Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. As a small-cap bank with a market capitalisation of US$730m, Opus Bank’s (NASDAQ:OPB) 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 Opus Bank’s bottom line. Today I will take you through some bad debt and liability measures to analyse the level of risky assets held by the bank. Looking through a risk-lens is a useful way to assess the attractiveness of Opus Bank’s a stock investment.
How Good Is Opus Bank At Forecasting Its Risks?
The ability for Opus Bank 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 level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then it is relatively accurate and prudent in its bad debt provisioning. Given its high bad loan to bad debt ratio of 130.78% Opus Bank has cautiously over-provisioned 30.78% above the appropriate minimum, indicating a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
What Is An Appropriate Level Of Risk?By nature, Opus Bank is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Typically, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. Bad debt is written off as expenses when loans are not repaid which directly impacts Opus Bank’s bottom line. A ratio of 0.87% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
How Big Is Opus Bank’s Safety Net?Opus Bank 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since Opus Bank’s total deposit to total liabilities is very high at 97% which is well-above the prudent level of 50% for banks, Opus Bank may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
OPB’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. The list below is my go-to checks for OPB. I use Simply Wall St’s platform to keep informed about any changes in the company and market sentiment, and also use their data as the basis for my articles.
- Future Outlook: What are well-informed industry analysts predicting for OPB’s future growth? Take a look at our free research report of analyst consensus for OPB’s outlook.
- Valuation: What is OPB 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 OPB 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.
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