How to Invest in Banking Sector
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💼 Banking Framework: Key Insights
Discover the framework of the banking sector and learn how to analyze bank profitability and predict future ROIC with key metrics like net spread, operating efficiency, and provisions. This video dives deep into the dynamics of current accounts, saving accounts, and how conventional and Islamic banks differ in their profit structures.
Understand the impact of State Bank policies, including recent changes to MDR requirements and their implications for financial institutions and Islamic banks. Gain insights into non-interest income sources like debit card services and trade and evaluate the efficiency of banks in managing deposits and loans.
Whether you're an investor or finance enthusiast, this video will guide you on how to identify high-performing banks that trade at premium price-to-book ratios.
Key Topics Covered::
How current accounts boost bank profitability.
Role of cost of deposits in determining net spread.
Differences between Islamic banks and conventional banks.
Impact of State Bank policies on interest rates and earnings.
Predicting future ROIC for banks.
Gain valuable insights into the evolving financial landscape and what it means for conventional banks.
Optimize your investment strategy and make smarter decisions by understanding the core metrics driving bank performance.
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Explaining businesses to retail investors, one sector at a time.
Bro is on another level
Excellent video. being a professor of finance and teacher of cfa and CA really appreciates the way you explained for layman. awesome
Let’s assume some figures to quantify the results. Let the book value for both banks is 1 and total invested capital by both banks is also 1.
Then for Bank 1
Share price value = 0.5
Total return = 0.15 (15% ROIC)
Return against price invested in acquiring share = 0.15/0.5*100 = 30%
For Bank 2
Share price value = 2
Total return = 0.35 (35% ROIC)
Return against price invested in acquiring share = 0.35/2*100 = 17.5
This suggests Bank1 to be a better buy at least for short term
To determine which bank is better, let's analyze the given metrics:
Bank 1
- ROIC (Return on Invested Capital): 15%
- Price to Book Value (P/BV): 0.5
Bank 2
- ROIC (Return on Invested Capital): 35%
- Price to Book Value (P/BV): 2
Analysis
1. *ROIC*: Bank 2 has a significantly higher ROIC (35%) compared to Bank 1 (15%). This indicates that Bank 2 is generating more profits from its invested capital.
2. *Price to Book Value (P/BV)*: Bank 1 has a P/BV of 0.5, which means its stock price is trading at half of its book value. This could indicate that the bank is undervalued. On the other hand, Bank 2 has a P/BV of 2, which means its stock price is trading at twice its book value. This could indicate that the bank is overvalued.
Conclusion
Considering the metrics, Bank 2 appears to be a better bank in terms of profitability (higher ROIC). However, its stock price seems to be overvalued (higher P/BV). On the other hand, Bank 1's stock price seems to be undervalued (lower P/BV), but its profitability is lower (lower ROIC).
Ultimately, the decision depends on your investment goals and risk tolerance. If you prioritize profitability and are willing to pay a premium for it, Bank 2 might be the better choice. However, if you're looking for a potentially undervalued stock with a lower price tag, Bank 1 might be worth considering.
For me bank 2 is better though.
ai genrated
When comparing Bank A and Bank B, we need to consider both their Return on Investment Capital (ROIC) and Price-to-Book (P/B) ratios.
Key Considerations
1. *ROIC*: Bank B has a significantly higher ROIC (35%) compared to Bank A (15%). This suggests that Bank B is more efficient in generating profits from its invested capital.
2. *Price-to-Book (P/B) Ratio*: Bank A has a lower P/B ratio (0.5), indicating that its stock may be undervalued, while Bank B's P/B ratio (2) suggests that its stock may be overvalued.
Conclusion
Considering both metrics, Bank A might be a better trade option if you're looking for undervalued stocks with potential for growth. However, Bank B's high ROIC indicates strong profitability, which could attract investors seeking income. Ultimately, the decision depends on your investment strategy and risk tolerance.
Bank B high ROIC
Means bank B genrate high return on invested capital (cost of equity and cost of debt),
Then growth will be more and reinvest in growth for new branches etc and so market cap will high and due to bank B more ROIC bank will pay resonable dividend on returns so investor will consider bank B even price to book value is 2.
Sir thanks for the banking analysis.
Answer:
Bank B as roic is high
Bank A is a better investment 💸💸
Because of higher implied return on equity (ROE).
The implied ROE is the return on equity that the market expects the bank to achieve, given its current valuation.
We can calculate it:
Implied ROE = ROIC / Price-to-book ratio
Bank A implied ROE = 15%/ 0.5 = 30%
Bank B Implied ROE = 35% / 2.5 = 14%
Based on this analysis, Bank A appears to be a better investment than Bank B. The higher implied ROE suggests that the market expects Bank A to be more profitable than Bank B, given their current valuations.
I will try to answer in your style.
Analysis: ROIC vs. Valuation (P/B)
Bank A: Lower ROIC (15%) but significantly undervalued at 0.5 P/B. This suggests the market has low expectations for Bank A's future profitability. Lower ROIC shows it may not be using its capital as well as other banks. However, if its fundamentals remain stable or improve, it could offer a higher margin of safety for investors.
Bank B: Higher ROIC (35%) but priced at 2.0 P/B, which is twice as high. The 2.0 P/B ratio reflects market confidence in its growth potential but also limits the upside unless it sustains its exceptional performance.
Key Considerations:
Bank A: Lower downside risk due to its undervaluation, but it may have weaker growth potential.
Bank B: Superior returns due to higher ROIC, but it comes with higher expectations and greater downside risk if it underperforms.
Recommendation:
For Value-Focused Investors: Bank A might be the better option because its low P/B ratio indicates significant undervaluation. However, it is important to investigate why it is so cheap (e.g., weaker market position, management issues, or sector-specific risks).
For Growth-Focused Investors: Bank B is more attractive if you are confident in its ability to sustain high ROIC and are comfortable paying a premium for quality. But make sure it has a proven track record of delivering strong returns.
My guess:
Since you provide financial advisory services and closely monitor different sectors and market trends, my guess is that you would recommend Bank B to your clients. However, you would issue an exit call if you foresee any sharp price corrections.
If I may tweak the prize a bit, instead of the 5000, how about enrolling me in the Investing Masterclass? Knowledge is priceless, and I promise I won’t ask for a refund! 😊
@@cadmenu gpt
@@muhammadfaiq9023DILL NA TORAIN. Yes, I used a few prompts like any other data analysis tool or software used to process information and improve answers. AI integration k liay tou aap extra points dain.
Bank B - The overall return over a long period of time 20 - 25 years is usually equal to the ROIC. As the returns for Bank B is higher thats why it is trading at a premium that is P/B ratio of 2. For Bank A, its ROIC is lower and also due to lower spread, current account deposits, higher operating costs it is not able to realise its potential value and trading at a discount w.r.t P/B Ratio.
As you told in the video that if a bank's share is operating at low PBV, this is for some reason and the reason is clear in case 1. As bank A has lower ROIC in fact lower than the half of the ROIC of bank 2. We analyse the banking sector on behalf of their future ROIC and if the future ROIC of bank 2 is 35% which is much better than bank 1, in fact more than double of bank1, then it's PBV 2 is justified as we have to analyse future ROIC while making investment decision in banking sector.So my pick would be bank 2 having higher ROIC that is35% even trading on a price double of it's book value
In the case of a policy rate cut, BANK A becomes more attractive because:
It is undervalued (P/B 0.5).
Interest rate cuts could boost demand for loans and improve valuations.
Moderate upside: BANK B may still benefit from rate cuts, but its premium valuation limits its upside compared to BANK A.
First we take the book value 100 for both banks.
The price of A is 50Rs and B bank is 200Rs.
If they both invest 100Rs.
A bank is making 115 and B is Making 135 Rs Roic.
Now we only pick additional earnings as eps for both banks that is eps for bank A is 15 and bank B 35. (we are not including tax and operations cost for both bank)
And if they both give dividend there full earnings as dividend so bank A give 15 Rs and B bank give 35Rs.
Now dividend yield for bank A is 30 and bank B is 17.5 %.
So, according to my thesis bank A is good for investment.
Kindly share if I'm wrong.
Bank A might appeal to value investors who believe the stock is undervalued and are willing to take on higher risk.
Bank B appears to be a higher-quality business with better profitability, as shown by its significantly higher ROIC. However, it is more expensive based on its P/B ratio.
---
Conclusion
If you prioritize quality and strong returns, Bank B is a better choice despite its higher price. However, if you are looking for a potential bargain and are comfortable with risk, Bank A may be worth considering.
Which Bank is Better?
Bank 1 (P/B = 0.5, ROIC = 15%): Suitable if you are a value investor looking for undervalued opportunities. It has lower ROIC, but its discounted price gives room for future appreciation if the bank improves its performance.
Bank 2 (P/B = 2.0, ROIC = 35%): Suitable if you focus on growth and quality. Despite the higher price, its superior ROIC justifies the premium, as the bank efficiently generates strong returns.
If you prioritize profitability and returns on investment, Bank B might be a better choice but If you're looking for potential undervaluation and a lower entry point, Bank A might be more appealing.
Bank A is a better investment wrt the value investing and future opportunities.
Bank A is earning 15 on ever 100 rupees capital vs Bank B earning 35 on same amount representing a 20 rupees extra earning on invested capital (20% more).
While when comparing P/B ratio the bank 1 is available at half its value while bank 2 is available at 2x which shows that bank 1 is available at a much cheaper rate than bank 2.
i.e if we suppose that both banks' book value is Rs.10 then Bank A is available at Rs.5 while bank B is available at Rs.20. It shows that buyers are paying premium of more than 20% (bank 1 is available 75% cheaper than bank 2).
This makes Bank A a better value for money at a 15% ROIC and 0.5 P/B.
Moreover, the potential upside in bank 1 can be more and more factors also are needed to be considered such as which bank is still in expanding phase, the moat and brand value of the bank and their operating expenses. Considering that people are willing to pay more premium on Bank B, it can be said that bank B has a strong moot but compared with the 15% ROIC of bank A, Bank A can be considered undervalued and a stock that potentially hasn't yet been picked up by many.
Based on the provided metrics, Company B appears to be a more attractive investment opportunity. Here's why:
_Higher ROIC (Return on Invested Capital):_ Company B's ROIC of 35% indicates it generates more profits from its invested capital compared to Company A's 15% ROIC.
_Price-to-Book (P/B) Ratio:_ Company B's P/B ratio of 2 suggests its stock price is twice its book value. While this might indicate the stock is somewhat overvalued, its high ROIC could justify the premium. In contrast, Company B's P/B ratio of 0.5 implies its stock price is significantly undervalued. However, its lower ROIC raises concerns about the company's ability to generate profits.
Considering these factors, Company B seems like a better investment opportunity due to its higher ROIC, despite its relatively higher P/B ratio. However, it's essential to conduct thorough research, consider other metrics, and assess the companies' overall financial health before making an investment decision.
Bank A has a low P/B ratio (0.5), indicating it is undervalued but has a moderate ROIC (15%), suggesting average profitability. Bank B has a higher P/B ratio (2), reflecting a premium valuation, but its ROIC (35%) indicates superior efficiency and strong returns. Bank B is the better choice.
From where you find Roic???
Two banks 🏦
Bank A with ROIC 15% and trading at 0.5 PB while bank B with ROIC 35% and trading at P/B 2 , bank B is better investment, factors to be considered bank B might have more current account > savings, net spread of B will better , operating expenses for bank B ll less, management of B is better than A making bank B is a better machine.
MY CHOICE WOULD BE BANK "B"
Its higher ROIC shows greater efficiency and more return would be generated in longer term. Higher P/B also means that it enjoys better investor confidence and not extreme overvaluation thus it would offer higher profitability, stronger growth and peace of mind as compared to bank A.
Bank "B" looks attractive in terms of ROIC, but Bank A is undervalued if you are looking for a value investing. The decision depends on whether you are focused on return on invested capital potential or looking for a discounted rate based on current market price to book value.
There are 2 possiblities
1. If bank A is small cap then Bank A will be best for inveestment, because If Bank A market capitslization is low then it has lots of more oppertunities to attract costomers for their current account deposits through marketing and personal working while Bank B almost grow at same rate like past history.
2. if Bank A and Bank B has almost same market capitalization then Bank B will be best for investment. Because both have equal oppertunities. Now we choose the one which gives 20% more ROI as compare to bank A.
If we prioritize profitability and efficiency: Bank B is the better option. Its higher ROIC of 35% shows that it is much more efficient in returns on its capital compared to Bank A’s. A higher ROIC reflects a well-run, profitable company, and investors looking for growth and profitability should lead towards Bank B.
If we prioritize undervaluation and a value investment strategy: Bank A might appear attractive due to its lower P/B ratio of 0.5. This shows that the stock is undervalued relative to its book value, and if you believe the market has mispriced the bank, it could be an opportunity to buy it at a such low value. However, the low ROIC is a concern.
Bank B is the better investment overall. It offers a much higher return and, despite its higher P/B ratio.
Bank A could be appeal to value investors who believe that the market is underestimating its potential.
Assalamualaikum
Sir Bank A with P/BV of 0.5 and 15 ROIC looks apparently undervalued as compared to Bank B with P/BV of 2 and ROIC of 35 % . But Book value of Bank A shows their is some fundamental flaw in bank a due to Wich Bank A is not able to efficiently make profits from invested capital hence have lower P/BV and lower ROIC compared to Bank B. On other Hand Bank B is trading at higher P/BV of 2 compared to Bank A due to its fundamentally higher profit making ability hence having higher ROIC of 35% compared to Bank A. So I recommend Bank B is better investment.
Moreover if we compare the profitability with price for Each bank here are hypothetical calculations.
Bank A. Price=1 BV= 2 P/BV= 0.5 ROIC 15%
Ratio of ROIC/Price= 15/1= 15
Bank B Price= 2 BV=1 P/BV= 2 ROIC= 35%
Ratio of ROIC/Price= 35/2= 17.5
Even comparing the ROIC with price Bank B is better investment.
Bank A PE 0.5 ROIC 15% lets assume BV 1
After 5 year its book value on 15% would be 2.011 if he get same 0.5PE its price would be 1, CAGR of 14.87%
Bank B PE 2 ROIC 35% lets assume BV 1
After 5 year its book value on 35% would be 2.3611 if he get same 2 PE its price would be 4.722 CAGR of 18.64%
Bank B appears to be a more attractive investment than Bank A due to a combination of factors:
- Bank B's significantly higher Return on Invested Capital (ROIC) of 35% compared to Bank A's 15% demonstrates a greater ability to generate profits from the capital it employs. This suggests stronger operational efficiency and potentially greater long-term growth prospects.
- The higher Price-to-Book (P/B) ratio of Bank B (2) indicates that the market values its shares at twice its book value. This premium valuation suggests that investors have greater confidence in Bank B's future earnings potential and are willing to pay a higher price for its shares.
While a higher P/B ratio can sometimes signal overvaluation, in this case, it's supported by Bank B's superior profitability. This suggests that the market's optimism is justified by the bank's strong financial performance.
Bank B is better because its fundamentally strong, return on equity is higher thats why its trading with premium and market is giving that bank higher multiple.. for example Meezan bank and UBL
Roic and price/book are not enough. An investor must always study the whole business in order to determine best investment. So it is not a wise decision to choose bank A or Bank B based on just two ratios
the choice is definitely dependent on numerous factors Abdul Rehman bhai!
A lower P/B value is often associated with stock undervaluation and a potential to grow in the future. A higher ROIC indicates that a business has a strong competitive advantage.
My answer would be to analyze the business and working of both banks through reports, and try to understand what they are up to.
I would choose *Bank A* if I see some revolutionary measures to be taken that could improve its ROIC above 15%. Being undervalued at the moment could potentially be saying that market is not considering it worth more than the current price (unless there is some change in operations and earnings).
I would choose *Bank B* if I find a competitive advantage that is enabling it to have a 35% ROIC. If by my analysis, I find that the competitive advantage can be sustained over a long term and allow continuously earning 35% ROIC, I wouldn't mind paying a higher price for the stock.
In short, the choice depends on alot more factors and not just these two metrics. That is why finding the right stock to invest in is more than just looking at a couple of ratios!
Fabl bank analysis please Sir
Another amazing video 🙌
Waiting for investing masterclass
Bank B is better because its ROIC of 35% shows it generate significantly higher returns compare to Bank As 15% While Bank B has a higher price-to-book PB ratio of 2 compare to Bank As 0.5 the strong efficiency and profitability of Bank B makes it more attractive High ROIC typically outweighs a low PB when the return difference is substantial as it indicate better long term value creation
Salam Abdul Rehman Bhai
Bank B's ROIC is significantly higher, indicating it generates more profits from its invested capital.
A higher ROIC suggests a company is more efficient in allocating its resources.
Bank B is the best investment because it has a higher ROIC, which indicating better capital allocation and profitability.
Based on the analysis, Bank B's high ROIC makes it a more attractive investment option.
If I am the winner, I kindly request that you donate the prize to a deserving individual or organization of your choice, supporting a worthy cause.
Bank b with 35% ROIC is better due to higher profitability with tremendous operational efficiency and pb denotes higher valuation with great future prospect
Bank B is better due to its superior ROIC (35%), justifying its P/B ratio of 2 with strong profitability and growth potential. Bank A, while undervalued (P/B 0.5), has weaker returns (ROIC 15%), making it less attractive for investment in long term.
Yes invest in Bank as Interest rates declined all businesses realises it's real value at that time
Good video well done !
1. Bank A:
ROIC: 15% (moderate profitability)
P/B Ratio: 0.5 (undervalued but may signal risks or low growth)
Key Insight: Attractive for value investors if no major risks exist.
2. Bank B:
ROIC: 35% (high profitability, strong operational efficiency)
P/B Ratio: 2 (high valuation reflects growth potential but may limit future upside).
Key Insight: Attractive for growth-focused investors but priced at a premium.
Very nice👍
Masha Allah
Bank A looks like BOP and Bank B looks like MEBL. I would go for MEBL.
Bank B is the better choice
Bank A is suitable h investment k Liye kion k is PE ratio risk sy km h
Bank B.
Bank B is better choice as its BV shows it is more efficient than Bank A so ultimately if you try to buy Bank A and it grows to double of its bv, bank B needs only fraction of improvement to counter so my vote bank B
Reason
Bank A has somthing fundamentally worngs with its business model. that is why it is trading on lower P/B ratio.
Bank A Might Be A Better Choice If U Are Potentially Looking For Undervalued Investment With A Lower P/B Ratio Despite Its Lower Roic...
Bank B Could Be More Attractive If U Prioritize High Efficiency And Profitability As Indicated By Its High Roic Even Through It Has A Higher P/b Ratio....
So My Friend The Better Investment Depends On Investment Strategy And Risk Tolerance...If U Prefer Undervalued Stocks With Potential For Growth Bank A Might Be More Appealing....If U Prioritize High Returns On Capital And Comfortable With A Higher Valuation Bank B Could Be Better Choice❤
Benazir ❤
Bank b
when interest rate goes down then business model of banks hit badly and impact on their profit margin so stocks prices of bank comes down
Bank2 with higher ROIC
BOP is undervalued stock
And second bank A stable and low risk management h
Abhi banking sector me invest nhi krna chahiye
Faysal bank seems to be better investment
No doubt it would be Bank B
Bank B
banks up n up from here
Waste of time...he did not bother to suggest at least 2-3 best banking shares.
❤❤❤
اگر آپ ان دو بینکوں میں سے بہترین سرمایہ کاری کا انتخاب کرنا چاہتے ہیں، تو ہمیں کچھ اہم میٹرکس کو دیکھنا ہوگا:
1. ROIC (سرمایہ پر واپسی):
بینک A: 15%
بینک B: 35%
زیادہ ROIC ظاہر کرتا ہے کہ بینک B اپنے سرمایہ سے زیادہ منافع پیدا کر رہا ہے۔
2. قیمت سے کتاب کا تناسب (Price to Book Ratio):
بینک A: 0.5
بینک B: 2
کم Price to Book ratio عام طور پر زیادہ فائدہ مند ہوتا ہے، کیونکہ یہ ظاہر کرتا ہے کہ بینک کی قیمت اس کی کتاب کی قیمت سے کم ہے۔ بینک A کا تناسب زیادہ کم ہے، یعنی وہ کم قیمت پر دستیاب ہے۔
نتیجہ:
بینک A کا Price to Book ratio کم ہے، جو کہ یہ ظاہر کرتا ہے کہ وہ ممکنہ طور پر undervalued (کم قیمت پر) ہے۔
بینک B کا ROIC زیادہ ہے، جو کہ یہ ظاہر کرتا ہے کہ وہ زیادہ منافع بخش اور مؤثر ہے۔
اگر آپ قدرتی قیمت (undervalued اسٹاک) تلاش کر رہے ہیں تو بینک A بہتر انتخاب ہو سکتا ہے۔ لیکن اگر آپ زیادہ منافع اور مؤثریت کو ترجیح دے رہے ہیں تو بینک B بہتر انتخاب ہوگا۔
FYSAL BANK
FABL i think
👋👏👏👏
I have been investing for 2 years in psx. may I have ur contact ?
www.arnfinancials.com
Salam Abdul Rehman Bhai
Bank B's ROIC is significantly higher, indicating it generates more profits from its invested capital.
A higher ROIC suggests a company is more efficient in allocating its resources.
Bank B is the best investment because it has a higher ROIC, which indicating better capital allocation and profitability.
Based on the analysis, Bank B's high ROIC makes it a more attractive investment option.
If I am the winner, I kindly request that you donate the prize to a deserving individual or organization of your choice, supporting a worthy cause.