1. How to analyse revenue drivers of Financial Services sector? 2.

What are the investment risks

associated with Financial Services Sector? 3. What are the valuation metrics of Financial Services
sector? 4. Download sample Financial Model.

Analysis of revenue drivers

Companies coming under this sub group are banking and non banking companies which deal in
providing financial services
Banking companies are involved in collecting of deposits and disbursement of loans
Non banking companies will cover the brokerage, investment banking, investment research, insurance
companies.
The major source of revenues for the banking companies is the collection of deposits
Banks play on the interest rate spreads i.e. The rate they pay for the deposits and the rate they earn
from their loans.
The spread becomes the net interest margin and the money earned by the bank is the net interest
income which is the total income of the bank
For the non banking companies the revenues depend upon several parameters depending upon the
sub industry we are focusing, like
Brokerage – The volume traded or number of transactions done
I Bank – Number of deals done successfully
Investment research firm – Number of reports sold
Insurance – Premium charged and the number of policies issued in a time frame

Investment Case
Increase in prime lending rates
High credit/deposit ratio, showing the rise in credit being higher than that of deposit, thus resulting in
general credit demand overload resulting in rise in interest rate.
CASA ratio (Current account to saving account)
Increased foreign flows
Loose monetary policy
Reduction in statutory ratios (CRR, SLR)
Higher business activity giving I Banks better chance of deals
Increased IPO activity

Investment Risks
Decline in asset quality
Lowering of interest rates
Increase in statutory requirements
Tight monetary policy
Government bonds flooding the market through the banking system
Political instability

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Valuation
The valuation multiple generally used to value financial services companies is P/BV ratio. Book value of
assets assumes a primary importance in the valuing this sector firms. The higher the book value of assets
the higher is the net interest income and thus higher profits.

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