to 100% of what it actually writes off, as this could imply a sensible and conservative approach towards bad loans. Given its high non-performing loan allowance to non-performing loan ratio of 145.38% Customers Bancorp has cautiously over-provisioned 45.38% above its current level of non-performing loans. This could indicate a prudent forecasting methodology, or indicate that further bad loans are expected.
What Is An Appropriate Level Of Risk?
Customers Bancorp is considered to be in better financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risk? Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of Customers Bancorp’s profit. The bank's bad debt only makes up a very small 0.32% to total debt which suggests the bank either has strict risk management - or its loans haven't started going bad yet.
Is There Enough Safe Form Of Borrowing?
Customers Bancorp makes money by lending out its various forms of borrowings. Deposits from customers tend to bear the lowest risk given the relatively stable amount available and interest rate. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since Customers Bancorp’s total deposit to total liabilities is very high at 80% which is well-above the prudent level of 50% for banks, Customers Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
The recent acquisition is expected to bring more opportunities for CUBI, 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. The list below is my go-to checks for CUBI. 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 CUBI’s future growth? Take a look at our free research report of analyst consensus for CUBI’s outlook.
- Valuation : What is CUBI 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 CUBI 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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