What You Should Know About Allegiance Bancshares, Inc.’s (NASDAQ:ABTX) Liquidity
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As a small-cap bank stock with a market capitalisation of US$840m, Allegiance Bancshares, Inc.’s (NASDAQ:ABTX) risk and profitability are largely determined by the underlying economic growth of the US regions in which it operates. 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. 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. 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 Allegiance Bancshares’s financial risk position by looking at three leverage and liquidity metrics.
See our latest analysis for Allegiance Bancshares
Why Does ABTX’s Leverage Matter?
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. Financial institutions are required to have a certain level of buffer to meet capital adequacy levels. Allegiance Bancshares’s leverage level of less than the suitable maximum level of 20x, at 6.62x, 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. Should the bank need to increase its debt levels to meet capital requirements, it will have abundant headroom to do so.
What Is ABTX’s Level of Liquidity?
As I eluded to above, loans are relatively illiquid. It’s helpful to understand how much of this illiquid asset makes up Allegiance Bancshares’s total asset. Normally, they should not exceed 70% of total assets, however its current level of 79% means the bank has lent out 9.09% 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 defaulting relative to banks with less loans.
Does ABTX Have Liquidity Mismatch?
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, yet customer deposits on the liability side must be paid on-demand and in short notice. 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 Allegiance Bancshares’s loan to deposit ratio of 101% is higher than the appropriate level of 90%, this level 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 ABTX in this article. But as a stock investment, there are other fundamentals you need to understand. There are three pertinent factors you should further research:
Future Outlook: What are well-informed industry analysts predicting for ABTX’s future growth? Take a look at our free research report of analyst consensus for ABTX’s outlook.
Valuation: What is ABTX 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 ABTX 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.
