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Should You Be Concerned About Great Western Bancorp, Inc.’s (NYSE:GWB) Liquidity?

Simply Wall St

Great Western Bancorp, Inc.’s (NYSE:GWB) profitability and risk are largely affected by the underlying economic growth for the region it operates in US given it is a small-cap stock with a market capitalisation of US$2.1b. 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. 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 Great Western Bancorp 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. Low levels of leverage coupled with sufficient liquidity may place Great Western Bancorp in a safe position in the face of adverse headwinds. We can measure this risk exposure by analysing three metrics for leverage and liquidity which I will take you through today.

Check out our latest analysis for Great Western Bancorp

NYSE:GWB Historical Debt, February 26th 2019

Why Does GWB’s Leverage Matter?

Banks with low leverage are exposed to lower risks around their ability to repay debt. A bank’s leverage can be thought of as the amount of assets it holds compared to its own shareholders’ funds. While financial companies will always have some leverage for a sufficient capital buffer, Great Western Bancorp’s leverage ratio of less than the suitable maximum level of 20x, at 6.94x, is considered to be very cautious and prudent. With assets 6.94 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.

What Is GWB’s Level of Liquidity?

Handing Money Transparent

As I eluded to above, loans are relatively illiquid. It’s helpful to understand how much of this illiquid asset makes up Great Western Bancorp’s total asset. Generally, they should make up less than 70% of total assets, however its current level of 77% means the bank has lent out 7.12% above the sensible threshold. This means its revenue is reliant on these specific assets which means the bank is also more exposed to default compared to banks with less loans.

What is GWB’s Liquidity Discrepancy?

A way banks make money is by lending out its deposits as loans. These loans tend to be fixed term which means they cannot be readily realized, yet customer deposits on the liability side must be paid on-demand and in short notice. This mismatch between illiquid loans and liquid deposits poses a risk for the bank if unusual events occur and requires it to immediately repay its depositors. Relative to the prudent industry loan to deposit level of 90%, Great Western Bancorp’s ratio of over 96% is higher, which puts the bank in a risky position as it borders negative liquidity disparity between loan and deposit levels. Basically, for $1 of deposits with the bank, it lends out over $0.9 which is imprudent.

Next Steps:

Today, we’ve only explored one aspect of Great Western Bancorp. However, as a potential stock investment, there are many more fundamentals you need to consider. There are three pertinent factors you should look at:

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