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As a small-cap bank stock with a market capitalisation of HK$15.94b, Jilin Jiutai Rural Commercial Bank Corporation Limited’s (HKG:6122) risk and profitability are largely determined by the underlying economic growth of the HK regions in which it operates. Since banks make money by reinvesting its customers’ deposits in the form of loans, strong economic growth will drive the level of savings deposits and demand for loans, directly impacting the cash flows of those banks. Post-GFC recovery brought about a new set of reforms, Basel III, which was created to improve regulation, supervision and risk management in the financial services industry. Basel III target banking regulations to improve the sector’s ability to absorb shocks resulting from economic stress which may expose financial institutions like Jilin Jiutai Rural Commercial Bank to vulnerabilities. Since its financial standing can unexpectedly decline in the case of an adverse macro event such as political instability, it is important to understand how prudent the bank is at managing its risk levels. Strong management of leverage and liquidity could place the bank in a protected position at the face of macro headwinds. We can gauge Jilin Jiutai Rural Commercial Bank’s risk-taking behaviour by analysing three metrics for leverage and liquidity which I will take you through now.
View our latest analysis for Jilin Jiutai Rural Commercial Bank
Is 6122’s Leverage Level Appropriate?
Banks with low leverage are better positioned to weather adverse headwinds as they have less debt to pay off. A bank’s leverage may be thought of as the level of assets it owns compared to its own shareholders’ equity. While financial companies will always have some leverage for a sufficient capital buffer, Jilin Jiutai Rural Commercial Bank’s leverage ratio of less than the suitable maximum level of 20x, at 11.26x, is considered to be very cautious and prudent. This means the bank exhibits very strong leverage management and is well-positioned to repay its debtors in the case of any adverse events since it has an appropriately high level of equity relative to the debt it has taken on to remain in business. Should the bank need to increase its debt levels to meet capital requirements, it will have abundant headroom to do so.
What Is 6122’s Level of Liquidity?
Due to its illiquid nature, loans are an important asset class we should learn more about. Normally, they should not exceed 70% of total assets, which is consistent with Jilin Jiutai Rural Commercial Bank’s state given its much lower ratio of 42.4%. This ratio suggests that less than half of the bank’s total assets are made up of loans, but the bank’s strong liquidity management may be at the price of generating higher interest income.