Investors should look for banks that can consistently generate mid- to high-teen ROE.
Investors should be concerned if a bank earns a level of ROE too far below this industry benchmark.
Ironically, investors should also be concerned if the ROE is too far above the industry benchmark too.
- Many fast-growing lenders have thrown off 30% or more ROEs just by provisioning too little for loan losses.
- Remember, it can be very easy to boost bank's earnings in the short term by underprovisioning or leveraging up the balance sheet, but this can be unduly risky over the long term.
Besides looking for a consistent mid- to high-teen ROE, it is good to see a high level of ROA as well.
For banks, a top ROA would be in the 1.2% to 1.4% range.
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