Advertisement
New Zealand markets closed
  • NZX 50

    12,105.29
    +94.63 (+0.79%)
     
  • NZD/USD

    0.5974
    -0.0031 (-0.52%)
     
  • NZD/EUR

    0.5535
    -0.0008 (-0.14%)
     
  • ALL ORDS

    8,153.70
    +80.10 (+0.99%)
     
  • ASX 200

    7,896.90
    +77.30 (+0.99%)
     
  • OIL

    83.06
    +1.71 (+2.10%)
     
  • GOLD

    2,240.60
    +27.90 (+1.26%)
     
  • NASDAQ

    18,254.69
    -26.15 (-0.14%)
     
  • FTSE

    7,952.62
    +20.64 (+0.26%)
     
  • Dow Jones

    39,807.37
    +47.29 (+0.12%)
     
  • DAX

    18,492.49
    +15.40 (+0.08%)
     
  • Hang Seng

    16,541.42
    +148.58 (+0.91%)
     
  • NIKKEI 225

    40,168.07
    -594.66 (-1.46%)
     
  • NZD/JPY

    90.3760
    -0.4040 (-0.45%)
     

Real Risks You Need To Know Before Investing In BOC Hong Kong (Holdings) Limited (HKG:2388)

As a HK$381.7b market capitalisation company operating in the financial services sector, BOC Hong Kong (Holdings) Limited (HKG:2388) has benefited from strong economic growth and improved credit quality as a result of post-GFC recovery. Economic growth fuels demand for loans and affects a borrower’s ability to repay which directly impacts the level of risk BOC Hong Kong (Holdings) takes on. As a consequence of the GFC, tighter regulations have led to more conservative lending practices by banks, leading to more prudent levels of risky assets on their balance sheets. 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.

View our latest analysis for BOC Hong Kong (Holdings)

SEHK:2388 Historical Debt October 5th 18
SEHK:2388 Historical Debt October 5th 18

How Much Risk Is Too Much?

BOC Hong Kong (Holdings) is engaging in risking lending practices if it is over-exposed to bad debt. Typically, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. Bad debt is written off as expenses when loans are not repaid which directly impacts BOC Hong Kong (Holdings)’s bottom line. The bank’s bad debt only makes up a very small 0.21% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.

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 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. Given its high bad loan to bad debt ratio of 193.4% BOC Hong Kong (Holdings) has cautiously over-provisioned 93.4% above the appropriate minimum, indicating a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.

Is There Enough Safe Form Of Borrowing?

Handing Money Transparent
Handing Money Transparent

BOC Hong Kong (Holdings) 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. BOC Hong Kong (Holdings)’s total deposit level of 83% 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 2388’s recent acquisition impact the business going forward? Should you be concerned about the future of 2388 and the sustainability of its 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:

ADVERTISEMENT
  1. 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.

  2. 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.

  3. 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.