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$5.4b, BOK Financial Corporation’s (NASDAQ:BOKF) 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 BOK Financial’s bottom line. Today we will analyse BOK Financial’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
Does BOK Financial Understand Its Own Risks?
BOK Financial’s understanding of its risk level can be estimated by its ability to forecast and provision for its bad loans. The bank has poorly anticipated the factors contributing to higher bad loan levels if it writes off more than 100% of the bad debt it provisioned for. This begs the question – does BOK Financial understand the risks it has taken on? With a bad loan to bad debt ratio of 89.1%, BOK Financial has under-provisioned by -10.9% which is below the sensible margin of error, illustrating room for improvement in the bank’s forecasting methodology.
How Much Risk Is Too Much?BOK Financial is engaging in risking lending practices if it is over-exposed to bad debt. Typically, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes directly out of the bank’s profit. A ratio of 1.29% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
How Big Is BOK Financial’s Safety Net?BOK Financial 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. BOK Financial’s total deposit level of 73% of its total liabilities is within the sensible margin for for financial institutions which generally has a ratio of 50%. This indicates a prudent level of the bank’s safer form of borrowing and a prudent level of risk.
BOKF’s acquisition will impact the business moving forward. Keep an eye on how this decision plays out in the future, especially on its financial health and earnings growth. Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for BOKF. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for BOKF’s future growth? Take a look at our free research report of analyst consensus for BOKF’s outlook.
- Valuation: What is BOKF 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 BOKF 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.