As a small-cap finance stock with a market capitalisation of øre17.08b, the risk and profitability of Norwegian Finans Holding ASA (OB:NOFI) 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. Post-GFC recovery brought about a new set of reforms, Basel III, which was created to improve regulation, supervision and risk management in the financial services industry. 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. Its financial position may weaken in an adverse macro event such as political instability which is why it is crucial to understand how well the bank manages its risks. 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 Norwegian Finans Holding’s financial risk position by looking at three leverage and liquidity metrics. Check out our latest analysis for Norwegian Finans Holding
Is NOFI’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. While financial companies will always have some leverage for a sufficient capital buffer, Norwegian Finans Holding’s leverage ratio of 7.35x is significantly below the appropriate ceiling of 20x. With assets 7.35 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. Should the bank need to increase its debt levels to meet capital requirements, it will have abundant headroom to do so.
What Is NOFI’s Level of Liquidity?Due to its illiquid nature, loans are an important asset class we should learn more about. Generally, they should make up less than 70% of total assets, however its current level of 74.53% means the bank has lent out 4.53% above the sensible threshold. This level implies dependency on this particular asset class as a source of revenue which makes the bank more exposed to default compared to banks with less loans.
Does NOFI Have Liquidity Mismatch?A way banks make money is by lending out its deposits as loans. 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. The discrepancy between loan assets and deposit liabilities threatens the bank’s financial position. If an adverse event occurs, it may not be well-placed to repay its depositors immediately. Compared to the appropriate industry loan to deposit level of 90%, Norwegian Finans Holding’s ratio of over 94.48% is higher which puts the bank in a risky position as it borders negative liquidity disparity between loan and deposit levels. Basically, for NOK1 of deposits with the bank, it lends out over NOK 0.9 which is imprudent.
Keep in mind that a stock investment requires research on more than just its operational side. There are three essential aspects you should further research:
- Future Outlook: What are well-informed industry analysts predicting for NOFI’s future growth? Take a look at our free research report of analyst consensus for NOFI’s outlook.
- Valuation: What is NOFI 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 NOFI 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.