As a small-cap bank stock with a market capitalisation of US$226.3m, Parke Bancorp Inc’s (NASDAQ:PKBK) risk and profitability are largely determined by the underlying economic growth of the US regions in which it operates. 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. Basel III target banking regulations to improve the sector’s ability to absorb shocks resulting from economic stress which may expose financial institutions like Parke 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 Parke Bancorp’s risk-taking behaviour by analysing three metrics for leverage and liquidity which I will take you through now.
Is PKBK’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. Though banks are required to have a certain level of buffer to meet its capital requirements, Parke Bancorp’s leverage level of 8.92x is significantly below the appropriate ceiling of 20x. 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.
How Should We Measure PKBK’s Liquidity?
As abovementioned, loans are quite illiquid so it is important to understand how much of these loans make up Parke Bancorp’s total assets. Normally, they should not exceed 70% of total assets, but its current level of 84.1% means the bank has obviously lent out 14.05% above the sensible upper limit. This indicates that revenue is dependent on this particular asset but also the bank is more likely to be exposed to default compared to its competitors with less loans.
Does PKBK Have Liquidity Mismatch?
Banks profit by lending out its customers’ deposits as loans and charge an interest on the principle. Loans are generally 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. 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%, Parke Bancorp’s ratio of over 106% is higher, which 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.
We’ve only touched on operational risks for PKBK in this article. But as a stock investment, there are other fundamentals you need to understand. Below, I’ve compiled three key factors you should further examine:
- Future Outlook: What are well-informed industry analysts predicting for PKBK’s future growth? Take a look at our free research report of analyst consensus for PKBK’s outlook.
- Valuation: What is PKBK 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 PKBK 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 past 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.