Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. Bank of Zhengzhou Co Ltd (HKG:6196) is a small-cap bank with a market capitalisation of HK$36.9b. Its profit and value are directly impacted by its borrowers’ ability to pay which is driven by the level of economic growth. This is because growth determines the stability of a borrower’s salary as well as the level of interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting Bank of Zhengzhou’s bottom line. Today we will analyse Bank of Zhengzhou’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
Does Bank of Zhengzhou Understand Its Own Risks?
Bank of Zhengzhou’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 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. With a bad loan to bad debt ratio of 176.77%, the bank has cautiously over-provisioned by 76.77%, which illustrates a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
How Much Risk Is Too Much?If Bank of Zhengzhou does not engage in overly risky lending practices, it is considered to be in good financial shape. Typically, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes out directly from Bank of Zhengzhou’s profit. Since bad loans only make up 1.69% of total assets for the bank, it exhibits prudent bad debt management and faces an industry-average risk of default.
Is There Enough Safe Form Of Borrowing?Bank of Zhengzhou 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. Bank of Zhengzhou’s total deposit level of 71% 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.
6196’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 6196. 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.
- Future Outlook: What are well-informed industry analysts predicting for 6196’s future growth? Take a look at our free research report of analyst consensus for 6196’s outlook.
- Valuation: What is 6196 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 6196 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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