Banks checklist

Savings / commercial Banks

Leveraged organisations that primarily earn via providing financial services, and earn via loans bid offer spread. They may provide cash management services, trade finance, investment management which leads to complexity in analysing its performance. As loans (assets) increase, increase in upfront fees which is added to equity. This increase ability to make more loans (Central Bank required reserve ratio)

What to look out for
1) strong deposit base (charateristics of population as savers )

2) Increased demand of loans (Improved business prospects) ,  and the bank making Loans back by collateral. Ability of borrowers to repay loans. Purpose and feasibility of project when making loans.

3) Buy when i/r increase and you are sure that it will lead to improvement in interest margin. Be careful of potential increase in borrowing cost (savings a/c i/r) .

4) Low overheads and low cost operator. Leading to higher profit margin. No increase in misc cost / distribution cost / advertising expense. 1 bank 1 branch, internet banking and ATM to reduce distribution and servicing cost.

5) High equity to asset ratio. Analyse book value and decide whether assets are worth the accounting figure

Strong book value. Low proportion of Asset that are illiquid (real estate, cdo, derivatives, unlisted securities).
High proportion or marketable and Liquid securities such as cash or i/r generating cash equivalents

Low proportion of high risk commercial loans (2008 subprime, DBS O&G NPL, real estate and property loans) High proportion of quality loans.

High loan loss reserve. Risk management tool and expectation of loss. If reality is not that dire, cash will be redirected back to earnings and give it a boost.

Low NPL. Low P/E and low P/BV. High cash flow. Share buyback. Strong operating history of surviving through recessions (stress test). Not issuing shares / rights to dilute EPS, unless raising capital to expand business within circle of competence

High ROE and ROA as measure of efficiency

6) Strong dividend history

7) Strong cash flow and balance sheet. Can achieve organic growth. Can hasten growth via buy out competitors cheaply to increase deposit base.

8) As bank are immensely hard to analyse from a retail perspective, call up the bank or post questions at agm to have a clearer picture of what is going on, about the progress and trends.

9) Management holding of shares and insider buying. Is management interests aligned with shareholders?

10) Dodgy banking techniques
Borrower wants to borrow 1 mil
Bank lends 1.2 MIL 0.2 MIL held at bank.
It default, bank use 0.2 MIL to buffer and extend Duration of loan. This gives the bank the potential of extending a loan that will most likely go sour. Dangerous if this practise constitutes a large proportion of loans.

Custodian banks

https://www.gurufocus.com/news/572460/what-does-warren-buffett-see-in-bank-of-new-york-mellon-

https://www.cnbc.com/2014/09/25/why-buffett-is-always-betting-big-on-bank-stocks.html

bank of new york
Holds assets and provide back end accounting services. Provides competitive cost for its services, great client servicing, and focus on increasing asset under management to benefit from economics of scale.

Moat - sticky client and services. Generally difficult for client to change custodians.

Fees driven instead of commission driven giving it predictable cash flow.

Not too negatively affected by interest rates due to fees based revenue. Not too affected by loan write-off (unlike commercial banks)

Net interest margin (profit margin)
Asset under Management
ROIC,  EPS, share buyback,  low P/BV, low PE,  low PEG

Fees based or commission based to determine whether earnings cyclical are follow a predictable trend

Buying preferred shares with good payout, with convertible warrants to protect Down side, if you are sure the company won't fail but unsure of its future prospects

Banks as a cyclical business and not a dollar average business. But when it is undervalued and you are sure it will recover. Hold until it is overvalued or utilising unsustainable banking practices or deteriorating fundamentals