Post-GFC recovery has strengthened economic growth and credit quality, benefiting large banks such as Citigroup Inc (NYSE:C), with a market capitalisation of US$168.45b.
Economic growth fuels demand for loans and affects a borrower’s ability to repay which directly impacts the level of risk Citigroup takes on. As a consequence of the GFC, tighter regulations have led to more conservative lending practices by banks, leading to more prudent levels of risky assets on their balance sheets.
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.
View out our latest analysis for Citigroup
What Is An Appropriate Level Of Risk?
If Citigroup does not engage in overly risky lending practices, it is considered to be in good financial shape. 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 Citigroup’s bottom line. Since bad loans make up a relatively small 0.63% of total assets, the bank exhibits strict bad debt management and faces low risk of default.How Good Is Citigroup At Forecasting Its Risks?
Citigroup’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 bank provision covers more than 100% of what it actually writes off, then it is considered sensible and relatively accurate in its provisioning of bad debt. With a bad loan to bad debt ratio of 291.16%, the bank has extremely over-provisioned by 191.16% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.
Is There Enough Safe Form Of Borrowing?
Citigroup makes money by lending out its various forms of borrowings. Deposits from customers tend to bear the lowest risk given the relatively stable amount available and interest rate.
As a rule, a bank is considered less risky if it holds a higher level of deposits.
Since Citigroup’s total deposit to total liabilities is within the sensible margin at 58.24% compared to other banks’ level of 50%, it shows a prudent level of the bank’s safer form of borrowing and an appropriate level of risk.
Next Steps:
C’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. I’ve bookmarked C’s company page on Simply Wall St to stay informed with changes in outlook and valuation. This is also the source of data for this article. The three main sections I’d recommend you check out are:
- Future Outlook: What are well-informed industry analysts predicting for C’s future growth? Take a look at our free research report of analyst consensus for C’s outlook.
- Valuation: What is C 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 C 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.