As a small-cap finance stock with a market capitalisation of øre9.1b, the risk and profitability of SpareBank 1 Østlandet (OB:SPOL) are largely tied to the underlying economic growth of the region it operates in NO. Since a bank profits from reinvesting its clients’ deposits in the form of loans, negative economic growth may lower deposit levels and demand for loan, adversely impacting its cash flow. 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. The Basel III reforms are aimed at banking regulations to improve financial institutions’ ability to absorb shocks caused by economic stress which could expose banks like SpareBank 1 Østlandet 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. High liquidity and low leverage could position SpareBank 1 Østlandet favourably at the face of macro headwinds. A way to measure this risk is to look at three leverage and liquidity metrics which I will take you through today.
Is SPOL’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. Though banks are required to have a certain level of buffer to meet its capital requirements, SpareBank 1 Østlandet’s leverage level of less than the suitable maximum level of 20x, at 8.81x, is considered to be very cautious and prudent. This means the bank has a sensibly high level of equity compared to the level of debt it has taken on to maintain operations which places it in a strong position to pay back its debt in unforeseen circumstances. 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 SPOL’s Liquidity?Since loans are relatively illiquid, we should know how much of SpareBank 1 Østlandet’s total assets are comprised of these loans. Generally, they should make up less than 70% of total assets, however its current level of 82% means the bank has clearly lent out 12.15% above the sensible threshold. This means its revenue is reliant on these specific assets which means the bank is also more likely to be exposed to default compared to its competitors with less loans.
Does SPOL Have Liquidity Mismatch?Banks profit by lending out its customers’ deposits as loans and charge an interest on the principle. These loans may be fixed term and often cannot be readily realized, yet customer deposits on the liability side must be paid on-demand and in short notice. 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 SpareBank 1 Østlandet’s loan to deposit ratio of 142% is unsustainably higher than the appropriate level of 90%, this level 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.
Today, we’ve only explored one aspect of SpareBank 1 Østlandet. However, as a potential stock investment, there are many more fundamentals you need to consider. I’ve put together three key factors you should look at:
- Future Outlook: What are well-informed industry analysts predicting for SPOL’s future growth? Take a look at our free research report of analyst consensus for SPOL’s outlook.
- Valuation: What is SPOL 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 SPOL 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.