Understated Factors To Consider Before Investing In Unicaja Banco, S.A. (BME:UNI)

By
Simply Wall St
Published
April 16, 2019
BME:UNI
Source: Shutterstock

Unicaja Banco, S.A.’s (BME:UNI) profitability and risk are largely affected by the underlying economic growth for the region it operates in ES given it is a small-cap stock with a market capitalisation of €1.5b. 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. 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. 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. 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. Low levels of leverage coupled with sufficient liquidity may place Unicaja Banco 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 Unicaja Banco

BME:UNI Historical Debt, April 16th 2019
BME:UNI Historical Debt, April 16th 2019

Why Does UNI'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, Unicaja Banco’s leverage level of 14.68x is significantly below the appropriate ceiling of 20x. This means the bank exhibits very strong leverage management and is well-positioned to repay its debtors in the case of any adverse events since it has an appropriately high level of equity relative to the debt it has taken on to remain in business. 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 UNI's Level of Liquidity?

Handing Money Transparent 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, which is consistent with Unicaja Banco’s state given its much lower ratio of 46%. This means less than half of the bank’s total assets are tied up in the form of illiquid loans, leading to high liquidity, perhaps at the expense of generating interest income.

Does UNI 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 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%, Unicaja Banco’s ratio of over 58% is noticeably lower, which means the bank is lending out less than its total level of deposits and places the bank in a relatively safe liquidity position given it has not excessively lent out its deposits and has maintained a suitable level for compliance. There is opportunity for the bank to increase its interest income by lending out more loans.

Next Steps:

Unicaja Banco ticks all the boxes for operational prudency in terms of liquidity and leverage. Investors often sideline these factors compared to other fundamentals, but they are equally important to consider as part of the investment thesis. High liquidity and low leverage places the bank in an ideal position to repay financial liabilities in case of adverse headwinds. Today, we've only explored one aspect of Unicaja Banco. However, as a potential stock investment, there are many more fundamentals you need to consider. There are three important factors you should further research:

  1. Future Outlook: What are well-informed industry analysts predicting for UNI’s future growth? Take a look at our free research report of analyst consensus for UNI’s outlook.
  2. Valuation: What is UNI 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 UNI 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.

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 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.

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