As a small-cap finance stock with a market capitalisation of USD $419.97M, the risk and profitability of MidWestOne Financial Group Inc (NASDAQ:MOFG) are largely tied to the underlying economic growth of the region it operates in US. 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 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 MidWestOne Financial Group 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 MidWestOne Financial Group’s risk-taking behaviour by analysing three metrics for leverage and liquidity which I will take you through now. View our latest analysis for MidWestOne Financial Group
Is MOFG’s Leverage Level Appropriate?
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. While financial companies will always have some leverage for a sufficient capital buffer, MidWestOne Financial Group’s leverage ratio of 9x is significantly below the appropriate ceiling of 20x. With assets 9 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 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 MOFG’s Liquidity?
Since loans are relatively illiquid, we should know how much of MidWestOne Financial Group’s total assets are comprised of these loans. Normally, they should not exceed 70% of total assets, but its current level of 71.16% means the bank has lent out 1% above the sensible upper limit. This means its revenue is reliant on these specific assets which means the bank is also more exposed to default compared to banks with less loans.
Does MOFG Have Liquidity Mismatch?
Banks operate by lending out its customers’ deposits as loans and charge a higher interest rate. These loans tend to be 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 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. Since MidWestOne Financial Group’s loan to deposit ratio of 89.84% is within the sensible margin, below than the appropriate maximum of 90%, this level positions the bank cautiously in terms of liquidity as it has not disproportionately lent out its deposits and has retained an apt level of deposits.
The bank’s prudent management of its risk levels is reflected in its sensible leverage and liquidity ratios. This means it is well-positioned to meet its financial obligations in case of any unforeseen and adverse macro events. Today, we’ve only explored one aspect of MidWestOne Financial Group. However, as a potential stock investment, there are many more fundamentals you need to consider. Below, I’ve compiled three key aspects you should look at:
1. Future Outlook: What are well-informed industry analysts predicting for MOFG’s future growth? Take a look at our free research report of analyst consensus for MOFG’s outlook.
2. Valuation: What is MOFG 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 MOFG is currently mispriced by the market.
3. 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 pass 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.