Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. As a small-cap bank with a market capitalisation of US$61m, Bank of the James Financial Group, Inc.’s (NASDAQ:BOTJ) profit and value are directly affected by economic growth. This is because borrowers’ demand for, and ability to repay, their loans depend on the stability of their salaries and interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting Bank of the James Financial Group’s bottom line. Today we will analyse Bank of the James Financial Group’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is Bank of the James Financial Group At Forecasting Its Risks?
Bank of the James Financial Group’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 the bank may be relatively accurate and prudent in its bad debt provisioning. With a non-performing loan allowance to non-performing loan ratio of 155.87%, the bank has cautiously over-provisioned by 55.87%, which may suggest the bank is anticipating additional non-performing loans.
How Much Risk Is Too Much?Bank of the James Financial Group’s operations expose it 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 debts. Bad debt is written off as expenses when loans are not repaid which directly impacts Bank of the James Financial Group’s bottom line. A ratio of 0.55% may indicate the bank faces relatively low chance of default and exhibits strong bad debt management – or it could indicate risks in the portfolio have not fully matured.
Is There Enough Safe Form Of Borrowing?Bank of the James Financial Group 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Bank of the James Financial Group’s total deposit level of 99% 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 BOTJ, 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. Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for BOTJ. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for BOTJ’s future growth? Take a look at our free research report of analyst consensus for BOTJ’s outlook.
- Valuation: What is BOTJ 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 BOTJ 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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