What is Return on Equity (ROE)?

Return on Equity (ROE) measures how effectively a bank generates profits from shareholder equity. It is calculated as Net Income divided by Average Shareholders' Equity. For US banks, an ROE above 10% is generally considered good, while below 6% may indicate challenges.

What is the Efficiency Ratio in banking?

The Efficiency Ratio measures a bank's operating expenses as a percentage of its total revenue. A lower ratio indicates better cost management. For banks, an efficiency ratio below 55% is considered excellent, while above 70% may suggest operational challenges.

What is the Graham Number?

The Graham Number is a value investing formula developed by Benjamin Graham that estimates the maximum fair price for a stock. It is calculated as the square root of (22.5 × Earnings Per Share × Book Value Per Share). When a bank's stock price is below its Graham Number, it may be undervalued.

What is a 10-K filing?

A 10-K filing is an annual report required by the SEC that provides a comprehensive summary of a company's financial performance. It includes audited financial statements, management discussion and analysis, and risk factors. Banks file 10-K reports annually, and BankSift uses this data to calculate financial metrics.

What does TTM mean in financial metrics?

TTM stands for Trailing Twelve Months. It is a financial measurement that sums the last four quarters of data to provide an up-to-date annual figure. TTM smooths out seasonal variations and provides more current data than the last fiscal year. BankSift calculates all income statement metrics on a TTM basis.

What is Price to Book (P/B) ratio for banks?

The Price to Book (P/B) ratio compares a bank's stock price to its book value per share. It is the primary valuation metric for banks because bank assets are mostly financial instruments carried near fair value. A P/B below 1.0 may indicate undervaluation if fundamentals are solid, while above 2.0x is typically considered expensive.

Financial Terms Glossary

Over 100 definitions of financial terms, metrics, and concepts used in bank analysis. Click on any term with a link to learn more.

Profitability & Efficiency

Return on Equity (ROE): Measures how effectively a bank generates profits from shareholder investments.
Return on Average Assets (ROAA): Measures how efficiently a bank uses its total assets to generate earnings.
Net Interest Margin (NIM): Measures the spread between interest earned and interest paid relative to earning assets.
Efficiency Ratio: Measures operating efficiency by comparing expenses to revenue.
Deposits to Assets Ratio: Shows what portion of bank assets are funded by customer deposits.
Loans to Deposits Ratio: Compares lending activity to deposit funding.
Return on Tangible Common Equity (ROTCE): Net income divided by average tangible common equity. A stricter profitability measure than ROE because it excludes goodwill and intangible assets.
Pre-Provision Net Revenue (PPNR): Total revenue minus non-interest expense, before subtracting the provision for credit losses. Isolates core earnings power from credit cycle volatility.
Operating Leverage: The rate at which revenue growth exceeds expense growth. Positive operating leverage means improving profitability over time.

Capital & Regulatory

Equity to Assets Ratio: Measures capital strength by comparing equity to total assets.
Loans to Assets Ratio: Shows what portion of assets are deployed in loans.
Basel Accords: International banking regulations (Basel I, II, and III) setting minimum capital requirements, leverage limits, and liquidity standards for banks worldwide.
Basel III / Basel III Endgame: The current global regulatory framework for bank capital, leverage, and liquidity. Basel III Endgame standardizes how banks calculate risk-weighted assets.
Common Equity Tier 1 (CET1) Ratio: Core equity capital divided by risk-weighted assets. The highest-quality form of regulatory capital and the most closely watched capital ratio.
Tier 1 Capital Ratio: CET1 plus additional Tier 1 instruments divided by risk-weighted assets. Measures core financial strength from a regulatory perspective.
Tier 2 Capital: Supplementary capital including subordinated debt and loan loss reserves that absorbs losses after Tier 1 capital is exhausted.
Total Capital Ratio: Total regulatory capital (Tier 1 plus Tier 2) divided by risk-weighted assets. US minimum is 8% for well-capitalized banks.
Risk-Weighted Assets (RWA): Total bank assets adjusted by risk weights assigned to each asset class. The denominator of all risk-based capital ratios.
Leverage Ratio (Regulatory): Tier 1 capital divided by average total consolidated assets, without risk weighting. A non-risk-based backstop to capital ratios.
Supplementary Leverage Ratio (SLR): An enhanced leverage ratio for the largest US banks that includes off-balance-sheet exposures in the denominator.
Capital Adequacy: The overall sufficiency of a bank's capital to absorb losses and support ongoing operations.
Capital Conservation Buffer: An additional 2.5% of CET1 capital above the regulatory minimum that banks must maintain to avoid restrictions on distributions.
Stress Testing (CCAR / DFAST): Regulatory exercises evaluating whether banks have sufficient capital to withstand severe economic downturns.
Tangible Common Equity Ratio: Tangible common equity divided by tangible assets. A conservative capital measure excluding goodwill, intangibles, and preferred equity.

Credit Quality & Risk

Provision for Credit Losses: An income statement expense representing management's estimate of expected loan losses. Provisions directly reduce reported earnings.
Non-Performing Loans (NPL): Loans 90 or more days past due or on non-accrual status. The NPL ratio is a primary measure of asset quality.
Non-Performing Assets (NPA): Non-performing loans plus other real estate owned and repossessed assets. Provides a broader view of problem assets.
Net Charge-Off Ratio: Loans written off minus recoveries, as a percentage of average loans. Measures actual credit loss experience.
Allowance for Credit Losses (ACL): A balance sheet reserve representing expected lifetime losses in the loan portfolio.
Reserve Coverage Ratio: Allowance for credit losses divided by non-performing loans. Above 100% means reserves exceed identified problem loans.
Texas Ratio: Non-performing assets divided by tangible common equity plus the allowance. Above 100% suggests insufficient reserves and capital.
OREO (Other Real Estate Owned): Real property acquired through foreclosure, carried at fair value on the balance sheet.
CECL (Current Expected Credit Losses): The accounting standard requiring banks to reserve for expected lifetime credit losses at loan origination.
Credit Cycle: The recurring pattern of expansion and contraction in lending standards, credit availability, and loan losses.
Credit Risk: The risk that borrowers will fail to make required payments. The single largest source of potential loss for banks.
Interest Rate Risk: The risk that interest rate changes will negatively affect a bank's earnings or economic value.
Liquidity Risk: The risk that a bank cannot meet short-term financial obligations without incurring unacceptable losses.
Concentration Risk: Risk from excessive exposure to a single borrower, industry, geography, or asset class.

Valuation

Book Value Per Share (BVPS): The net asset value attributable to each common share.
Price to Earnings (P/E) Ratio: Compares stock price to per-share earnings.
Price to Book (P/B) Ratio: Compares stock price to book value per share.
Graham Number: A value investing formula for estimating the maximum fair price based on earnings and book value.
Margin of Safety: The discount between intrinsic value and purchase price that provides a buffer against errors.
Price to Book Valuation: Valuing banks based on the ratio of market price to accounting book value.
Price to Earnings Valuation: Valuing banks based on the ratio of market price to per-share earnings.
ROE-P/B Valuation Framework: A framework linking justified price-to-book multiple to return on equity.
Dividend Discount Model: Values a bank based on the present value of expected future dividends.
Peer Comparison Analysis: Valuing a bank by comparing its metrics and multiples to similar banks.
Tangible Book Value: Total shareholders' equity minus intangible assets and goodwill.
Intrinsic Value: The calculated true value of a company based on fundamental analysis, regardless of market price.
Market Capitalization: Total market value of outstanding shares, calculated as share price multiplied by shares outstanding.
Shares Outstanding: The total number of shares currently held by all shareholders.
Price to Tangible Book Value (P/TBV): Stock price divided by tangible book value per share. A stricter valuation metric than P/B.

Income Statement

Earnings Per Share (EPS): Net profit attributable to each common share.
Dividend Payout Ratio: Percentage of earnings paid out as dividends.
Net Interest Income: Interest earned on assets minus interest paid on liabilities. Typically the largest revenue source for traditional banks.
Non-Interest Income: Revenue from sources other than interest, including service charges, fees, and trading gains.
Non-Interest Expense: Operating expenses excluding interest expense, including salaries, occupancy, and technology costs.
Fee Income: Revenue from service charges, wealth management fees, card interchange, and other non-lending activities.
Net Interest Spread: The difference between average yield on interest-bearing assets and average rate on interest-bearing liabilities.
Mortgage Banking Income: Revenue from originating, selling, and servicing mortgage loans.
Interest Expense: The cost a bank pays for borrowed funds, including interest on deposits and other borrowings.

Funding & Deposits

Core Deposits: Stable, low-cost deposits from local customers including checking, savings, and small time deposits.
Non-Interest-Bearing Deposits: Deposit accounts that pay no interest, representing free funding for the bank.
Time Deposits / Certificates of Deposit: Deposits held for a fixed term at a specified interest rate.
Brokered Deposits: Deposits placed by third-party brokers, typically more expensive and less stable than core deposits.
Wholesale Funding: Non-deposit funding sources such as FHLB advances, federal funds purchased, and subordinated debt.
Cost of Funds: The blended interest rate a bank pays on all funding sources. Lower cost of funds supports wider net interest margin.
Deposit Franchise: The value of a bank's deposit-gathering network and customer relationships.
Federal Home Loan Bank (FHLB): A government-sponsored enterprise providing wholesale funding to member banks through secured advances.
Liquidity Coverage Ratio (LCR): A Basel III requirement that banks hold enough liquid assets to cover 30-day net cash outflows in a stress scenario.
Net Stable Funding Ratio (NSFR): A Basel III requirement that stable funding sources match the maturity profile of a bank's assets.

Banking Industry

Community Bank: A locally focused bank typically with less than $10 billion in total assets.
Regional Bank: A mid-sized bank operating across multiple states, typically $10–250 billion in assets.
Money Center Bank: The largest banks with diversified business lines, typically exceeding $250 billion in assets.
G-SIB (Global Systemically Important Bank): A bank designated as systemically important to the global financial system, subject to additional capital surcharges and supervision.
Bank Holding Company (BHC): A corporation that owns or controls one or more banks, regulated by the Federal Reserve.
De Novo Bank: A newly chartered bank, typically in its first three to seven years of operation with suppressed profitability metrics.
Thrift / Savings Institution: A financial institution historically focused on residential mortgage lending and savings deposits.
FDIC (Federal Deposit Insurance Corporation): The US agency that insures deposits up to $250,000 per depositor and regulates state-chartered non-Fed-member banks.
OCC (Office of the Comptroller of the Currency): The federal agency that charters, regulates, and supervises national banks and federal savings associations.
Federal Reserve: The US central bank that sets monetary policy, supervises bank holding companies, and serves as lender of last resort.
CAMELS Rating: A supervisory rating system evaluating Capital, Asset quality, Management, Earnings, Liquidity, and Sensitivity to market risk.
Dodd-Frank Act: The 2010 financial reform law establishing enhanced regulatory requirements for large banks including stress testing and the Volcker Rule.
Volcker Rule: A Dodd-Frank provision prohibiting banks from proprietary trading and limiting hedge fund and private equity investments.
Living Will / Resolution Plan: A document describing a large bank's strategy for orderly resolution in the event of financial distress.

Investment Analysis

Value Investing: An investment strategy buying securities that appear underpriced based on fundamental analysis.
Cost of Equity: The return equity investors require to compensate for risk. A bank earning ROE above cost of equity creates shareholder value.
Dividend Yield: Annual dividends per share divided by stock price, measuring the income return on a stock investment.
DuPont Decomposition: An analytical framework breaking ROE into its component drivers. For banks: ROE = ROAA × Equity Multiplier.
Equity Multiplier: Total assets divided by equity. Measures financial leverage; the inverse of the equity-to-assets ratio.
Sustainable Growth Rate: The maximum rate a bank can grow equity without raising external capital: ROE × retention ratio.
Retention Ratio: The percentage of net income retained rather than paid as dividends. Equals 1 minus the dividend payout ratio.
Normalized Earnings: Earnings adjusted to remove one-time items and unusual provision levels, estimating typical operating earnings.
Gordon Growth Model: A dividend discount model: D₁ / (r − g). Commonly used for stable, dividend-paying bank stocks.
Peer Group: A set of comparable banks selected for benchmarking based on asset size, geography, and business model.
Earnings Quality: An assessment of how sustainable and repeatable a bank's reported earnings are.

Balance Sheet & Accounting

Goodwill: An intangible asset arising when a bank acquires another institution above the fair value of net tangible assets.
Fair Value: The price at which an asset could be sold in an orderly transaction between market participants.
AOCI (Accumulated Other Comprehensive Income): Unrealized gains and losses in equity, primarily from available-for-sale securities. Directly affects book value and CET1.
Held-to-Maturity Securities: Debt securities carried at amortized cost because the bank intends to hold them until maturity.
Available-for-Sale Securities: Debt securities carried at fair value with unrealized gains and losses recorded in AOCI.
Mark-to-Market: An accounting method valuing assets at current market price rather than historical cost.
Tangible Common Equity (TCE): Total equity minus preferred equity, goodwill, and intangible assets. The most conservative equity measure.
Asset-Liability Management (ALM): Managing a bank's balance sheet to control interest rate risk by matching asset and liability repricing characteristics.

Data Sources

SEC EDGAR: The SEC's Electronic Data Gathering, Analysis, and Retrieval system providing free public access to corporate filings.
10-K Filing: An annual report with audited financial statements, management discussion, and risk factors.
10-Q Filing: A quarterly report with unaudited financial statements and updates on financial condition.
Trailing Twelve Months (TTM): A measurement summing the last four quarters to provide an up-to-date annual figure.
SIC Code: Standard Industrial Classification code categorizing companies by industry. Banks fall under SIC codes 6021, 6022, 6035-6036.
CIK Number: Central Index Key — a unique SEC identifier used to look up filings in the EDGAR database.
Call Report (FFIEC): A quarterly regulatory filing containing detailed financial data that every US bank must submit.

Using This Glossary

This glossary covers financial metrics and terms commonly used in bank stock analysis. Terms linked to detailed pages include formulas, interpretation guides, and typical ranges for banks. All data on BankSift is sourced from official SEC EDGAR filings.

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