What Makes Fidelity Southern Corporation (NASDAQ:LION) A Hard Investment?
As a small-cap bank stock with a market capitalisation of US$649m, Fidelity Southern Corporation’s (NASDAQ:LION) risk and profitability are largely determined by the underlying economic growth of the US regions in which it operates. Since a bank profits from reinvesting its clients’ deposits in the form of loans, negative economic growth may lower deposit levels and demand for loan, adversely impacting its cash flow. 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. These reforms target banking regulations and intends to enhance financial institutions’ ability to absorb shocks resulting from economic stress which could expose banks like Fidelity Southern 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 Fidelity Southern’s risk-taking behaviour by analysing three metrics for leverage and liquidity which I will take you through now.
View our latest analysis for Fidelity Southern
Is LION’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. Financial institutions are required to have a certain level of buffer to meet capital adequacy levels. Fidelity Southern’s leverage level of less than the suitable maximum level of 20x, at 11.14x, 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. 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 LION’s Level of Liquidity?
As abovementioned, loans are quite illiquid so it is important to understand how much of these loans make up Fidelity Southern’s total assets. Usually, they should not be higher than 70% of total assets, however its current level of 76% means the bank has lent out 6.39% above the sensible threshold. This indicates that revenue is dependent on this particular asset but also the bank is more exposed to defaulting relative to banks with less loans.
What is LION’s Liquidity Discrepancy?
Banks profit by lending out its customers’ deposits as loans and charge an interest on the principle. Loans are generally fixed term which means they cannot be readily realized, conversely, on the liability side, customer deposits must be paid in very short notice and on-demand. 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. Compared to the appropriate industry loan to deposit level of 90%, Fidelity Southern’s ratio of over 91% is higher which places the bank in a relatively dangerous territory to go into negative discrepancy in liquidity. Essentially, for $1 of deposits with the bank, it lends out more than $0.9 which is risky.
Next Steps:
Keep in mind that a stock investment requires research on more than just its operational side. I’ve put together three important aspects you should further research:
Future Outlook: What are well-informed industry analysts predicting for LION’s future growth? Take a look at our free research report of analyst consensus for LION’s outlook.
Valuation: What is LION 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 LION 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.
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.
