Analysing Banks where, really, credit, factors, reading

mouse123

What are the factors you look at when you analyse a bank for credit risk? Can anyone make some recommendations where to find reading materials on how S&P or Moodys analyse banks? Any help will be really appreciated.

jmh530

Good luck. I don't think anyone has a decent way to analyze bank credit risk.

BC_MBA_student

I guess you know that in general these dubious rating agencies use leverage and profitability metrics such as debt-to-equity, or ebt/revenue etc, etc. When I look at financial statements for banks (i dont work for a rating agency, nor ER, i repackage fin stats for traders) i look at the main balance sheet metrics such as Tier 1 capital ratios, ROE, ROA, provisions for bad loans and their evolution. In terms of revenue generating i'd concentrate more on the net interest income (especially now that equity and fixed income are disappointing). Of course you will analyze also the macro economic risks. For example, if a country is downgraded, its regional banks are also downgraded.
What I suggest you do is open an account at either moody's or s&p (it's free) and you can have a look at their press releases about downgrades/upgrades or change of outlook. Select a bank that they recently downgraded or affirmed the outlook or ratings and read their release. They usually provide good analysis on what they looked on.
But as Chuck pointed out no one has a decent way at analyzing a bank balance sheet or credit risk, even less so S&P, Moodys or Fitch.

Dapper425

you need to look at various factors such as Tier 1 capital, leverage ratios, RWA, ROE, ROA. Read up on Basel 2 implementation as well.

Viceroy

haha it's basel III now wake

anshultongia

whoops, my bad. In the US at least, you'd be surprised how many banks are still on Basel 2 though.

chunty

I think the implementation phase will take a bit longer. I guess most banks are on basel 2. In Europe they're complaining a lot about the change in tier 1 requirement of pure capital ie no hybrid capital such as no preferred shares, no coco bonds. The requirement now is about 10% (including the buffer capital). It's a mess.

RoastBeef

The main factors to look at are capitalization, asset quality, liquidity, and profitability.

-Capitalization will tell you how much the bank can take in losses before it becomes insolvent and the best measure for this is the core T1 ratio.

-Asset quality will give you an idea of how big future losses might be. For this, you'll want to look at the non-performing loan ratio, cost of risk, and NPL coverage ratio.

-Liquidity is important because banks rely on debt issued in capital markets in order to fund the loans they give out. They constantly need access to refinance this debt in the open market. If investors lose confidence and are no longer willing to lend to a bank, it will default on its debt way before it technically becomes insolvent.

When analyzing the credit risk of a bank, it's important to understand what they do and where they operate. For example, banks who are more geographically diversified are generally considered stronger credits. Those who focus more on retail banking instead of investment banking are stronger credits.

The rating agencies put out a full report on each company every few quarters. Read a few of those and you'll get a good idea of what they look for.



Edited 2 time(s). Last edit at Thursday, August 11, 2011 at 01:40PM by FIresearch.

Analyze_This

Great ideas, thanks guys.

tobeornottobe

The FDIC website is where you can find data that banks report and are more accurate than what they report on Wall Street. The large banks are hard to analyze but regional ones and smaller ones are easy. Check under Assets and Liabilities and find Noncurrent loans to loans and compare this with loan loss reserves. There are plenty of ways to analyze them with that data.