Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. Bank of Commerce Holdings (NASDAQ:BOCH) is a small-cap bank with a market capitalisation of US$201m. 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 Bank of Commerce Holdings’s bottom line. Today we will analyse Bank of Commerce Holdings’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
Does Bank of Commerce Holdings Understand Its Own Risks?
Bank of Commerce Holdings’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 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 large bad loan to bad debt ratio of 333.39%, Bank of Commerce Holdings excessively over-provisioned by 233.39% above the appropriate minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
What Is An Appropriate Level Of Risk?By nature, Bank of Commerce Holdings is exposed to risky assets by lending to borrowers who may not be able to repay their loans. 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 out directly from Bank of Commerce Holdings’s profit. Since bad loans only make up a very insignificant 0.40% 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.
How Big Is Bank of Commerce Holdings’s Safety Net?Bank of Commerce Holdings 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since Bank of Commerce Holdings’s total deposit to total liabilities is very high at 97% which is well-above the prudent level of 50% for banks, Bank of Commerce Holdings may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
How will BOCH’s recent acquisition impact the business going forward? Should you be concerned about the future of BOCH and the sustainability of its financial health? I’ve bookmarked BOCH’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 BOCH’s future growth? Take a look at our free research report of analyst consensus for BOCH’s outlook.
- Valuation: What is BOCH 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 BOCH 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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