Rule #1 Finance Blog

With Investor Phil Town

RULE #1 QUESTION OF THE WEEK: BANKS & ROE

Alfredo in Sao Paolo, Brazil is interested in banks.  Read on.  [Edited for length.]

Q:  Dear Phil,  This email is to congratulate you because of your contribution to the life of others (your book).  And also I would like to ask you about one point. I love banks, have meaning for me because i love finance. The question is: How do you consider the % of ROIC in Banks? In company with that level of leverage (you know that in this industry deposits are liabilities and loan assets) is not easy (or imposible) to find ROI of 10 % or more. I like Wells Fargo and I am going to begin to analize as Rule #1 company. But I need your help to consider this point in my analizys.

A: Banks are the exception to the ROIC rule because they work with so much borrowed capital.  With banks, use ROE:  Return on Equity.  10% and not dropping.

Now go play.