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$267.45M, Civista Bancshares Inc’s (NASDAQ:CIVB) 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 Civista 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. View our latest analysis for Civista Bancshares
How Good Is Civista Bancshares At Forecasting Its Risks?
Civista Bancshares’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 it is relatively accurate and prudent in its bad debt provisioning. Given its large bad loan to bad debt ratio of 258.14%, Civista Bancshares excessively over-provisioned by 158.14% above the appropriate minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
What Is An Appropriate Level Of Risk?
Civista Bancshares 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 recuperated by the bank, also known as bad loans, should typically form 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 only make up a very insignificant 0.43% of its total assets, the bank exhibits very strict bad loan management and is exposed to a relatively insignificant level of risk in terms of default.
Is There Enough Safe Form Of Borrowing?
Civista Bancshares 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. Since Civista Bancshares’s total deposit to total liabilities is very high at 91.39% which is well-above the prudent level of 50% for banks, Civista Bancshares may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
Civista Bancshares exhibits prudent management of risky assets and lending behaviour with sensible levels for all three ratios. It has maintained a sufficient level of deposits against liabilities and reasonably provisioned for the level of bad debt. The company’s judicious lending strategy gives us higher conviction in its ability to manage its operational risks which makes Civista Bancshares a less risky investment. We’ve only touched on operational risks for CIVB in this article. But as a stock investment, there are other fundamentals you need to understand. Below, I’ve compiled three pertinent aspects you should further examine:
- Future Outlook: What are well-informed industry analysts predicting for CIVB’s future growth? Take a look at our free research report of analyst consensus for CIVB’s outlook.
- Valuation: What is CIVB 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 CIVB 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 pass 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.