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Understated Factors To Consider Before Investing In ConnectOne Bancorp, Inc. (NASDAQ:CNOB)

Devin Koller

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As a small-cap bank stock with a market capitalisation of US$658m, ConnectOne Bancorp, Inc.’s (NASDAQ:CNOB) 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 ConnectOne Bancorp 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. Strong management of leverage and liquidity could place the bank in a protected position at the face of macro headwinds. We can gauge ConnectOne Bancorp’s risk-taking behaviour by analysing three metrics for leverage and liquidity which I will take you through now.

Check out our latest analysis for ConnectOne Bancorp

NASDAQGS:CNOB Historical Debt February 5th 19

Why Does CNOB’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, ConnectOne Bancorp’s leverage ratio of less than the suitable maximum level of 20x, at 8.9x, 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 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 CNOB’s Liquidity?

Handing Money Transparent

As I eluded to above, loans are relatively illiquid. It’s helpful to understand how much of this illiquid asset makes up ConnectOne Bancorp’s total asset. Generally, they should make up less than 70% of total assets, however its current level of 82% means the bank has clearly lent out 12.5% 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 CNOB Have Liquidity Mismatch?

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, however, customer deposits are liabilities which must be repaid 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%, ConnectOne Bancorp’s ratio of over 110% is higher, which places the bank in a relatively dangerous position given the negative liquidity discrepancy. Essentially, for $1 of deposits with the bank, it lends out more than $1 which is unsustainable.

Next Steps:

We’ve only touched on operational risks for CNOB in this article. But as a stock investment, there are other fundamentals you need to understand. I’ve put together three essential factors you should further research:

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