Yahoo Finance Have You Considered These Key Risks For Industrial and Commercial Bank of China Limited (HKG:1398)?
Large banks such as Industrial and Commercial Bank of China Limited (HKG:1398), with a market capitalisation of HK$2.39t, have benefited from improving credit quality as a result of post-GFC recovery, leading to a strong growth environment. Growth stimulates demand for loans and impacts a borrower’s ability to repay which directly affects the level of risk Industrial and Commercial Bank of China 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. Since the level of risky assets held by a bank impacts its cash flow and therefore the attractiveness of its stock as an investment, I will take you through three metrics that are insightful proxies for risk. Check out our latest analysis for Industrial and Commercial Bank of China
How Much Risk Is Too Much?
Industrial and Commercial Bank of China is engaging in risking lending practices 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. Bad debt is written off as expenses when loans are not repaid which directly impacts Industrial and Commercial Bank of China’s bottom line. Since bad loans only make up 1.59% of total assets for the bank, it exhibits prudent bad debt management and faces an industry-average risk of default.
Does Industrial and Commercial Bank of China Understand Its Own Risks?
Industrial and Commercial Bank of China’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. Given its high bad loan to bad debt ratio of 154.07% Industrial and Commercial Bank of China has cautiously over-provisioned 54.07% 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 Industrial and Commercial Bank of China’s Safety Net?
Industrial and Commercial Bank of China 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Industrial and Commercial Bank of China’s total deposit level of 91.12% of its total liabilities is very high and is well-above the sensible level of 50% for financial institutions. This may mean the bank is too cautious with its level of its safer form of borrowing and has plenty of headroom to take on risker forms of liability.
Next Steps:
How will 1398’s recent acquisition impact the business going forward? Should you be concerned about the future of 1398 and the sustainability of its financial health? I’ve bookmarked 1398’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 1398’s future growth? Take a look at our free research report of analyst consensus for 1398’s outlook.
Valuation: What is 1398 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 1398 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 pass 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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
