Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. First Citizens BancShares Inc (NASDAQ:FCNC.A) is a small-cap bank with a market capitalisation of US$4.94b. 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 First Citizens BancShares’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 First Citizens BancShares’s a stock investment. View out our latest analysis for First Citizens BancShares
Does First Citizens BancShares Understand Its Own Risks?
The ability for First Citizens BancShares 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 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 245.61%, the bank has extremely over-provisioned by 145.61% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.
How Much Risk Is Too Much?
First Citizens BancShares is engaging in risking lending practices if it is over-exposed to bad debt. 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 First Citizens BancShares’s bottom line. Since bad loans only make up a very insignificant 0.38% of its total assets, the bank exhibits very strict bad loan management and is exposed to a relatively insignificant level of risk in terms of default.
Is There Enough Safe Form Of Borrowing?
First Citizens BancShares 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. First Citizens BancShares’s total deposit level of 96.48% 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.
The recent acquisition is expected to bring more opportunities for FCNC.A, 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. I’ve bookmarked FCNC.A’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 FCNC.A’s future growth? Take a look at our free research report of analyst consensus for FCNC.A’s outlook.
- Historical Performance: What has FCNC.A’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.