Understanding the Quality score

Quality for banks

What makes a strong business?

A good business needs more than a good year. The Quality score looks at how well the company uses its money, earns profit and supports its finances.

We use checks suited to lending. A bank’s money set aside to absorb losses is called its capital buffer.

4 parts. One score from 0 to 100.
The score describes the business. It does not tell you whether the shares are cheap.

Using owners’ money well 25%Growing income 15%Steady lending income 25%Absorbing loan losses 35%

Quality for banks: illustrated explanation; the same checks are explained below. — Open the full-size image in a new tab.

01 / Read the result

What does the number tell you?

0Lower score

A higher score means stronger results on these checks.

100Higher score

Each part receives points from 0 to 100. The percentages above show how much each part counts. A higher total means stronger results on these checks.

02 / Explore the business

Questions behind the score

The percentages show how much each part counts.

Using owners’ money well

How much profit does the bank earn from its owners’ money?

25%of the score

A simple example

A 10% annual return means$10 earned for every $100 used

This describes a return in the business, not the return you receive on your shares.

See how the points are calculated

▸Return on capital – 25%: We compare profit with average shareholders' equity, the owners' value in the bank's accounts. This is called ROAE. It shows how much the bank earns relative to owners' capital. On the bank scale, 5% earns 0 points and 15% earns 100 points.

Growing income

Is income growing for each share?

15%of the score

A simple example

Income per share$10 → $11=10% growth

Using an amount per share allows for changes in the number of shares.

See how the points are calculated

▸Business trend – 15%: We look at whether revenue grows per share.

Steady lending income

How steady is interest income after interest costs, compared with the assets earning that income?

25%of the score

A simple example

Interest income after costs, relative to income-earning assets2% · 2% · 2%

This is a steady lending margin across three years.

See how the points are calculated

▸Profitability stability – 25%: We examine the stability of the bank's net interest margin. This compares interest income after interest costs with the assets that earn interest. It helps us assess the consistency of the bank's interest business.

Absorbing loan losses

How much capital can absorb losses? How many loans have repayment problems?

35%of the score

A simple example

$2 of every $100 lenthas repayment problems

That is a 2% problem-loan share. A smaller share is stronger here.

See how the points are calculated

▸Capital strength – 35%: We examine the capital available to absorb losses relative to the risk in the bank's assets. This is called the Tier 1 capital ratio and counts for 55% of this part. We also examine the share of loans with repayment problems (45% of this part). This considers both the bank's buffer against losses and problems already visible in its lending.

Missing figures reduce the information supporting the score and may change how much each remaining check counts. With too little usable information, no score is shown. Read the notes beside the company’s score. A usable return measure is required.

03 / Look a little closer

How we calculate the points

Explore the calculation, the periods used and the information behind the result.

How the checks add up

Banks

For a bank, we place particular emphasis on its ability to absorb lending losses. Capital strength therefore counts for 35%. We do not use the standard cash-generation component.

The finer details

If the usual net interest margin is unavailable, Findx may use net interest income relative to all assets as an alternative. This is not exactly the same measure, and the explanation identifies the figures used. The same applies to an alternative calculation of ROAE.

What happens when figures are missing?

A poor result and a missing figure are different things. A poor result lowers its part of the score. When a figure is missing, the other parts may receive more weight. We also show that the assessment is based on less information.

We measure how much of the calculation has usable information. We use the component weights, so a missing measure with a large share matters more. At least 90% normally gives High confidence, 70% to below 90% gives Medium, and 60% to below 70% gives Limited. Confidence can be lower when some figures rely on an alternative calculation.

We do not show an overall Quality score if usable information covers less than 60% of the calculation. We also need a usable return-on-capital measure. Without it, we do not show the score. For a bank, we use the corresponding bank return measure.

A measure that is not used for that business type does not count as missing. For example, we do not assess a bank using the standard free cash flow calculation.