Because banks borrow, buy and sell money, we cannot use conventional
methods to figure revenues. The
annual revenues must be deciphered from several figures on the S&P and Value
Line reports, and quarterly revenues must come from the 10K and 10Q reports.
You cannot obtain quarterly revenues from S&P or VL.
There are four values that determine bank revenues:
Net Interest Income. This
is the difference between the money the bank makes on loans, and the interest it
pays on fed loans and depositor accounts.
Non-Interest Income. This
is the money they make from non-lending activities, like trust services, bank
fees, safety deposit boxes, and credit card fees, etc.
Loan Loss Provision. Banks
are required to set aside a certain amount of money to cover bad debt.
It’s usually a percentage of their loan portfolio.
This must be deducted from the revenues.
Tax Equivalent Adjustment. Some
of the bank’s interest income is tax-exempt.
This adjustment turns their tax-exempt dollars into pre-tax dollars so we
can compare apples-to-apples. This
is for advanced study, so we do not have to take this into consideration.
e) Therefore, the annual and quarterly revenue for the SSG will be Net Interest Income + Non-Interest Income - Loan Loss Provision.
(Information for those who want it: S&P
uses Gross Interest Income in their reports, which doesn’t account for changes
in interest rates. This skews the
earnings, so we shouldn’t use it. Value
Line uses Loans in their reports, which doesn’t account for the other income
sources, so we shouldn’t use it, either. VL’s Loan figures do already
include the Loss Loan Provision, so they are “net”.)
be running parallel with Earnings. If not, the bank’s fundamentals are deteriorating. And, if Book
Value is growing at a rate less than EPS, then EPS growth will eventually be limited.
the average 5-year rate of growth for each, then he picks the lowest growth rate of these, and uses
it as his forecast for future earnings. So, if 5-year growth history has been:
Book Value 13.2%
A value of 1% or more is good, and it should be trending up.
Net Profit (Net income) div. by Total Assets = ROA. (Make this 2C)
or the types of loans held in their portfolio. Mortgage loans are the safest, commercial loans
and consumer loans and next safest, and construction loans are the riskiest.
What does matter is its ability to earn income on those borrowed dollars. We measure this with
(2C) Return on Assets.
a sure sign of potential problems. It could indicate a slowing economy or an aggressive lending strategy.
Capital Ratio: Banks
grow by increasing deposits from new or existing customers.
This increases their asset base. Banks
are required by law to grow their Equity and Loan Loss Provision Reserves by an
equal amount in order to maintain a “primary capital” ratio of 5.5% to 6%.
Therefore, Share Equity + Loan Loss Provision div. by Total Assets =
Capital Ratio. These can be
found on the Value Line. And we
should avoid banks that are skirting the edge of permissible limits of primary
capital. It’s nice to have
a cushion in the case of unexpected events.
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