Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. BCB Bancorp Inc (NASDAQ:BCBP) is a small-cap bank with a market capitalisation of US$247.08M. 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 BCB Bancorp’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 BCB Bancorp’s a stock investment. See our latest analysis for BCB Bancorp

Does BCB Bancorp Understand Its Own Risks?

BCB Bancorp’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. 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 172.68% BCB Bancorp has cautiously over-provisioned 72.68% 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?

BCB Bancorp 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? Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. Bad debt is written off as expenses when loans are not repaid which directly impacts BCB Bancorp’s bottom line. A ratio of 0.6% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.

How Big Is BCB Bancorp’s Safety Net?

BCB Bancorp 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since BCB Bancorp’s total deposit to total liabilities is very high at 88.79% which is well-above the prudent level of 50% for banks, BCB Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.

Next Steps:

BCB Bancorp shows prudent management of risky assets and lending behaviour. It has maintained a sufficient level of deposits against liabilities and reasonably provisioned for the level of bad debt. BCB Bancorp is deemed a less risky investment given its sound and sensible lending strategy which gives us more confidence in its operational risk management. Keep in mind that a stock investment requires research on more than just its operational side. There are three essential aspects you should look at:

1. Future Outlook: What are well-informed industry analysts predicting for BCBP’s future growth? Take a look at our free research report of analyst consensus for BCBP’s outlook.

2. Valuation: What is BCBP 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 BCBP is currently mispriced by the market.

3. 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.