Risk Factors To Consider Before Investing In Guangzhou Rural Commercial Bank Co Ltd (HKG:1551)

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 HK$50b, Guangzhou Rural Commercial Bank Co Ltd’s (HKG:1551) 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 Guangzhou Rural Commercial Bank’s bottom line. Today we will analyse Guangzhou Rural Commercial Bank’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.

See our latest analysis for Guangzhou Rural Commercial Bank

SEHK:1551 Historical Debt November 14th 18
SEHK:1551 Historical Debt November 14th 18

How Good Is Guangzhou Rural Commercial Bank At Forecasting Its Risks?

The ability for Guangzhou Rural Commercial Bank 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. With a bad loan to bad debt ratio of 198.58%, the bank has cautiously over-provisioned by 98.58%, which illustrates a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.

What Is An Appropriate Level Of Risk?

By nature, Guangzhou Rural Commercial Bank is exposed to risky assets by lending to borrowers who may not be able to repay their loans. 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 directly out of the bank’s profit. A ratio of 1.41% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.

Is There Enough Safe Form Of Borrowing?

Handing Money Transparent Guangzhou Rural Commercial Bank profits from lending out its various forms of borrowings and charging interest rates. Deposits from customers tend to carry the lowest risk due to 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. Guangzhou Rural Commercial Bank’s total deposit level of 79% of its total liabilities is within the sensible margin for for financial institutions which generally has a ratio of 50%. This indicates a prudent level of the bank’s safer form of borrowing and a prudent level of risk.

Next Steps:

1551’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. The list below is my go-to checks for 1551. 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.

  1. Future Outlook: What are well-informed industry analysts predicting for 1551’s future growth? Take a look at our free research report of analyst consensus for 1551’s outlook.
  2. Valuation: What is 1551 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 1551 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.