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As a small-cap bank stock with a market capitalisation of US$3.2b, Investors Bancorp, Inc.’s (NASDAQ:ISBC) risk and profitability are largely determined by the underlying economic growth of the US regions in which it operates. 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. These reforms target bank level regulation and aims to improve the banking sector’s ability to absorb shocks arising from economic stress which could expose financial institutions 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. Sufficient liquidity and low levels of leverage could place the bank in a safe place in case of unexpected macro headwinds. Today we will be measuring Investors Bancorp’s financial risk position by looking at three leverage and liquidity metrics.
Why Does ISBC's Leverage Matter?
Banks with low leverage are better positioned to weather adverse headwinds as they have less debt to pay off. A bank’s leverage may be thought of as the level of assets it owns compared to its own shareholders’ equity. While financial companies will always have some leverage for a sufficient capital buffer, Investors Bancorp’s leverage ratio of less than the suitable maximum level of 20x, at 8.98x, is considered to be very cautious and prudent. With assets 8.98 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. Should the bank need to increase its debt levels to meet capital requirements, it will have abundant headroom to do so.
What Is ISBC's Level of Liquidity?
Since loans are relatively illiquid, we should know how much of Investors Bancorp’s total assets are comprised of these loans. Normally, they should not exceed 70% of total assets, however its current level of 81% means the bank has clearly lent out 11% above the sensible threshold. This indicates that revenue is dependent on this particular asset but also the bank is more likely to be exposed to default compared to its competitors with less loans.
Does ISBC Have Liquidity Mismatch?
A way banks make money is by lending out its deposits as loans. These loans tend to be fixed term which means they 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. Relative to the prudent industry loan to deposit level of 90%, Investors Bancorp’s ratio of over 122% is extremely and unsustainably higher, which puts the bank in a risky position due to the high liquidity disparity between loan and deposit levels. Basically, for $1 of deposits with the bank, it lends out over $1.20 which is unjustifiable.
Today, we've only explored one aspect of Investors Bancorp. However, as a potential stock investment, there are many more fundamentals you need to consider. Below, I've compiled three important aspects you should further examine:
- Future Outlook: What are well-informed industry analysts predicting for ISBC’s future growth? Take a look at our free research report of analyst consensus for ISBC’s outlook.
- Valuation: What is ISBC 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 ISBC 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 firstname.lastname@example.org. 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.