As a HK$423.79b market capitalisation company operating in the financial services sector, Postal Savings Bank of China Co Ltd (HKG:1658) has benefited from strong economic growth and improved credit quality as a result of post-GFC recovery. A borrower’s demand for, and ability to repay, loans is driven by economic growth which directly impacts the level of risk Postal Savings Bank of China 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. Since the level of risky assets held by a bank impacts its cash flow and therefore the attractiveness of its stock as an investment, I will take you through three metrics that are insightful proxies for risk. Check out our latest analysis for Postal Savings Bank of China

How Much Risk Is Too Much?

By nature, Postal Savings Bank of China 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. Since bad loans make up a relatively small 0.70% of total assets, the bank exhibits strict bad debt management and faces low risk of default.

Does Postal Savings Bank of China Understand Its Own Risks?

The ability for Postal Savings Bank of China 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 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 351.93%, Postal Savings Bank of China excessively over-provisioned by 251.93% above the appropriate minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.

Is There Enough Safe Form Of Borrowing?

Postal Savings 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Postal Savings Bank of China’s total deposit level of 96.74% 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.