How do I value financial institutions/banks? ER

Don’t move this to the careers section. Title.

I just had a phone interview with an analyst. He said it’s great that I passed the exams but I don’t have enough capital markets experience. But he’s still deciding who to bring in for an interview (7-8 people) and told me to follow up in a week or two.

If I get through and asked to pitch a stock, I want to be ready. I might as well go in and pitch a stock from the same sector because I have nothing to lose, right? Or should I pitch another industry? He specifically said he doesn’t use DCF so would it be worthless to pitch some retail/manufacture company?


rawraw taught me everything i know

Sell side firms value banks on a multiple of earnings and book. If you need help with a bank stock pitch, PM me. Pitching a company in his industry is a high beta play, but if you learn enough about financials you’ll probably stand out. One of the hard parts in hiring financial associates is they have to start from nothing on how to read the financials

If I was you, I’d pitch a bank outside of his territory if you choose to go that route. Bank analysts tend to be regional given the sector, so if he covers southwest banks pitch him an Alaska bank

What do you mean by this? It’s going to take longer because banks are valued differently?

Do I have to prepare a model? Start with the balance sheet, maintain core capital, then determine how much dividends a bank has to pay out while covering risk-weighted assets?

This is in Canada. I know he covers some asset/wealth management firms too.

Ah Canada you guys only have like 3 banks. Banks are a harder industry to learn than covering restaurants or something similar. The learning curve is steeper

Yes you’ll typically model a balance sheet and income statement. No cash flow statement

Balance sheet is important. Think of how banks make money. They take in deposits at a lower rate then try to lend it out for a higher rate and pick up the difference. Deduct the operational costs and you have net income!

You’d want to have a bank that is well Capitalized. Imagine a bank with 1000 assets and 100 liabilities with an owners equity of 900. Vs a bank with 10000 assets and 10100 liabilities with an owners equity of 900. Now which is a lot riskier? Both are worth the same but Obviously the one with a ton of liabilities relative to the equity is far riskier. A small underperformance on assets will result in negative book value right away. While a company with more owners equity have less risk in terms of going negative.

so price to book is one thing. But you still gotta be careful on like liabilities to book to see how levered the fucker is.

how do they make money? Is it through investments or is it through fees from banking. Fees from banking has far less risk and is generally preferable.

also check how the bank is invested. Are they invested in good assets? Is it business debt, consumer debt, mortgage debt, construction loans, subsidiaries, do they do trading?

How much of their liabilities are cds which cost them money vs demand deposits which are interest free. How much do they keep as bad loss reserves. What percentage of their assets do they constantly write down.

Overall banks are great when times are good. But when times are bad, you really gotta look at their balance sheet, cuz for the most part, these dudes are really profitable until they blow up. Then you are looking at magnified losses at the expense of their customers but who are typically bailed out by the federal government! This is typically why if you look at P/E ratios, they are relatively cheap. They trade at like 10x or less in this environment, cuz they are super levered!

pitch Deutsche. target $0 but prove why. then provide a target price for RY assuming Deutsche goes to $0. that’ll get you the job.

^ Do EU banks get bailouts? I know you’re being facetious with the $0 target but what’s the link between Deutsche and RY?

here is a comparison:

so this is db

70b in equity vs 1.5t in assets. so roughly 4%. if assets fall by 4%, this co is worthless. trades at about 20b.

in terms of comprehensive net income. its losing 4b per year.

negative pe ratio.

here is wfc for comparison

200b in equity vs 2t in assets. so roughly 10%. trades close to bookvalue.

its earns 20b per year. so about 10x pe.

now lets look at JPM.

250b in equity, vs 2.6t in assets. roughly 10%. trades at around 350b. 1.5x

it earns around 30b per year.

so around 12x pe.

so if you want to kno what is causing db to do so shittiliy. look at their income statement to see if its business operations. then look at comprehensive inc to see if its their shit investments. but they have been losing that amount for the last 3 years. unsure for this year. also at 4%, not sure on exact calculation on basel 3 but i think the requirement is 8%.

Might turn into an epic failure. Deutsche and Commerzbank are in merger talks.

Based on customer service.

with a p/b of 0.33 db is cheap. commerz can pick up 50b in equity from this assuming assets mark to market is correct.

if operations are the issue, then fire the db people and things will fix itself.

but if the issue is the 1.5 trillion in assets they have are underperforming and cannot recover the same amount if sold today, then its going to be a real shit show for them, and other people holding similar crap!

as charlie munger once said:

“The liabilities are always 100 percent good. It’s the assets you have to worry about.”

also my favorite scene in margin call, when they start talking about a firesale. hahaha. be first, be smart, or cheat!

DB’s assets are crap. enough of them at least to do enough damage to wipe out equity. i’m negative on any company that cannot raise enough capital in public markets to help fill any future funding holes. DB would need to dilute current shareholders 10x to do any such hole filling (haha).

the main issue is that italians are not going to be in favour of a DB bailout unless italy gets a full out, no strings attached bailout and much looser budget rules. neither will happen and both will implode. not sure on timing but it is inevitable.

if DB goes down, every bank in the world, particularly banks with european exposure (e.g. RY) will be facing liquidity issues.

europe could end up being much worse than the us in 2008 due to a lack of political unity. at least in the us, both parties came together fairly quickly to solve the problem. with italy run by euroskeptics, this unity does not exist and will create big problems when a credit event occurs.