As a small-cap bank stock with a market capitalisation of øre251.25m, Sparebank 1 Nordvest’s (OB:SNOR) risk and profitability are largely determined by the underlying economic growth of the NO regions in which it operates. 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. 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 Sparebank 1 Nordvest 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 Sparebank 1 Nordvest 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.
Why Does SNOR’s Leverage Matter?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. Financial institutions are required to have a certain level of buffer to meet capital adequacy levels. Sparebank 1 Nordvest’s leverage level of 7.23x is significantly below the appropriate ceiling of 20x. With assets 7.23 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 firm up its capital cushion, it has ample headroom to increase its debt level without deteriorating its financial position.
What Is SNOR’s Level of Liquidity?As abovementioned, loans are quite illiquid so it is important to understand how much of these loans make up Sparebank 1 Nordvest’s total assets. Generally, they should make up less than 70% of total assets, however its current level of 81.50% means the bank has clearly lent out 11.5% 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 SNOR’s Liquidity Discrepancy?A way banks make money is by lending out its deposits as loans. Loans are generally fixed term which means they cannot be readily realized, yet customer deposits on the liability side must be paid 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%, Sparebank 1 Nordvest’s ratio of over 141.43% is unsustainably higher, which positions the bank in a risky spot given the significantly high liquidity disparity between loan and deposit levels. Essentially, for NOK1 of deposits with the bank, it lends out more than NOK1.20 which is unsustainable.
Keep in mind that a stock investment requires research on more than just its operational side. There are three important factors you should further examine:
- Future Outlook: What are well-informed industry analysts predicting for SNOR’s future growth? Take a look at our free research report of analyst consensus for SNOR’s outlook.
- Valuation: What is SNOR 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 SNOR 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 firstname.lastname@example.org.