Quality for banks

See how well this business uses money, earns profits and supports its finances.

The score in pictures

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

What we check

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

Using owners’ money well (25%)

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

Growing income (15%)

Is income growing for each share?

Steady lending income (25%)

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

Absorbing loan losses (35%)

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

How to read the 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.

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.

A strong business can still have an expensive share price. The score does not predict what the share price will do.

How we calculate the points

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.

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

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.