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Banks play a major role in any country’s economy. For investors looking for strong economic growth, they should focus on emerging economies rather than mature economies.
China obviously qualifies as one of the faster-growing economies in the world today, despite growth slowing down from a heady double-digit figure in the 1990s to around the 6% to 7% range currently.
Let’s take a quick look at Industrial and Commercial Bank of China (SEHK: 1398) using two metrics – loan-to-deposit ratio and non-performing loans, both of which were discussed in my previous article, to see how much risk the bank is taking.
1. Loan-to-deposit ratio
The loan-to-deposit ratio shows investors the amount of risk the bank is taking on. This is because, with every loan, there is a chance of default, meaning the borrower might not be able to return the money.
When this happens, the bank might lose the amount loaned out or get only a fraction back. Even then, the bank is still liable to its customers for their deposits.
ICBC’s had loans amounting to RMB 16,660 billion and deposits of RMB 23,368 billion resulting in a loan-to-deposit ratio of 71.3% as at the end of September 2019. This was a slight improvement compared to the end of 2018, when ICBC’s loan-to-deposit ratio stood at 72.02%.
2. Non-performing loans ratio
The next indicator is the non-performing loans ratio, or NPL ratio. The NPL ratio measures the quantum of loans that the borrower has problems servicing and is an indicator of how much of the loan book may be under stress.
During times of economic crisis, or during downturns, NPL ratios have been known to spike as companies that had borrowed money during the boom times experience financial difficulties.
ICBC’s NPL ratio was 1.4% for at the end of September 2019, down slightly from 1.52% as at the end of 2018. This is not a major cause for concern, and investors should only be worried if the NPL ratio rises to 4% or 5%.
Taking a quick look at ICBC’s finances, we can see that its risk profile has improved over the past nine months, despite the Chinese economy showing signs of slowing.
The improving risk profile is good for investors as they don’t have to worry about the bank being over-leveraged should the economy take a turn for the worse, as the bank can easily cover its liabilities.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Saket Jhajharia doesn’t own shares in any companies mentioned.