The industry that I choose to write about is banking. In united state you have five big banks, JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs each one of them are very successful. I heard few times that this industry have a stigma of being quiet old and “boring” therefore, a global trend of deregulation decided to open up new businesses to the banks. Add-on to that, improving technological development such as Internet banking and ATM’S, can prove that banking industry is obviously doing its best to change the “boring” side, that way people may look at this industry a bit different.
Bank stocks are among the hardest to analyze, they hold billions of dollars in assets and have several subsidiaries in different industries. The best way to describe why bank-analyzing stock is so difficult is because of the length of their financials that normally reaches over thousands of pages just to explain all the Ins and Outs of banking industry.
Two major types of banks: 1. Regional and thrift banks that considered being the smaller financial institutions, who’s primarily focus on one geographical area within a country. There are six regions in united state; southeast, northeast, central etc. that providing depository and lending services that take the primary line of business for regional banks.
2. Another type is the major mega bank that might maintain local branches. Their main scope is in financial centers like New York, where they involved with international transactions and underwriting.
Banks have become cornerstone of our economy for few reasons; they willingly to transfer risk, provide liquidity, facilitate both major and minor transactions and provide financial information for both individual and businesses.
People have no idea how difficult it is to run a bank. It’s just as difficult to analyze investments purposes. A banks management has certain criteria that they have to look before they decide how many loans to extend, who receive them and in what rates. Those criteria are; capital adequacy and the role of capital, asset and liability management, interest risk, liquidity, asset quality and profitability. The biggest difference that’s sets banking industry from others is the government’s heavy involvement in it. Moreover, setting restrictions on borrowing limits as well as the amount of deposits that a bank most hold in vault, the government has the largest influence on banks profitability.
Key ratio:
1. Interest rates: united state Federal Reserve is the one to decide the interest rates because it directly affects the credit market. Banks are afraid and they try constantly to predict the next interest rate move for them to adapt their own rates. Small bad prediction can cost millions.
2. Gap: is the difference, over time, between liabilities and assets of a financial institution. If you notice a negative gap you have to know that liabilities are higher than assets. If you notice a positive gap its when there are more assets than liabilities. Just In case and the interest rate are going up, the banks that have positive gap will profit. The opposite is accurate when interest rate are falling.
3. Capital Adequacy: bank’s capital or equity is the margin by which creditors are covered if the bank has liquidated assets. A good measure of a bank’s health is its capital/asset ratio, which, is required to be above a prescribed minimum by law.
Interest rate is a huge role in the probability of a bank. Therefore, they try to get away from dependence by generating more revenue on fee-based, the non-interest services. There are many banks where the financial statement will break up the revenue figures into those fee-based and non-fee generated revenue. Sometimes firms with higher non-interest revenue will typically earn a higher return on assets than competitors.
Porter’s 5 forces analysis
1. Threat of new entrants – it’s not that easy for an average person to start up a bank, but there