As a small-cap bank stock with a market capitalisation of €3.08b, Banco BPM Società per Azioni’s (BIT:BAMI) risk and profitability are largely determined by the underlying economic growth of the IT regions in which it operates. 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. After the GFC, a set of reforms called Basel III was imposed in order to strengthen regulation, supervision and risk management in the banking sector. 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 Banco BPM Società per Azioni 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 Banco BPM Società per Azioni’s financial risk position by looking at three leverage and liquidity metrics.
Is BAMI’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, Banco BPM Società per Azioni’s leverage level of less than the suitable maximum level of 20x, at 15.34x, is considered to be very cautious and prudent. With assets 15.34 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 BAMI’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 Banco BPM Società per Azioni’s total asset. Usually, they should not be higher than 70% of total assets, however its current level of 73.28% means the bank has lent out 3.28% above the sensible threshold. This means its revenue is reliant on these specific assets which means the bank is also more likely to be exposed to default compared to its competitors with less loans.
Does BAMI 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, however, customer deposits are liabilities which must be repaid on-demand and in short notice. The discrepancy between loan assets and deposit liabilities threatens the bank’s financial position. If an adverse event occurs, it may not be well-placed to repay its depositors immediately. Since Banco BPM Società per Azioni’s loan to deposit ratio of over 150%, is unsustainably higher than the appropriate level of 90%, this positions the bank in a risky spot given the significantly high liquidity disparity between loan and deposit levels. Basically, for €1 of deposits with the bank, it lends out over €1.5 which is unjustifiable.
Keep in mind that a stock investment requires research on more than just its operational side. There are three relevant factors you should look at:
- Future Outlook: What are well-informed industry analysts predicting for BAMI’s future growth? Take a look at our free research report of analyst consensus for BAMI’s outlook.
- Valuation: What is BAMI 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 BAMI 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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