The document discusses 10 important banking metrics for evaluating bank performance and value. It defines each metric and provides details on what numbers are considered good. Return on equity measures profitability and banks generally want to see over 10%. Return on assets also measures profitability but doesn't reflect leverage like return on equity. Net interest margin shows how much a bank earns from its invested assets. The efficiency ratio measures operating expenses to see if a bank is a low-cost operator.

1. Return on
Assets
Return on
Equity
Efficiency
Ratio
Net Interest
Margin
NPL
Ratio
Book Value
per Share
Loans to
Deposits
Ratio
NCO
Ratio
Tier 1
Common
Capital
Price to
Book Value
Ratio
The 10 Most Important
BANKING METRICS
(Click on the arrow below to view slideshow)

2. Return on Equity: This is the most important metric in all of bank
investing. It measures profitability by dividing a bank’s net income
by its shareholders’ equity; the higher the number, the greater the
return. Normally, you want to see a figure in excess of 10%, which
is generally assumed to mark the threshold between long-term
value creation and destruction.
Slideshow by John J. Maxfield, The Motley Fool

3. Return on Assets: This number is similar to return on equity
but it doesn’t reflect the impact of a bank’s leverage. Because
banks are typically leveraged by a factor of 10 to 1, in order to
generate a 10% return on equity, a bank must earn the
equivalent of at least 1% on its assets. This has long been one
of the bank industry’s most commonly cited benchmarks.
Slideshow by John J. Maxfield, The Motley Fool

4. Net Interest Margin: A bank is a leveraged fund that borrows
money at low short-term rates and then invests the funds
into higher interest-earning assets. By doing so, a bank earns
“net interest income.” If you divide this by a bank’s earning
assets, you get its net interest margin, which shows how much
the business yields on its invested assets.
Slideshow by John J. Maxfield, The Motley Fool

5. Efficiency Ratio: Warren Buffett has intimated in the past that
there are two ways a bank can generate outsized returns, one
of which is to be a “very low-cost operator.” A bank’s success
at managing expenses is gauged by the efficiency ratio, which
divides a bank’s operating expenses by its net revenue -- lower
is better. Ideally, you’re looking for ratios under 60%.
Slideshow by John J. Maxfield, The Motley Fool

6. Nonperforming Loans Ratio: Because banks are so leveraged,
it’s critical that they only invest in assets with little risk of default.
Analysts use the NPL ratio to measure how lenders perform in
this regard. It’s calculated by dividing a bank’s nonperforming
loans by total loans. A good rule of thumb is that the NPL ratio
should be less than 1% through all stages of the credit cycle.
Slideshow by John J. Maxfield, The Motley Fool

7. Net Charge-Off Ratio: A close cousin of the NPL ratio, the
NCO ratio measures what happens after loans actually default,
triggering a bank’s obligation to charge the loans off against its
capital. Because this metric factors in the recovery of collateral,
a bank’s NCO ratio should be smaller than its NPL ratio. If not,
the bank probably isn’t focusing enough on collections.
Slideshow by John J. Maxfield, The Motley Fool

8. Loan-to-Deposit Ratio: This metric expresses a bank’s loans
as a percent of deposits. In doing so, its purpose is to measure
liquidity. Banks with a high ratio have less core funding to
cover withdrawals or other exigencies that arise. Banks with too
low of a ratio aren’t maximizing the spread between their cost of
funds and interest on earning assets.
Slideshow by John J. Maxfield, The Motley Fool

9. Tier 1 Common Capital Ratio: Regulators assess a bank’s
strength first by looking at the size and composition of its
capital base. The most important metric in this regard is the tier
1 common capital ratio, which compares a bank’s core equity
capital (common stock less most types of preferred stock) to its
risk-weighted assets. The regulatory minimum is 4.5%.
Slideshow by John J. Maxfield, The Motley Fool

10. Book Value per Share: When you purchase shares of a bank,
you’re staking a claim to a portion of its shareholders’ equity,
or book value. The size of that claim is a function of (1) the
number of shares you buy, and (2) the amount of book value
each share entitles you to. As the next slide explains, this metric
plays a leading role in the valuation of bank stocks.
Slideshow by John J. Maxfield, The Motley Fool

11. Price-to-Book-Value Ratio: To determine how much you should
pay for a bank’s shares, you look to the price-to-book-value ratio.
Depending on where we’re at in the credit cycle, a typical bank’s
shares will trade for between 0.5 to 2.5 times book value, with 1
times book value serving generally as the minimum threshold for
banks that earn at least 10% on their equity.
Slideshow by John J. Maxfield, The Motley Fool

12. Return on
Assets
Return on
Equity
Efficiency
Ratio
Net Interest
Margin
NPL
Ratio
Book Value
per Share
Loans to
Deposits
Ratio
NCO
Ratio
Tier 1
Common
Capital
Price to
Book Value
Ratio
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