Collector AB’s (

STO:COLL

) profitability and risk are largely affected by the underlying economic growth for the region it operates in SE given it is is it legal to carry a machete in californiaa small-cap stock with a market capitalisation of kr5.1b. 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. 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 Collector 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 Collector’s financial risk position by looking at three leverage and liquidity metrics.

Check out our latest analysis for Collector

OM:COLL Historical Debt January 2nd 19

Why Does COLL’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. Collector’s leverage level of 7.82x is significantly below the appropriate ceiling of 20x. With assets 7.82 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 COLL’s Liquidity?

Handing Money Transparent

Since loans are relatively illiquid, we should know how much of Collector’s total assets are comprised of these loans. Normally, they should not exceed 70% of total assets, but its current level of 89% means the bank has obviously lent out 18.91% above the sensible upper limit. This level implies dependency on this particular asset class as a source of revenue which makes the bank more exposed to default compared to banks with less loans.

What is COLL’s Liquidity Discrepancy?

Banks operate by lending out its customers’ deposits as loans and charge a higher interest rate. Loans are generally 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. 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. Compared to the appropriate industry loan to deposit level of 90%, Collector’s ratio of over 124% is unsustainably higher, which puts the bank in a risky position due to the high liquidity disparity between loan and deposit levels. Basically, for SEK1 of deposits with the bank, it lends out over SEK1.20 which is unjustifiable.

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Next Steps:

Keep in mind that a stock investment requires research on more than just its operational side. I’ve put together three key factors you should further examine:

Future Outlook

: What are well-informed industry analysts predicting for COLL’s future growth? Take a look at our

free research report of analyst consensus

for COLL’s outlook.

Valuation

: What is COLL 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 COLL 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

[email protected]

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