As a small-cap bank stock with a market capitalisation of US$34m, Glen Burnie Bancorp’s (NASDAQ:GLBZ) 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. 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. 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 Glen Burnie Bancorp 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. High liquidity and low leverage could position Glen Burnie Bancorp favourably at the face of macro headwinds. A way to measure this risk is to look at three leverage and liquidity metrics which I will take you through today.
Is GLBZ’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. While financial companies will always have some leverage for a sufficient capital buffer, Glen Burnie Bancorp’s leverage ratio of 12.34x is significantly below the appropriate ceiling of 20x. This means the bank exhibits very strong leverage management and is well-positioned to repay its debtors in the case of any adverse events since it has an appropriately high level of equity relative to the debt it has taken on to remain in business. 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 GLBZ’s Liquidity?
As I eluded to above, loans are relatively illiquid. It’s helpful to understand how much of this illiquid asset makes up Glen Burnie Bancorp’s total asset. Generally, they should make up less than 70% of total assets, however its current level of 71% means the bank has lent out 1.11% above the sensible threshold. 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.
Does GLBZ Have Liquidity Mismatch?
GLBZ profits 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, however, customer deposits are liabilities which must be repaid 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. Compared to the appropriate industry loan to deposit level of 90%, Glen Burnie Bancorp’s ratio of over 87% is sensibly lower and within the safe margin, which positions the bank cautiously in terms of liquidity as it has not disproportionately lent out its deposits and has retained an apt level of deposits.
The bank’s liquidity and leverage ratios suggest its sensible operational risk management. This means it is well-placed to meet its financial obligations in the case of any adverse and unpredictable macro events. We’ve only touched on operational risks for GLBZ in this article. But as a stock investment, there are other fundamentals you need to understand. There are three key factors you should further examine:
- Future Outlook: What are well-informed industry analysts predicting for GLBZ’s future growth? Take a look at our free research report of analyst consensus for GLBZ’s outlook.
- Valuation: What is GLBZ 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 GLBZ 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 email@example.com.