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Why Agricultural Bank of China Limited (HKG:1288) May Not Be As Risky Than You Think

Large banks such as Agricultural Bank of China Limited (HKG:1288), with a market capitalisation of HK$1.4t, have benefited from improving credit quality as a result of post-GFC recovery, leading to a strong growth environment. Economic growth fuels demand for loans and affects a borrower’s ability to repay which directly impacts the level of risk Agricultural Bank of China 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. 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.

See our latest analysis for Agricultural Bank of China

SEHK:1288 Historical Debt November 28th 18
SEHK:1288 Historical Debt November 28th 18

What Is An Appropriate Level Of Risk?

Agricultural Bank of China is considered to be in a good financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risky? 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 Agricultural Bank of China’s profit. Since bad loans only make up 1.67% of total assets for the bank, it exhibits prudent bad debt management and faces an industry-average risk of default.

How Good Is Agricultural Bank of China At Forecasting Its Risks?

Agricultural Bank of China’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. If the bank provisions for more than 100% of the bad debt it actually writes off, then it is considered to be relatively prudent and accurate in its bad debt provisioning. Given its large bad loan to bad debt ratio of 248.4%, Agricultural Bank of China excessively over-provisioned by 148.4% above the appropriate minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.

How Big Is Agricultural Bank of China’s Safety Net?

Handing Money Transparent
Handing Money Transparent

Agricultural 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Agricultural Bank of China’s total deposit level of 88% 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:

The recent acquisition is expected to bring more opportunities for 1288, which in turn should lead to stronger growth. I would stay up-to-date on how this decision will affect the future of the business in terms of earnings growth and financial health. I’ve bookmarked 1288’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:

  1. Future Outlook: What are well-informed industry analysts predicting for 1288’s future growth? Take a look at our free research report of analyst consensus for 1288’s outlook.

  2. Valuation: What is 1288 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 1288 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.

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