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Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. 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$6.4b, Cullen/Frost Bankers, Inc.’s (NYSE:CFR) 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 Cullen/Frost Bankers’s bottom line. Today we will analyse Cullen/Frost Bankers’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
Does Cullen/Frost Bankers Understand Its Own Risks?
The ability for Cullen/Frost Bankers 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. Given its high bad loan to bad debt ratio of 179.19% Cullen/Frost Bankers has cautiously over-provisioned 79.19% above the appropriate minimum, indicating a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
How Much Risk Is Too Much?
Cullen/Frost Bankers 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. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts Cullen/Frost Bankers’s bottom line. A ratio of 0.52% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
Is There Enough Safe Form Of Borrowing?
Cullen/Frost Bankers 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. Cullen/Frost Bankers’s total deposit level of 94% 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.
How will CFR’s recent acquisition impact the business going forward? Should you be concerned about the future of CFR and the sustainability of its financial health? The list below is my go-to checks for CFR. 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 CFR’s future growth? Take a look at our free research report of analyst consensus for CFR’s outlook.
- Valuation: What is CFR 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 CFR 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 email@example.com.