As a HK$307.1b market capitalisation company operating in the financial services sector, BOC Hong Kong (Holdings) Limited (HKG:2388) 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 BOC Hong Kong (Holdings) 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.
What Is An Appropriate Level Of Risk?By nature, BOC Hong Kong (Holdings) is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts BOC Hong Kong (Holdings)’s bottom line. The bank’s bad debt only makes up a very small 0.21% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
How Good Is BOC Hong Kong (Holdings) At Forecasting Its Risks?
BOC Hong Kong (Holdings)’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. Given its high bad loan to bad debt ratio of 193.4% BOC Hong Kong (Holdings) has cautiously over-provisioned 93.4% 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 BOC Hong Kong (Holdings)’s Safety Net?BOC Hong Kong (Holdings) 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 BOC Hong Kong (Holdings)’s total deposit to total liabilities is very high at 83% which is well-above the prudent level of 50% for banks, BOC Hong Kong (Holdings) may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
2388’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. I’ve bookmarked 2388’s company page on Simply Wall St to stay informed with changes in outlook and valuation. This is also the source of data for this article. The three main sections I’d recommend you check out are:
- Future Outlook: What are well-informed industry analysts predicting for 2388’s future growth? Take a look at our free research report of analyst consensus for 2388’s outlook.
- Valuation: What is 2388 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 2388 is currently mispriced by the market.
- 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.
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