BPER Banca S.p.A.’s (BIT:BPE) profitability and risk are largely affected by the underlying economic growth for the region it operates in IT given it is a small-cap stock with a market capitalisation of €1.8b. Given that banks operate by reinvesting deposits in the form of loans, negative economic growth may lower the level of saving deposits and demand for loans, directly affecting those banks’ levels of cash flows. 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. 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. 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. Strong management of leverage and liquidity could place the bank in a protected position at the face of macro headwinds. We can gauge BPER Banca’s risk-taking behaviour by analysing three metrics for leverage and liquidity which I will take you through now.
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Why Does BPE’s Leverage Matter?
A low level of leverage subjects a bank to less risk and enhances its ability to pay back its debtors. Leverage can be thought of as the amount of assets a bank owns relative to its shareholders’ funds. Though banks are required to have a certain level of buffer to meet its capital requirements, BPER Banca’s leverage level of 14.43x is significantly below the appropriate ceiling of 20x. 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 BPE’s Liquidity?
Since loans are relatively illiquid, we should know how much of BPER Banca’s total assets are comprised of these loans. Generally, they should make up less than 70% of total assets, however its current level of 79% means the bank has lent out 9.36% above the sensible threshold. This means its revenue is reliant on these specific assets which means the bank is also more exposed to defaulting relative to banks with less loans.
What is BPE’s Liquidity Discrepancy?
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, conversely, on the liability side, customer deposits must be paid in very short notice and on-demand. The disparity between the immediacy of deposits compared to the illiquid nature of loans puts pressure on the bank’s financial position if an adverse event requires the bank to repay its depositors. Relative to the prudent industry loan to deposit level of 90%, BPER Banca’s ratio of over 126% is extremely and unsustainably higher, which places the bank in a very dangerous position given the high liquidity discrepancy. Essentially, for €1 of deposits with the bank, it lends out more than €1.20 which is unsustainable.
We’ve only touched on operational risks for BPE in this article. But as a stock investment, there are other fundamentals you need to understand. There are three essential factors you should look at:
- Future Outlook: What are well-informed industry analysts predicting for BPE’s future growth? Take a look at our free research report of analyst consensus for BPE’s outlook.
- Valuation: What is BPE 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 BPE 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 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.