Your Complete Guide to Investing in Bank Stocks | Investment Series

What are the various sorts of bank stocks?

Generally, there are three basic sorts of banks:

Commercial banks

Commercial banks are what most people think of when they hear the term "bank," which are those earning money by taking in client deposits and lending the overwhelming majority of the cash to borrowers. Wells Fargo (NYSE:WFC) and U.S. Bancorp (NYSE:USB) are two of the major commercial banks.

Investment banks

Investment banks such as Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) typically offer financial services to firms, companies, and governments. They also offer services such as completing sophisticated financial transactions, advising services, stock trading, and asset management. Investment banks also advise firms through their first public offerings (IPOs) (IPOs).

Universal banks

These banks provide both commercial banking and investment banking services — think Bank of America (NYSE:BAC), Citigroup (NYSE:C), and JPMorgan Chase (NYSE:JPM) (NYSE:JPM). They provide the benefits of a diverse income stream and worldwide size. They also come with the dangers of both commercial and investment banking and are more complicated enterprises to comprehend.

In Malaysia, these are banks like Pubic Bank, Maybank,CIMB or RHB Bank.

Top three bank stocks by market cap in US

JPMorgan Chase

The biggest U.S. bank by assets, JPMorgan Chase was incorporated in 2000, but its oldest precursor organization, The Manhattan Company, was founded in 1799. With assets of over $4 trillion, JPMorgan concentrates its primary business on community banking, investment banking, and wealth management.

Under the leadership of CEO Jamie Dimon, JPMorgan managed to emerge from the global financial crisis in better health than its rivals. Sensing the mounting default risk, the corporation mostly kept away from the hazardous subprime and derivatives markets, a decision that garnered criticism for being overly cautious. Like its other mega-bank rivals, JPMorgan has likewise weathered the COVID-19 epidemic, emerged relatively uninjured, and is now positioned to benefit from higher interest rates.

Bank of America

Bank of America is second to JPMorgan, with more than $3.2 trillion in assets. Unlike JPMorgan, the corporation was scarred and damaged by the financial crisis following two noteworthy acquisitions that brought years of expensive litigation and cost tens of billions in damages.

CEO Brian Moynihan, who took over in 2010, produced one of the most remarkable turnarounds in banking history. As a consequence, Bank of America was well-positioned entering into the COVID-19 epidemic with a cleaned-up balance sheet and strong management. Today's BofA is perhaps the best-run of the largest banks, and the constant improvement in its return measures confirms this. Buffett is undoubtedly a huge admirer, having made Bank of America comfortably the largest bank in Berkshire's portfolio. With the capital from the greatest low-cost deposit base in banking, BofA is possibly in the best position to benefit from increasing interest rates.

Wells Fargo

Wells Fargo (NYSE:WFC) has an excellent track record of good lending outcomes throughout economic cycles. It remained impressively steady during the Great Recession, adopting a prudent approach to loan and deposit growth and avoiding hazardous ventures. Historically, Wells Fargo been one of the finest banks at navigating through crises, a significant reason Buffett long made it a highlighted asset in the Berkshire portfolio.

But the repercussions from a bogus accounts scandal that tarnished the bank's image and led to the removal of its CEO has dogged the corporation and made Buffett a seller. It also resulted to significant limitations from authorities, including a ban on expanding its assets over $1.95 trillion. As of May 2022, this asset ceiling was still in force, a severe constraint as we enter into a rising-rate environment.

How to calculate profitability ratios for a bank

Since many banks make profits via lending operations, it's crucial to know which financial indicators portray the greatest image of how successful a bank truly is.

Here are four critical profitability criteria for examining conventional bank stocks:

PROFITABILITY METRIC | HOW TO CALCULATE | IDEAL BENCHMARK

Return on equity (ROE) (ROE) = Net income ÷ Total shareholder's equity x 100 = At least 10%

Return on assets (ROA) (ROA) = Net income ÷ Total assets x 100 = At least 1%

Net interest margin (NIM) (NIM) = Net interest ÷ Total interest producing assets x 100 = At least 3%

Efficiency ratio = Noninterest expenditure ÷ Net revenue x 100 60% or lower = Empty heading

Return on equity

Return on equity (ROE) is how much profit a firm earns as a proportion of shareholders' equity, or the amount that would be given to shareholders if all assets were sold and debts settled. The greater the ROE, the more effectively a firm is putting shareholder money to work.

Return on assets

Return on assets (ROA) is the proportion of overall profit, or net income, a firm produces compared to its total assets (which include interest-earning loans, securities, cash, etc). (which include interest-earning loans, securities, cash, etc.).

Net interest margin

Net interest margin (NIM) is the proportion of interest a bank makes on loans after deducting the interest it pays on deposits and other sources of capital. NIM tends to fluctuate in concert with interest rates. As interest rates increase, so do bank interest margins because it is able to boost rates on loans higher than the return it pays on deposits. Conversely, declining rates often lead to decreased net interest margins.

As a general guideline, you shouldn't look at net interest margin as a stand-alone statistic but understand a bank's net interest revenue and costs — in particular, how effective a bank is at sustaining low-interest-yield deposit clients throughout rising-rate conditions.

Efficiency ratio

Efficiency ratio determines how much of a bank's revenues go toward paying operational expenditures. Unlike with the measures above, where a greater number is desirable, a lower efficiency ratio is what you want to see. This should lead to improved returns and profitability as reduced expenditures imply more money left to lend or otherwise invest.

How to analyze a bank's risk

Banks are heavily leveraged enterprises, lending out 90% or more of the deposits they collect from clients. As a consequence, a bank's ability to perform as an investment is significantly related to its ability to avoid loan losses, especially during economic downturns.

Here are two major bank risk metrics:

Nonperforming loan ratio

Nonperforming loans (NPL) are loans that are at least 90 days past due and nearing default. The lesser the proportion of problematic loans, the better. A NPL ratio exceeding 2% might be reason for worry.

Net charge-offs

A charge-off is a statement by the bank that money given out is unlikely to be recovered. Generally such a statement is issued concerning an overdue obligation that has gone more than six months without payment. The net charge-off rate, which is net charge-offs divided by total loans, reflects the proportion of total loans unlikely to be paid back. This measure is particularly crucial to examine for banks with substantial unsecured debt, such as credit card debt, especially during economic downturns.

Valuing a bank stock

Price-to-earnings (P/E) ratio is a handy indicator for assessing how pricey a company is compared to its earnings. But, for bank stocks, the price-to-tangible book value (P/TBV) ratio is also highly beneficial. P/TBV indicates how much a bank is trading at compared to assets such as property, cash, and the loans in its portfolio. This is in contrast to the price-to-book (P/B) ratio, which also includes intangible assets like as patents, brand names, and goodwill. The P/TBV measure takes out intangible assets and concentrates on the actual assets that fuel a bank's profits and underlie its value.

A variety of variables might impact the earnings and book-value multiple investors are prepared to pay for a bank. A decent rule of thumb is to concentrate on the best-quality banks and buy in them when shares sell for a significant discount to their historical values. It's also vital to compare banks to comparable peers as variations in banking services, operational strategies, and profitability indicators might result in one bank regularly selling for a greater — or cheaper — value than dissimilar peers.

Key trend to watch: The emergence of fintech

Banks aren't recognised as beacons of innovation. Their lengthy procedures, exorbitant costs, and often dubious lending practises have produced an industry ripe for upheaval. Fintech (the phrase is short for financial technology) might achieve exactly that. Fintech comprises a vast number of applications, many of which banks have already begun embracing such as chip-enabled card systems and mobile banking apps. But the real pressure comes from newer, more imaginative methods to how customers bank: Peer-to-peer (P2P) loans and payments, robo-advisors, and brokers providing inexpensive stock transactions.

Whether fintech will fully alter the banking business paradigm is up for dispute. What we do know is that fintech businesses are driving banks to either pick up their game or risk becoming outdated.

Dividends

Bank stocks may be great dividend investments, with the caveat that they're quite leveraged and strongly related to the ups and downs of the economy. As a consequence, banks may continue for years, paying and growing a regular dividend, only to have the distribution wiped away when there's an economic downturn or financial crisis. That's especially true for the bigger banks, which face more stricter regulation. Wells Fargo, for instance, was obliged to slash its dividend more than 80% in 2020 owing to worries about its financial position.

Owning a handful of the major banks as part of a dividend portfolio is likely to be a solid approach as long as your holdings are diversified.

Is today a good time to purchase bank stocks?

Despite the pandemic's repercussions on the global economy, the enormous government stimulus and a rising economy resulted in the banking sector escaping unhurt. Combine the present strength of most bank balance sheets with a rising interest rate environment, and most banks — notably commercial and universal banks with extensive commercial activities — are poised to deliver extremely solid profit performance in the years ahead.

Recently, banks trade at some of the lowest P/E multiples we have seen in years, which is a consequence of inflation, increasing housing costs, persistent supply chain issues, and fears of recession. If such elements contribute to an economic downturn, bank stocks will almost likely decrease in the near run.

But, looking at the longer term, today's valuations appear like great price points given how good the long-term trends are for bank equities. If those prices are still this cheap when you read this, then now is undoubtedly a terrific opportunity to purchase bank stocks.

Financial Services Stocks To Invest in Malaysia

We have compiled most of the top financial services stocks in Malaysia as below.

You can trade and invest it in through KLSE.

Some are bank, insurance companies, stock exchange and credit companies.

Some of the stocks even offers quite a high dividend yield of more than 5%.

With the inflation that is so high nowadays, investors can consider to diversify into some banking stocks as well.

You will also realize that some are big cap companies too.

These blue chip companies can offer stability to investors.

Name	Code	Share Price	PE	Dividend Yield (%)	MCap.(M)
JOHAN	3441	0.05	0.3	0	58
BURSA	1818	6.25	18.57	6.56	5058
TAKAFUL	6139	3.35	7.28	3.58	2805
AEONCR	5139	13.92	9.73	3.48	3554
RCECAP	9296	1.64	9.34	4.62	1214
LPI	8621	13.04	17.51	5.67	5195
P&O	6009	1.07	7.24	5.61	308
PBBANK	1295	4.47	15.61	3.4	86766
ALLIANZ	1163	13.4	5.1	1.19	2385
ABMB	2488	3.65	8.84	5.07	5651
HLBANK	5819	20.7	13.64	2.42	44872
HLFG	1082	18.82	8.81	2.13	21596
INSAS	3379	0.8	2.58	3.12	555
RHBBANK	1066	5.68	9.56	7.04	23925
MAYBANK	1155	8.86	13.87	6.55	106054
AMBANK	1015	4.1	8.85	1.22	13588
KENANGA	6483	0.89	7.37	11.8	655
ELKDESA	5228	1.37	10.82	3.83	415
HLCAP	5274	6.26	21.33	4.15	1546
BIMB	5258	2.6	13.86	4.2	5604
AFFIN	5185	2.08	7.31	6.01	4602
CIMB	1023	5.37	16.25	4.28	56247
MANULFE	1058	1.97	10.3	3.55	426
APEX	5088	1.02	15.96	12.75	218
MNRB	6459	0.95	13.63	2.63	744
MBSB	1171	0.605	25.17	4.96	4339
MPHBCAP	5237	1.38	60.72	3.62	987
ALLIANZ-PA	1163PA	13.14		0	0
ECM	2143	0.185	-29.92	0	89
TUNEPRO	5230	0.305	-6.27	0	229
KUCHAI	2186	1.38	-1.72	0.95	171
MAA	1198	0.43	-0.83	0	113

Happy Investing! 😉