As a HK$374b market capitalisation bank, BOC Hong Kong (Holdings) Limited (HKG:2388) is well-positioned to benefit from the improving credit quality as a result of post-GFC recovery. Growth stimulates demand for loans and impacts a borrower’s ability to repay which directly affects the level of risk BOC Hong Kong (Holdings) takes on. With stricter regulations as a consequence of the recession, banks are more conservative in their lending practices, leading to more prudent levels of risky assets on the balance sheet. It is relevant to understand a bank’s level of risky assets on its accounts as it affects the attractiveness of its stock as an investment. Today I will be taking you through three metrics that are useful proxies for risk.
See our latest analysis for BOC Hong Kong (Holdings)
What Is An Appropriate Level Of Risk?
BOC Hong Kong (Holdings) may be taking on too many risky loans if it is over-exposed to bad debt. 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. When these loans are not repaid, they are written off as expenses which come directly out of the bank’s profit. The bank’s bad debt only makes up a very small 0.19% to total debt which suggests the bank either has strict risk management – or its loans haven’t started going bad yet.Does BOC Hong Kong (Holdings) Understand Its Own 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 bank provisions for more than 100% of the bad debt it actually writes off, then could be considered to be relatively prudent and accurate in its bad debt provisioning. Given its large non-performing loan allowance to non-performing loan ratio of 226.9%, BOC Hong Kong (Holdings) over-provisioned by 126.9% above the minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
Is There Enough Safe Form Of Borrowing?
BOC Hong Kong (Holdings) 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.
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 85% 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.
Next Steps:
The recent acquisition is expected to bring more opportunities for 2388, which in turn should lead to stronger growth. I would stay up-to-date on how this decision will affect the future of the business in terms of earnings growth and financial health. 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.
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