As a small-cap finance stock with a market capitalisation of øre65.69m, 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. 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. These reforms target banking regulations and intends to enhance financial institutions’ ability to absorb shocks resulting from economic stress which could expose banks like Høland og Setskogrebank 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. High liquidity and low leverage could position Høland og Setskogrebank favourably at the face of macro headwinds. A way to measure this risk is to look at three leverage and liquidity metrics which I will take you through today.
Is HSPG’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. Though banks are required to have a certain level of buffer to meet its capital requirements, Høland og Setskogrebank’s leverage level of 9.42x is very safe and substantially below the maximum limit 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. Usually, they should not be higher than 70% of total assets, but its current level of 85.12% means the bank has obviously lent out 15.12% above the sensible upper limit. This indicates that revenue is dependent on this particular asset but also the bank is more likely to be exposed to default compared to its competitors with less loans.
Does HSPG Have Liquidity Mismatch?Banks operate by lending out its customers’ deposits as loans and charge a higher interest rate. These loans may be fixed term and often cannot be readily realized, yet customer deposits on the liability side must be paid 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 119.58% is higher, which positions the bank in a risky spot given the adverse liquidity disparity between loan and deposit levels. Essentially, for NOK1 of deposits with the bank, it lends out more than NOK1 which is unsustainable.
Keep in mind that a stock investment requires research on more than just its operational side. I’ve put together three pertinent aspects you should further examine:
- 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.
- Historical Performance: What has HSPG’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.
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