Banks are like any company whose shares you can trade. Their goal is to maximise revenues, while minimising costs to grow profits and pay dividends. The set-up is similar to non-financials, even if the terminology may differ. So when looking at financial statements on the banks, what should you be looking for in terms of numbers and metrics?

Rather than Sales or Revenues, look at Income. For a bank like Lloyds, this is mostly Net Interest Income: what the bank makes from borrowers less what it pays to savers. The key is whether the Net Interest Margin, or NIM, is growing. Think of it like the bank’s own net interest rate.

Lloyds’ full year results for 2018 highlighted a Banking Net Interest Margin +7bp (from 2.86% to 2.93%). Within that, Retail grew by 8bp (from 2.60% to 2.68%) while Commercial fell 1bp (from 3.28% to 3.27%. So we know the margin for the less profitable Retail bank improved while that of the more profitable Commercial bank fell slightly. A little extra information to help you decide whether you want to trade the shares.

Banking is very cost-heavy, so another key metric to look at is the Cost:Income ratio. What you want to see here is the ratio falling, which means that the income is rising faster than costs. Lloyds reported a ratio of 49.3%, down from 51.8%, implying improved profitability. That said, remember that when income and costs are cut, profitability may be maintained, but profits will still be lower. And as a shareholder, what’s important to you and the share price is your portion of the profits via dividends.

One other important metric, especially as we continue to recover from the financial crisis, is the Core Tier 1 Capital ratio. This is a measure of a bank’s financial strength from a regulatory standpoint. Think of it as how much cushion the bank has against risky transactions. How strong would the bank be in another financial crisis? In the case of Lloyds, it maintained a decent ratio of 13.9% in 2018.

The fallout from the financial crisis also brought to light mis-selling of products such as PPI (Payment Protection Insurance). It’s not quite water under the bridge. Hefty provisions to pay back borrowers are far less than they were, but can spoil an otherwise good set of results. Lloyds, which has borne the most charges so far, thankfully announced no new PPI provision for the the last quarter of 2018.

Curious how these margins and metrics stack up against peers like Barclays, RBS and HSBC? Just get in touch with us. We can provide you with all the numbers to help you chose your next trade. Whether it’s for an upside or downside move, CFDs allow you to trade in both directions. A handy tool for both bulls and bears.

If you trade any of the UK Banks, get access to our research Gold Pass now! That way you will benefit from twice-daily alerts made up of hand-picked trading opportunities.

Think ranges (horizontal, rising, falling), candidates for a rebound (or sell-offs), shares on a breakout (or breakdowns), those displaying signs of momentum (positive or negative) and names reporting results or paying dividends.

We cover it all.

Mike van Dulken, Head of Research, 5 March 2019