As a HK$ 529.46B market capitalisation bank, Bank of Communications Co Ltd. (SEHK:3328) 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 Bank of Communications 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. 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 Bank of Communications
What Is An Appropriate Level Of Risk?By nature, Bank of Communications 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. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts Bank of Communications’s bottom line. Since bad loans only make up 1.51% of total assets for the bank, it exhibits prudent bad debt management and faces an industry-average risk of default.
Does Bank of Communications Understand Its Own Risks?
Bank of Communications’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 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 151.06%, the bank has cautiously over-provisioned by 51.06%, which illustrates a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
How Big Is Bank of Communications’s Safety Net?Bank of Communications 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. Since Bank of Communications’s total deposit to total liabilities is within the sensible margin at 64.69% 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 Communications 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 Communications a less risky one. We’ve only touched on operational risks for 3328 in this article. But as a stock investment, there are other fundamentals you need to understand. I’ve put together three important aspects you should look at:
- Future Outlook: What are well-informed industry analysts predicting for 3328’s future growth? Take a look at our free research report of analyst consensus for 3328’s outlook.
- Valuation: What is 3328 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 3328 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.