As a small-cap finance stock with a market capitalisation of øre1.3b, the risk and profitability of SpareBank 1 Telemark (OB:SBTE) 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. Basel III target banking regulations to improve the sector’s ability to absorb shocks resulting from economic stress which may expose financial institutions like SpareBank 1 Telemark 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. Low levels of leverage coupled with sufficient liquidity may place SpareBank 1 Telemark 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.
Is SBTE’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. Financial institutions are required to have a certain level of buffer to meet capital adequacy levels. SpareBank 1 Telemark’s leverage level of less than the suitable maximum level of 20x, at 7.94x, is considered to be very cautious and prudent. 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 firm up its capital cushion, it has ample headroom to increase its debt level without deteriorating its financial position.
How Should We Measure SBTE’s Liquidity?As abovementioned, loans are quite illiquid so it is important to understand how much of these loans make up SpareBank 1 Telemark’s total assets. Usually, they should not be higher than 70% of total assets, but its current level of 90% means the bank has obviously lent out 19.97% above the sensible upper limit. This means its revenue is reliant on these specific assets which means the bank is also more exposed to default compared to banks with less loans.
What is SBTE’s Liquidity Discrepancy?Banks operate by lending out its customers’ deposits as loans and charge a higher interest rate. 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 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 SpareBank 1 Telemark’s loan to deposit ratio of 145% is unsustainably higher than the appropriate level of 90%, this level places the bank in a very dangerous position given the high liquidity discrepancy. Essentially, for NOK1 of deposits with the bank, it lends out more than NOK1.20 which is unsustainable.
Today, we’ve only explored one aspect of SpareBank 1 Telemark. However, as a potential stock investment, there are many more fundamentals you need to consider. Below, I’ve compiled three pertinent factors you should look at:
- Future Outlook: What are well-informed industry analysts predicting for SBTE’s future growth? Take a look at our free research report of analyst consensus for SBTE’s outlook.
- Valuation: What is SBTE 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 SBTE 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 email@example.com.