Banks make profits by giving loans to people on a higher rate of interest than what they pay to depositors. There is a massive difference in banks collecting and spending money. Non-interest income; is an option that banks use to double their revenue even during low interest rates. This method includes charges such as transaction fees, overdraft charges, trading fees and a list of other sources that can generate a significant amount of revenue for some banks. Investing in bank stocks has been a trend in place for more than 200 years in the financial industry. A few countries have also experienced significant bank panics for several years.
Let’s Find Out Top Three American Banks that Rank the Highest In terms of Stocks by Market Cap.
JP Morgan Chase
As known as the largest bank in the U.S. with assets over $2.6 trillion, JP Morgan ranks the first in the list. JP Morgan was founded in 1799 and headquartered in New York.
Bank of America
Founded in 1874, in Charlotte, North Carolina; Bank of America is one of the country’s largest banks with more than $2.2 trillion in assets, 4,500 business units, and 16,000 ATMs.
This bank was founded in 1852 and headquartered in San Francisco, California. Following JP Morgan and Bank of America, Well Fargo has assets over $1.9 trillion.
Here are the Top Factors that You Must Consider if You are Planning to Invest in Bank Stocks
- First, you must consider understanding the history of bank stocks. It is essential to do your homework to gain knowledge over its ups and downs. The value of your cash can either double or dip at the same time. As mentioned earlier, this sector has witnessed significant drops several times that remained the same for so many years, leaving the investors in trouble.
- Return on equity (ROE) is another crucial factor to be considered. ROE is nothing but how much profit a company generates as a percentage of shareholder’s equity. More ROE means more efficiency of a company putting shareholder’s equity to work.
- An easy way to measure a bank’s profitability is the net interest margin (NIM). It is nothing but the difference between the interest a bank receives and the interest a bank pays in terms of its total-interest-generates assets. A NIM of at least 3% or more means that the bank is profitably managing its assets.
- Besides evaluating a bank’s profits, it’s also necessary to know how good is a bank in terms of generating income. Efficiency ratio can be calculated by taking the bank’s operating costs (non-interest expense) and dividing it by the net revenue.
- Make sure to do thorough research on how the coverage ratio of the bank looks like. Every bank can’t recover the loan amount which they have paid. So, it’s necessary to get this checked before you plan to invest in a particular bank’s stocks.