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Should You Be Concerned About West Bancorporation, Inc.’s (NASDAQ:WTBA) Liquidity?

Simply Wall St

As a small-cap bank stock with a market capitalisation of US$354m, West Bancorporation, Inc.’s (NASDAQ:WTBA) risk and profitability are largely determined by the underlying economic growth of the US regions in which it operates. 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. After the Financial Crisis in 2008, a set of reforms called Basel III was created with the purpose of strengthening regulation, risk management and supervision in the banking sector. 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 West Bancorporation 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. Sufficient liquidity and low levels of leverage could place the bank in a safe place in case of unexpected macro headwinds. Today we will be measuring West Bancorporation’s financial risk position by looking at three leverage and liquidity metrics.

Check out our latest analysis for West Bancorporation

NasdaqGS:WTBA Historical Debt, April 18th 2019

Is WTBA's Leverage Level Appropriate?

Banks with low leverage are better positioned to weather adverse headwinds as they have less debt to pay off. A bank’s leverage may be thought of as the level of assets it owns compared to its own shareholders’ equity. Financial institutions are required to have a certain level of buffer to meet capital adequacy levels. West Bancorporation’s leverage level of 12.02x is very safe and substantially below the maximum limit of 20x. With assets 12.02 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. 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 WTBA's Level of Liquidity?

Handing Money Transparent

Due to its illiquid nature, loans are an important asset class we should learn more about. Normally, they should not exceed 70% of total assets, however its current level of 74% means the bank has lent out 4.25% 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 WTBA'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, however, customer deposits are liabilities which must be repaid 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. Compared to the appropriate industry loan to deposit level of 90%, West Bancorporation’s ratio of over 90% 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:

We've only touched on operational risks for WTBA in this article. But as a stock investment, there are other fundamentals you need to understand. Below, I've compiled three important aspects you should further research:

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