Article taken from: finance.yahoo.com
What Makes Secure Trust Bank Plc (LON:STB) A Hard Investment? Gerald Huddleston Reblog Want to participate in a short research study ? Help shape the future of investing tools and you could win a $250 gift card! Secure Trust Bank Plc’s ( LON:STB ) profitability and risk are largely affected by the underlying economic growth for the region it operates in GB given it is a small-cap stock with a market capitalisation of UK£256m. 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 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 banking regulations and intends to enhance financial institutions’ ability to absorb shocks resulting from economic stress which could expose banks like Secure Trust Bank to vulnerabilities. Its financial position may weaken in an adverse macro event such as political instability which is why it is crucial to understand how well the bank manages its risks. Strong management of leverage and liquidity could place the bank in a protected position at the face of macro headwinds. We can gauge Secure Trust Bank’s risk-taking behaviour by analysing three metrics for leverage and liquidity which I will take you through now. More Is STB’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, Secure Trust Bank’s leverage ratio of 9.72x 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. Should the bank need to increase its debt levels to meet capital requirements, it will have abundant headroom to do so. What Is STB’s Level of Liquidity? Handing Money Transparent More Due to its illiquid nature, loans are an important asset class we should learn more about. Normally, they should not exceed 70% of total assets, but its current level of 84% means the bank has obviously lent out 14.09% above the sensible upper limit. This means its revenue is reliant on these specific assets which means the bank is also more exposed to default compared to banks with less loans. What is STB’s Liquidity Discrepancy? 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. Relative to the prudent industry loan to deposit level of 90%, Secure Trust Bank’s ratio of over 112% is higher, which positions the bank in a risky spot given the adverse liquidity disparity between loan and deposit levels. Essentially, for £1 of deposits with the bank, it lends out more than £1 which is unsustainable. Next Steps: We’ve only touched on operational risks for STB in this article. But as a stock investment, there are other fundamentals you need to understand. There are three relevant aspects you should further examine: Future Outlook : What are well-informed industry analysts predicting for STB’s future growth? Take a look at our free research report of analyst consensus for STB’s outlook. Valuation : What is STB 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 STB 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 . To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements. The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at .