Can Bank of Gansu Co., Ltd. (HKG:2139) Survive The Next Financial Crisis?




  • In Business
  • 2019-02-22 05:54:24Z
  • By Simply Wall St.
 

Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!

As a small-cap bank stock with a market capitalisation of HK$23b, Bank of Gansu Co., Ltd.'s (HKG:2139) risk and profitability are largely determined by the underlying economic growth of the HK regions in which it operates. A bank's cash flow is directly impacted by economic growth as it is the main driver of deposit levels and demand for loans which it profits from. 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. These reforms target banking regulations and intends to enhance financial institutions' ability to absorb shocks resulting from economic stress which could expose banks like Bank of Gansu to vulnerabilities. Unpredictable macro events such as political instability could weaken its financial position which is why it is important to understand how well the bank manages its risk levels. High liquidity and low leverage could position Bank of Gansu favourably at the face of macro headwinds. A way to measure this risk is to look at three leverage and liquidity metrics which I will take you through today.

Check out our latest analysis for Bank of Gansu

Why Does 2139's Leverage Matter?

A low level of leverage subjects a bank to less risk and enhances its ability to pay back its debtors. Leverage can be thought of as the amount of assets a bank owns relative to its shareholders' funds. Though banks are required to have a certain level of buffer to meet its capital requirements, Bank of Gansu's leverage level of 12.44x is very safe and substantially below the maximum limit of 20x. With assets 12.44 times equity, the banks has maintained a prudent level of its own fund relative to borrowed fund which places it in a strong position to pay back its debt in times of adverse events. If the bank needs to increase its debt levels to firm up its capital cushion, there is plenty of headroom to do so without deteriorating its financial position.

What Is 2139's Level of Liquidity?

As I eluded to above, loans are relatively illiquid. It's helpful to understand how much of this illiquid asset makes up the bank's total asset. Generally, they should make up less than 70% of total assets, which is the case for Bank of Gansu, with a ratio well-below the maximum level at 49%. At this level of loan, the bank has preserved a high level of liquidity but perhaps at the cost of producing interest income from illiquid loan.

What is 2139's Liquidity Discrepancy?

Banks operate by lending out its customers' deposits as loans and charge a higher interest rate. Loans are generally fixed term which means they cannot be readily realized, conversely, on the liability side, customer deposits must be paid in very short notice and on-demand. The disparity between the immediacy of deposits compared to the illiquid nature of loans puts pressure on the bank's financial position if an adverse event requires the bank to repay its depositors. Compared to the appropriate industry loan to deposit level of 90%, Bank of Gansu's ratio of over 68% is noticeably lower, which means the bank is lending out less than its total level of deposits and places the bank in a relatively safe liquidity position given it has not excessively lent out its deposits and has maintained a suitable level for compliance. There is opportunity for the bank to increase its interest income by lending out more loans.

Next Steps:

Bank of Gansu ticks all the boxes for operational prudency in terms of liquidity and leverage. Investors often sideline these factors compared to other fundamentals, but they are equally important to consider as part of the investment thesis. High liquidity and low leverage places the bank in an ideal position to repay financial liabilities in case of adverse headwinds. We've only touched on operational risks for 2139 in this article. But as a stock investment, there are other fundamentals you need to understand. Below, I've compiled three important factors you should look at:

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

COMMENTS

More Related News

White House foresees long economic boom where others don
White House foresees long economic boom where others don't

Contrary to the views of most economists, the Trump administration expects the U.S. economy to keep booming over the next decade on the strength of further tax cuts, reduced regulation and improvements to the nation's infrastructure.

What Can We Expect From Zions Bancorporation, National Association
What Can We Expect From Zions Bancorporation, National Association's (NASDAQ:ZION) Earnings In Next 12 Months?

Based on Zions Bancorporation, National Association's (NASDAQ:ZION) recently announced earnings update on 31 December 2018, analyst forecasts seem pessimistic, with profits predicted to drop by -0.6% next year against theRead More...

Introducing Nahar Capital and Financial Services (NSE:NAHARCAP), The Stock That Zoomed 111% In The Last Five Years
Introducing Nahar Capital and Financial Services (NSE:NAHARCAP), The Stock That Zoomed 111% In The Last Five Years

When you buy a stock there is always a possibility that it could drop 100%. But when you pick a company that is really flourishing, you can make more thanRead More...

Fed to hold fire on interest rates as world economy slows
Fed to hold fire on interest rates as world economy slows

There is virtually no chance the US Federal Reserve will raise interest rates in the coming week, since policymakers have all but promised to hold their fire as the global economy slows. With inflation still tame as US economic growth decelerates in 2019, economists also say Fed officials will once again lower the number of rate hikes they expect this year, from the two projected in December. Fed Chairman Jerome Powell is due to announce the second policy decision of the year on Wednesday by the rate-setting Federal Open Market Committee.

Leave a Comment

Your email address will not be published. Required fields are marked with *

Cancel reply

Comments

Top News: Business

facebook
Hit "Like"
Don't miss any important news
Thanks, you don't need to show me this anymore.