Analyzing Banks – Three Simple Banking Ratios To Help


Analyzing banks is difficult as they are a substantially different business from most other firms. Loans are assets while deposits are liabilities – it’s a topsy-turvy world. You are going to need all the help that you can get. Here are just 3 ratios which are specific to banks.

Provision for Loan Loss Ratio (PLL Ratio)

Analyzing Banks - Three Simple Banking Ratios To Help

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The PLL ratio is an asset quality ratio that measures a bank’s exposure to credit risk. The Provision for Loan Loss account measures charge-offs for loans which are deemed to be uncollectible by the bank. A higher PPL ratio implies poorer asset quality and a more aggressive, risk-taking behaviour which makes more risky loans. However, different banks may have different ways of determining whether a loan is uncollectible which may skew their PPL ratio in either way. Also, as with most provisions, charge-offs are entirely reversible if the loan is repaid in the future.

Temporary Investments Ratio

The Temporary Investments Ratio measures the liquidity of a bank. Temporary investments include federal funds sold, amount due from banks and any investment that has a period of less than 1 year. A high value indicates high liquidity which is a vital aspect of bank management, especially when shocks happen.

Volatility Liability Dependence Ratio

This liquidity ratio measures the extent to which a bank’s riskiest assets are funded by the most unstable liabilities. Volatile liabilities are “hot” or “unstable” funds that can disappear from a bank’s balance sheet overnight. These include brokered deposits, deposits in foreign offices, fed funds purchased and other uninsured borrowings. Therefore, a lower ratio implies a safer asset base which is less susceptible to external shocks.

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I developed my passion for investment management especially equity research at a relatively young age. My investment journey began when I was 20, at a point in time where markets were still recovering from the Global Financial Crisis. My portfolio started from money I saved over the past years and through working during the holidays. I was fortunate to have a good friend with common investing mentality to began my journey towards value investing. To date, we still research and invest in companies together, discussing valuations and potential risks of a company. To date, I manage a fund with a value investing style. Positions are decided upon via a bottom-up approach or smart speculation (a term I came up with when buying a stock for quick profit due to a mismatch in prices in the market due to takeovers/selling of a subsidiary or associate). Apart from managing my own portfolio, I enjoy sharing my research with family and friends, seeking their opinions and views towards the stock. Reading Economics in London, I constantly keep up with the financial news in Singapore & Hong Kong. Despite my busy schedule, it has not stopped me from enjoying other aspects of life. I enjoy a variety of activities in whatever free time I may have – endurance running, marathons, traveling, fine dining, whiskey appreciation, fashion. Lastly, I enjoy meeting new people, discussing ideas and gaining new perspectives towards issues in the world.