As a small-cap finance stock with a market capitalisation of USD $74.01M, the risk and profitability of AmeriServ Financial Inc (NASDAQ:ASRV) are largely tied to the underlying economic growth of the region it operates in US. Since a bank profits from reinvesting its clients’ deposits in the form of loans, negative economic growth may lower deposit levels and demand for loan, adversely impacting its cash flow. Following the Financial Crisis in 2008, a set of reforms termed Basel III was enforced to bolster risk management, regulation, and supervision in the financial services industry. The Basel III reforms are aimed at banking regulations to improve financial institutions’ ability to absorb shocks caused by economic stress which could expose banks like AmeriServ Financial 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. High liquidity and low leverage could position AmeriServ Financial 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. View our latest analysis for AmeriServ Financial
Is ASRV’s Leverage Level Appropriate?
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. Financial institutions are required to have a certain level of buffer to meet capital adequacy levels. AmeriServ Financial’s leverage level of 12x is significantly below the appropriate ceiling of 20x. With assets 12 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. Should the bank need to increase its debt levels to meet capital requirements, it will have abundant headroom to do so.
How Should We Measure ASRV’s Liquidity?
As abovementioned, loans are quite illiquid so it is important to understand how much of these loans make up AmeriServ Financial’s total assets. Normally, they should not exceed 70% of total assets, but its current level of 75.66% means the bank has lent out 6% above the sensible upper limit. This indicates that revenue is dependent on this particular asset but also the bank is more exposed to defaulting relative to banks with less loans.
What is ASRV’s Liquidity Discrepancy?
Banks profit by lending out its customers’ deposits as loans and charge an interest on the principle. These loans may be fixed term and often cannot be readily realized, yet customer deposits on the liability side must be paid on-demand and in short notice. 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%, AmeriServ Financial’s ratio of over 91.62% is higher which puts the bank in a risky position as it borders negative liquidity disparity between loan and deposit levels. Basically, for USD 1 of deposits with the bank, it lends out over USD 0.9 which is imprudent.
Today, we’ve only explored one aspect of AmeriServ Financial. However, as a potential stock investment, there are many more fundamentals you need to consider. I’ve put together three relevant factors you should further examine:
1. Valuation: What is ASRV 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 ASRV is currently mispriced by the market.
2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on AmeriServ Financial’s board and the CEO’s back ground.
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.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.