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The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. As a small-cap bank with a market capitalisation of HK$22.3b, Dah Sing Banking Group Limited’s (HKG:2356) 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 Banking Group’s bottom line. Today we will analyse Dah Sing Banking Group’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
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How Good Is Dah Sing Banking Group At Forecasting Its Risks?
Dah Sing Banking Group’s understanding of its risk level can be estimated by its ability to forecast and provision for its bad loans. If it writes off more than 100% of the bad debt it provisioned for, then it has poorly anticipated the factors that may have contributed to a higher bad loan level which begs the question – does Dah Sing Banking Group understand its own risk?. With a bad loan to bad debt ratio of 86.15%, Dah Sing Banking Group has under-provisioned by -13.85% which is below the sensible margin of error, illustrating room for improvement in the bank’s forecasting methodology.
What Is An Appropriate Level Of Risk?
Dah Sing Banking Group is engaging in risking lending practices if it is over-exposed to bad debt. Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts Dah Sing Banking Group’s bottom line. Since bad loans make up a relatively small 0.81% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
How Big Is Dah Sing Banking Group’s Safety Net?
Dah Sing Banking Group 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since Dah Sing Banking Group’s total deposit to total liabilities is very high at 90% which is well-above the prudent level of 50% for banks, Dah Sing Banking Group may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.