Investing in banking stocks requires a nuanced approach, considering various financial ratios and external factors:
Price-to-Earnings (P/E) Ratio: Financial ratio analysis operates to compare the P/E ratio with other historical data as well as the P/E ratio of similar industry banks.
Price-to-Book (P/B) Ratio: A ratio below one, is often observed on the P/B ratio. Hence, a value of 0 may indicate that the stock is relatively cheap in terms of its book value, but such low ratios may also indicate signs of a company’s troubles.
Efficiency Ratio: A lower level of efficiency ratios is considered good, while the measurement of cost to income ratio is highly relevant when evaluating the financial performance of a bank.
Loan-to-Deposit Ratio (LDR): This is an ideal situation that shows that the management of the deposits and extension of loans are properly managed with the right balance between risks and returns.
Capital Ratios: Metrics such as Tier 1 Capital Ratio and Total Capital Ratio give an indication of how ready and able a bank is to withstand shocks.
