The stocks of banks and financial institutions are called bank stocks. Such financial institutions are highly regulated and are licensed to hold deposits and give loans to businesses and individuals.
Bank stocks experience similar risks and rewards as other public company stocks; however, due to their regulated nature, they are subject to additional risks on top of the general market sentiments, economic, and political factors.
Bank stocks are largely affected by additional interest rate risk, counterparty risk, and regulatory risk as banks’ assets and liabilities are quite sensitive to interest rates, government regulations, and counterparties.
|BAC||Bank of America Corporation||$37.00||-18.84%||296.8B|
|BMO||Bank Of Montreal||$96.10||-10.50%||65.1B|
|BNS||Bank Nova Scotia Halifax Pfd 3||$51.30||-19.64%||61.2B|
|CM||Canadian Imperial Bank of Commerce||$47.25||-17.22%||42.8B|
|EWBC||East West Bancorp Inc.||$68.14||-13.20%||9.6B|
|JPM||JP Morgan Chase & Co.||$136.56||-15.30%||400.6B|
|NTB||Bank of N.T. Butterfield & Son Limited (The) Voting||$35.00||-5.38%||1.8B|
|RY||Royal Bank Of Canada||$98.41||-3.24%||137.1B|
|TD||Toronto Dominion Bank (The)||$65.95||-10.11%||119.7B|
|UBS||UBS Group AG Registered||$18.26||6.47%||64.9B|
How We Chose the Best Bank Stocks
Our goal when selecting the best bank stocks was to find safer companies with established businesses and strong performance within the sector.
In selecting our list of the top bank stocks we chose global banking companies with positive returns over a 5-year period.
While the banking sector had lackluster performance between 2000 and 2015, banking stocks have generated nice returns since then. The companies listed above have generated an average return of 65% over the past 5 years. On top of that, many of the companies on our list offer dividends.
How Banks Make Money
Banks make money by lending money to people who want to borrow the money, and they charge them interest on the loan. For instance, if someone wants to borrow $2,000 from a bank for one year with a 12% annual percentage rate (APR), then that person would have to pay back $2,208. The bank’s profit is the interest they charge the borrower. This is one of a few ways the bank makes money.
In addition to charging interest on loans, banks also charge fees for other financial services they provide like real estate loans, credit cards, and debit cards. Banks also make money by buying securities on the stock market to earn interest from those investments.
Another way banks make money is by trading stocks and bonds for their customers. Banks earn extra fees from the trades they make for their customers if it is a large amount of stock or bonds being traded. Banks may offer this type of service to institutions. They may also offer smaller money management programs for their retail customers.
Banks can be privately owned, publicly traded on the stock market or completely backed by the government. The U.S Federal Deposit Insurance Corporation (FDIC) insures all bank accounts up to at least $250 thousand per person with each account covered separately.
Factors to Consider Before Investing in Bank Stocks
Bank stocks are, undoubtedly, exposed to various risks due to their regulated nature. However, the regulations also lend stability and strong future growth to bank stocks.
After considering all the possible risks and their implications, investors must perform an in-depth fundamental analysis of the financial institutions before investing in bank stocks. The factors that determine the profitability and growth of a financial institution include return on equity, return on assets, net interest margin, and efficiency ratio.
It is integral to assess and quantify the inherent risks before making any investments. The reading of non-performing loan ratios, coverage for bad loans, and net chargeoffs are fundamental parts in understanding a financial institution’s health. For example, knowing that an underlying bank has many regular customers who rely on its loans can help judge how well it may be able to weather hard times ahead; whereas if the majority of debtors defaulted in the past year this could indicate future difficulties due to their recent instability as a business entity
Which Bank Stocks Should I Buy?
Bank stocks are the right avenues of investment for steady and regular returns. Among the hundreds of bank stocks, we have aggregated a list of the top bank stocks for you to choose from. The most useful metric to decide which bank stocks to buy is the price-to-tangible book value ratio.
Bank stocks that trade between 0.5 times of book value to 2 times of book value are considered to be safe investments. On the other hand, bank stocks trading at more than two times of book value have limited reward potential and high-risk potential.