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The financial sector in any economy comprises some of the largest banking institutions, insurance companies, consumer finance, financial services and mortgage finance. Adding financial stocks in the portfolio is one of the popular investment strategies amongst the investors. In this context, investors are faced with a tough decision to asses the most yielding stocks and apply their due diligence to decide if the characteristics of the stock are within their risk tolerance limits.
Analysing a companyâs historical data, stock price movements as well index performance can help in better and efficient stock selection. In the historical data, one can look at the companyâs assets under management (AUM) and contribution of management fees. Besides, the investors and market analysts often use several financial ratios such as those described below-
Net Interest Margin (NIM)
Net Interest Margin is one of the most important financial ratios. It is defined as bankâs net profit on interest-bearing assets like loans and investment securities. This financial metric is of utmost importance as the interest earned on assets is a major source of earnings for a bank, thus determining a bankâs overall earnings and financial stability. The higher the margin, the more well performing is the bank. It is calculated as the sum of interest and investment returns less the related expenses; the figure is then divided by average total of earning assets.
Return-on-assets (ROA)
ROA ratio is essentially used to analyse the per-dollar profit a company earns on its assets. It is derived as company's after-tax net income divided by its total assets. Interestingly, even a relatively low ROA of 1-2% may represent an essentially profitable stock with substantial revenues as the banking firms are largely leveraged.
Loan-To-Assets ratio
Thirdly, the loan-to-assets ratio may help investors understand a bankâs operations. A lower loan-to-assets ratio indicate a well performing bank that derives incomes from more diversified, non-interest earning avenues such as trading or asset management.
On February 15th, on the Australian Securities Exchange, the S&P/ASX 200 Financials (XFJ) index wrapped up the trading session at AUD 5771.3, up 0.15%, indicating an intra-day gain of AUD 8.5. This index comprises major companies involved in activities such as banking, asset management and custody, consumer finance, insurance, investment banking and brokerage, mortgage finance, specialised finance, corporate lending, financial investment as well as real estate including REIT.
The top four Australian financial institutions listed on the ASX with massive market capitalisations include Westpac (WBC), National Australia Bank (NAB), Australia And New Zealand Banking Group Limited (ANZ) and the Commonwealth Bank of Australia (CBA).
With the last of the trading session on February 16th, 2019, ANZ closed at AUD 26.810, up 1.017% by AUD 0.270; CBA closed at AUD 70.810, up 0.312% by AUD 0.220; WBC closed at AUD 26.240, up 0.191% by AUD 0.050; and NAB closed at AUD 24.220, down 0.041% by AUD 0.010.
Disclaimer
This website is a service of Kalkine Media Pty. Ltd. A.C.N. 629 651 672. The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine Media does not in any way endorse or recommend individuals, products or services that may be discussed on this site. Our publications are NOT a solicitation or recommendation to buy, sell or hold. We are neither licensed nor qualified to provide investment advice.
