As a small-cap finance stock with a market capitalisation of øre457m, the risk and profitability of Aurskog Sparebank (OB:AURG) are largely tied to the underlying economic growth of the region it operates in NO. 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 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. 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 Aurskogrebank’s financial risk position by looking at three leverage and liquidity metrics.
Why Does AURG’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. While financial companies will always have some leverage for a sufficient capital buffer, Aurskogrebank’s leverage ratio of 9.12x is very safe and substantially below the maximum limit of 20x. With assets 9.12 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 AURG’s Liquidity?As I eluded to above, loans are relatively illiquid. It’s helpful to understand how much of this illiquid asset makes up Aurskogrebank’s total asset. Generally, they should make up less than 70% of total assets, but its current level of 85% means the bank has obviously lent out 15.17% above the sensible upper limit. 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.
What is AURG’s Liquidity Discrepancy?Banks profit by lending out its customers’ deposits as loans and charge an interest on the principle. These loans may be fixed term and often 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%, Aurskogrebank’s ratio of over 141% is extremely and unsustainably higher, which positions the bank in a risky spot given the significantly high liquidity disparity between loan and deposit levels. Basically, for NOK1 of deposits with the bank, it lends out over NOK1.20 which is unjustifiable.
Today, we’ve only explored one aspect of Aurskogrebank. However, as a potential stock investment, there are many more fundamentals you need to consider. I’ve put together three important aspects you should further research:
- Future Outlook: What are well-informed industry analysts predicting for AURG’s future growth? Take a look at our free research report of analyst consensus for AURG’s outlook.
- Valuation: What is AURG 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 AURG 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 firstname.lastname@example.org.