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Financial Metrics For Washington Trust Bancorp, Inc. (NASDAQ:WASH)

As a small-cap finance stock with a market capitalisation of US$827m, the risk and profitability of Washington Trust Bancorp, Inc. (NASDAQ:WASH) 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 Washington Trust Bancorp 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 Washington Trust Bancorp’s risk-taking behaviour by analysing three metrics for leverage and liquidity which I will take you through now.

Check out our latest analysis for Washington Trust Bancorp

NasdaqGS:WASH Historical Debt December 18th 18
NasdaqGS:WASH Historical Debt December 18th 18

Is WASH’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, Washington Trust Bancorp’s leverage ratio of less than the suitable maximum level of 20x, at 11.15x, is considered to be very cautious and prudent. 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 firm up its capital cushion, it has ample headroom to increase its debt level without deteriorating its financial position.

What Is WASH’s Level of Liquidity?

Handing Money Transparent
Handing Money Transparent

As abovementioned, loans are quite illiquid so it is important to understand how much of these loans make up Washington Trust Bancorp’s total assets. Generally, they should make up less than 70% of total assets, however its current level of 74% means the bank has lent out 3.99% above the sensible threshold. 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 WASH’s Liquidity Discrepancy?

Banks profit by lending out its customers’ deposits as loans and charge an interest on the principle. 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%, Washington Trust Bancorp’s ratio of over 103% is higher, which positions the bank in a risky spot given the adverse liquidity disparity between loan and deposit levels. Basically, for $1 of deposits with the bank, it lends out over $1 which is imprudent.

Next Steps:

We’ve only touched on operational risks for WASH in this article. But as a stock investment, there are other fundamentals you need to understand. Below, I’ve compiled three pertinent factors you should look at:

  1. Future Outlook: What are well-informed industry analysts predicting for WASH’s future growth? Take a look at our free research report of analyst consensus for WASH’s outlook.

  2. Valuation: What is WASH 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 WASH is currently mispriced by the market.

  3. 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 editorial-team@simplywallst.com.

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