Norwegian Finans Holding ASA’s (OB:NOFI) 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 øre17.02b. Given that banks operate by reinvesting deposits in the form of loans, negative economic growth may lower the level of saving deposits and demand for loans, directly affecting those banks’ levels of cash flows. 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. These reforms target banking regulations and intends to enhance financial institutions’ ability to absorb shocks resulting from economic stress which could expose banks like Norwegian Finans Holding 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. Low levels of leverage coupled with sufficient liquidity may place Norwegian Finans Holding 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. See 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 less than the suitable maximum level of 20x, at 7.35x, is considered to be very cautious and prudent. 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. 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.
How Should We Measure NOFI’s Liquidity?As abovementioned, loans are quite illiquid so it is important to understand how much of these loans make up Norwegian Finans Holding’s total assets. Normally, they should not exceed 70% of total assets, however its current level of 74.53% means the bank has lent out 4.53% 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.
What is NOFI’s Liquidity Discrepancy?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, conversely, on the liability side, customer deposits must be paid in very short notice and on-demand. 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 Norwegian Finans Holding’s loan to deposit ratio of 94.48% is higher than the appropriate level of 90%, this level puts the bank in a risky position as it borders negative liquidity disparity between loan and deposit levels. Essentially, for NOK1 of deposits with the bank, it lends out more than NOK 0.9 which is risky.
We’ve only touched on operational risks for NOFI in this article. But as a stock investment, there are other fundamentals you need to understand. Below, I’ve compiled three relevant 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.
- Historical Performance: What has NOFI’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.