The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. QCR Holdings, Inc. (NASDAQ:QCRH) is a small-cap bank with a market capitalisation of US$523m. Its profit and value are directly impacted by its borrowers’ ability to pay which is driven by the level of economic growth. This is because growth determines the stability of a borrower’s salary as well as the level of interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting QCR Holdings’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.
How Good Is QCR Holdings At Forecasting Its Risks?
The ability for QCR Holdings 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 147.39% QCR Holdings has cautiously over-provisioned 47.39% 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, QCR Holdings is exposed 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 directly out of the bank’s profit. Since bad loans make up a relatively small 0.80% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
Is There Enough Safe Form Of Borrowing?QCR Holdings 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. QCR Holdings’s total deposit level of 87% 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.
QCRH’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 QCRH. 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 QCRH’s future growth? Take a look at our free research report of analyst consensus for QCRH’s outlook.
- Valuation: What is QCRH 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 QCRH 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.