As a small-cap bank stock with a market capitalisation of USD $615.28M, QCR Holdings Inc’s (NASDAQ:QCRH) 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. 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. These reforms target banking regulations and intends to enhance financial institutions’ ability to absorb shocks resulting from economic stress which could expose banks like QCR Holdings to vulnerabilities. Since its financial standing can unexpectedly decline in the case of an adverse macro event such as political instability, it is important to understand how prudent the bank is at managing its risk levels. Low levels of leverage coupled with sufficient liquidity may place QCR Holdings in a safe position in the face of adverse headwinds. We can measure this risk exposure by analysing three metrics for leverage and liquidity which I will take you through today. Check out our latest analysis for QCR Holdings
Why Does QCRH’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. While financial companies will always have some leverage for a sufficient capital buffer, QCR Holdings’s leverage ratio of 11x is very safe and substantially below the maximum limit of 20x. With assets 11 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.
How Should We Measure QCRH’s Liquidity?
Since loans are relatively illiquid, we should know how much of QCR Holdings’s total assets are comprised of these loans. Usually, they should not be higher than 70% of total assets, however its current level of 74.40% means the bank has lent out 4% above the sensible threshold. 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 QCRH’s Liquidity Discrepancy?
A way banks make money is by lending out its deposits as loans. These loans may be fixed term and often cannot be readily realized, conversely, on the liability side, customer deposits must be paid in very short notice and on-demand. 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 QCR Holdings’s loan to deposit ratio of 91.27% 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. Essentially, for USD 1 of deposits with the bank, it lends out more than USD 0.9 which is risky.
Keep in mind that a stock investment requires research on more than just its operational side. I’ve put together three important factors you should look at:
- 1. Future Outlook: What are well-informed industry analysts predicting for QCRH’s future growth? Take a look at our free research report of analyst consensus for QCRH’s outlook.
- 2. Valuation: What is QCRH 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 QCRH 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 pass 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.