As a small-cap bank stock with a market capitalisation of US$192m, Coastal Financial Corporation’s (NASDAQ:CCB) risk and profitability are largely determined by the underlying economic growth of the US 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. Following the Financial Crisis in 2008, a set of reforms termed Basel III was enforced to bolster risk management, regulation, and supervision in the financial services industry. These reforms target banking regulations and intends to enhance financial institutions’ ability to absorb shocks resulting from economic stress which could expose banks like Coastal Financial 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. Strong management of leverage and liquidity could place the bank in a protected position at the face of macro headwinds. We can gauge Coastal Financial’s risk-taking behaviour by analysing three metrics for leverage and liquidity which I will take you through now.
Why Does CCB’s Leverage Matter?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, Coastal Financial’s leverage ratio of 8.72x is very safe and substantially below the maximum limit of 20x. With assets 8.72 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 CCB’s Level of Liquidity?As above-mentioned, loans are quite illiquid so it is important to understand how much of these loans make up Coastal Financial’s total assets. Generally, they should make up less than 70% of total assets, but its current level of 80% means the bank has lent out 9.66% above the sensible upper limit. 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.
Does CCB Have Liquidity Mismatch?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. 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 Coastal Financial’s loan to deposit ratio of 94% is higher than the appropriate level of 90%, this level positions the bank in a risky spot given the potential to cross into negative liquidity disparity between loan and deposit levels. Essentially, for $1 of deposits with the bank, it lends out more than $0.9 which is risky.
We’ve only touched on operational risks for CCB in this article. But as a stock investment, there are other fundamentals you need to understand. I’ve put together three pertinent factors you should further examine:
- Future Outlook: What are well-informed industry analysts predicting for CCB’s future growth? Take a look at our free research report of analyst consensus for CCB’s outlook.
- Valuation: What is CCB 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 CCB 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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