Because their entire business - their strengths and their opportunities - is built on risk, it's a good idea to focus on conservatively managed institutions that consistently deliver solid - but not knockout - profits. Here's a list of some major metrics to consider:
1. Strong Capital Base
2. Return on Equity and Return on Assets
3. Efficiency Ratios
4. Net Interest Margins
5. Strong Revenues
These metrics should serve as a starting point for seeking out quality bank stocks.
Overall, we think the best defense for investors who want to pick their own financial services stocks is patience and a healthy sense of skepticism.
Build a paper portfolio of core companies that look promising and learn the businesses over time. Get a feel for,
- the kind of lending they do,
- the way that risk is managed,
- the quality of management, and
- the amount of equity capital the bank holds.
Ref: The Five Rules for Successful Stock Investing by Pat Dorsey
Hallmarks of Success for Banks
Hallmarks of Success for Banks: Strong Capital Base
Hallmarks of Success for Banks: ROE and ROA
Hallmarks of Success for Banks: Efficiency Ratios
Hallmarks of Success for Banks: Net Interest Margins
Hallmarks of Success for Banks: Strong Revenues
Hallmarks of Success for Banks: Price-to-Book