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$533m, Bank of Marin Bancorp’s (NASDAQ:BMRC) 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 Bank of Marin 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.
Does Bank of Marin Bancorp Understand Its Own Risks?
Bank of Marin 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. 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. Given its large bad loan to bad debt ratio of over 500%, Bank of Marin Bancorp has excessively over-provisioned above the appropriate minimum of 100%, indicating the bank is extremely cautious with their expectation of bad debt and should adjust their forecast moving forward.
What Is An Appropriate Level Of Risk?Bank of Marin Bancorp is considered to be in a good financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risky? 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 as expenses when loans are not repaid which directly impacts Bank of Marin Bancorp’s bottom line. The bank’s bad debt only makes up a very small 0.022% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
How Big Is Bank of Marin Bancorp’s Safety Net?Bank of Marin 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since Bank of Marin Bancorp’s total deposit to total liabilities is very high at 99% which is well-above the prudent level of 50% for banks, Bank of Marin Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
How will BMRC’s recent acquisition impact the business going forward? Should you be concerned about the future of BMRC and the sustainability of its financial health? The list below is my go-to checks for BMRC. 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 BMRC’s future growth? Take a look at our free research report of analyst consensus for BMRC’s outlook.
- Valuation: What is BMRC 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 BMRC 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.