Understated Factors To Consider Before Investing In LegacyTexas Financial Group, Inc. (NASDAQ:LTXB)
LegacyTexas Financial Group, Inc.’s (NASDAQ:LTXB) 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$2.0b. Since banks make money by reinvesting its customers’ deposits in the form of loans, strong economic growth will drive the level of savings deposits and demand for loans, directly impacting the cash flows of those banks. After the Financial Crisis in 2008, a set of reforms called Basel III was created with the purpose of strengthening regulation, risk management and supervision in the banking sector. These reforms target bank level regulation and aims to improve the banking sector’s ability to absorb shocks arising from economic stress which could expose financial institutions 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 LegacyTexas Financial Group 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.
Check out our latest analysis for LegacyTexas Financial Group
Why Does LTXB’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, LegacyTexas Financial Group’s leverage ratio of 8.27x is very safe and substantially below the maximum limit of 20x. With assets 8.27 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 LTXB’s Level of Liquidity?
As I eluded to above, loans are relatively illiquid. It’s helpful to understand how much of this illiquid asset makes up LegacyTexas Financial Group’s total asset. Normally, they should not exceed 70% of total assets, but its current level of 85% means the bank has obviously lent out 15.01% 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 LTXB Have Liquidity Mismatch?
Banks profit by lending out its customers’ deposits as loans and charge an interest on the principle. These loans may be fixed term and often 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 LegacyTexas Financial Group’s loan to deposit ratio of 112% is higher than the appropriate level of 90%, this level 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 LTXB in this article. But as a stock investment, there are other fundamentals you need to understand. Below, I’ve compiled three essential aspects you should further examine:
Future Outlook: What are well-informed industry analysts predicting for LTXB’s future growth? Take a look at our free research report of analyst consensus for LTXB’s outlook.
Valuation: What is LTXB 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 LTXB 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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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
