Yahoo Finance What Makes Cambridge Bancorp (NASDAQ:CATC) A Hard Investment?
As a small-cap bank stock with a market capitalisation of US$367.5m, Cambridge Bancorp’s (NASDAQ:CATC) risk and profitability are largely determined by the underlying economic growth of the US regions in which it operates. Since banks make money by reinvesting its customers’ deposits in the form of loans, strong economic growth will drive the level of savings deposits and demand for loans, directly impacting the cash flows of those banks. Following the Financial Crisis in 2008, a set of reforms termed Basel III was enforced to bolster risk management, regulation, and supervision in the financial services industry. These reforms target banking regulations and intends to enhance financial institutions’ ability to absorb shocks resulting from economic stress which could expose banks like Cambridge Bancorp 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. 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 Cambridge Bancorp’s financial risk position by looking at three leverage and liquidity metrics.
View our latest analysis for Cambridge Bancorp
Why Does CATC’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, Cambridge Bancorp’s leverage ratio of less than the suitable maximum level of 20x, at 12.66x, is considered to be very cautious and prudent. With assets 12.66 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. If the bank needs to increase its debt levels to firm up its capital cushion, there is plenty of headroom to do so without deteriorating its financial position.
How Should We Measure CATC’s Liquidity?
As abovementioned, loans are quite illiquid so it is important to understand how much of these loans make up Cambridge Bancorp’s total assets. Normally, they should not exceed 70% of total assets, but its current level of 70.3% means the bank has lent out 0.29% above the sensible upper limit. This means its revenue is reliant on these specific assets which means the bank is also more likely to be exposed to default compared to its competitors with less loans.
Does CATC 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, conversely, on the liability side, customer deposits must be paid in very short notice and on-demand. The disparity between the immediacy of deposits compared to the illiquid nature of loans puts pressure on the bank’s financial position if an adverse event requires the bank to repay its depositors. Relative to the prudent industry loan to deposit level of 90%, Cambridge Bancorp’s ratio of over 77.5%is appropriately lower, which 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.
Next Steps:
Passing two of the three checks for liquidity and leverage demonstrates a relatively sensible operational risk management by the bank. Its high liquidity and low leverage levels mean it is well-positioned to meet its financial obligations in the case of any adverse and unpredictable macro events. Keep in mind that a stock investment requires research on more than just its operational side. I’ve put together three important aspects you should further examine:
Future Outlook: What are well-informed industry analysts predicting for CATC’s future growth? Take a look at our free research report of analyst consensus for CATC’s outlook.
Valuation: What is CATC 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 CATC 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 editorial-team@simplywallst.com.
