The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. As a small-cap bank with a market capitalisation of US$198m, The Bank of Princeton’s (NASDAQ:BPRN) 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 Princeton’s bottom line. Today we will analyse Bank of Princeton’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
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How Good Is Bank of Princeton At Forecasting Its Risks?
The ability for Bank of Princeton to accurately forecast and provision for its bad loans shows it has a strong 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 251.22%, Bank of Princeton excessively over-provisioned by 151.22% above the appropriate minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
How Much Risk Is Too Much?Bank of Princeton 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 recovered by the bank are known as bad loans and typically should make up less than 3% of its total loans. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts Bank of Princeton’s bottom line. The bank’s bad debt only makes up a very small 0.43% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
Is There Enough Safe Form Of Borrowing?Bank of Princeton 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Bank of Princeton’s total deposit level of 97% 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.
How will BPRN’s recent acquisition impact the business going forward? Should you be concerned about the future of BPRN and the sustainability of its financial health? I’ve bookmarked BPRN’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 BPRN’s future growth? Take a look at our free research report of analyst consensus for BPRN’s outlook.
- Valuation: What is BPRN 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 BPRN 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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