As a small-cap finance stock with a market capitalisation of øre1.5b, the risk and profitability of Helgeland Sparebank (OB:HELG) are largely tied to the underlying economic growth of the region it operates in NO. A bank’s cash flow is directly impacted by economic growth as it is the main driver of deposit levels and demand for loans which it profits from. 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. Low levels of leverage coupled with sufficient liquidity may place Helgelandrebank 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.
Is HELG’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, Helgelandrebank’s leverage ratio of 9.77x is very safe and substantially below the maximum limit 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. 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 HELG’s Liquidity?As abovementioned, loans are quite illiquid so it is important to understand how much of these loans make up Helgelandrebank’s total assets. Generally, they should make up less than 70% of total assets, however its current level of 83% means the bank has clearly lent out 13.09% above the sensible threshold. This indicates that revenue is dependent on this particular asset but also the bank is more exposed to defaulting relative to banks with less loans.
Does HELG 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, yet customer deposits on the liability side must be paid 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. Since Helgelandrebank’s loan to deposit ratio of over 150%, is unsustainably higher than the appropriate level of 90%, this positions the bank in a risky spot given the significantly high liquidity disparity between loan and deposit levels. Essentially, for NOK1 of deposits with the bank, it lends out more than NOK1.5 which is unsustainable.
Today, we’ve only explored one aspect of Helgelandrebank. However, as a potential stock investment, there are many more fundamentals you need to consider. I’ve put together three key aspects 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.
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.