As a HK$374b market capitalisation bank, BOC Hong Kong (Holdings) Limited (HKG:2388) 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 BOC Hong Kong (Holdings) 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. Since the level of risky assets held by a bank impacts its cash flow and therefore the attractiveness of its stock as an investment, I will take you through three metrics that are insightful proxies for risk.

See our latest analysis for BOC Hong Kong (Holdings)

How Much Risk Is Too Much?

If BOC Hong Kong (Holdings) does not engage in overly risky lending practices, it is considered to be in relatively better financial shape. Ideally, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of BOC Hong Kong (Holdings)’s profit. The bank's bad debt only makes up a very small 0.19% to total debt which suggests the bank either has strict risk management - or its loans haven't started going bad yet.

Does BOC Hong Kong (Holdings) Understand Its Own Risks?

BOC Hong Kong (Holdings)’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 provisions for more than 100% of the bad debt it actually writes off, then could be considered to be relatively prudent and accurate in its bad debt provisioning. Given its large non-performing loan allowance to non-performing loan ratio of 226.9%, BOC Hong Kong (Holdings) over-provisioned by 126.9% above the minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.

How Big Is BOC Hong Kong (Holdings)’s Safety Net?

BOC Hong Kong (Holdings) 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since BOC Hong Kong (Holdings)’s total deposit to total liabilities is very high at 85% which is well-above the prudent level of 50% for banks, BOC Hong Kong (Holdings) may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.

Next Steps:

2388's acquisition will impact the business moving forward. Keep an eye on how this decision plays out in the future, especially on its financial health and earnings growth. I’ve bookmarked 2388’s company page on Simply Wall St to stay informed with changes in outlook and valuation. This is also the source of data for this article. The three main sections I’d recommend you check out are:

1. Future Outlook: What are well-informed industry analysts predicting for 2388’s future growth? Take a look at our free research report of analyst consensus for 2388’s outlook.

2. Valuation: What is 2388 worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether 2388 is currently mispriced by the market.

3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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.