🏦 On Evaluation Criteria for the Financial Industry (No. 1 Banking Edition) — What is a '💰 Cash Cow'?

Hello! I am Paponyan 🌹, an investor who loves roses, a corporate accountant.

I define companies that can be expected to see 'revenue growth, profit growth, and dividend increases' into the future as 💰 Cash Cows, and I score them using my own unique evaluation system.

📢 This time, I am announcing the 'Evaluation Criteria for the Financial Industry (No. 1 Banking Edition)'

Until now, I have evaluated all sectors among the 33 TSE sectors, excluding the financial industry, using the same criteria, but because the financial industry's business model and financial structure differ significantly from other industries, I have decided to revise them to evaluation criteria specifically for the financial industry.

In this article, I introduce the reasons for this and the details of the changes.

📝 For those who feel it might be a bit difficult...

In this article, I introduce the reasons and details of the changes, but it does include some technical content.

However, please rest assured. The final scores and key judgment points are summarized simply, as always.

You are welcome to skip any parts that you feel are 'a bit difficult'.

It is enough to simply understand that 'the financial industry cannot be accurately evaluated using the same criteria as other industries'.

🧐 Why can't the four financial sectors be evaluated correctly using the 'conventional evaluation criteria'?

Among the 33 TSE industry sectors,

🟢☑️Banking (Evaluation criteria explained in this article)🟢
☑️Securities and Commodity Futures Trading
☑️Insurance
☑️Other Financial Services

For these four sectors, there has been a challenge where they cannot be evaluated correctly using conventional criteria.

🔍 Why can't they be evaluated correctly using conventional criteria?

The financial industry is a business model that generates revenue by increasing funds collected from others (deposits, insurance premiums, funds associated with securities trading, etc.) through lending and asset management.

In other words, while 'debt = risk' in other industries, in the financial industry, how efficiently one can collect and utilize large amounts of funds becomes the competitive edge.

✏️ Standard business models in the financial industry

🟢☑️Banking (Evaluation criteria explained in this article)🟢
Lends funds collected through deposits, etc., to companies and individuals, and earns revenue from the difference between lending interest rates and deposit interest rates (interest margin). → The interest rate spread is the source of revenue, which is significantly influenced by the scale of the loan balance and interest rate levels.

☑️Securities and Commodity Futures Trading

In addition to commission income from brokerage of stocks and bonds, earns revenue through proprietary trading and investment trust management (asset management). → Since commission income increases as investor trading becomes more active, performance is easily swayed by market conditions such as stock price movements and market buoyancy or stagnation.

☑️Insurance
Earns revenue from both insurance premium income and investment gains by investing premiums collected from policyholders. → For revenue stability, the balance between 'received premiums' and 'paid insurance claims' is important. Since profits are squeezed if insurance claim payments surge due to disasters, etc., insurance design and risk management are key.

☑️Other Financial Services
Earns revenue through interest and fees received in exchange for lending money or assets, such as through leasing (renting equipment), credit cards, and consumer finance. → While interest income is central, it is susceptible to risks such as the borrower's inability to repay (default risk) and a decrease in loan demand due to economic downturns.

💡 Reasons why differences in financial structure mean 'they cannot be evaluated by conventional criteria'

For example, the following financial indicators have completely different meanings in the financial industry:

• Current Ratio
  Usually an indicator to measure short-term solvency. → However, in banking, because deposits are recorded as large amounts of short-term liabilities, there is no problem even if the ratio is low.
  

• Net D/E Ratio
  → In the banking industry, since borrowing is a prerequisite, a high numerical value does not directly link to bankruptcy risk.

As described, because the financial industry differs significantly from other industries in both its business model and financial structure, we determined that 💰 'Cash Cow' evaluation requires dedicated evaluation criteria.

🏦 Regarding evaluation criteria for the banking industry

This time, I will focus on the banking industry and introduce the changes to the evaluation criteria.

✅Growth Potential (60 points)
As before, this will be evaluated from the perspective of "revenue growth, profit growth, and dividend increases."

✅Safety (20 points)
☑️ Non-performing loan ratio (10 points)
→ An indicator that directly shows a bank's credit risk and is fundamental to assessing soundness. The lower it is, the more sound the lending practices are considered to be.

☑️ Common Equity Tier 1 (CET1) ratio (10 points)
→ Indicates the proportion of the most reliable capital among the capital held by a bank.

✅ Profitability (20 points)
☑️ Ordinary profit margin (10 points)
→ The bank's comprehensive profit margin, including interest margins and fee income. In line with industry characteristics, it is evaluated based on ordinary profit rather than operating profit.

☑️ ROA (5 points)
→ Return on total assets. An indicator that can also be commonly used in the banking industry.
☑️ ROE (5 points)
→ Return on equity. An indicator that can also be commonly used in the banking industry.

👍 (Reference) What are the differences between the CET1 ratio, Tier 1 ratio, and total capital adequacy ratio?

There are various types of "capital adequacy ratios" used to measure a bank's soundness. While the denominator is common (total risk-weighted assets), they are distinguished by the "quality difference" of the capital that serves as the numerator.

☑️ Formula for capital adequacy ratio (common)
Ratio = Capital ÷ Total risk-weighted assets (%)

"Total risk-weighted assets"
The amount obtained by weighting and totaling assets such as loans and investments held by a bank according to the magnitude of their respective risks. For example, safe assets like government bonds are counted almost negligibly because their risk is low, but high-risk assets like corporate loans and stock investments are counted more heavily.


☑️ Common Equity Tier 1 (CET1) ratio
CET1 ÷ Total risk-weighted assets (%)

→ Covers only the most reliable capital (such as payments from shareholders and retained earnings). An important indicator showing a bank's core capital.

☑️ Tier 1 ratio
Tier 1 (CET1 + AT1) ÷ Total risk-weighted assets (%)

→ In addition to CET1, it also includes AT1 (Additional Tier 1 capital).

AT1 refers to hybrid securities such as perpetual subordinated bonds that are recognized as capital under certain conditions. Its reliability is lower than that of CET1.

☑️ Total capital adequacy ratio
(Tier 1 + Tier 2) ÷ Total risk-weighted assets (%)

→ In addition to Tier 1, it also includes Tier 2 (supplementary capital).

Tier 2 includes subordinated bonds, revaluation reserves, and loan loss provisions, representing the broadest concept of capital. Its reliability is lower than that of Tier 1.

✏️ For the safety evaluation of the banking industry, I will adopt the most reliable and internationally emphasized CET1 ratio. I will also display the Tier 1 ratio and total capital adequacy ratio on my evaluation sheet as reference indicators.

In this way, by switching to financial indicators suitable for the banking industry, a more realistic evaluation becomes possible.

🙇‍♂️ Securities, commodity futures trading, insurance, and other financial industries are currently under consideration.

Now, let's take a look at the details of the scoring criteria for the banking industry's "💰 Cash Cow."

✅ What is a "💰 Cash Cow"?

First, I will briefly explain what I consider a "💰 Cash Cow" to be!

☑️ Definition:
Stocks of companies that can be expected to have increasing revenue, increasing profits, and increasing dividends in the future.

☑️ Benefits:
You can earn stable dividend income through long-term holding.
→ It becomes a source of income to support your future life other than a pension.

☑️ Points:
❗️ Do not choose just because the "dividend yield is high"!
→ Even if the current yield is low, if continuous dividend increases can be expected, the yield on the initial investment amount will be high in the future.
👍 Choose by emphasizing the company's profitability and safety!

✅ What are the scoring criteria for a "💰 Cash Cow"?

So, from what perspective should you evaluate a company? I will share those criteria next.

I decided to evaluate companies from the following two perspectives and quantify them on a 100-point scale.

1️⃣ Have performance and dividends grown over the past 10 years? (Points: 60)

Now, let's look at the specific scoring criteria.
Emphasizing the growth of performance and dividends over the past 10 years, I will evaluate the company's growth potential based on the following criteria.

☑️ Revenue Growth: (Points: 20)
Divide the past 10 years into the first 5 years and the last 5 years, and add points according to the growth rate of each.
📌 150% or more: +😄 10 points, thereafter -5% per -1 point

☑️ Profit Growth: (Points: 20)
Divide the past 10 years into the first 5 years and the last 5 years, and add points according to the growth rate of each.
📌 150% or more: +😄 10 points, thereafter -5% per -1 point

☑️ Dividend Growth: (Points: 20)
📌 Dividend Increase: +😄2 points / year
📌 Dividend Maintenance: +😄 1 point / year
❗️ Commemorative dividends are excluded from the evaluation.

2️⃣ Will performance and dividends continue to grow in the future? (Points: 40)

To evaluate future growth potential, it is important to check a company's safety and profitability. Each is evaluated based on the following criteria.

📕 (1) Safety (Points: 20)

Regarding safety, to accurately grasp the company's current financial situation, we evaluate using the latest financial results.

☑️ Non-Performing Loan (NPL) Ratio: (Points: 10)
• Formula
　NPL Ratio = Non-Performing Loans (JPY) ÷ Total Loans (JPY)
• What does it represent?
　The NPL ratio is an indicator showing the percentage of money lent by a bank that is considered 'bad debt' and difficult to recover.
　The lower this number, the better the credit status of the borrowers, and the lower the risk of loan defaults.
• Points
　Generally, exceeding 1% is considered high risk.
　Conversely, 0.4% or less is considered excellent.
• Scoring Criteria
　0.4% or less 📉 = 😄 +10 points
　Thereafter, 1 point deducted for every 0.1% increase

☑️ Common Equity Tier 1 (CET1) Ratio: (Points: 10)
• Formula
　CET1 Ratio = CET1 (JPY) ÷ Total Risk Assets (JPY)
• What does it represent?
　The CET1 ratio is an indicator showing how much of a bank's equity—specifically its most reliable 'core capital' (such as shareholder equity and retained earnings)—is available against risk assets.
　In other words, it can be called a 'safety yardstick' for measuring how financially stable a bank is.
• Points
　A higher CET1 ratio indicates stronger management and the ability to withstand unexpected losses.
• Scoring Criteria
　14% or more 📈 = 😄 +10 points
　Thereafter, 1 point deducted for every 0.5% decrease

☑️ (Reference) Tier 1 Ratio
• Formula　
　Tier 1 Ratio = Tier 1 (CET1 + AT1) ÷ Total Risk Assets (JPY)
• What does it represent?
　The Tier 1 ratio is an indicator showing how much 'basic equity capital'—which includes CET1 (the highest quality equity) plus AT1 (other Tier 1 capital)—is available against risk assets.
　AT1 includes hybrid securities that are recognized as capital under certain conditions, such as perpetual subordinated bonds.
• Points
　Although the quality of capital is slightly lower compared to the CET1 ratio, the Tier 1 ratio is still an important safety indicator showing the 'core of a bank's equity capital'.

☑️ (Reference) Total Capital Ratio
• Formula　
　Total Capital Ratio = (Tier 1 + Tier 2) ÷ Total Risk Assets (JPY)
• What does it represent?
　The total capital ratio is an indicator showing the extent of 'comprehensive equity capital'—which includes Tier 1 (basic equity capital) plus Tier 2 (supplementary equity capital)—available against risk assets.
　Tier 2 includes subordinated bonds, revaluation reserves, and loan loss provisions.
• Points
　The total capital ratio is the broadest concept for capturing a bank's capital. While inferior to Tier 1 in terms of quality, it is useful for seeing the 'big picture' of a bank's ability to absorb future losses.

📕 (2) Profitability (Points: 20)

Regarding profitability, to reduce fluctuations in profit and loss for each fiscal year and accurately evaluate the company's inherent earning power, we use the average of the financial results from the last three years.

☑️ Ordinary Profit Margin: (Points: 10)
• Formula
Ordinary Profit Margin = Ordinary Profit (yen) ÷ Ordinary Revenue (yen)
• What does this represent?
This is an indicator showing how efficiently a bank generates profit from its core business.
It is suitable for measuring core business profitability, including interest margins (the difference between lending and deposit interest rates) and fee income.
• Key Points
While operating profit margin is used for general companies, banks do not disclose 'operating profit,' so the ordinary profit margin is a more realistic indicator. A higher value means the bank is stably generating profit from its daily operations.
• Scoring Criteria
20% or higher 📈 for 😄 +10 points
Thereafter, 1 point deducted for every 2% decrease

☑️ ROA (Return on Assets): (Points: 5)
• Formula
ROA (Return On Assets, Ordinary Return on Total Assets)
= Ordinary Profit (yen) ÷ Total Assets (yen)
• What does this represent?
ROA indicates how efficiently a company uses its total assets to generate profit.
• Key Points
A high ROA indicates high asset utilization efficiency.
• Scoring Criteria
1% or higher 📈 for 😄 +5 points
Thereafter, 1 point deducted for every 0.2% decrease

❗️ In the financial industry, ROA tends to be lower than in general companies, so the scoring criteria have been adjusted.

☑️ ROE (Return on Equity): (Points: 5)
• Formula
ROE (Return On Equity, Return on Equity)
= Net Income (yen) ÷ Equity (yen)
• What does this represent?
ROE indicates how efficiently a company uses the capital invested by shareholders to generate profit.
• Key Points
A high ROE indicates efficient use of shareholder equity. However, since ROE can also be inflated by excessive use of interest-bearing debt, financial safety must also be considered.
• Scoring Criteria
12% or higher 📈 for 😄 +5 points
Thereafter, 1 point deducted for every 2% decrease

❗️ The scoring criteria have been adjusted to be suitable for the financial industry.

Thank you for reading this far! 🙇‍♂️
I hope this provides some hints for your asset formation and portfolio design. 😊

＼Follow & Like, it encourages me! 💖／
Paponyan 🌹 Investor who loves roses🐾