As a small-cap finance stock with a market capitalisation of US$563m, the risk and profitability of HarborOne Bancorp, Inc. (NASDAQ:HONE) are largely tied to the underlying economic growth of the region it operates in US. Since banks make money by reinvesting its customers’ deposits in the form of loans, strong economic growth will drive the level of savings deposits and demand for loans, directly impacting the cash flows of those banks. 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. These reforms target bank level regulation and aims to improve the banking sector’s ability to absorb shocks arising from economic stress which could expose financial institutions to vulnerabilities. Its financial position may weaken in an adverse macro event such as political instability which is why it is crucial to understand how well the bank manages its risks. High liquidity and low leverage could position HarborOne Bancorp favourably at the face of macro headwinds. A way to measure this risk is to look at three leverage and liquidity metrics which I will take you through today.
Is HONE'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, HarborOne Bancorp’s leverage level of less than the suitable maximum level of 20x, at 10.22x, is considered to be very cautious and prudent. This means the bank has a sensibly high level of equity compared to the level of debt it has taken on to maintain operations which places it in a strong position to pay back its debt in unforeseen circumstances. 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 HONE's Liquidity?
As above-mentioned, loans are quite illiquid so it is important to understand how much of these loans make up HarborOne Bancorp’s total assets. Normally, they should not exceed 70% of total assets, however its current level of 81% means the bank has clearly lent out 11.16% above the sensible threshold. This level implies dependency on this particular asset class as a source of revenue which makes the bank more likely to be exposed to default compared to its competitors with less loans.
Does HONE Have Liquidity Mismatch?
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. 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. Since HarborOne Bancorp’s loan to deposit ratio of 110% is higher than the appropriate level of 90%, this level puts the bank in a risky position due to the negative liquidity disparity between loan and deposit levels. Basically, for $1 of deposits with the bank, it lends out over $1 which is imprudent.
Today, we've only explored one aspect of HarborOne Bancorp. However, as a potential stock investment, there are many more fundamentals you need to consider. There are three important aspects you should further research:
- Future Outlook: What are well-informed industry analysts predicting for HONE’s future growth? Take a look at our free research report of analyst consensus for HONE’s outlook.
- Valuation: What is HONE 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 HONE 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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If you spot an error that warrants correction, please contact the editor at email@example.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.