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$6.5b, Commerce Bancshares, Inc.’s (NASDAQ:CBSH) 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 Commerce Bancshares’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 Commerce Bancshares Understand Its Own Risks?
The ability for Commerce Bancshares 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 provision covers more than 100% of what it actually writes off, then it is considered sensible and relatively accurate in its provisioning of bad debt. Given its large bad loan to bad debt ratio of over 500%, Commerce Bancshares 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.
How Much Risk Is Too Much?Commerce Bancshares’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes out directly from Commerce Bancshares’s profit. The bank’s bad debt only makes up a very small 0.060% 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?Commerce Bancshares 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Commerce Bancshares’s total deposit level of 90% 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 CBSH, 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 CBSH. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for CBSH’s future growth? Take a look at our free research report of analyst consensus for CBSH’s outlook.
- Valuation: What is CBSH 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 CBSH 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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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.