“The bank hath benefit of interest on all moneys which it creates out of nothing.”
- William Paterson, Co-Founder Bank of England 1694.
The below spreadsheet, which I have cobbled together to help analyze banks and thrifts alike contains 18 key metrics/ratios and can hopefully assist one with “putting it all together” in terms of getting a general overview of respective institutions.
Why use ratios? Well for one, the most common valuations utilized for banking institutions are A) Peer Group comparisons B) Takeout Value C) Liquidation Value. Not necessarily in this order, but use of the key ratios contained in the spreadsheet is an easy way to perform A) and likewise it can also give one a clearer picture of what B) & C) are approx. going to amount to in the end.
Another reason would be trend analysis, using key ratios for banks in this context is crucial as it can provide one with clues as to whether a given institution’s condition is likely to improve or deteriorate going forth.
Use of the metrics presented in the spreadsheet can also help one with CAMELS, which are also important when it comes to analyzing financial institutions, who would have guessed? Just in case anyone didn’t get it, it is an acronym for the below, not the Camels of old cigarette ad fame.
- Capital Adequacy
- Asset Quality
- Management Quality
The spreadsheet helps not so much with the middle two (Management Quality & Earnings) scuttlebutt and a deeper quantitative analysis is required for this. But definitely assists with giving one a more accurate picture of the other four respective metrics (Capital Adequacy, Asset Quality, Liquidity & Asset/Liability Sensitivity).
Before parting, I leave you with a warning and that is: Do not infer too much from any single ratio! They can help one in terms of a sound, fundamental starting point and asking the right questions, but they do not provide all the answers by any means. Accounting discretion and other factors are at work, at the end of the day nothing can replicate your own intelligent, in-depth analysis. But of course, you already knew that;)
Should you find this at all helpful, please do share with others so far as they may benefit as much as you have.