Personal Finance

5-Point Checklist for Investing in Banks

BAC Chart
BAC Chart

BAC data by YCharts

5: Shareholder-friendly decision making?

Finally, assess how the bank has treated its shareholders in the past. Start with its dividend, which can sometimes be considerable, but focus more of your attention on a more sinister force: dilution.

Shareholder dilution can come quickly and publicly, or slowly and under the radar. When a bank finds itself in need of capital because of regulator demands or during a genuine economic crisis, some banks will turn to issuing huge amounts of new shares, crushing existing shareholders. Citigroup and Bank of America are two notable examples, both diluting shareholders significantly to raise new capital during the financial crisis. If you owned Citi or B of A during this period, you may want to scroll past this chart.

BAC data by YCharts

Other times, banks can quietly dilute shareholders through poorly structured and overpriced mergers and acquisitions. M&A activity should be driven by adding value, not an ego-driven desire to quickly increase total assets. M&T Bank CEO Robert Wilmers is a perfect role model for other CEOs to emulate in this regard. In the bank's 2015 letter to shareholders, he explained M&A strategy perfectly:

"M&T has long prided itself on a patient approach to mergers and acquisitions, entering into partnerships that made sense and which were additive to shareholder value. We are not motivated by growth for growth's sake, and even while cognizant of gaps that may exist in our geographic footprint, prudence has always dictated that we wait for the right opportunities for expansion."

Now you've got everything you need

Banks can be an intimidating business to analyze because the operations, financials, and jargon are so different from other industries. However, now that you're equipped with this checklist, you have everything you need to analyze nearly any bank stock. Start with its risk profile, move on to earnings and growth, and conclude with valuation and shareholder friendliness. It really is just that simple. {%sfr%}

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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