Improving credit quality as a result of post-recession recovery has led to a strong growth environment for financial institutions. Large banks such as China Construction Bank Corporation (HKG:939), with a market capitalisation of HK$1.89t, have benefited from this momentum. A borrower’s demand for, and ability to repay, loans is driven by economic growth which directly impacts the level of risk China Construction Bank takes on. With stricter regulations as a result of the GFC, banks are more conservative in their lending practices, leading to more prudent levels of risky assets on the balance sheet. It is relevant to understand a bank’s level of risky assets on its accounts as it affects the attractiveness of its stock as an investment. Today I will be taking you through three metrics that are useful proxies for risk. Check out our latest analysis for China Construction Bank
What Is An Appropriate Level Of Risk?
China Construction Bank’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. 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 when loans are not repaid. This is classified as an expense which directly impacts China Construction Bank’s bottom line. A ratio of 1.49% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
Does China Construction Bank Understand Its Own Risks?
China Construction Bank’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. Given its high bad loan to bad debt ratio of 189.48% China Construction Bank has cautiously over-provisioned 89.48% 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?
China Construction Bank 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. China Construction Bank’s total deposit level of 86.08% 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.
How will 939’s recent acquisition impact the business going forward? Should you be concerned about the future of 939 and the sustainability of its financial health? Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for 939. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for 939’s future growth? Take a look at our free research report of analyst consensus for 939’s outlook.
- Valuation: What is 939 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 939 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.