Banks mainly manage three types of risks: credit risk, liquidity risk and interest rate risk.
Banks usually use three protective measures to isolate risks:
a. Diversified loan portfolio.
b. Conservative underwriting and account management.
c. Aggressive remittance procedures.
Investors must pay close attention to the bank's deposit and loan categories and trends.
The impact of interest rate risk on a bank's balance sheet is complex and dynamic.
a. Huge capital demand: a large amount of capital demand is one of the main deterrents to competitors.
b. Huge economic scale: scale advantage is the guarantee of profitability.
c. The industry structure of monopoly of the whole region: Monopoly status to increase industry access and reduce costs.
d. Consumer conversion costs: high conversion threshold is conducive to improving bargaining power.
Focus on moderate management, consistently distributed profits and unobtrusive banks. The factors to be considered here are:
a. Strong capital base: Concerns include equity ratio of shareholders' equity, capital adequacy ratio, core capital adequacy ratio and provision liability ratio.
b. ROE and ROA: Looking for banks with ROEs around 15-20% and ROAs around 1.2-1.4%, it is easy to note that it is easy to increase profits by not mentioning bad debt reserves or using leverage to improve profits in the short term, but It has placed excessive risks for the long-term operation of the bank.
c. Efficiency ratio: The efficiency ratio measures non-interest expense or operating expenses as a percentage of net income, which tells us how efficient the management of the bank is. Many good banks have an efficiency ratio below 55% (low is good).
d. Net interest margin: It refers to the percentage of net interest income as an average profitable asset. It is an indicator for measuring the profitability of a loan.
e. The percentage of fee income to total revenue.
f. The increase in fee income.
g. P/B ratio: The bank's balance sheet is mainly composed of assets with different liquidity, so the book value is a good representative of the bank's stock value. Assuming that assets and liabilities are fairly close to the value they report, the underlying value of the bank should be its book value. Large banks generally trade at a price of 2-3 times the book value (P/B ratio).
For a bank with shareholder equity of average assets, profit is the first layer of protection for credit risk. When the loss exceeds the profit, the reserve account on the balance sheet is the second level of protection. If the loss exceeds the reserve, the difference comes directly from the owner's equity. For the liquidation of the bank, the owner's equity is expressed as the remaining value. When the loss begins to destroy the owner's equity, the bank should close.
Look for investment opportunities with sound financial leverage and solid and reliable. Excellent banks have a good equity base, moderate and stable return on equity (15-20%) and return on assets (1.2-1.4%). In addition, comparing banks with similar P/B ratio indicators may be a good way to avoid paying too much for bank stocks.
The significance of cash flow for banks and other financial companies is very different from that of the general industry. Focus on avoiding banks with more short-term loans than long-term loans. If banks and financial companies have unusually high net interest rates, they may increase the risk of financial crises.