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Why These Fundamentals Make The Bank Of NT. Butterfield & Son ... - AOL

The Bank of NT. Butterfield & Son Limited's (NYSE:NTB) 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$2.64B. 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. Post-GFC recovery brought about a new set of reforms, Basel III, which was created to improve regulation, supervision and risk management in the financial services industry. 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 Bank of N.T. Butterfield & Son 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. 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 Bank of N.T. Butterfield & Son's financial risk position by looking at three leverage and liquidity metrics. View our latest analysis for Bank of N.T. Butterfield & Son

NYSE:NTB Historical Debt Jun 1st 18

Why Does NTB'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. Financial institutions are required to have a certain level of buffer to meet capital adequacy levels. Bank of N.T. Butterfield & Son's leverage level of less than the suitable maximum level of 20x, at 13x, is considered to be very cautious and prudent. This means the bank has a sensibly high level of equity compared to the level of debt it has taken on to maintain operations which places it in a strong position to pay back its debt in unforeseen circumstances. 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 NTB's Level of Liquidity?

Handing Money Transparent

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, which is the case for Bank of N.T. Butterfield & Son, with a ratio well-below the maximum level at 36.01%. At this level of loan, the bank has preserved a high level of liquidity but perhaps at the cost of producing interest income from illiquid loan.

Does NTB Have Liquidity Mismatch?

Banks operate by lending out its customers' deposits as loans and charge a higher interest rate. 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. Since Bank of N.T. Butterfield & Son's loan to deposit ratio of 40.57%is well-below than the appropriate maximum of 90%, this means the bank is lending out less than its total level of deposits and positions the bank cautiously in terms of liquidity as it has not disproportionately lent out its deposits and has retained an apt level of deposits. Given the large headroom for growth in loans, the bank has opportunity to grow its interest income.

Next Steps:

Bank of N.T. Butterfield & Son meets all of our liquidity and leverage criteria, exhibiting operational prudency. The operational risk side of a bank is an important fundamental often overlooked by investors. The bank's favourable liquidity and leverage position exposes it to less risk when it comes to repaying financial obligations, in particular, in the case of an adverse macro event. We've only touched on operational risks for NTB in this article. But as a stock investment, there are other fundamentals you need to understand. I've put together three relevant aspects you should further research:

Future Outlook: What are well-informed industry analysts predicting for NTB's future growth? Take a look at our free research report of analyst consensus for NTB's outlook.

Valuation: What is NTB 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 NTB 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 pass 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.

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