Large banks such as Regions Financial Corporation (NYSE:RF), with a market capitalisation of US$20.11B, have benefited from improving credit quality as a result of post-GFC recovery, leading to a strong growth environment. Economic growth fuels demand for loans and affects a borrower’s ability to repay which directly impacts the level of risk Regions Financial 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. Since the level of risky assets held by a bank impacts its cash flow and therefore the attractiveness of its stock as an investment, I will take you through three metrics that are insightful proxies for risk. Check out our latest analysis for Regions Financial
How Much Risk Is Too Much?
Regions Financial is considered to be in a good financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risky? Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of Regions Financial’s profit. Since bad loans make up a relatively small 0.83% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
How Good Is Regions Financial At Forecasting Its 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 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 140.03%, the bank has cautiously over-provisioned by 40.03%, which illustrates a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
How Big Is Regions Financial’s Safety Net?
Regions Financial 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since Regions Financial’s total deposit to total liabilities is very high at 89.63% which is well-above the prudent level of 50% for banks, Regions Financial may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
With positive measures for all three ratios, Regions Financial shows a prudent level of managing its risky assets. It seems to have a clear understanding of how much it needs to provision each year for lower quality borrowers and it has maintained a safe level of deposits against its liabilities. The company’s judicious lending strategy gives us higher conviction in its ability to manage its operational risks which makes Regions Financial a less risky investment. We’ve only touched on operational risks for RF in this article. But as a stock investment, there are other fundamentals you need to understand. There are three key aspects you should further research:
- 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 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.