As a US$171.59B market capitalisation company operating in the financial services sector, Citigroup Inc (NYSE:C) has benefited from strong economic growth and improved credit quality as a result of post-GFC recovery. Economic growth fuels demand for loans and affects a borrower’s ability to repay which directly impacts the level of risk Citigroup 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. The level of risky assets a bank holds on its accounts affects the attractiveness of the company as an investment. So today we will focus on three important metrics that are insightful proxies for risk. See our latest analysis for Citigroup

What Is An Appropriate Level Of Risk?

Citigroup is engaging in risking lending practices if it is over-exposed to bad debt. Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes out directly from Citigroup’s profit. A ratio of 0.63% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.

How Good Is Citigroup At Forecasting Its Risks?

Citigroup’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. If the level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then it is relatively accurate and prudent in its bad debt provisioning. With a bad loan to bad debt ratio of 291.16%, the bank has extremely over-provisioned by 191.16% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.

How Big Is Citigroup’s Safety Net?

Citigroup 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 Citigroup’s total deposit to total liabilities is within the sensible margin at 58.24% 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.

Next Steps:

Citigroup shows prudent management of risky assets and lending behaviour. It has maintained a sufficient level of deposits against liabilities and reasonably provisioned for the level of bad debt. Citigroup is deemed a less risky investment given its sound and sensible lending strategy which gives us more confidence in its operational risk management. We’ve only touched on operational risks for C in this article. But as a stock investment, there are other fundamentals you need to understand. I’ve put together three important factors you should further examine: