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As a small-cap finance stock with a market capitalisation of US$238m, the risk and profitability of Bankwell Financial Group, Inc. ( NASDAQ:BWFG ) are largely tied to the underlying economic growth of the region it operates in US. Given that banks operate by reinvesting deposits in the form of loans, negative economic growth may lower the level of saving deposits and demand for loans, directly affecting those banks’ levels of cash flows. 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. 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 Bankwell Financial Group 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. Strong management of leverage and liquidity could place the bank in a protected position at the face of macro headwinds. We can gauge Bankwell Financial Group’s risk-taking behaviour by analysing three metrics for leverage and liquidity which I will take you through now.
Is BWFG’s Leverage Level Appropriate?
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. Though banks are required to have a certain level of buffer to meet its capital requirements, Bankwell Financial Group’s leverage level of 10.76x 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.
How Should We Measure BWFG’s Liquidity?
Due to its illiquid nature, loans are an important asset class we should learn more about. Generally, they should make up less than 70% of total assets, but its current level of 85% means the bank has obviously lent out 14.69% above the sensible upper limit. This indicates that revenue is dependent on this particular asset but also the bank is more exposed to default compared to banks with less loans.
Does BWFG Have Liquidity Mismatch?
A way banks make money is by lending out its deposits as loans. 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. 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%, Bankwell Financial Group’s ratio of over 106% is higher, which places the bank in a relatively dangerous position given the negative liquidity discrepancy. Basically, for $1 of deposits with the bank, it lends out over $1 which is imprudent.
We’ve only touched on operational risks for BWFG in this article. But as a stock investment, there are other fundamentals you need to understand. I’ve put together three relevant factors you should further research:
- Future Outlook : What are well-informed industry analysts predicting for BWFG’s future growth? Take a look at our free research report of analyst consensus for BWFG’s outlook.
- Valuation : What is BWFG 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 BWFG 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 .
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 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.