FIG analysis vs other industries
Hoping for some tips and ideas. When analyzing FIG financials, what are the primary differences with other industries to look for? Thanks.
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^^ It says it all
Assuming we're talking of a commercial bank, In short: - most "revenues" come from the interests part (bank's business is to make money on the IR spread) - Financial structure complicated => equity multiples - Regulatory Capital, liquidity reserve, leverage (how many times $1 of deposit is lent) - deposits' growth
For those reason, DCF is often brushed off, but it's to be put into perspective (as a FIG guy pointed out to me during an interview, a "true" investment bank has a fee-based revenue model, so DCF would make sense)
Anyone confirm?
To further clarify, the differences really apply to banks and insurance companies, where investment/interest income is a big part of income.
FIG at a lot of banks also covers businesses like exchanges and pure advisory investment banks. For these fee-based financial services firms conventional valuation techniques can be used - e.g.; you would value NYSE more like Google than you would like Wells Fargo.
Full Disclosure: I don't work ing FIG but this is based on a recent conversation with a friend at JPM FIG.
Great input guys. What are the key drivers for Sales, COGS, and SG&A? Thanks!
Generally speaking: Sales = Interest Income; Yield on Loans COGS = Interest Expense; Cost of Deposits Gross Margin = Net Interest Income
You'll then provision some income for potential loans losses based on what your projections for loss reserves is (usually based off of projected net charge offs or a % of loans)
Going down the I/S you'll have: Non-interest Income = Fee Income; usually driven by % of revenue or % of assets Non-interest expenses = Operating Expenses; standard headcount / G&A stuff. Main driver is branches / employees
Then you get to pre-tax income and you go from there
^ This question is a bit meaningless for Banks. There are no "COGS" to speak of or "Sales" in the traditional sense. You look less to the income statement to value a commercial bank and more to the Balance Sheet. It's all about tangible book value and how fast the bank can grow that (i.e., increase their loan portfolio).
You need to think about what a traditional bank does. They don't 'sell' things. They borrow short and lend long. So you need to look at things like loan growth, deposit growth, allowance for loan loss reserves, average delinquencies, etc.
In better times banks are absolutely valued on their earnings power. Banks with higher ROEs will trade at higher multiples
Just increasing loans for the sake of increasing loans isn't the main goal for banks. It's making loans that will return at the highest rates while paying deposits against those loans at the lowest possible rate. The goal of banks is to maximize net interest margin and non-interest income while minimizing operating expenses and loan losses
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