As a small-cap finance stock with a market capitalisation of øre68m, the risk and profitability of Høland og Setskog Sparebank (OB:HSPG) are largely tied to the underlying economic growth of the region it operates in NO. 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. Following the Financial Crisis in 2008, a set of reforms termed Basel III was enforced to bolster risk management, regulation, and supervision in the financial services industry. Basel III target banking regulations to improve the sector’s ability to absorb shocks resulting from economic stress which may expose financial institutions like Høland og Setskogrebank 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 Høland og Setskogrebank’s financial risk position by looking at three leverage and liquidity metrics.
Is HSPG’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. Though banks are required to have a certain level of buffer to meet its capital requirements, Høland og Setskogrebank’s leverage level of 9.74x is significantly below the appropriate ceiling of 20x. This means the bank has a sensibly high level of equity compared to the level of debt it has taken on to maintain operations which places it in a strong position to pay back its debt in unforeseen circumstances. 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.
What Is HSPG’s Level of Liquidity?Since loans are relatively illiquid, we should know how much of Høland og Setskogrebank’s total assets are comprised of these loans. Normally, they should not exceed 70% of total assets, but its current level of 83% means the bank has obviously lent out 13.49% above the sensible upper limit. This means its revenue is reliant on these specific assets which means the bank is also more exposed to defaulting relative to banks with less loans.
Does HSPG Have Liquidity Mismatch?Banks profit by lending out its customers’ deposits as loans and charge an interest on the principle. These loans tend to be 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%, Høland og Setskogrebank’s ratio of over 122% is extremely and unsustainably higher, which puts the bank in a risky position due to the high liquidity disparity between loan and deposit levels. Essentially, for NOK1 of deposits with the bank, it lends out more than NOK1.20 which is unsustainable.
We’ve only touched on operational risks for HSPG in this article. But as a stock investment, there are other fundamentals you need to understand. There are three pertinent aspects you should further research:
- Future Outlook: What are well-informed industry analysts predicting for HSPG’s future growth? Take a look at our free research report of analyst consensus for HSPG’s outlook.
- Valuation: What is HSPG 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 HSPG 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.