As a small-cap finance stock with a market capitalisation of US$323.4m, the risk and profitability of Howard Bancorp Inc (NASDAQ:HBMD) are largely tied to the underlying economic growth of the region it operates in US. 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. 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. Basel III target banking regulations to improve the sector’s ability to absorb shocks resulting from economic stress which may expose financial institutions like Howard Bancorp 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 Howard Bancorp’s risk-taking behaviour by analysing three metrics for leverage and liquidity which I will take you through now.
Is HBMD’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. Howard Bancorp’s leverage level of less than the suitable maximum level of 20x, at 7.54x, is considered to be very cautious and prudent. 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. Should the bank need to increase its debt levels to meet capital requirements, it will have abundant headroom to do so.
What Is HBMD’s Level of Liquidity?
Due to its illiquid nature, loans are an important asset class we should learn more about. Normally, they should not exceed 70% of total assets, but its current level of 73.5% means the bank has lent out 3.47% above the sensible upper limit. This level implies dependency on this particular asset class as a source of revenue which makes the bank more likely to be exposed to default compared to its competitors with less loans.
Does HBMD Have Liquidity Mismatch?
Banks profit 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, 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. Since Howard Bancorp’s loan to deposit ratio of 102% is higher than the appropriate level of 90%, this level puts the bank in a risky position due to the negative liquidity disparity between loan and deposit levels. Essentially, for $1 of deposits with the bank, it lends out more than $1 which is unsustainable.
We’ve only touched on operational risks for HBMD in this article. But as a stock investment, there are other fundamentals you need to understand. Below, I’ve compiled three pertinent aspects you should look at:
- Future Outlook: What are well-informed industry analysts predicting for HBMD’s future growth? Take a look at our free research report of analyst consensus for HBMD’s outlook.
- Valuation: What is HBMD 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 HBMD 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.