As a small-cap bank stock with a market capitalisation of øre2.3b, SpareBank 1 BV’s (OB:SBVG) risk and profitability are largely determined by the underlying economic growth of the NO regions in which it operates. 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. After the GFC, a set of reforms called Basel III was imposed in order to strengthen regulation, supervision and risk management in the banking sector. These reforms target banking regulations and intends to enhance financial institutions’ ability to absorb shocks resulting from economic stress which could expose banks like SpareBank 1 BV 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 SpareBank 1 BV 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.
Why Does SBVG's Leverage Matter?
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. Though banks are required to have a certain level of buffer to meet its capital requirements, SpareBank 1 BV’s leverage level of 7.54x is significantly below the appropriate ceiling of 20x. With assets 7.54 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. If the bank needs to firm up its capital cushion, it has ample headroom to increase its debt level without deteriorating its financial position.
What Is SBVG'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, however its current level of 80% means the bank has clearly lent out 10.3% above the sensible threshold. This level implies dependency on this particular asset class as a source of revenue which makes the bank more exposed to default compared to banks with less loans.
Does SBVG Have Liquidity Mismatch?
Banks profit by lending out its customers’ deposits as loans and charge an interest on the principle. Loans are generally fixed term which means they cannot be readily realized, conversely, on the liability side, customer deposits must be paid in very short notice and on-demand. 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. Compared to the appropriate industry loan to deposit level of 90%, SpareBank 1 BV’s ratio of over 133% is unsustainably higher, which puts the bank in a risky position due to the high liquidity disparity between loan and deposit levels. Basically, for NOK1 of deposits with the bank, it lends out over NOK1.20 which is unjustifiable.
Keep in mind that a stock investment requires research on more than just its operational side. Below, I've compiled three pertinent factors you should further research:
- Future Outlook: What are well-informed industry analysts predicting for SBVG’s future growth? Take a look at our free research report of analyst consensus for SBVG’s outlook.
- Valuation: What is SBVG 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 SBVG 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 email@example.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.