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Summary: Bank Investing: A Practitioner’s Field Guide by Suhail Chandy

  • The book introduces the basics of bank financial statements, the different types of banks, and the competitive landscape, regulatory environment, and industry trends that affect bank performance and strategy.
  • The book explores the various methods and tools for bank valuation, such as dividend discount model, residual income model, price-to-book ratio, price-to-earnings ratio, and peer comparison. It also provides tips and best practices for conducting due diligence, building financial models, and writing investment reports.
  • The book presents the different strategies and styles for bank investing, such as value investing, growth investing, activist investing, credit investing, and macro investing. It also shares insights and advice from successful bank investors and management teams.

Bank Investing (2021) helps you navigate the intricate maze of bank financial statements with ease. Dive deep into credit analysis, master the dance of regulations and interest rates, and get a front-row seat to the dynamic world of banking mergers and acquisitions. You’ll not only be able to decipher bank metrics with flair but harness them to guide your investment choices like a seasoned pro.

Introduction: Master bank investing, maximize returns, and become a savvy investor.

Have you ever felt lost when staring at pages of bank financial statements, not knowing what to focus on or how to make sense of the numbers? Do you wonder how some people seem to effortlessly navigate the complexities of bank investing, as if they have a secret map? You’re not alone. The world of bank investments, with its labyrinthine financial metrics and nuanced regulations, can feel like a maze that’s difficult to navigate. But what if you could become the savvy guide of your own financial journey, armed with the right tools to confidently decipher this maze?

In this summary, we’ll provide you with that map – a comprehensive guide to understanding the intricacies of bank investments. From key profitability metrics like Return on Assets and Return on Equity to deeper aspects like credit analysis, regulatory landscape, and even mergers and acquisitions, we’ve got it covered. By the time you finish, you’ll not only become adept at reading bank financial statements, but you’ll also understand how to assess risks, profitability, and growth opportunities. And it’s not just about becoming a better investor – it’s about growing as a person who’s empowered to make more informed, confident decisions about your financial future.

Summary: Bank Investing: A Practitioner's Field Guide by Suhail Chandy

Your guide to decoding bank financials

Imagine you’re in a maze. It’s a maze of numbers, ratios, and terms that could spell either success or disaster for your investment journey. You don’t have a regular map – instead, you have financial statements – specifically, bank financial statements. And you know what? This isn’t just any maze – it’s a unique one that requires a specialized set of tools and a keen eye for detail. Let’s explore how you can be the savvy guide of your own financial journey by deeply understanding bank financial statements.

Firstly, let’s get acquainted with two key terms that are like the North Star in your financial galaxy – Return on Assets, or ROA, and Return on Equity, or, you guessed it, ROE. These metrics tell you a lot about the profitability of a bank. ROA is calculated by dividing net income by average assets, meaning the average value of assets over an accounting period like a quarter or a fiscal year. This number is usually in the low single-digit range.

ROE is similar to ROA but it’s net income divided by average equity. So, you might think of ROA as the muscle of the bank, how much it’s able to leverage its assets. ROE, then, is like the efficiency of that muscle, showcasing how good the bank is at generating a return on the equity it holds. Keeping an eye on these metrics allows you to gauge the fundamental profitability of a bank. So, when you’re considering an investment, always examine a bank’s ROA and ROE.

Now, let’s zoom in on something that’s critically important but often overlooked – asset quality. Meet Sarah, a budding investor. She’s assessing two banks – both have similar profitability, but Bank A has a much higher ratio of Non-Performing Assets or NPAs compared to its total assets. This should be a red flag. Higher NPAs mean the bank is taking on more risk and could face potential credit issues. Sarah smartly picks Bank B. The advice here? Scrutinize asset quality metrics like NPAs to judge how risky a bank is.

Next, there’s something that’s as important as the air we breathe, but for banks – liquidity. Look at metrics like the Loan to Deposit Ratio, which is the amount of loans a bank has compared to its deposits. A ratio that’s too high could mean the bank is over-leveraged, while a very low ratio could indicate inefficiency. It’s like a potted plant – water it too much or too little, and it won’t grow.

Lastly, let’s talk about growth, but not just any growth – sustainable growth. Banks, like all businesses, need to grow. However, skyrocketing loan growth can sometimes be a double-edged sword. If Sarah sees that Bank C’s loans have grown dramatically in a short period, she should pause to consider if that growth is sustainable or if the bank is being reckless. The growth rate should be in sync with the bank’s peers for it to be considered healthy.

Remember – bank financial statements aren’t just spreadsheets – they’re the DNA of the institution. They reveal not just how much money a bank makes, but how it operates, the risks it takes, and how sustainable it is in the long run. By understanding the key metrics we’ve just examined, you’re not just looking at numbers – you’re reading a story – a story that can guide you through the maze of bank investing.

Beyond the balance sheet in bank investing

You’ve just navigated through the intricate maze of bank financial statements, understanding how terms like Return on Assets and Return on Equity can serve as your North Star. But a well-rounded perspective on bank investing doesn’t stop at financial metrics or asset quality. The next layer of the puzzle? Credit analysis and loan portfolio composition. These add the context, the shades of gray, to what otherwise might seem like stark black-and-white numbers.

We’ll start by looking at loan loss reserves, which are funds a bank sets aside as an allowance for bad loans – that is, loans that might default in the future. Now here’s the thing: higher loan loss reserves aren’t necessarily good. Sure, a healthy reserve sounds comforting, but what you’re really after is a reserve that’s just right. Banks, you see, operate in a fluid environment where regulations and tax laws change. Too much stashed away in loan loss reserves could mean the bank is missing profitable lending opportunities. On the flip side, too little means increased risk of default.

So how do you, as an investor, navigate this? Evaluate historical trends. If a bank suddenly changes its reserve calculations without a corresponding shift in regulations or market conditions, that’s a flag.

Now, onto credit quality. This is the lifeblood of a bank’s operation. Given that banks operate on a leveraged basis, even a slight uptick in loan defaults can hit hard. Look for credit quality indicators like the Texas Ratio and Net Charge-Offs.

The Texas Ratio is a measure that divides a bank’s non-performing assets by its loan loss reserves and its tangible common equity. In simple terms, tangible common equity is the actual, hard capital that a bank has on hand, after removing assets that can’t be easily converted into cash. This ratio helps to assess the level of credit risk a bank has – a high ratio is a red flag. As for Net Charge-Offs, this represents the value of loans that a bank doesn’t expect to recover, expressed as a percentage of its loan portfolio. Rising Net Charge-Offs are often an indicator of deteriorating credit quality. Think of the Texas Ratio and Net Charge-Offs as your canaries in the coal mine – if they start showing signs of distress, there’s likely trouble ahead.

Changes in how accounting is done can also have a big impact on how a bank’s portfolio looks. Take the Current Expected Credit Loss model, or CECL. This model was introduced to make loss allowance estimates more dynamic and responsive to economic cycles. If you see abrupt changes in a bank’s accounting approach, dig deeper. Has the bank adopted CECL? How has it impacted its loan categories? You’ll want to understand this fully, as CECL’s effects can ripple through the bank’s operations, potentially having a significant impact on consumer loans.

In the grand tapestry of bank investing, credit analysis and loan portfolio composition provide the essential shading that transforms numbers into a vivid picture. By fine-tuning your focus on loan loss reserves, credit quality, and the implications of accounting changes like CECL, you’ll be more equipped to see not just numbers, but a story – a story that guides you in making smarter investment decisions.

The ins and outs of bank regulations and interest rates

Navigating the complexities of regulations and interest rates can be daunting. And yet, understanding key aspects like the regulatory environment and the impact of interest rates can serve as your guiding light in the world of bank investing. Let’s delve deeper into factors such as capital requirements and stress tests, as well as how interest rates shape a bank’s profitability and your investment potential.

Capital requirements are like the safety net under a tightrope walker. Banks need to hold a certain level of capital to absorb potential losses and prevent a financial free fall. Regulatory bodies like the Federal Reserve and the Office of the Comptroller of the Currency – or OCC, assess banks using the CAMELS system, which evaluates Capital, Assets, Management, Earnings, Liquidity, and Market Sensitivity. A strong CAMELS rating suggests that a bank is well-managed and could be a solid investment.

What does this mean for you? Well, it’s definitely a good idea to look for public disclosures of a bank’s CAMELS ratings or at least some indicators that can give you an insight into their capital adequacy. The more transparent a bank is, the better.

Another indicator of a bank’s health is stress testing. This is more than just a buzzword – it’s a way for regulatory bodies to run “what-if” scenarios. Imagine if our investor friend Sarah wanted to test out her personal portfolio against a housing market crash. She’d swap out variables, predict outcomes, and see where she stands. Banks do the same but on a more complex scale, calculating how they’d fare under extreme conditions like drastic interest rate changes or severe economic downturns.

Here’s the kicker: banks that cross the $10 billion asset threshold have to undergo mandatory stress tests. So, if you’re eyeing a bank that’s growing rapidly, pay close attention to how it navigates this $10 billion mark. Because the rules of the game change at this point, and you don’t want to be holding a hot potato if the bank is not prepared for this regulatory milestone.

Now that we’ve covered regulations, let’s talk about interest rates. Picture them as the tide of the ocean, affecting all boats, big and small. When interest rates rise, banks generally see an increase in what they earn from loan interest, outpacing what they pay out on things like savings accounts. But when interest rates are low, the opposite happens, and that could eat into the bank’s profitability.

So here’s another piece of advice: keep an eye on Federal Reserve announcements about interest rates. It might sound boring, but these meetings can signal changes that could significantly affect your bank stocks. If you’re in it for the long haul, understanding the broader economic cycles can help you anticipate interest rate movements, giving you the upper hand.

Lastly, don’t overlook the 2018 Economic Growth Act, which changed the asset levels at which banks get extra scrutiny from the government. If a bank you’re interested in is on the cusp of these regulatory asset limits, like $50 billion or $250 billion, know that its regulatory landscape and compliance costs could shift dramatically.

At the end of the day, understanding the interplay between regulations and interest rates is not just for Wall Street insiders. These factors affect the stability and profitability of banks, and consequently, the return on your investments. By being attuned to capital requirements, stress testing, and interest rate changes, you’ll not only be a more informed investor but likely a more successful one.

Unlocking the puzzle of bank mergers

By now, you’re pretty well-versed in understanding bank financial statements, credit analysis, and how regulation and interest rates can impact a bank’s performance. But have you ever wondered how all these pieces fit into the bigger puzzle of the banking industry? That’s what we’re diving into now: understanding mergers and acquisitions and the competitive landscape in the banking world.

Picture this: there’s been a significant drop in the number of bank charters since the 1980s. What does this tell you? It’s a glaring indicator that consolidation, as in merging, is more than a buzzword – it’s a long-term trend in the banking industry. This consolidation is not random – it’s fueled by very distinct elements like economies of scale, which allow banks to reduce costs per unit as they grow. There’s also the growing burden of regulatory and compliance expenses that smaller banks find hard to shoulder.

So, what does this mean for you as an investor? Keep an eye out for banks that could be ripe for acquisition. Investing in a portfolio of these likely takeover candidates has historically outperformed benchmarks.

But wait, it’s not just about who’s buying who – it’s also about how these deals are structured. Various transaction types exist, from whole bank acquisitions to FDIC-assisted deals, each with its nuances.

Let’s unpack this. In a whole bank acquisition, one bank buys everything from another – assets, staff, and all. This can be a quick way to grow, but it’s risky if the bought bank has hidden issues. On the other hand, FDIC-assisted deals involve the Federal Deposit Insurance Corporation, a U.S. agency, which steps in to help a healthy bank take over a failing one. This is often less risky for the buying bank. Knowing these deal types can help you understand which might be more beneficial for the banks involved.

Don’t overlook the importance of post-acquisition integration either. A well-executed integration strategy can often be the distinguishing factor between the success and failure of M&A – that is, mergers and acquisitions. Cultural alignment, technological harmonization, and customer experience management all play pivotal roles in ensuring that one plus one equals more than two in the banking M&A equation.

The complexity of the banking industry’s M&A landscape isn’t just a subject of business journals – it’s a live playbook for anyone seriously considering investment in this sector. Mergers and acquisitions are driven by multiple factors such as economies of scale, compliance costs, and deal structure intricacies. By scrutinizing these areas closely, you equip yourself with the analytical tools needed to make well-informed decisions. In an industry that’s continually morphing through consolidations and regulatory shifts, staying ahead of the M&A curve isn’t an option – it’s a requirement.


Bank investing is a multifaceted endeavor that goes beyond merely glancing at financial statements. It’s about deeply understanding key metrics like Return on Assets and Return on Equity for gauging profitability, and scrutinizing asset quality and liquidity to assess risk. But it doesn’t stop there – diving into the bank’s loan portfolio reveals critical aspects like credit quality and loan loss reserves, offering a window into the bank’s risk management capabilities. Regulatory elements like capital requirements and stress tests also play a pivotal role in a bank’s stability, while external factors like interest rates directly impact profitability. Finally, the competitive landscape of the banking industry, marked by a trend of mergers and acquisitions, offers a live playbook for savvy investing. Understanding these diverse aspects can guide you through the maze of bank investing, helping you make informed and successful decisions.

About the Author

Suhail Chandy


Money, Investments, Economics


The book is a practical guide for investors who want to learn how to analyze and invest in banks. It covers the following topics:

  • The basics of bank financial statements, such as income statement, balance sheet, and cash flow statement. It also explains the key metrics and ratios that measure bank profitability, asset quality, liquidity, growth, and valuation.
  • The different types of banks, such as commercial banks, investment banks, regional banks, community banks, and fintechs. It also discusses the competitive landscape, regulatory environment, and industry trends that affect bank performance and strategy.
  • The various methods and tools for bank valuation, such as dividend discount model, residual income model, price-to-book ratio, price-to-earnings ratio, and peer comparison. It also provides tips and best practices for conducting due diligence, building financial models, and writing investment reports.
  • The different strategies and styles for bank investing, such as value investing, growth investing, activist investing, credit investing, and macro investing. It also shares insights and advice from successful bank investors and management teams.

The book is a comprehensive and useful resource for anyone who wants to understand and invest in banks. The author draws from his academic expertise and professional experience to offer a clear and accessible introduction to the fundamentals of bank investing. He also presents his own perspective on bank investing from a practitioner’s point of view, which he argues is more relevant and realistic than other alternatives.

The book is not without its limitations, however. Some readers may find the author’s style too informal or conversational, and may prefer more academic or technical language. Others may disagree with the author’s assumptions or conclusions about certain banks or investment opportunities, and may feel that he is too biased or optimistic in his approach. Still others may question the author’s claim that there is only one way of investing in banks that is most effective and ethical, and may wonder if there are other possibilities or nuances that are not considered.

Overall, the book is a valuable contribution to the literature on bank investing. It is a stimulating and challenging invitation to reflect on our own investment practices and choices, and to seek the best way to invest in banks in a way that respects their interests and values. It is also a hopeful and inspiring affirmation of the power of bank investing to create wealth and social good.

Alex Lim is a certified book reviewer and editor with over 10 years of experience in the publishing industry. He has reviewed hundreds of books for reputable magazines and websites, such as The New York Times, The Guardian, and Goodreads. Alex has a master’s degree in comparative literature from Harvard University and a PhD in literary criticism from Oxford University. He is also the author of several acclaimed books on literary theory and analysis, such as The Art of Reading and How to Write a Book Review. Alex lives in London, England with his wife and two children. You can contact him at [email protected] or follow him on Website | Twitter | Facebook

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