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As a small-cap finance stock with a market capitalisation of €237m, the risk and profitability of Banco di Desio e della Brianza S.p.A. (BIT:BDB) are largely tied to the underlying economic growth of the region it operates in IT. 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 Financial Crisis in 2008, a set of reforms called Basel III was created with the purpose of strengthening regulation, risk management and supervision in the banking sector. Basel III target banking regulations to improve the sector’s ability to absorb shocks resulting from economic stress which may expose financial institutions like Banco di Desio e della Brianza 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. Sufficient liquidity and low levels of leverage could place the bank in a safe place in case of unexpected macro headwinds. Today we will be measuring Banco di Desio e della Brianza’s financial risk position by looking at three leverage and liquidity metrics.
Is BDB’s Leverage Level Appropriate?Banks with low leverage are exposed to lower risks around their ability to repay debt. A bank’s leverage can be thought of as the amount of assets it holds compared to its own shareholders’ funds. While financial companies will always have some leverage for a sufficient capital buffer, Banco di Desio e della Brianza’s leverage ratio of 15.39x is significantly below the appropriate ceiling of 20x. With assets 15.39 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. Should the bank need to increase its debt levels to meet capital requirements, it will have abundant headroom to do so.
How Should We Measure BDB’s 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 81% means the bank has clearly lent out 10.62% above the sensible threshold. This level implies dependency on this particular asset class as a source of revenue which makes the bank more likely to be exposed to default compared to its competitors with less loans.
Does BDB Have Liquidity Mismatch?Banks operate by lending out its customers’ deposits as loans and charge a higher interest rate. Loans are generally fixed term which means they cannot be readily realized, however, customer deposits are liabilities which must be repaid 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. Relative to the prudent industry loan to deposit level of 90%, Banco di Desio e della Brianza’s ratio of over 120% is higher, which positions the bank in a risky spot given the adverse liquidity disparity between loan and deposit levels. Basically, for €1 of deposits with the bank, it lends out over €1 which is imprudent.
Today, we’ve only explored one aspect of Banco di Desio e della Brianza. However, as a potential stock investment, there are many more fundamentals you need to consider. I’ve put together three relevant aspects you should further research:
- Future Outlook: What are well-informed industry analysts predicting for BDB’s future growth? Take a look at our free research report of analyst consensus for BDB’s outlook.
- Valuation: What is BDB 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 BDB 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.
To help readers see past 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. For errors that warrant correction please contact the editor at email@example.com.