Diversity Investment Group Analyzing Bank Stocks

Analyzing Bank Stocks

By Candis King

In order to help make bank stocks a little bit easier to analyze, here is a form you might want to use when filling out a Stock Selection Guide. You will need the Annual Report or Value Line or S&P sheets to get the data.

Since you will be using 10 years of data on the Stock Selection Guide (SSG), you will need to repeat this procedure for each year. I suggest photocopying the form several times, dating it and and filling in the data as needed. This is a very simplified method. There can be additional considerations, but this is just meant to be a starting point.

The first piece of information that you will need will be "Net Interest Income". This is the difference between what it costs the bank to "buy" or "borrow" the money it lends out to its clients and what it recieves from those clients.

The second piece of information you will need is "Net Non-Interest Income". "Non-Interest Income" is the income that banks receive for their services, such as safe-deposit boxes, trust services, overdrawn check charges, and other services. "Net Non-Interest Income" is the difference between the gross income from these services and the cost to provide those services. Banks are trying to increase the percentage of income they derive from non-interest sources because these sources are perceived to tend to be a bit more stable than interest based income.

The third piece of information you will need is "Loan Loss Provision". This is an amount of money the bank sets aside just in case someone defaults on a loan. Sort of like an "Allowance for damaged/returned goods" entry in a manufacturing entity. There is going to be someone who defaults on a loan, but the banks try to manage that very carefully. "Loan Loss Provision" reduces earnings.

For example:

Add "Net Interest Income"        98.7 (an example)
to "Net Non-Interest Income" +   65.4 (an example)
                                 --------------
Resulting in:                   164.3
from which you will subtract  
"Loan Loss Provision"        -   32.1 (an example)
                                 ---------------
which is the
"Annual Sales" figure           132.2
which you will use on the Stock Selection Guide.

So, here is your very own blank form:

Year (or Quarter) being studied (____________)

Add "Net Interest Income"        ____________+

And "Net Non-Interest Income"    ____________+

which equals:                    ____________=
from this subtract
"Loan Loss Provision"            ____________-

Results in yearly sales figure   ____________

Here's a ratio that you might find worthwhile in looking at banks.

The efficiency ratio is non-interest expense divided by net interest income before provision for loan losses. If this ratio increases, then the company is losing a larger percentage of its income to expenses.

If the number is getting higher, it is bad for the bank. If it is getting lower, it is good for the bank and its shareholders.

I hope this help your analysis. If you have suggestions on how to improve this, please feel free to contact me at

candis@enteract.com.

Good Luck and Great Investing!

If you have questions or comments, write to: DIGnet@mindspring.com.

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