As a small-cap bank stock with a market capitalisation of øre1.3b, Sandnes Sparebank’s (OB:SADG) risk and profitability are largely determined by the underlying economic growth of the NO regions in which it operates. 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. Basel III target banking regulations to improve the sector’s ability to absorb shocks resulting from economic stress which may expose financial institutions like Sandnesrebank 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. 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 Sandnesrebank’s financial risk position by looking at three leverage and liquidity metrics.
Is SADG’s Leverage Level Appropriate?Banks with low leverage are exposed to lower risks around their ability to repay debt. A bank’s leverage can be thought of as the amount of assets it holds compared to its own shareholders’ funds. Though banks are required to have a certain level of buffer to meet its capital requirements, Sandnesrebank’s leverage level of 9.29x is significantly below the appropriate ceiling 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. 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 SADG’s Level of Liquidity?As I eluded to above, loans are relatively illiquid. It’s helpful to understand how much of this illiquid asset makes up Sandnesrebank’s total asset. Normally, they should not exceed 70% of total assets, however its current level of 82% means the bank has clearly lent out 11.69% 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 SADG 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, conversely, on the liability side, customer deposits must be paid in very short notice and on-demand. 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. Since Sandnesrebank’s loan to deposit ratio of over 150%, is unsustainably higher than the appropriate level of 90%, this puts the bank in a risky position due to the exceedingly high liquidity disparity between loan and deposit levels. Basically, for NOK1 of deposits with the bank, it lends out over NOK1.5 which is unjustifiable.
Keep in mind that a stock investment requires research on more than just its operational side. I’ve put together three essential factors you should further research:
- Future Outlook: What are well-informed industry analysts predicting for SADG’s future growth? Take a look at our free research report of analyst consensus for SADG’s outlook.
- Valuation: What is SADG 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 SADG 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.
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