The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. As a small-cap bank with a market capitalisation of HK$31b, Bank of Zhengzhou Co., Ltd.’s (HKG:6196) profit and value are directly affected by economic growth. This is because borrowers’ demand for, and ability to repay, their loans depend on the stability of their salaries and 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 I will take you through some bad debt and liability measures to analyse the level of risky assets held by the bank. Looking through a risk-lens is a useful way to assess the attractiveness of Bank of Zhengzhou’s a stock investment.
How Good Is Bank of Zhengzhou At Forecasting Its Risks?
The ability for Bank of Zhengzhou 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 157.72% Bank of Zhengzhou has cautiously over-provisioned 57.72% 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 Much Risk Is Too Much?By nature, Bank of Zhengzhou is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Typically, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of Bank of Zhengzhou’s profit. Since bad loans only make up 1.74% 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 Zhengzhou’s Safety Net?Bank of Zhengzhou 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since Bank of Zhengzhou’s total deposit to total liabilities is within the sensible margin at 70% 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.
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. I’ve bookmarked 6196’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 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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