When choosing a bank or financial institution to hold your money, it’s important to ensure that the institution offers the products, services, and coverage you require and is a safe and sound institution. To help you in your decision-making process, here are some key factors to consider when assessing the reputation and stability of a bank.
Credit Rating
This refers to a numerical evaluation of a borrower’s ability to repay debt, as determined by a credit rating agency. A high credit rating indicates a low risk of default, while a low credit rating suggests a higher risk of default. A fiscally conservative bank with a strong risk-averse approach may have a higher credit rating, making it a safer option for depositors.
TIP: Look for a bank that is fiscally conservative and has a strong risk-averse approach, such as not offering any balance sheet lending.
Capacity Statement
Refers to a statement provided by a bank indicating its ability to meet its financial obligations.
TIP: Look for banks that are considered among the world’s leading global digital banks and have a top ten digital bank ranking. Also, ensure that the bank only utilizes the services of strong and secure correspondent banks.
Capital
Capital refers to the amount of money that a bank holds to support its lending activities and to protect depositors. Banks are required to maintain a minimum level of capital, as determined by regulators, to ensure their financial stability. Ensure that the bank fully complies with all capital adequacy ratios required by regulators to reduce the risk of default.
TIP: When picking the right bank for your needs, check that the bank is fully compliant with all capital adequacy ratios required by regulators.
Gross non-performing assets (NPAs)
NPA is the total value of loans or assets on a bank’s balance sheet that are not producing income. A low gross NPA ratio means that the bank’s asset quality is usually in good shape, which is generally considered a positive sign for depositors.
TIP: Ensure that the bank has an NPA ratio below 3%, which means the bank’s asset quality is usually in good shape.
Provisioning Coverage Ratio
This refers to the percentage of non-performing assets that have been set aside to cover potential losses. A high PCR ratio means that most asset quality issues have been taken care of, and the bank is not vulnerable.
TIP: Look for a high PCR ratio (ideally above 70%). This is a positive sign for depositors, as it reduces the risk of default.
Credit-deposit Ratio
This refers to the ratio of a bank’s loans to its deposits. A low credit-deposit ratio suggests a healthy and safe balance sheet, indicating that the bank is not heavily relying on borrowing to fund its lending activities. A credit-deposit ratio below 100% is considered low.
TIP: Check that the bank has a low credit-deposit ratio, as this suggests a healthy and safe balance sheet.
Texas Ratio
The Texas Ratio is a measure of a bank’s financial health that takes into account the amount of non-performing loans compared toits capital and loan-loss reserves. It is calculated by dividing the sum of the bank’s-performing loans and the value of its real estate owned by the sum of its loan-loss reserves and tangible common equity. ATexas Ratio below 100% (or 1:1) indicates that the bank has adequate capital and reserves to cover potential losses from defaulted loans, making it a more financially-stable institution.
TIP: Check that the bank has a Texas Ratio well below 100% (or 1:1), as this means they are better able to absorb losses on defaulted loans.
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