In This Article:
Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. Bank of Tianjin Co Ltd (HKG:1578) is a small-cap bank with a market capitalisation of HK$24.28b. Its profit and value are directly impacted by its borrowers’ ability to pay which is driven by the level of economic growth. This is because growth determines the stability of a borrower’s salary as well as the level of interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting Bank of Tianjin’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.
Check out our latest analysis for Bank of Tianjin
How Good Is Bank of Tianjin At Forecasting Its Risks?
Bank of Tianjin’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 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. With a bad loan to bad debt ratio of 239.59%, the bank has extremely over-provisioned by 139.59% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.
What Is An Appropriate Level Of Risk?
Bank of Tianjin’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of Bank of Tianjin’s profit. With a ratio of 1.62%, the bank faces an appropriate level of bad loan, indicating prudent management and an industry-average risk of default.
Is There Enough Safe Form Of Borrowing?
Bank of Tianjin operates by lending out its various forms of borrowings. Customers’ deposits tend to carry the smallest risk given the relatively stable interest rate and amount available. As a rule, a bank is considered less risky if it holds a higher level of deposits. Bank of Tianjin’s total deposit level of 60.0% 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.
Next Steps:
1578’s acquisition will impact the business moving forward. Keep an eye on how this decision plays out in the future, especially on its financial health and earnings growth. Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for 1578. I’ve also used this site as a source of data for my article.