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As a HK$370b market capitalisation company operating in the financial services sector, Hang Seng Bank Limited (HKG:11) 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 Hang Seng Bank 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. 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 Hang Seng Bank
What Is An Appropriate Level Of Risk?
By nature, banks like Hang Seng Bank are exposed to risky assets, by lending to borrowers who may not be able to repay their loans. Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which come directly out of the bank’s profit. Since bad loans only make up an insignificant 0.25% of its total assets, the bank may have very strict risk management - or perhaps the risks in its portfolio have not eventuated yet.
Does Hang Seng Bank Understand Its Own Risks?
Hang Seng Bank’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. We generally prefer to see that a provisions covers close to 100% of what it actually writes off, as this could imply a sensible and conservative approach towards bad loans. With a non-performing loan allowance to non-performing loan ratio of 123.98%, the bank has cautiously over-provisioned by 23.98%, which may suggest the bank is anticipating additional non-performing loans.
Is There Enough Safe Form Of Borrowing?
Hang Seng Bank 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. Hang Seng Bank’s total deposit level of 85% 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.