The Banking Industry

If there is one industry that has the stigma of being old and boring, it would have to be banking; however, a global trend of deregulation has opened up many new businesses to the banks. Coupling that with technological developments like internet banking and ATMs, the banking industry is obviously trying its hardest to shed its lackluster image.

There is no question that bank stocks are among the hardest to analyze. Many banks hold billions of dollars in assets and have several subsidiaries in different industries. A perfect example of what makes analyzing a bank stock so difficult is the length of their financials - they are typically well over 100 pages. While it would take an entire textbook to explain all the ins and outs of the banking industry, here we'll shed some light on the more important areas to look at when analyzing a bank as an investment. (For background reading, see Analyzing A Bank's Financial Statements.)

There are two major types of banks in North America:

* Regional (and Thrift) Banks - These are the smaller financial institutions, which primarily focus on one geographical area within a country. In the U.S., there are six regions: Southeast, Northeast, Central, etc. Providing depository and lending services is the primary line of business for regional banks.

* Major (Mega) Banks - While these banks might maintain local branches, their main scope is in financial centers like New York, where they get involved with international transactions and underwriting.

Could you imagine a world without banks? At first, this might sound like a great thought! But banks (and financial institutions) have become cornerstones of our economy for several reasons. They transfer risk, provide liquidity, facilitate both major and minor transactions and provide financial information for both individuals and businesses.

Running a bank is just as difficult as analyzing it for investment purposes. A bank's management must look at the following criteria before it decides how many loans to extend, to whom the loans can be given, what rates to set, and so on:

* Capital Adequacy and the Role of Capital

* Asset and Liability Management - There is a happy medium between banks overextending themselves (lending too much) and lending enough to make a profit.

* Interest Rate Risk - This indicates how changes in interest rates affect profitability.

* Liquidity - This is formulated as the proportion of outstanding loans to total assets.