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As a small-cap bank stock with a market capitalisation of HK$15b, Jilin Jiutai Rural Commercial Bank Corporation Limited’s (HKG:6122) risk and profitability are largely determined by the underlying economic growth of the HK regions in which it operates. Since banks make money by reinvesting its customers’ deposits in the form of loans, strong economic growth will drive the level of savings deposits and demand for loans, directly impacting the cash flows of those banks. After the Financial Crisis in 2008, a set of reforms called Basel III was created with the purpose of strengthening regulation, risk management and supervision in the banking sector. The Basel III reforms are aimed at banking regulations to improve financial institutions’ ability to absorb shocks caused by economic stress which could expose banks like Jilin Jiutai Rural Commercial Bank to vulnerabilities. Its financial position may weaken in an adverse macro event such as political instability which is why it is crucial to understand how well the bank manages its risks. Sufficient liquidity and low levels of leverage could place the bank in a safe place in case of unexpected macro headwinds. Today we will be measuring Jilin Jiutai Rural Commercial Bank’s financial risk position by looking at three leverage and liquidity metrics.
See our latest analysis for Jilin Jiutai Rural Commercial Bank
Is 6122’s Leverage Level Appropriate?
Banks with low leverage are better positioned to weather adverse headwinds as they have less debt to pay off. A bank’s leverage may be thought of as the level of assets it owns compared to its own shareholders’ equity. Though banks are required to have a certain level of buffer to meet its capital requirements, Jilin Jiutai Rural Commercial Bank’s leverage level of 10.8x is very safe and substantially below the maximum limit of 20x. With assets 10.8 times equity, the banks has maintained a prudent level of its own fund relative to borrowed fund which places it in a strong position to pay back its debt in times of adverse events. If the bank needs to increase its debt levels to firm up its capital cushion, there is plenty of headroom to do so without deteriorating its financial position.
What Is 6122’s Level of Liquidity?
As I eluded to above, loans are relatively illiquid. It’s helpful to understand how much of this illiquid asset makes up the bank’s total asset. Generally, they should make up less than 70% of total assets, which is the case for Jilin Jiutai Rural Commercial Bank, with a ratio well-below the maximum level at 44%. This ratio suggests that less than half of the bank’s total assets are made up of loans, but the bank’s strong liquidity management may be at the price of generating higher interest income.