As a small-cap finance stock with a market capitalisation of US$817.93M, the risk and profitability of Guaranty Bancorp (NASDAQ:GBNK) are largely tied to the underlying economic growth of the region it operates in US. 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. 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 Guaranty 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. Low levels of leverage coupled with sufficient liquidity may place Guaranty Bancorp in a safe position in the face of adverse headwinds. We can measure this risk exposure by analysing three metrics for leverage and liquidity which I will take you through today. View our latest analysis for Guaranty Bancorp

Is GBNK’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, Guaranty Bancorp’s leverage ratio of 9x is very safe and substantially below the maximum limit of 20x. With assets 9 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 GBNK’s Liquidity?

Since loans are relatively illiquid, we should know how much of Guaranty Bancorp’s total assets are comprised of these loans. Generally, they should make up less than 70% of total assets, however its current level of 75.22% means the bank has lent out 5% above the sensible threshold. 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.