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As a small-cap financial security with a market capitalization of HK 20 billion, the risk and profitability of Shengjing Bank Co., Ltd. (HKG: 2066) are largely related to the underlying economic growth of the region where it operates in HK. Given that banks are reinvesting deposit loans, negative economic growth could lower the level of savings deposits and loan demand, which would have a direct impact on the cash flows of these banks. After the GFC, a set of reforms called Basel III was imposed to strengthen regulation, supervision and risk management in the banking sector. The Basel III reforms aim to ensure that banking regulations improve the ability of financial institutions to absorb shocks caused by economic tensions that could expose banks such as Shengjing Bank to vulnerabilities. Unpredictable macroeconomic events, such as political instability, could weaken its financial situation. That's why it's important to understand how well the bank is managing its risk levels correctly. High liquidity and low debt could positively position Shengjing Bank in the face of headwinds. One way to measure this risk is to look at three indicators of leverage and liquidity that I will explain just now.

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SEHK: Historical Debt 2066 February 9 19

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Why is the 2066 leverage important?

Low-indebted banks are exposed to lower risks in terms of their ability to repay their debts. The leverage of a bank can be thought of as the amount of assets it holds relative to the funds of its own shareholders. Although banks are required to have a certain level of safety margin to meet their capital requirements, Shengjing Bank's level of indebtedness of 17.74 times is very safe and well below maximum limit of 20 times. This means that the bank has a very good level of leverage management and is well positioned to repay its receivables in the event of an adverse event, as it has an adequate level of capital relative to the debt contracted to stay in business. If the bank were to increase its level of debt to meet its capital needs, it would have plenty of leeway to do so.

What is the liquidity level of 2066?

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Because of their non-liquid nature, loans are an important asset class on which we should know more. In general, they should not exceed 70% of total assets, which is the case for Shengjing Bank, with a ratio well below the maximum level of 34%. At this level of lending, the bank has maintained a high level of liquidity, but perhaps at the cost of producing interest from illiquid loans.

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Is 2066 a liquidity gap?

2066 by lending its clients' deposits in the form of loans and taking interest on the principle. These loans can be futures and can not often be easily realized, but deposits of customers on the liabilities must be paid on demand and within a short time. The disparity between the immediacy of the deposits and the non-liquid nature of the loans puts the financial situation of the bank at serious strain if an adverse event requires the bank to repay its depositors. Compared to the appropriate level of loan on industry deposits to 90%, the ratio of more than 60% of Shengjing Bank is significantly lower, which means that the bank lends less than the total amount of its deposits and the place in a relatively safe liquidity position did not lend too much and maintained a sufficient level of compliance. The bank has the opportunity to increase its interest by lending more loans.

Next steps:

Shengjing Bank meets all our liquidity and leverage requirements, with operational prudence. The operational risk of a bank is a fundamental principle often overlooked by investors. The bank's favorable liquidity and indebtedness make it less risky for the repayment of financial obligations, particularly in the case of an adverse macroeconomic event. Today, we have only explored one aspect of Shengjing Bank. However, as a potential equity investment, you need to consider many other fundamental factors. Below, I've compiled three key factors that you should deepen:

  1. Future prospects: What do well-informed industry analysts predict for the future growth of 2066? Take a look at our free research report on analyst consensus for the 2066 outlook.
  2. Evaluation: What is 2066 worth today? Has the potential for future growth already been factored into the price? The infographics of intrinsic value of our free research report allows to visualize whether 2066 is currently misjudged by the market.
  3. Other performing stocks: Are there other stocks offering better prospects with proven track records? Explore our free list of these large stocks here.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "To help readers understand the past volatility of the financial market in the short term, our goal is to provide you with a long-term research analysis based solely on fundamental data. Note that our analysis does not take into account the latest price sensitive business announcements.

The author is an independent contributor and, at the time of publication, was not positioned in the actions mentioned. For errors that need to be corrected, please contact the publisher at editorial-team@simplywallst.com.

"data-reactid =" 69 "> To help readers overcome the short-term volatility of the financial market, we aim to provide you with a long-term research analysis based solely on fundamental data. account of the latest price sensitive business announcements.

The author is an independent contributor and, at the time of publication, was not positioned in the actions mentioned. For errors that need to be corrected, please contact the publisher at editorial-team@simplywallst.com.