As a small-cap finance stock with a market capitalisation of US$181m, the risk and profitability of Ohio Valley Banc Corp (NASDAQ:OVBC) are largely tied to the underlying economic growth of the region it operates in US. 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 Ohio Valley Banc 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. 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 Ohio Valley Banc’s financial risk position by looking at three leverage and liquidity metrics.
Is OVBC’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. While financial companies will always have some leverage for a sufficient capital buffer, Ohio Valley Banc’s leverage ratio of less than the suitable maximum level of 20x, at 9.08x, is considered to be very cautious and prudent. With assets 9.08 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. Should the bank need to increase its debt levels to meet capital requirements, it will have abundant headroom to do so.
What Is OVBC’s Level of Liquidity?
Since loans are relatively illiquid, we should know how much of Ohio Valley Banc’s total assets are comprised of these loans. Generally, they should make up less than 70% of total assets, however its current level of 75% means the bank has lent out 4.89% above the sensible threshold. This indicates that revenue is dependent on this particular asset but also the bank is more exposed to defaulting relative to banks with less loans.
Does OVBC Have Liquidity Mismatch?
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, 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. Relative to the prudent industry loan to deposit level of 90%, Ohio Valley Banc’s ratio of over 91% is higher, which positions the bank in a risky spot given the potential to cross into 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.
We’ve only touched on operational risks for OVBC in this article. But as a stock investment, there are other fundamentals you need to understand. Below, I’ve compiled three relevant aspects you should look at:
- Future Outlook: What are well-informed industry analysts predicting for OVBC’s future growth? Take a look at our free research report of analyst consensus for OVBC’s outlook.
- Valuation: What is OVBC 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 OVBC 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 email@example.com.