Understated Factors To Consider Before Investing In Veritex Holdings, Inc. (NASDAQ:VBTX)

Veritex Holdings, Inc.’s (NASDAQ:VBTX) profitability and risk are largely affected by the underlying economic growth for the region it operates in US given it is a small-cap stock with a market capitalisation of US$1.3b. 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. 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. Basel III target banking regulations to improve the sector’s ability to absorb shocks resulting from economic stress which may expose financial institutions like Veritex Holdings 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 Veritex Holdings 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.

See our latest analysis for Veritex Holdings

NasdaqGM:VBTX Historical Debt, April 1st 2019
NasdaqGM:VBTX Historical Debt, April 1st 2019

Why Does VBTX’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. Financial institutions are required to have a certain level of buffer to meet capital adequacy levels. Veritex Holdings’s leverage level of less than the suitable maximum level of 20x, at 6.05x, 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 VBTX’s Level of Liquidity?

Handing Money Transparent As abovementioned, loans are quite illiquid so it is important to understand how much of these loans make up Veritex Holdings’s total assets. Normally, they should not exceed 70% of total assets, however its current level of 79% means the bank has lent out 9.05% above the sensible threshold. This level implies dependency on this particular asset class as a source of revenue which makes the bank more exposed to defaulting relative to banks with less loans.

What is VBTX’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, conversely, on the liability side, customer deposits must be paid in very short notice and on-demand. 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. Compared to the appropriate industry loan to deposit level of 90%, Veritex Holdings’s ratio of over 97% is higher which positions the bank in a risky spot given the potential to cross into negative liquidity disparity between loan and deposit levels. Basically, for $1 of deposits with the bank, it lends out over $0.9 which is imprudent.

Next Steps:

Today, we’ve only explored one aspect of Veritex Holdings. However, as a potential stock investment, there are many more fundamentals you need to consider. Below, I’ve compiled three key aspects you should look at:

  1. Future Outlook: What are well-informed industry analysts predicting for VBTX’s future growth? Take a look at our free research report of analyst consensus for VBTX’s outlook.
  2. Valuation: What is VBTX 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 VBTX is currently mispriced by the market.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.