Voss Veksel- og Landmandsbank ASA’s (OB:VVL) 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 øre283m. 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. 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. 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 Voss Veksel- og Landmandsbank 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. 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 Voss Veksel- og Landmandsbank’s financial risk position by looking at three leverage and liquidity metrics.
Is VVL’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. While financial companies will always have some leverage for a sufficient capital buffer, Voss Veksel- og Landmandsbank’s leverage ratio of 11.56x 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 firm up its capital cushion, it has ample headroom to increase its debt level without deteriorating its financial position.
What Is VVL’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 Voss Veksel- og Landmandsbank’s total asset. Usually, they should not be higher than 70% of total assets, however its current level of 88% means the bank has clearly lent out 18.29% 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 VVL Have Liquidity Mismatch?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. Since Voss Veksel- og Landmandsbank’s loan to deposit ratio of 140% 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.
We’ve only touched on operational risks for VVL in this article. But as a stock investment, there are other fundamentals you need to understand. Below, I’ve compiled three relevant factors you should further research:
- Future Outlook: What are well-informed industry analysts predicting for VVL’s future growth? Take a look at our free research report of analyst consensus for VVL’s outlook.
- Valuation: What is VVL 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 VVL 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 email@example.com. 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.