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Quarter-End Insights

Financial Services: Re-Analyzing Banking Systems and Bank Moats

Investors see banking crises as the result of extraordinary circumstances--chiefly, unforeseeable economic shocks. We disagree.

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  • Our overall financial services sector valuation remains attractive at a price/fair value ratio of 0.88. Credit services and life insurers are especially undervalued at a sector price to fair value estimate ratio of 0.85.
  • Our revised methodology expands on our existing framework to more deeply and consistently analyze the strength of bank moats across our coverage. We examine the strength of banks' traditional financial intermediary businesses--chiefly retail and commercial banking--and of nonintermediary businesses, like investment banking and wealth management, which can impact a bank's moat. We also introduce a rigorous analysis of the banking systems in which banks operate, which is critical to our confidence in the sustainability of a bank's excess returns and evaluating the likelihood of value-destroying events.
  • We've also added switching costs as a moat source for most banks, complementing cost advantage, as they play a key role in maintaining low-cost funding.

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Stephen Ellis does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.