FIG 101

Not sure if this is something you had in mind, but might be interesting: https://www.coursera.org/course/money

http://www.investopedia.com/features/industryhandbook/banking.asp

Mainly understanding FIG business models (i.e. EBIT, EBITDA, cash flows, etc are kind of negligible) with the exception of exchanges and AM (they do generate EBITDA). Regulatory reviews such as CCAR and what it means for shareholders, provisions and reserves, profitability drivers, asset quality, etc.

FIG is cool actually. Damodaran has texts on this I think, just google it.

http://people.stern.nyu.edu/adamodar/pdfiles/papers/finfirm09.pdf

Exactly :)

FIG is diffeferent from normal industry. And yes, understanding of accounting and regulatory developmemt is crucial.

I like fig newtons if that helps

It's not for St Charles is it?

Read up on Basel III.

I'm not in IB yet but might be of some help.

Off the top of my head.

1. -

2. DDM is generally a subset of DCF.

DDM = discounted dividends. dividends are usually a cash flow. hence they are discounted cashflows...

i suppose if there's any difference, DCF is more cash-based, but DDM may attempt to capture the value from all dividend-based returns off an investment. i think you can adjust your model to capture how dividends can be transmuted into options and shares from company schemes instead of strictly cash... no idea.

3. i think T1 capital is one of the most liquid assets a traditional bank with holdings tends to have. i think there are minimum standards because of the GFC (around 11%) that a bank needs to have in case of liquidity crises. i think T1 capital are things like cash, highly liquid securities, generally high quality easily-liquid instruments etc. the big banks worldwide went on about how much of this shit they have to prepare for bad situations (theres a term for this but i don't know what it is)... the ones that survived anyway.

there's probably compliance standards on this now.

it's impractical to have extremely high T1 in most cases i think because liquidity obviously comes at a cost... so you want just enough for possible meltdown scenario

4. -

2: as you might know bank's have the probably most complicated financial statements out there.. a lot of the earnings numbers are often useless and even easier to manipulate for management than at most industrial companies..just think of the way banks generate money. Most importantly, the net interest income (NII) - it is so easy at the moment just to base your whole performance on this for comm. banks if you lend at de facto 0% from your central bank and shoot it out long-term to your customers..however, have fune once the yield curve shoots up at the short-end, it will destroy your whole profitability. Same goes with cash generated, once you increase deposit rates for your customers' money, you will encounter a high inflow, although it may come at a high cost relative to what you can do with the money..there are so many ways to make most financial ratios totally biased and useless that using actual money distributed to your shareholders makes more sense. In this sense it should capture the things above by assuming that management is unlikely to distribute more than what the profitability actually allows them to do.

3. Most important equity figure for banks. Basel III is going to change this once more and kick out a bunch of kind of diluted 'equity-like' capital (hybrids, warrants etc). In the future it is only going to consist of shareholders' equity and retained earning. The ratio is then computed by taking the risk-weighted assets (RWAs) of a bank, divided by it's tier 1 capital. RWAs are also subject to a great number of further changes and stricter definitions (i.e. you have to set aside equity for a loan depending on some internal rating etc).. so basically, while RWAs are going to increase and your tier 1 capital is going to decrease via Basel III, it is going to be a lot more difficult to keep up with the regulatory requirement (see some of the recent rights issues by banks like DB to cope with it).

4. good sources include reading a lot of news (forget the WSJ, it's crap), stick to quality papers like the FT. A lot of the important stuff is about capital ratios, but also loan ratios (non performing loans etc)..you should get a feeling for that. insurances are another vast topic, but that would be too much for the moment..

I hope I could get you some insight. Remember, FI have the most complex and difficult statements to analyse and to really understand. Learn how the structure of their statements is different to normal industrial companies, that is a good starting point. Good luck

Thank you very much GotBushels and Chipmunck! I appreciate it.

Lax monkey: It's not for St. Charles.

My 2 cents:

1. Multiples: Banking - P/E, P/TBV, P/BV (if intangibles are non-material, eg. for some emerging markets)

Insurance - P/E, P/BV, P/GWP

Asset management - it's a EBITDA based business so standard multiples apply here. Plus EV/AUM

Ratios: Banking - net interest margin, net interest spread, cost/income, cost of risk (provision expense to avg loans), ROE, ROA, NPL (non-performing loans) ratio, provisions / NPL, loans/deposits, leverage ratio (assets/equity), tier 1 ratio, total capital ratio

Insurance - loss ratio, expense ratio, combined ratio (sum of 2 previous - main indicator of operating efficiency), investment yield, reserving ratio (new technical reserves / net written premiums), ROE, ROA (that's for P&C, have no idea about life)

2. In 2 words DDM values financial company based on its capacity to pay out money to shareholders after meeting regulatory capital requirements. Reason it's used instead of DCF is because bank or insurer can't simply pay out all its free cash since it must maintain the level of capital adequate to the scale of business. Also there are issues with determining working capital, capex and debt for FIs so standard FCFF formula won't work. You can still use DCF for EBITDA based FIs like asset managers.

3. Tier 1 - main measure of bank's financial strength. It includes shareholders equity and retained earnings (core tier 1) and may also include certain types of hybrid instruments (subordinated, non-cumulative, non-redeemable). Also when calculating tier 1 capital sum of intangible assets and goodwill is subtracted.

4. Probably it's not complete list but you'll be good if you know:

• how banks/insurers/other FIs make money, which the main drivers of profitability/growth are

• the structure of financial statements, how different items flow through FS, how provisions/insurance reserves work

• capital requirements and methods of required capital calculation (may be asked to explain formulas and economic sense behind them)

• latest developments in regulatory legislation, differences between new and old standards (Basel I vs. II vs. III, Solvency I vs. Solvency II)

• valuation techniques other than DDM (like embedded value for life insurers)

5. News, web-sites of Central banks/financial regulators

Hope that helps.

Thank you very much Cabol!

http://www.stern.nyu.edu/~adamodar/pdfiles/papers/finfirm.pdf

Financial Institutions, Markets, and Money by David S. Kidwell, David W. Blackwell, David A. Whidbee and Richard L Peterson

bronte capital blog (browse it)

valuation methods:

Banks: P/BV, DDM, maybe P/E in mature markets Life Insurace: P/EV (embedded value), VNB multiple, Appraisal value modeling (usually done by actuaries but essentiall a complicated DDM that bankers do not understand), maybe P/E in mature markets P&C Insurance: P/B, DDM

I think you're forgetting Lazard FIG

FIG is good at MS and LEH as well

Lazard isn't a BB

I know ;)

UBS used too but took a hit with Sarkozy leaving. I'd still rate them in the upper tier, but I'd say GS is for sure #1. In terms of exit opps, I know some banks have financial technology fall under the FIG umbrella. That sector is pretty hot, with a good amount of M&A activity among the various exchanges. I'd have to bet that sector because of the M&A activity in this slow market, along with the fact they use EBIT/EBITDA multiples, would be a good place to generate experience for exit opps.

banks are the most interesting of the lot, insurance is the most boring by a long shot.

what's so great about FIG?

it's probably the really catchy name

From what I gathered during recruiting ...

GS is the best overall,

MS is really strong in insurance,

UBS is strong in banks & thrifts (not sure how this has changed since Sarko left),

CS is doing pretty well with specialty finance and financial technology.