Yahoo Finance Why Regions Financial Corporation (NYSE:RF) May Not Be As Risky Than You Think
As a US$15b market capitalisation company operating in the financial services sector, Regions Financial Corporation (NYSE:RF) has benefited from strong economic growth and improved credit quality as a result of post-GFC recovery. Growth stimulates demand for loans and impacts a borrower’s ability to repay which directly affects the level of risk Regions Financial takes on. With stricter regulations as a consequence of the recession, banks are more conservative in their lending practices, leading to more prudent levels of risky assets on the balance sheet. It is relevant to understand a bank’s level of risky assets on its accounts as it affects the attractiveness of its stock as an investment. Today I will be taking you through three metrics that are useful proxies for risk.
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What Is An Appropriate Level Of Risk?
Regions Financial’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. 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 Regions Financial’s bottom line. A ratio of 0.68% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
Does Regions Financial Understand Its Own Risks?
The ability for Regions Financial 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. With a bad loan to bad debt ratio of 151.62%, the bank has cautiously over-provisioned by 51.62%, which illustrates a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
Is There Enough Safe Form Of Borrowing?
Regions 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Regions Financial’s total deposit level of 85% of its total liabilities is very high and is well-above the sensible level of 50% for financial institutions. This may mean the bank is too cautious with its level of its safer form of borrowing and has plenty of headroom to take on risker forms of liability.
Next Steps:
RF’s acquisition will impact the business moving forward. Keep an eye on how this decision plays out in the future, especially on its financial health and earnings growth. Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for RF. I’ve also used this site as a source of data for my article.
Future Outlook: What are well-informed industry analysts predicting for RF’s future growth? Take a look at our free research report of analyst consensus for RF’s outlook.
Valuation: What is RF 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 RF 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.
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.
