Three Understated Metrics For First Business Financial Services, Inc. (NASDAQ:FBIZ) You Should Know
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First Business Financial Services, Inc.’s (NASDAQ:FBIZ) 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$194m. 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. Basel III target banking regulations to improve the sector’s ability to absorb shocks resulting from economic stress which may expose financial institutions like First Business Financial Services 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. Low levels of leverage coupled with sufficient liquidity may place First Business Financial Services 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.
View our latest analysis for First Business Financial Services
Is FBIZ’s Leverage Level Appropriate?
A low level of leverage subjects a bank to less risk and enhances its ability to pay back its debtors. Leverage can be thought of as the amount of assets a bank owns relative to its shareholders’ funds. Financial institutions are required to have a certain level of buffer to meet capital adequacy levels. First Business Financial Services’s leverage level of less than the suitable maximum level of 20x, at 10.88x, is considered to be very cautious and prudent. With assets 10.88 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 FBIZ’s Level of Liquidity?
As abovementioned, loans are quite illiquid so it is important to understand how much of these loans make up First Business Financial Services’s total assets. Usually, they should not be higher than 70% of total assets, but its current level of 81% means the bank has obviously lent out 11.22% above the sensible upper limit. 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.
Does FBIZ Have Liquidity Mismatch?
Banks operate by lending out its customers’ deposits as loans and charge a higher interest rate. Loans are generally fixed term which means they cannot be readily realized, yet customer deposits on the liability side must be paid 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. Relative to the prudent industry loan to deposit level of 90%, First Business Financial Services’s ratio of over 110% is higher, which places the bank in a relatively dangerous position given the negative liquidity discrepancy. Basically, for $1 of deposits with the bank, it lends out over $1 which is imprudent.
Next Steps:
Keep in mind that a stock investment requires research on more than just its operational side. There are three pertinent aspects you should further examine:
Future Outlook: What are well-informed industry analysts predicting for FBIZ’s future growth? Take a look at our free research report of analyst consensus for FBIZ’s outlook.
Valuation: What is FBIZ 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 FBIZ 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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