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What You Should Know About Capital Bancorp, Inc.’s (NASDAQ:CBNK) Liquidity

Kristin Rankin

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Capital Bancorp, Inc.’s (NASDAQ:CBNK) profitability and risk are largely affected by the underlying economic growth for the region it operates in US given it is a small-cap stock with a market capitalisation of US$167m. 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 Capital 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 Capital Bancorp’s risk-taking behaviour by analysing three metrics for leverage and liquidity which I will take you through now.

See our latest analysis for Capital Bancorp

NASDAQGS:CBNK Historical Debt February 20th 19

Is CBNK’s Leverage Level Appropriate?

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. Though banks are required to have a certain level of buffer to meet its capital requirements, Capital Bancorp’s leverage level of 9.65x is very safe and substantially below the maximum limit of 20x. With assets 9.65 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 increase its debt levels to firm up its capital cushion, there is plenty of headroom to do so without deteriorating its financial position.

What Is CBNK’s Level of Liquidity?

Handing Money Transparent

Since loans are relatively illiquid, we should know how much of Capital Bancorp’s total assets are comprised of these loans. Normally, they should not exceed 70% of total assets, but its current level of 89% means the bank has obviously lent out 19.49% above the sensible upper limit. This means its revenue is reliant on these specific assets which means the bank is also more exposed to default compared to banks with less loans.

What is CBNK’s Liquidity Discrepancy?

Banks operate by lending out its customers’ deposits as loans and charge a higher interest rate. These loans may be fixed term and often 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 Capital Bancorp’s loan to deposit ratio of 104% 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. Essentially, for $1 of deposits with the bank, it lends out more than $1 which is unsustainable.

Next Steps:

Today, we’ve only explored one aspect of Capital Bancorp. However, as a potential stock investment, there are many more fundamentals you need to consider. There are three important aspects you should further research:

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

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.