Post-GFC recovery has led to improving credit quality and a strong growth environment for 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 HKD HK$21.83B, Bank of Gansu Co Ltd (SEHK:2139)’s 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 Bank of Gansu’s bottom line. Since the level of risky assets held by the bank impacts the attractiveness of it as an investment, I will take you through three metrics that are insightful proxies for risk. Check out our latest analysis for Bank of Gansu
Does Bank of Gansu Understand Its Own Risks?
The ability for Bank of Gansu 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 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 192.71% Bank of Gansu has cautiously over-provisioned 92.71% above the appropriate minimum, indicating 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, Bank of Gansu is exposed to risky assets by lending to borrowers who may not be able to repay their loans. 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 Bank of Gansu’s bottom line. Since bad loans only make up 1.81% of total assets for the bank, it exhibits prudent bad debt management and faces an industry-average risk of default.
How Big Is Bank of Gansu’s Safety Net?Bank of Gansu 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. Since Bank of Gansu’s total deposit to total liabilities is within the sensible margin at 79.28% 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.
With positive measures for all three ratios, Bank of Gansu shows a prudent level of managing its risky assets. It has maintained a sufficient level of deposits against liabilities and reasonably provisioned for the level of bad debt. The company’s sound and sensible lending strategy gives us more conviction in its ability to manage its operational risks which makes an investment in Bank of Gansu a less risky one. Keep in mind that a stock investment requires research on more than just its operational side. There are three relevant factors you should further research:
1. Valuation: What is 2139 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 2139 is currently mispriced by the market.
2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Bank of Gansu’s board and the CEO’s back ground.
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.