Money in the Bank: How to Find Opportunities in a Fallen Sector
by John Deysher
In the past year or so, bank stock prices have fallen sharply, reflecting a negative shift in sector prospects.
Since summer 2007, the Value Line Bank Index is down 25% and the Thrift Index is down 30%. Some banks have reduced or eliminated their dividends, a sure sign of stress. The causes include:
In this article
- How to Case a Bank
- Quantitative Factors
- Capital Ratios
- Non-Qualitative Factors
- Banking on Bank Stocks
- Casing a Bank: Key Ratios and Other Factors
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Declining loan quality. Non-performing assets and loan charge-offs are rising across most loan categories—real estate/home equity loans, credit cards, highly leveraged transactions and others. At year-end 2007, about 1.4% of all loans were delinquent, according to the FDIC. That’s the highest level since 1992, but still below the 2% level reached in 1990–91.
Net interest income is down. Banks are tightening credit standards and lending terms and making fewer loans. Consumer and business confidence is the lowest in years, resulting in lower loan demand.
Fee income is also down. Fewer loans means less fees, and a reduced securitization market inhibits banks’ ability to flip new loans to the secondary market for a gain.
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Discussion
What a great writeup for the average guy, especially now that financials are beginning to bloom a little.
posted about 1 year ago by Jim from Texas
Being ex-military I enjoy seeing "OREO" for foreclosed property. With all these articles I am getting better. I can tell if a firm is overly leveraged or if net income is poorly matched to earnings. I wish there was a simple dictionary that listed all the ratios and what value they should be. It does seem that every author has their favorite accounting term or ratio that I have never heard of before. I know it is not that simple and every industry, every company, has their own way of looking at often the same thing. I will remember "OREO".
posted 12 months ago by Steven from Iowa
At the risk of Monday morning quarter-backiing here circa April 2012; John Deysher's post here is severely flawed in that it fails to do this same kind of analysis on all the people borrowing from the bank. Always be aware of portfolio managers touting their own benchmark's investments becasue they make money from fees and will sternly justify their fees by beating a benchmark, even if that benchamrk falls 50%
and they only lost their investors 46%. They don't care, they beat their 'benchmark'. Beating their benchamrk is all most portfolio managers care about, I say that because I heard a portfolio manager say exactly that on a trading floor where I used to work at a major mutual fund firm in 1996.
posted 11 months ago by C from Rhode Island
