Analysis has many dimensions
Analyzing companies and sectors has many dimensions. One important dimension of analysis is using indicators for analysis. But, before moving ahead, we must understand what indicators are. In simple words, an indicator is a statistic or a data point that reveals something significant about the subject. The subject can be the economy, a sector or sectors, or a company or companies.
Two categories of financial indicators
In the world of finance and economics, indicators fit into two broad categories. These are economic indicators and performance indicators. Economic indicators are mainly concerned with the economy as a whole. An example of an economic indicator can be gross domestic product (or GDP). Performance indicators, on the other hand, are mainly concerned with the performance of a company or a sector. Most of the time, performance indicators are applicable to both the sector and individual companies.
An example of a sector performance indicator is net interest margin for banks. Similarly, products sold per customer is a company level performance indicator of Wells Fargo (WFC), JP Morgan (JPM), US Bank (USB), or Bank of America (BAC). Out of these banks, Wells Fargo is the largest bank in the portfolio of the Financial Select Sector SPDR (XLF). Wells Fargo accounts for 8.64% of XLF’s portfolio.
Banking asset indicators are important
In this series, we’ll focus on banking asset indicators for the sector. Banking asset indicators are important because the majority of banking income comes from the assets side of the balance sheet. We’ll take a look at various asset indicators and look briefly at what is leading to the rise or fall in asset indicators. This will also help us in understanding why some banks outperform others like the chart above indicates.