What are the specificities of the banking sector in the stock market?
First of all, it is essential to understand that banks are not like other companies. As they have multiple sources of income, it is important to understand what their particularities are.
- Firstly, banks are often able to generate significant income and most banking organisations therefore pay their shareholders a dividend. These stocks are therefore to be analysed as yield stocks and not as growth stocks.
- Banks are also so-called mature companies, which means that the volatility of their stocks is often lower than for newer sectors such as technology. They are therefore often favoured by investors who are not looking for big profits.
- Finally, banks generally show little variation in their profit and loss accounts from one year to the next, with a more or less regular net profit.
- However, the attractiveness of banking stocks to investors can be influenced by more global data such as monetary policies and economic growth.
The banking sector may seem complicated to non-financial investors, but in reality it has a fairly easy to understand business model.
It should be remembered here that banks earn their money by charging interest on loans or fees for their financial services. By studying certain ratios that you will find on all stock market sites about these listed companies, you will be able to carry out an initial fundamental analysis of these securities.
The main European banking shares :
The European stock market has several large banking group stocks that you can buy and add to your stock portfolio or trade online with derivatives.
- HSBC share : This British bank, present in more than 84 countries, has a capitalization of more than 148 billion euros.
- Santander share : With a capitalization of 88.22 billion euros, this Spanish bank is also one of the largest European banks.
- Allianz share : The German financial institution Allianz has a market capitalisation of 77.11 billion euros and is primarily an insurance group.
- BNP Paribas share : The capitalisation of this French bank is currently 72.80 billion euros. It is the leading European bank in terms of profitability.
- UBS share : With a market capitalisation of EUR 55.44 billion, UBS is a Swiss bank and the world's leading wealth manager.
- ING share : ING Bank has a market capitalisation of 55.03 billion euros. It is a bancassurance group of Dutch origin.
- BBVA share : This Spanish banking group has a capitalization of more than 45.56 billion euros. It is currently one of the largest financial institutions in the world.
- Société Générale share : The French bank has a capitalisation of 35.75 billion euros. It is one of the oldest French banks, having been created in 1868.
- Crédit Agricole share : The stock market capitalisation of this French banking group is 34.14 billion euros. Crédit Agricole is now the largest network of cooperative and mutual banks in the world.
- Deutsche Bank share : This German bank is also one of the largest in Europe with a market capitalisation of over 30.95 billion euros. Germany's largest bank, it is the eighth largest bank in the world in terms of market capitalisation.
- Credit Suisse share : The Swiss bank has a market capitalisation of EUR 28.04 billion. Credit Suisse shares are listed on both the Swiss and New York stock exchanges.
- Natixis share : Finally, the French-based bank Natixis has a capitalisation of 17.37 billion euros. This banking group is actually a subsidiary of BPCE.
You can find more information about these banking stocks on our dedicated pages.
How to do a fundamental analysis of banking stocks?
Let's now discover in a little more detail how to carry out a fundamental analysis for a share in the banking sector. To do this, we will follow the following indicators in particular:
- The price/earnings ratio is often used by analysts to see how a share price is positioned in relation to earnings per share. Here we will compare this ratio to that of other publicly traded banking companies.
- The profitability of each bank will also need to be studied closely to see how its share may develop. Since most banks in the market offer the same products and services, it is worth looking at the profitability of each bank to find the most interesting one. Here, the return on equity will be used as a priority. The net interest margin, which is the difference between the average rate paid by banks to remunerate its customers' deposits and the rate applied to loans, gives a good indication of the profitability of a bank.
- Key interest rates in the Eurozone, issued by the ECB or other geographical areas will also have a direct impact on banks' activities. Indeed, high rates will reduce the demand for credit but may increase savings. The evolution of these rates will therefore favour certain segments and penalise others.
- The strength of the bank and its balance sheet are also important considerations here. Since the last financial crisis, every investor has to make sure that the bank he invests in is able to cope with the global economic downturn. Banks must now accumulate more funds and are regularly tested by central banks. To do this, the capital adequacy ratio of each bank is examined.
- The dividend paid is also an indicator to follow, as the higher and more regular the dividend, the more likely the share will be bought by investors with a long term strategy. Share buyback programmes may also be of interest to investors as they help to improve the strength of the balance sheet. But the focus here is on the yield of each dividend, not on the amount alone.
- Finally, it will also be necessary to take into account events that may influence each individual bank, such as partnerships, company takeovers and other influential news.
Of course, this fundamental analysis is not the only analysis you need to perform to study these bank stocks. You should also focus your attention on a relevant technical analysis with the help of the main chart indicators.