Should You Be Concerned About Hope Bancorp Inc’s (NASDAQ:HOPE) Liquidity?
Hope Bancorp Inc’s (NASDAQ:HOPE) 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$2.62B. Given that banks operate by reinvesting deposits in the form of loans, negative economic growth may lower the level of saving deposits and demand for loans, directly affecting those banks’ levels of cash flows. 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 Hope Bancorp 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. Strong management of leverage and liquidity could place the bank in a protected position at the face of macro headwinds. We can gauge Hope Bancorp’s risk-taking behaviour by analysing three metrics for leverage and liquidity which I will take you through now. View our latest analysis for Hope Bancorp
Is HOPE’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. Though banks are required to have a certain level of buffer to meet its capital requirements, Hope Bancorp’s leverage level of less than the suitable maximum level of 20x, at 7x, is considered to be very cautious and prudent. This means the bank exhibits very strong leverage management and is well-positioned to repay its debtors in the case of any adverse events since it has an appropriately high level of equity relative to the debt it has taken on to remain in business. If the bank needs to increase its debt levels to firm up its capital cushion, there is plenty of headroom to do so without deteriorating its financial position.
What Is HOPE’s Level of Liquidity?
As abovementioned, loans are quite illiquid so it is important to understand how much of these loans make up Hope Bancorp’s total assets. Generally, they should make up less than 70% of total assets, but its current level of 77.55% means the bank has lent out 8% above the sensible upper limit. This indicates that revenue is dependent on this particular asset but also the bank is more exposed to default compared to banks with less loans.
What is HOPE’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, conversely, on the liability side, customer deposits must be paid in very short notice and on-demand. 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. Since Hope Bancorp’s loan to deposit ratio of 101.58% is higher than the appropriate level of 90%, this level positions the bank in a risky spot given the adverse liquidity disparity between loan and deposit levels. Essentially, for $1 of deposits with the bank, it lends out more than $1 which is unsustainable.
Next Steps:
Today, we’ve only explored one aspect of Hope Bancorp. However, as a potential stock investment, there are many more fundamentals you need to consider. Below, I’ve compiled three pertinent aspects you should further research:
Future Outlook: What are well-informed industry analysts predicting for HOPE’s future growth? Take a look at our free research report of analyst consensus for HOPE’s outlook.
Valuation: What is HOPE 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 HOPE is currently mispriced by the market.
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.
