With a €32b market capitalisation, Crédit Agricole SA (EPA:ACA) falls in the large, commercial bank category. A common risk large financial institutions face is credit risk, measured by the level of bad debt it writes off. In the last recession, large banks like JP Morgan Chase, Bank of America and Wells Fargo Bank lost billions of dollars in shareholder equity as their risky lending portfolios were exposed to a tumultuous credit market. This led to investors losing trust in these once stable financial stocks. Levels of bad debt and liabilities can be useful insights into Crédit Agricole’s engagement with risky lending practices and operational prudency. Today we will talk about some important bank-specific metrics to better understand financial stock investments before taking the plunge.
What Is An Appropriate Level Of Risk?
Crédit Agricole’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Typically, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of Crédit Agricole’s profit. With a ratio of 1.82%, the bank faces an appropriate level of bad loan, indicating prudent management and an industry-average risk of default.
Does Crédit Agricole Understand Its Own Risks?
The ability for Crédit Agricole to forecast and provision for its bad loans accurately serves as an indication for the bank’s understanding of its own level of risk. The bank has poorly anticipated the factors contributing to higher bad loan levels if it writes off more than 100% of the bad debt it provisioned for. This begs the question – does Crédit Agricole understand the risks it has taken on? With a bad loan to bad debt ratio of 74.48%, Crédit Agricole has under-provisioned by -25.52% which is below the sensible margin of error, illustrating room for improvement in the bank’s forecasting methodology.
Is There Enough Safe Form Of Borrowing?
Crédit Agricole borrows money in many different forms to lend back out. Deposits from its customers tends to bear the lowest risk because they are less volatile in terms of amount available and interest rate paid. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Crédit Agricole’s total deposit level of 38% of its total liabilities is below the sensible margin for for financial institutions which generally has a ratio of 50%. This means the bank’s safer form of borrowing makes up less than half of its liabilities, indicating riskier operational activity.
Compared to the total liabilities Crédit Agricole holds, its safer form of borrowing is undesirably lower. Furthermore, its imprudent bad debt management could negatively impact its cash flows. These risk metrics indicate that its operational risk management could be improved on in order to give investors higher conviction of the business. Keep in mind that a stock investment requires research on more than just its operational side. I’ve put together three essential factors you should further research:
- Future Outlook: What are well-informed industry analysts predicting for ACA’s future growth? Take a look at our free research report of analyst consensus for ACA’s outlook.
- Valuation: What is ACA 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 ACA 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.