Public joint-stock commercial bank Primorye’s (MISX:PRMB) profitability and risk are largely affected by the underlying economic growth for the region it operates in RU given it is a small-cap stock with a market capitalisation of RUРУБ3.20B. 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 commercial bank Primorye 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. High liquidity and low leverage could position commercial bank Primorye 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. Check out our latest analysis for commercial bank Primorye
Is PRMB’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, commercial bank Primorye’s leverage ratio of less than the suitable maximum level of 20x, at 9x, 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.
What Is PRMB’s Level of Liquidity?As abovementioned, loans are quite illiquid so it is important to understand how much of these loans make up the bank’s total assets. Usually, they should not be higher than 70% of total assets, however, this should not be a concern for commercial bank Primorye given its substantially lower ratio of below 30%. At this level of loan, the bank has preserved a significantly high level of liquidity but possibly at the cost of producing interest income from illiquid loan.
What is PRMB’s Liquidity Discrepancy?PRMB profits 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, however, customer deposits are liabilities which must be repaid 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. Compared to the appropriate industry loan to deposit level of 90%, commercial bank Primorye’s ratio of over 26.62% is noticeably lower, which means the bank is lending out less than half its total deposits and placed the bank in very cautious liquidity position as it has not lent out the majority of its deposits and has retained an extremely high level of deposits. Given the substantial headroom for growth in loans, the bank has opportunity to grow its interest income.
commercial bank Primorye passes all of our liquidity and leverage checks which shows it is prudent in managing those factors. This gives us confidence in the operational side of the business, an important aspect to consider before investing in the stock. Its high liquidity and low leverage levels mean the bank is well-positioned to meet its financial obligations in the case of any adverse and unpredictable macro events. Keep in mind that a stock investment requires research on more than just its operational side. There are three important aspects you should further examine:
- Valuation: What is PRMB 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 PRMB is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on commercial bank Primorye’s board and the CEO’s back ground.
- 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.