Spirit of Texas Bancshares, Inc.’s (NASDAQ:STXB) 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$258m. 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. 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. The Basel III reforms are aimed at banking regulations to improve financial institutions’ ability to absorb shocks caused by economic stress which could expose banks like Spirit of Texas Bancshares 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 Spirit of Texas Bancshares 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.
Is STXB’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. Spirit of Texas Bancshares’s leverage level of 7.3x is very safe and substantially below the maximum limit of 20x. With assets 7.3 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.
How Should We Measure STXB’s Liquidity?
Since loans are relatively illiquid, we should know how much of Spirit of Texas Bancshares’s total assets are comprised of these loans. Normally, they should not exceed 70% of total assets, but its current level of 86% means the bank has obviously lent out 16% 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.
What is STXB’s Liquidity Discrepancy?
Banks operate by lending out its customers’ deposits as loans and charge a higher interest rate. 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. This mismatch between illiquid loans and liquid deposits poses a risk for the bank if unusual events occur and requires it to immediately repay its depositors. Compared to the appropriate industry loan to deposit level of 90%, Spirit of Texas Bancshares’s ratio of over 109% 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.
We’ve only touched on operational risks for STXB in this article. But as a stock investment, there are other fundamentals you need to understand. There are three relevant aspects you should further research:
- Future Outlook: What are well-informed industry analysts predicting for STXB’s future growth? Take a look at our free research report of analyst consensus for STXB’s outlook.
- Valuation: What is STXB 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 STXB 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.