Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. As a small-cap bank with a market capitalisation of HKD HK$26.39B, Harbin Bank Co Ltd (SEHK:6138)’s 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 Harbin Bank’s bottom line. Today we will analyse Harbin Bank’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank. See our latest analysis for Harbin Bank
How Good Is Harbin Bank At Forecasting Its Risks?
The ability for Harbin Bank to accurately forecast and provision for its bad loans shows it has a strong 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 158.93% Harbin Bank has cautiously over-provisioned 58.93% 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 Much Risk Is Too Much?
Harbin 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. Loans are written off as expenses when they are not repaid, which comes directly out of Harbin Bank’s profit. With a ratio of 1.69%, the bank faces an appropriate level of bad loan, indicating prudent management and an industry-average risk of default.
How Big Is Harbin Bank’s Safety Net?
Harbin 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. Harbin Bank’s total deposit level of 79.88% of its total liabilities is within the sensible margin for for financial institutions which generally has a ratio of 50%. This indicates a prudent level of the bank’s safer form of borrowing and a prudent level of risk.
Conclusion
Harbin Bank shows prudent management of risky assets and lending behaviour. It seems to have a clear understanding of how much it needs to provision each year for lower quality borrowers and it has maintained a safe level of deposits against its liabilities. The company’s judicious lending strategy gives us higher conviction in its ability to manage its operational risks which makes Harbin Bank a less risky investment.