Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. As a small-cap bank with a market capitalisation of HK$15.85b, Dah Sing Financial Holdings Limited’s (HKG:440) 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 Dah Sing Financial Holdings’s bottom line. Today we will analyse Dah Sing Financial Holdings’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
See our latest analysis for Dah Sing Financial Holdings
How Good Is Dah Sing Financial Holdings At Forecasting Its Risks?
Dah Sing Financial Holdings’s ability to forecast and provision for its bad loans relatively accurately indicates it has a good understanding of the level of risk it is taking on. If it writes off more than 100% of the bad debt it provisioned for, then it has inadequately estimated the factors that may have added to a higher bad loan level which begs the question – does Dah Sing Financial Holdings understand its own risk? Dah Sing Financial Holdings’s low bad loan to bad debt ratio of 86.95% means the bank has under-provisioned by -13.05%, indicating either an unexpected one-off occurence with defaults or poor bad debt provisioning.
What Is An Appropriate Level Of Risk?
By nature, Dah Sing Financial Holdings 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. Loans are written off as expenses when they are not repaid, which comes directly out of Dah Sing Financial Holdings’s profit. A ratio of 0.61% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
Is There Enough Safe Form Of Borrowing?
Dah Sing Financial Holdings 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since Dah Sing Financial Holdings’s total deposit to total liabilities is very high at 87.86% which is well-above the prudent level of 50% for banks, Dah Sing Financial Holdings may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.