SpareBank 1 SR-Bank ASA’s (OB:SRBANK) 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 øre24b. 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 Financial Crisis in 2008, a set of reforms called Basel III was created with the purpose of strengthening regulation, risk management and supervision in the banking sector. These reforms target bank level regulation and aims to improve the banking sector’s ability to absorb shocks arising from economic stress which could expose financial institutions 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. Strong management of leverage and liquidity could place the bank in a protected position at the face of macro headwinds. We can gauge SpareBank 1 SR-Bank’s risk-taking behaviour by analysing three metrics for leverage and liquidity which I will take you through now.
Is SRBANK’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. While financial companies will always have some leverage for a sufficient capital buffer, SpareBank 1 SR-Bank’s leverage ratio of less than the suitable maximum level of 20x, at 10.84x, 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. Should the bank need to increase its debt levels to meet capital requirements, it will have abundant headroom to do so.
How Should We Measure SRBANK’s Liquidity?Due to its illiquid nature, loans are an important asset class we should learn more about. Generally, they should make up less than 70% of total assets, but its current level of 82% means the bank has obviously lent out 11.55% above the sensible upper limit. This level implies dependency on this particular asset class as a source of revenue which makes the bank more exposed to default compared to banks with less loans.
What is SRBANK’s Liquidity Discrepancy?Banks operate by lending out its customers’ deposits as loans and charge a higher interest rate. 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. This mismatch between illiquid loans and liquid deposits poses a risk for the bank if unusual events occur and requires it to immediately repay its depositors. Since SpareBank 1 SR-Bank’s loan to deposit ratio of over 150%, is unsustainably higher than the appropriate level of 90%, this places the bank in a dangerous position given the exceedingly high liquidity discrepancy. Essentially, for NOK1 of deposits with the bank, it lends out more than NOK1.5 which is unsustainable.
Today, we’ve only explored one aspect of SpareBank 1 SR-Bank. However, as a potential stock investment, there are many more fundamentals you need to consider. I’ve put together three essential factors you should further examine:
- Future Outlook: What are well-informed industry analysts predicting for SRBANK’s future growth? Take a look at our free research report of analyst consensus for SRBANK’s outlook.
- Valuation: What is SRBANK 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 SRBANK 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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.