The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. Hanmi Financial Corporation (NASDAQ:HAFC) is a small-cap bank with a market capitalisation of US$695m. 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 Hanmi Financial’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 Hanmi Financial’s a stock investment.

Check out our latest analysis for Hanmi Financial

How Good Is Hanmi Financial At Forecasting Its Risks?

Hanmi Financial’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. With a bad loan to bad debt ratio of 173.25%, the bank has cautiously over-provisioned by 73.25%, which illustrates 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?

Hanmi Financial’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Typically, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of Hanmi Financial’s profit. The bank’s bad debt only makes up a very small 0.40% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.

Is There Enough Safe Form Of Borrowing?

Hanmi Financial 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 Hanmi Financial’s total deposit to total liabilities is very high at 94% which is well-above the prudent level of 50% for banks, Hanmi Financial may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.

Next Steps:

The recent acquisition is expected to bring more opportunities for HAFC, which in turn should lead to stronger growth. I would stay up-to-date on how this decision will affect the future of the business in terms of earnings growth and financial health. Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for HAFC. I’ve also used this site as a source of data for my article.

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

2. Valuation: What is HAFC 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 HAFC 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 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 editorial-team@simplywallst.com.