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Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. Economic growth impacts the stability of salaries and interest rate level which in turn affects borrowers’ demand for, and ability to repay, their loans. As a small-cap bank with a market capitalisation of CA$1.7b, Laurentian Bank of Canada’s (TSE:LB) profit and value are directly affected by economic activity. Risk associate with repayment is measured by the level of bad debt which is an expense written off Laurentian Bank of Canada’s bottom line. Today we will analyse Laurentian Bank of Canada’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
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Does Laurentian Bank of Canada Understand Its Own Risks?
Laurentian Bank of Canada’s understanding of its risk level can be estimated by its ability to forecast and provision for its bad loans. If it writes off more than 100% of the bad debt it provisioned for, then it has poorly anticipated the factors that may have contributed to a higher bad loan level which begs the question – does Laurentian Bank of Canada understand its own risk?. Laurentian Bank of Canada’s low bad loan to bad debt ratio of 54.69% means the bank has under-provisioned by -45.31%, indicating either an unexpected one-off occurence with defaults or poor bad debt provisioning.
How Much Risk Is Too Much?
Laurentian Bank of Canada is engaging in risking lending practices if it is over-exposed to bad debt. Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. Bad debt is written off as expenses when loans are not repaid which directly impacts Laurentian Bank of Canada’s bottom line. The bank’s bad debt only makes up a very small 0.45% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
How Big Is Laurentian Bank of Canada’s Safety Net?
Laurentian Bank of Canada 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. Laurentian Bank of Canada’s total deposit level of 66% of its total liabilities is within the sensible margin for for financial institutions which generally has a ratio of 50%. This indicates a prudent level of the bank’s safer form of borrowing and a prudent level of risk.