As a small-cap bank stock with a market capitalisation of US$437.2m, Atlantic Capital Bancshares Inc’s (NASDAQ:ACBI) risk and profitability are largely determined by the underlying economic growth of the US regions in which it operates. A bank’s cash flow is directly impacted by economic growth as it is the main driver of deposit levels and demand for loans which it profits from. After the GFC, a set of reforms called Basel III was imposed in order to strengthen regulation, supervision and risk management in the banking sector. These reforms target banking regulations and intends to enhance financial institutions’ ability to absorb shocks resulting from economic stress which could expose banks like Atlantic Capital Bancshares 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 Atlantic Capital Bancshares’s financial risk position by looking at three leverage and liquidity metrics.
View our latest analysis for Atlantic Capital Bancshares
Why Does ACBI’s Leverage Matter?
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. While financial companies will always have some leverage for a sufficient capital buffer, Atlantic Capital Bancshares’s leverage ratio of less than the suitable maximum level of 20x, at 8.49x, is considered to be very cautious and prudent. With assets 8.49 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 firm up its capital cushion, it has ample headroom to increase its debt level without deteriorating its financial position.
How Should We Measure ACBI’s Liquidity?
Since loans are relatively illiquid, we should know how much of Atlantic Capital Bancshares’s total assets are comprised of these loans. Generally, they should make up less than 70% of total assets, but its current level of 71.2% means the bank has lent out 1.16% above the sensible upper limit. 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.