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Should You Be Concerned About Guangzhou Rural Commercial Bank Co Ltd’s (HKG:1551) Risks?

Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. As a small-cap bank with a market capitalisation of HK$49b, Guangzhou Rural Commercial Bank Co Ltd’s (HKG:1551) 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 Guangzhou Rural Commercial Bank’s bottom line. Since the level of risky assets held by the bank impacts the attractiveness of it as an investment, I will take you through three metrics that are insightful proxies for risk.

View our latest analysis for Guangzhou Rural Commercial Bank

SEHK:1551 Historical Debt December 10th 18

How Good Is Guangzhou Rural Commercial Bank At Forecasting Its Risks?

Guangzhou Rural Commercial 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 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 198.58%, the bank has cautiously over-provisioned by 98.58%, 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?

By nature, Guangzhou Rural Commercial Bank 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. When these loans are not repaid, they are written off as expenses which comes directly out of the bank’s profit. A ratio of 1.41% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.

How Big Is Guangzhou Rural Commercial Bank’s Safety Net?

Handing Money Transparent

Guangzhou Rural Commercial Bank 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 Guangzhou Rural Commercial Bank’s total deposit to total liabilities is within the sensible margin at 79% 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.

Next Steps:

How will 1551’s recent acquisition impact the business going forward? Should you be concerned about the future of 1551 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 1551. I’ve also used this site as a source of data for my article.

  1. Future Outlook: What are well-informed industry analysts predicting for 1551’s future growth? Take a look at our free research report of analyst consensus for 1551’s outlook.
  2. Valuation: What is 1551 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 1551 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.