Caisse Regionale de Credit Agricole Mutuel Toulouse 31’s (EPA:CAT31) profitability and risk are largely affected by the underlying economic growth for the region it operates in FR given it is a small-cap stock with a market capitalisation of €577m. 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. 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 Caisse Regionale de Credit Agricole Mutuel Toulouse 31 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. Strong management of leverage and liquidity could place the bank in a protected position at the face of macro headwinds. We can gauge Caisse Regionale de Credit Agricole Mutuel Toulouse 31’s risk-taking behaviour by analysing three metrics for leverage and liquidity which I will take you through now.
Is CAT31’s Leverage Level Appropriate?
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, Caisse Regionale de Credit Agricole Mutuel Toulouse 31’s leverage ratio of 7.38x is very safe and substantially below the maximum limit 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 CAT31’s Liquidity?
As abovementioned, loans are quite illiquid so it is important to understand how much of these loans make up Caisse Regionale de Credit Agricole Mutuel Toulouse 31’s total assets. Normally, they should not exceed 70% of total assets, but its current level of 76% means the bank has lent out 5.55% above the sensible upper limit. This level implies dependency on this particular asset class as a source of revenue which makes the bank more exposed to default compared to banks with less loans.
What is CAT31’s Liquidity Discrepancy?
Banks operate by lending out its customers’ deposits as loans and charge a higher interest rate. 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. The discrepancy between loan assets and deposit liabilities threatens the bank’s financial position. If an adverse event occurs, it may not be well-placed to repay its depositors immediately. Since Caisse Regionale de Credit Agricole Mutuel Toulouse 31’s loan to deposit ratio of 96% is higher than the appropriate level of 90%, this level puts the bank in a risky position as it borders negative liquidity disparity between loan and deposit levels. Essentially, for €1 of deposits with the bank, it lends out more than €0.9 which is risky.
Today, we’ve only explored one aspect of Caisse Regionale de Credit Agricole Mutuel Toulouse 31. However, as a potential stock investment, there are many more fundamentals you need to consider. Below, I’ve compiled three important aspects you should further research:
- Future Outlook: What are well-informed industry analysts predicting for CAT31’s future growth? Take a look at our free research report of analyst consensus for CAT31’s outlook.
- Valuation: What is CAT31 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 CAT31 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.
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