Want to invest in bank stocks; here are things to look out for

It is no doubt that bank stocks have traditionally been known to be one of the highest trading stocks that easily catch the attention of investors, both the old and new.
Unfortunately, events of the last four years have largely shown the danger of this mass drove to bank stocks, because while the capital market was down more evident in bank and insurance stocks, manufacturing and other service sectors flourished indicating why many investors lost fortunes in financial services sector stocks.
While it is true that bank often times are the exchange’s largest, most liquid shares, investors must of great importance open their eyes to the key indices for performance from where each bank can be measured.
Abdulrasaq Adeyemi, a research analyst from Vetiva Capital management; gives an insight into key indicators to look out for, when going for bank stocks. He said first of all “There’s a lot of number-crunching to be done when deciding which bank to buy.” Among the indices he listed includes - profitability, growth, asset quality, value, and dividend yield.
Profitability
If you’re in the market for a bank stock, chances are you’d prefer one that actually makes money. So, do well to screen out all the banks that failed to produce a positive average return on assets (ROA) over the past five years. Here’s how they stacked up:
Assets
Profitability is great, but Africa’s best banks are constantly growing their assets. They’re tapping new market segments, expanding into new territory, or acquiring smaller competitors. And because the banking industry is particularly conducive to building economies of scale, a larger asset base generally translates into greater profitability.
Asset quality
A bank’s challenge is to lend as much money as possible for the best return possible. In their zeal to do so, some banks end up lending valuable assets to some rather un-credit worthy customers. When these customers default, the loans must be written down to zero – a bad thing for profitability and growth.
Value
Investing, of course, is all about value. The most profitable, fastest growing, well-managed bank in Nigeria can end up losing you money if the price you pay for it is too dear.
Dividend yield
Dividend yield is a function of both profitability and value. Generous dividends also suggest a confident management team. Dividend cuts typically wreak havoc on a stock’s share price. Therefore, most banks won’t raise dividends beyond a level they believe they can sustain.