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One of the biggest risk Raiffeisen Bank International AG (WBAG:RBI) faces as a bank is bad loans, also known as credit risk. With a €9.46B market capitalisation, it falls in the large, commercial bank category. Exposure to the volatile credit market during the 2008 Financial Crisis caused billion dollar losses for large commercial banks with risky lending portfolios. This led to investors losing trust in these once stable financial stocks. Now we will analyse financial metrics focused on bad debt and liabilities in order to gain insights into Raiffeisen Bank International’s lending practices and better understand its operational risks. View our latest analysis for Raiffeisen Bank International
How Much Risk Is Too Much?
Raiffeisen Bank International is seen as engaging in imprudent risky lending practices if bad loans make up more than 3% of its total loans. Loans that are “bad” cannot be recovered by the bank and are written off as expenses which comes out directly from its profit. Bad debt makes up 4.79% of the bank’s total assets which is above the appropriate level of 3%. Given that most banks are generally well-below this threshold, Raiffeisen Bank International faces a much higher level of risk and exhibits below-average bad debt management.
Does Raiffeisen Bank International Understand Its Own Risks?
Raiffeisen Bank International’s understanding of its risk level can be estimated by its ability to forecast and provision for its bad loans. If it writes off more than 100% of the bad debt it provisioned for, then it has inadequately estimated the factors that may have added to a higher bad loan level which begs the question – does Raiffeisen Bank International understand its own risk? With a bad loan to bad debt ratio of 69.41%, Raiffeisen Bank International has under-provisioned by -30.59% which is below the sensible margin of error, illustrating room for improvement in the bank’s forecasting methodology.
How Big Is Raiffeisen Bank International’s Safety Net?
Raiffeisen Bank International 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 Raiffeisen Bank International’s total deposit to total liabilities is very high at 84.56% which is well-above the prudent level of 50% for banks, Raiffeisen Bank International may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.