Top 100 bank stocks to watch
Your ultimate guide to bank stocks. We give you the ins and outs of the industry, explain how to invest and trade in bank shares, and outline the 100 largest banks in the world.
Understanding bank stocks: what you need to know
Banks sit at the heart of the global economy are responsible for keeping the money flowing and the economy ticking along. They provide a safe place for consumers and businesses to store their money and dish out credit to those that need it. They do it mostly by taking deposits and using them to provide loans, such as a mortgage or financing package for a car. In the US, for example, a bank is only required to have 10% of a client’s deposit readily available and can lend the other 90% out.
By bringing together those that have money and those that need it, banks have become responsible for providing the liquidity required to keep everything going. This means a business can borrow money to expand without savings, or somebody can purchase a house even if they don’t have the full sum required.
Banks have been undergoing a slow but steady recovery over the last decade after the financial crisis, when it became clear that banks had too strong an appetite for risk and not enough capital to buffer the books. Much of the last ten years has been spent bolstering balance sheets, paying for pricey litigations, and reorganising themselves into leaner, more efficient businesses. But banks are in much better shape now than they were before 2008, litigation costs have peaked, and many are through the worst of any restructuring. In fact, 2018 was the most profitable year for the global banking industry since the financial crash.
Yet new challenges have emerged. Many of the oldest and largest banks have struggled to update their IT systems and launch digital banking services at the time when leaner start-ups are entering the space to tap digitally-savvy customers. The smaller entrants are nowhere near the size of most banks, but they have built new digital businesses from the ground up using modern day technology. Meanwhile, traditional banks have stubbornly tried to upgrade legacy systems or failed to compete with the technological creativity of new competition. This has also heightened the need for ever-tighter cyber security as hacking and cyber theft becomes a bigger problem. A study by Ernst & Young last year suggests 62% of global banks expect to be 'digitally mature' by 2020, compared to just 19% in 2018.
Why do people invest in banks?
The banking industry is home to some of the largest and well-known names in business. They are regarded as safe, long-term investments that, more often than not, pay dividends to provide reliable income to shareholders. However, this view has been weakened since the last financial crash. The economy is cyclical, and banks perform well when it is on the up and suffer when it is in decline. Fortunately, the good times last considerably longer than the bad, but the banks pay a heavy price during an economic downturn or financial crisis.
Banks can be among the first stocks to move as new economic data is released or when a new political drama begins to unfold. If people get worried about the future because unemployment has gone up, productivity has gone down, or because a radical new government is coming to power, then this will usually be reflected in the share prices of banks. Similarly, if the economy is picking up and there is certainty in the political sphere, then bank stocks can increase. This has given them the label of safe bets in the long term, providing opportunities for both investors and traders, despite significant short-term reactions. Value investors, for example, buy stocks when everyone is selling and sell shares when everyone else is buying, and banks are ideal for them.
Types of banks
The scope of a bank’s services and responsibilities are broad and diverse, and most banks are complex organisations with many different tentacles. Below is a list of some of the key types of services that are offered by banks around the world.
Retail banking is also known as consumer banking. This is the day-to-day banking that you are most familiar with, whereby people use current accounts, overdrafts, credit cards, savings accounts, mortgages, loans and so on. Retail banks cater to the mass market, and therefore tend to offer a broad range of services to entice customers and retain them. This has traditionally involved operating local branches and cash machines, but is increasingly becoming an online operation.
Commercial banking is also known as business banking. This involves providing the services and facilities needed for people to run their businesses day-to-day, such as an account to accept sales and purchase goods, loans, savings accounts and business loans. The primary driver of a commercial bank is earning interest on the various loans and financing it provides to its clients. Many banks combine their retail and business banking operations under one division.
Corporate banking is similar to commercial banking, but the main difference is the type of customer they serve. While commercial banking is more about supplying basic services to smaller businesses, corporate banking tends to deal with larger clients that have greater needs. The amount of money involved in corporate banking far exceeds that of business banking, and includes providing large loans, lines of credit and financing, and helping businesses manage their assets and investments. Corporate banking can also include, or be referred to as institutional banking, which can involve providing similar services and advice to the likes of governments.
Wholesale banking is when a bank provides services to other banks or financial services firms. Many banks offer services to clients that are provided by somebody else. This could be foreign exchange services, loans, asset financing and merchant banking. It also covers the large amounts of interbank lending. An easy example would be a large retailer offering credit to customers so they can buy now and pay later. More often than not, the retailer itself won’t be able to provide this service, so they must source the service from a bank that can.
Investment banking is all about creating capital for clients, which tend to be high net worth individuals, corporations and governments. Investment banks underwrite debt and equity when it is issued and help firms complete complex deals, such as mergers, acquisitions or restructurings. They deal with the large and complex transactions that happen in global financial markets.
Wealth management is regarded as a sub-section of investment banking, but is designed for affluent individuals rather than big business. It involves helping individual clients manage and grow their assets and investments, and advising them on how to manage everything from their real estate to their pension. It is all about providing expertise to people and helping them formulate strategies to protect or grow their wealth.
Asset management is when a bank manages assets on the behalf of an individual, business or institution. Asset managers, often part of the investment banking division, are in charge of not only protecting a client’s investments but help optimise and grow them. This can see banks responsible for a swathe of different asset classes – such as real estate, cash, equities, commodities, pensions and funds.
Markets, often given different names depending on which bank you’re talking about, refers to the services some banks provide to keep the global financial system going. This can include trading and execution platforms, brokerage services, settlements, and risk and compliance advice. This tends to be on a global scale, helping connect different financial markets around the world.
How do interest rates impact bank stocks?
Interest rates play a vital role in the banking industry. Central banks set interest rates, which in turn dictates the interest a bank pays and charges. All else being equal, higher interest rates are good for banks like a higher gold price is good for a gold miner. The higher the rate, the better yield a bank gets on the money it holds on behalf of customers in its vaults, and the more profit it can make on each loan it makes.
However, it is something of a balancing act: demand for new loans will fall if interest rates are too high, but the profitability will go up. Demand for loans will shoot up when interest rates are low but the margin won’t be as good.
How to analyse and compare bank stocks
Understanding banks can seem daunting at first considering the complexity and size of their activities, but the business model is relatively simple to understand. Banks make most of their money by either charging interest on loans or fees for providing financial services. It often involves taking cash deposited by customers and savers, and using it to lend out to the markets to help drive growth. Fortunately, once you have figured out how to analyse one bank stock you should be able to analyse all bank stocks and make easy comparisons, helping you make better-informed decisions.
Below are some key metrics used to evaluate the health or performance of a bank. The name of the metric will change depending on what bank and what geography you’re concentrating on, but the majority of them will use the same metrics one way or another. Some of the metrics are specifically designed for the banking and financial services industries and should be used as a part of a wider fundamental analysis.
Understanding how much a bank is worth is key to discover whether it is currently under-or over-valued. You can use the price-to-earnings (PE) ratio, which shows how a share price compares to earnings per share (EPS). The PE ratio is most effective when comparing it to the PE ratio of another bank to understand how the markets value different businesses. For example, if Bank A had a PE ratio of 20x and Bank B had a ratio of 30x, then that would show Bank A is deemed better value than Bank B.
Another popular valuation metric used for banks is the price-to-book value, which compares the stock’s share price to the book value of the business defined as assets minus liabilities. For example, a bank with $100 billion worth of assets and $25 billion of liabilities would have a book value of $75 billion. Again, this is best used to compare different banks against one another. Some prefer to use the price-to-tangible book value, which focuses on hard assets. The tangible book value is the book value minus intangible assets, which could include everything from intellectual property to patents.
Earnings and profitability
With so many banks offering the same services, there is an obvious benefit to knowing which ones are the most profitable and efficient. The first metric to consider is return on equity (ROE), which measures how efficient a bank is at growing earnings. ROE, calculated by dividing net income by shareholders’ equity, shows what return the bank earns on its net assets and how well a business uses its resources to make money.
Another common metric is the net interest margin (NIM). NIM is the difference between the amount of interest a bank pays to its customers for keeping cash in the bank, and the amount of interest the bank earns from its interest-bearing assets, like the loans it has given to customers.
Over recent years, when banks have been trying to hone their focus, slim down their businesses and improve profitability, attention has been paid to a bank’s cost to income ratio, also known as jaws. The jaws ratio shows which is growing faster: costs or income. A positive jaws ratio shows income growth is outpacing that of costs, while a negative jaws ratio shows costs are growing faster than income.
Balance sheet strength
The strength of a bank’s balance sheet is integral and the focus on the health of a bank has increased significantly since the last financial crisis, when the industry was too weak to handle the global economic downturn. Banks are required to hoard more cash than ever, and are tested regularly by central banks to ensure they are up to scratch. Central banks use a slew of ratios to evaluate the strength of a bank’s balance sheet, including the Tier 1 common capital ratio, Tier 1 risk-based capital ratio, total risk-based capital ratio and Tier 1 leverage ratio. For UK banks, the main ratio used is the Common Equity Tier 1 (CET1). This should be at least 4.5% of risk-weighted assets, while the Tier 1 capital ratio should be at least 6%. The higher the ratios the better, as it shows the bank’s ability to weather the most severe of downturns.
Dividends are key to the investment case of most major banks. Some make payouts every quarter while others pay semi-annual dividends. It is not uncommon for large banks to pay special dividends after a particularly good year. Many of them also buy back their own shares from investors on a regular basis, partly because this can help improve the strength of their balance sheet.
Calculating the dividend yield is the best way to compare the value of payouts made by different banks. This is the same as for any other stock, dividing a bank’s dividend per share by its share price. The higher the yield the better, but remember this will not take any special dividends or share buybacks into account.
How to trade bank stocks
- Decide whether you want to invest in shares or trade them. If you invest, then you buy the shares outright and are entitled to any dividends that are paid. You are not entitled to dividends if you trade shares and you don’t own them outright, but you can use leverage.
- Open an IG share dealing account if you want to invest, or use IG’s spread betting or CFD services to speculate on share prices. You can also practice your trading strategy by opening an IG demo account first, which allows you to try out your investment or trading strategy completely risk-free.
- Research and compare different bank stocks to find which ones you want to buy or trade
- Make your first investment or place your first trade
Top 100 banks in the world
Below is a list of the world’s 100 largest banks ranked by total assets as of the end of 2018. The data has been taken from S&P Global. To see the full details, including the methodology used, you can view the original report here.
|Company||HQ||Total assets ($Bn)|
|1||Industrial & Commercial Bank of China||China||4,027|
|2||China Construction Bank||China||3,376|
|3||Agricultural Bank of China||China||3,287|
|4||Bank of China||China||3,092|
|5||Mitsubishi UFJ Financial Group||Japan||2,812|
|8||Bank of America||US||2,354|
|12||Japan Post Bank||Japan||1,911|
|14||Sumitomo Mitsui Financial Group||Japan||1,848|
|15||Mizuho Financial Group||Japan||1,837|
|21||Bank of Communications||China||1,385|
|22||Postal Savings Bank of China||China||1,383|
|23||Royal Bank of Canada||Canada||1,039|
|24||Lloyds Banking Group||UK||1,016|
|27||China Merchants Bank||China||980|
|28||Credit Mutuel Group||France||976|
|34||Shanghai Pudong Development Bank||China||914|
|36||Royal Bank of Scotland||UK||884|
|37||China CITIC Bank||China||882|
|38||China Minsheng Banking||China||871|
|42||Banco Bilbao Vizcaya Argentaria||Spain||774|
|43||Commonwealth Bank of Australia||Australia||691|
|45||Australia & New Zealand Banking Group||Australia||681|
|49||China Everbright Bank||China||633|
|50||Bank of Montreal||Canada||613|
|52||National Australia Bank||Australia||583|
|54||State Bank of India||India||538|
|57||Sumitomo Mitsui Trust||Japan||520|
|59||Canadian Imperial Bank of Commerce||Canada||467|
|64||KB Financial Group||South Korea||430|
|65||Shinhan Financial Group||South Korea||412|
|66||PAO Sberbank of Russia||Russia||412|
|70||PNC Financial Services Group||US||382|
|72||NongHyup Financial Group||South Korea||374|
|73||Capital One Financial Corp||US||372|
|74||Bank of Beijing||China||368|
|75||Bank of New York Mellon||US||362|
|76||Banco de Brasil||Brazil||360|
|77||Hana Financial Group||South Korea||345|
|81||Caixa Economica Federal||Brazil||326|
|83||China Guangfa Bank||China||318|
|84||Nationwide Building Society||UK||306|
|85||Woori Financial Group||South Korea||305|
|87||Skandinaviska Enskilda Banken||Sweden||288|
|88||Bank of Shanghai||China||285|
|89||United Overseas Bank||Singapore||284|
|90||Bank of Jiangsu||China||282|
|91||Le Banque Postale||France||280|
|93||Erste Group Bank||Austria||271|
|94||Industrial Bank of Korea||South Korea||260|
|95||Banco de Sabadell||Spain||254|
|99||China Zheshang Bank||China||239|
|100||BFA Sociedad Tendora de Acciones||Spain||237|
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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