Helgeland Sparebank’s (OB:HELG) profitability and risk are largely affected by the underlying economic growth for the region it operates in NO given it is a small-cap stock with a market capitalisation of øre1.5b. Since a bank profits from reinvesting its clients’ deposits in the form of loans, negative economic growth may lower deposit levels and demand for loan, adversely impacting its cash flow. 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. The Basel III reforms are aimed at banking regulations to improve financial institutions’ ability to absorb shocks caused by economic stress which could expose banks like Helgelandrebank 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 Helgelandrebank’s financial risk position by looking at three leverage and liquidity metrics.
Is HELG’s Leverage Level Appropriate?Banks with low leverage are better positioned to weather adverse headwinds as they have less debt to pay off. A bank’s leverage may be thought of as the level of assets it owns compared to its own shareholders’ equity. Financial institutions are required to have a certain level of buffer to meet capital adequacy levels. Helgelandrebank’s leverage level of 9.92x is significantly below the appropriate ceiling of 20x. With assets 9.92 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 firm up its capital cushion, it has ample headroom to increase its debt level without deteriorating its financial position.
What Is HELG’s Level of Liquidity?As abovementioned, loans are quite illiquid so it is important to understand how much of these loans make up Helgelandrebank’s total assets. Normally, they should not exceed 70% of total assets, but its current level of 84% means the bank has obviously lent out 13.76% above the sensible upper limit. This indicates that revenue is dependent on this particular asset but also the bank is more exposed to default compared to banks with less loans.
What is HELG’s Liquidity Discrepancy?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. 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%, Helgelandrebank’s ratio of over 150% is extremely and unsustainably higher, which places the bank in a dangerous position given the exceedingly high liquidity discrepancy. Essentially, for NOK1 of deposits with the bank, it lends out more than NOK1.5 which is unsustainable.
We’ve only touched on operational risks for HELG in this article. But as a stock investment, there are other fundamentals you need to understand. I’ve put together three key factors you should further examine:
- Future Outlook: What are well-informed industry analysts predicting for HELG’s future growth? Take a look at our free research report of analyst consensus for HELG’s outlook.
- Valuation: What is HELG 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 HELG 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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