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Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. Columbia Banking System Inc (NASDAQ:COLB) is a small-cap bank with a market capitalisation of US$3.13B. 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 Columbia Banking System’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. Check out our latest analysis for Columbia Banking System
How Good Is Columbia Banking System At Forecasting Its Risks?
The ability for Columbia Banking System 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 114.29% Columbia Banking System has cautiously over-provisioned 14.29% above the appropriate minimum, indicating a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
How Much Risk Is Too Much?
If Columbia Banking System does not engage in overly risky lending practices, it is considered to be in good financial shape. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. When these loans are not repaid, they are written off as expenses which comes out directly from Columbia Banking System’s profit. A ratio of 0.79% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
Is There Enough Safe Form Of Borrowing?
Columbia Banking System operates by lending out its various forms of borrowings. Customers’ deposits tend to carry the smallest risk given 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 Columbia Banking System’s total deposit to total liabilities is very high at 97.82% which is well-above the prudent level of 50% for banks, Columbia Banking System may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.