As an investor, your approach to analysing and choosing banking and finance stocks needs to be distinct too. In the first part of this article, I had dwelt on the CAMEL approach to deep-diving into a bank’s business.
There are certain characteristics which make evaluating banking and finance stocks different from others which produce goods and services. Money cannot be lent to someone unless there is an inflow by way of capital or debt. Since it is not practical to lend only from capital, borrowing (or leverage) is the sustaining food for this business. Naturally in using this leverage, there are good and bad apples.