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.