As a small-cap finance stock with a market capitalisation of US$61m, the risk and profitability of United Bancorp, Inc. (NASDAQ:UBCP) are largely tied to the underlying economic growth of the region it operates in US. 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. Following the Financial Crisis in 2008, a set of reforms termed Basel III was enforced to bolster risk management, regulation, and supervision 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. 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 United Bancorp’s risk-taking behaviour by analysing three metrics for leverage and liquidity which I will take you through now.
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Why Does UBCP’s Leverage Matter?
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, United Bancorp’s leverage level of 11.64x is significantly below the appropriate ceiling of 20x. With assets 11.64 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 firm up its capital cushion, it has ample headroom to increase its debt level without deteriorating its financial position.
How Should We Measure UBCP’s Liquidity?
Since loans are relatively illiquid, we should know how much of United Bancorp’s total assets are comprised of these loans. Usually, they should not be higher than 70% of total assets, but its current level of 74% means the bank has lent out 4.47% 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.
What is UBCP’s Liquidity Discrepancy?
Banks operate by lending out its customers’ deposits as loans and charge a higher interest rate. Loans are generally 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. 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. Since United Bancorp’s loan to deposit ratio of 90% is higher than the appropriate level of 90%, this level places the bank in a relatively dangerous territory to go into negative discrepancy in liquidity. 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 UBCP in this article. But as a stock investment, there are other fundamentals you need to understand. There are three pertinent aspects you should further research:
- Future Outlook: What are well-informed industry analysts predicting for UBCP’s future growth? Take a look at our free research report of analyst consensus for UBCP’s outlook.
- Valuation: What is UBCP 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 UBCP 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.