Why Industrial and Commercial Bank of China Limited (HKG:1398) May Not Be As Risky Than You Think

As a CN¥2.24t market capitalisation company operating in the financial services sector, Industrial and Commercial Bank of China Limited (HKG:1398) has benefited from strong economic growth and improved credit quality as a result of post-GFC recovery. A borrower’s demand for, and ability to repay, loans is driven by economic growth which directly impacts the level of risk Industrial and Commercial Bank of China takes on. With stricter regulations as a result of the GFC, banks are more conservative in their lending practices, leading to more prudent levels of risky assets on the balance sheet. 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 Industrial and Commercial Bank of China

How Much Risk Is Too Much?

Industrial and Commercial Bank of China 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 recovered by the bank are known as bad loans and typically should make up 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 Industrial and Commercial Bank of China’s bottom line. Since bad loans only make up 1.59% of total assets for the bank, it exhibits prudent bad debt management and faces an industry-average risk of default.

How Good Is Industrial and Commercial Bank of China At Forecasting Its Risks?

Industrial and Commercial Bank of China’s ability to forecast and provision for its bad loans indicates it has a good understanding of the level of risk it is taking on. 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. Given its high bad loan to bad debt ratio of 154.07% Industrial and Commercial Bank of China has cautiously over-provisioned 54.07% 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 Big Is Industrial and Commercial Bank of China’s Safety Net?

Industrial and Commercial Bank of China operates by lending out its various forms of borrowings. Customers’ deposits tend to carry the smallest risk given the relatively stable interest rate and amount available. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Industrial and Commercial Bank of China’s total deposit level of 91.12% 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.

Next Steps:

1398's acquisition will impact the business moving forward. Keep an eye on how this decision plays out in the future, especially on its financial health and earnings growth. Below, I've listed three fundamental areas on Simply Wall St's dashboard for a quick visualization on current trends for 1398. I've also used this site as a source of data for my article.

1. Future Outlook: What are well-informed industry analysts predicting for 1398’s future growth? Take a look at our free research report of analyst consensus for 1398’s outlook.
2. Valuation: What is 1398 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 1398 is currently mispriced by the market.
3. 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 editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.