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As a HK$ 1.71T market capitalisation bank, Agricultural Bank of China Limited (SEHK:1288) is well-positioned to benefit from the improving credit quality as a result of post-GFC recovery. Growth stimulates demand for loans and impacts a borrower’s ability to repay which directly affects the level of risk Agricultural Bank of China takes on. With stricter regulations as a consequence of the recession, banks are more conservative in their lending practices, leading to more prudent levels of risky assets on the balance sheet. The level of risky assets a bank holds on its accounts affects the attractiveness of the company as an investment. So today we will focus on three important metrics that are insightful proxies for risk. Check out our latest analysis for Agricultural Bank of China
How Much Risk Is Too Much?
If Agricultural Bank of China does not engage in overly risky lending practices, it is considered to be in good financial shape. Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes out directly from Agricultural Bank of China’s profit. With a ratio of 1.97%, the bank faces an appropriate level of bad loan, indicating prudent management and an industry-average risk of default.
Does Agricultural Bank of China Understand Its Own Risks?
Agricultural Bank of China’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 provision covers more than 100% of what it actually writes off, then it is considered sensible and relatively accurate in its provisioning of bad debt. Given its high bad loan to bad debt ratio of 194.29% Agricultural Bank of China has cautiously over-provisioned 94.29% above the appropriate minimum, indicating a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
Is There Enough Safe Form Of Borrowing?
Agricultural Bank of China profits from lending out its various forms of borrowings and charging interest rates. Deposits from customers tend to carry the lowest risk due to 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. Agricultural Bank of China’s total deposit level of 88.65% 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.