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Post-GFC recovery has strengthened economic growth and credit quality, benefiting large banks such as Citizens Financial Group, Inc. (NYSE:CFG), with a market capitalisation of US$16b. A borrower’s demand for, and ability to repay, loans is driven by economic growth which directly impacts the level of risk Citizens Financial Group takes on. With stricter regulations as a result of the GFC, banks are more conservative in their lending practices, leading to more prudent levels of risky assets on the balance sheet. The level of risky assets a bank holds on its accounts affects the attractiveness of the company as an investment. So today we will focus on three important metrics that are insightful proxies for risk.
What Is An Appropriate Level Of Risk?
By nature, banks like Citizens Financial Group are exposed to risky assets, by lending to borrowers who may not be able to repay their loans. 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 when loans are not repaid. This is classified as an expense which directly impacts Citizens Financial Group’s bottom line. A ratio of 0.68% may indicate the bank faces relatively low chance of default and exhibits strong bad debt management - or it could indicate risks in the portfolio have not fully matured.
How Good Is Citizens Financial Group At Forecasting Its Risks?
Citizens Financial Group’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 the bank may be relatively accurate and prudent in its bad debt provisioning. With a non-performing loan allowance to non-performing loan ratio of 155.83%, the bank has cautiously over-provisioned by 55.83%, which may suggest the bank is anticipating additional non-performing loans.
Is There Enough Safe Form Of Borrowing?
Citizens Financial Group 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since Citizens Financial Group’s total deposit to total liabilities is very high at 86% which is well-above the prudent level of 50% for banks, Citizens Financial Group may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
The recent acquisition is expected to bring more opportunities for CFG, 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. The list below is my go-to checks for CFG. I use Simply Wall St's platform to keep informed about any changes in the company and market sentiment, and also use their data as the basis for my articles.
- Future Outlook: What are well-informed industry analysts predicting for CFG’s future growth? Take a look at our free research report of analyst consensus for CFG’s outlook.
- Valuation: What is CFG 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 CFG 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.