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The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. Economic growth impacts the stability of salaries and interest rate level which in turn affects borrowers’ demand for, and ability to repay, their loans. As a small-cap bank with a market capitalisation of US$4.7b, CIT Group Inc.’s (NYSE:CIT) profit and value are directly affected by economic activity. Risk associate with repayment is measured by the level of bad debt which is an expense written off CIT Group’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 CIT Group’s a stock investment.
Does CIT Group Understand Its Own Risks?
The ability for CIT Group 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 provisions for more than 100% of the bad debt it actually writes off, then it is considered to be relatively prudent and accurate in its bad debt provisioning. Given its high bad loan to bad debt ratio of 173.47% CIT Group has cautiously over-provisioned 73.47% above the appropriate minimum, indicating 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?
If CIT Group does not engage in overly risky lending practices, it is considered to be in good financial shape. Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. Bad debt is written off as expenses when loans are not repaid which directly impacts CIT Group’s bottom line. Since bad loans make up a relatively small 0.92% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
Is There Enough Safe Form Of Borrowing?
CIT Group 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since CIT Group’s total deposit to total liabilities is within the sensible margin at 73% 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.
The recent acquisition is expected to bring more opportunities for CIT, 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 CIT. 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 CIT’s future growth? Take a look at our free research report of analyst consensus for CIT’s outlook.
- Valuation: What is CIT 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 CIT 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 firstname.lastname@example.org.