The FIG Special

Financial Institutions Group Coverage Universe

Everything you need to master the most regulated sector in investment banking

Cram Sheet — Coming Soon Available on launch day

Why FIG is Different

Financial Institutions Group is the crown jewel of investment banking M&A and capital markets coverage. But it demands a fundamentally different analytical framework than corporates.

Regulated Capital: Every decision flows through regulatory constraints (CET1, leverage ratios, MREL, Solvency II)
Mark-to-Market Volatility: Trading books create earnings volatility banks can't control
No Traditional EBITDA: Net Interest Income (NII), Net Revenue, Operating Profit replace EBITDA
Liability Side Matters: Cost of deposits, funding structure, and refinancing risk are existential

Interview Rule: Never value a bank like you value a corporate. The regulatory lens is non-negotiable.

BANKS: Universal/Retail Banking Fundamentals

The heart of traditional banking. Key metrics for any bank interview question.

Net Interest Income (NII): Interest earned on loans minus cost of deposits. The core earnings driver.
Net Interest Margin (NIM): NII as % of average earning assets. Typically 1.5–3.5% for Tier 1 banks.
Cost-to-Income Ratio: Opex / Net revenue. Lower is better. Top-tier: 40–50%. Stressed: 80%+
CET1 Ratio: Common Equity Tier 1 as % of RWA. Minimum requirement ~4.5%, plus buffers = 13–15% target for Tier 1 banks.
Loan Deposit Ratio (LDR): Total loans / total deposits. 80–100% is healthy; above 110% signals funding stress.
NIM = NII / Average Earning Assets Example: NII €10bn / avg assets €500bn = 2% NIM

BANKS: Credit Quality & Impairments

The early warning system. Credit metrics tell you where losses are hiding.

NPL Ratio: Non-Performing Loans / Total Loans. Tier 1 EU banks: 0.5–2%. Above 3% = concern.
Coverage Ratio: Loan Loss Provisions / NPLs. Target: 50–100%. Low coverage = future charge.
Cost of Risk (CoR): Impairment charges / average loans. 20–50 bps is normal. 150+ bps = stress.
IFRS 9 Stage Classification: Stage 1 (performing), Stage 2 (early warning), Stage 3 (defaulted). Migration to Stage 2/3 = future provisions.
Critical Interview Trap: IFRS 9 introduced forward-looking provisioning (expected loss) vs. old IAS 39 incurred loss model. Banks must provision earlier now. Overlay management (subjective add-ons) can mask deterioration. Always ask about model overlays and PMO (Post-Model Overlays).
Example: Bank A: €100bn loans, 2% NPL ratio, 60% coverage = €1.2bn reserves. If 50% of Stage 2 loans (say €8bn) migrate to Stage 3 next year, potential €400m additional provision hit.

BANKS: The P/TBV & ROTE Valuation Framework

P/E multiples are useless for banks. The real valuation story lives in ROTE and justified P/TBV.

Justified P/TBV = (ROTE − g) / (Cost of Equity − g) Where: - ROTE = Return on Tangible Equity (Net Income / Tangible Equity) - g = long-term growth rate (typically 2–3%) - COE = Cost of Equity (8–10% for developed market banks)
Worked Example: Bank trades at 0.9x TBV. Is it cheap? - ROTE = 9% - g = 2% - COE = 9.5% Justified P/TBV = (9% − 2%) / (9.5% − 2%) = 7% / 7.5% = 0.93x Trading at 0.9x vs justified 0.93x = Slight discount. Fair value around 0.91x.
Why P/E is Broken for Banks: Earnings fluctuate with credit cycles, funding costs, and trading revenue. A bank earning 8% ROTE at 10x P/E is expensive; earning 12% ROTE at 8x P/E is cheap.
Benchmark P/TBV: Tier 1 EU banks in normal environments: 0.8–1.2x. Crisis: 0.4–0.6x. Peak: 1.5–2.0x (mid-2000s).

BANKS: Capital, Basel III/IV & Regulation

Regulatory capital is the "debt ceiling" that sets the strategy. Get this wrong and you miss the whole thesis.

CET1 Ratio: Minimum 4.5% (pillar 1) + 2.5% capital buffer + 0–3% systemic buffer = 7–10.5% hard floor
Leverage Ratio: Capital / Total assets (not RWA-weighted). ~3% floor. Backstop for RWA arbitrage.
MREL/TLAC: Total Loss Absorbing Capacity. Systemically important banks must hold 16–20% of RWA in bail-in debt.
RWA Density: Total RWA / Total assets. Higher = more leverage. 40–50% normal, 35% = low-risk mix, 55%+ = concentrated risk.
Maximum Lending Capacity = CET1 Capital / CET1 Ratio Requirement Example: €50bn CET1 capital at 12% requirement = €417bn max RWA If RWA density is 45%, max total assets ≈ €926bn
Key Interview Point: Banks can't just grow assets freely. They're capital-constrained. Any acquisition that increases RWA density eats into future growth capacity. Always model "excess capital" available for buybacks/dividends.

Investment Banking & Capital Markets Divisions

The volatility engine. 40–50% of Tier 1 bank revenues, but lumpy and cycle-dependent.

FICC (Fixed Income, Currencies, Commodities): 40–50% of capital markets revenue. Highly dependent on vol, repo spreads, and client flow.
Equities (cash + derivatives): 20–30% of capital markets revenue. Client facilitation more stable than prop trading.
ECM (Equity Capital Markets): IPOs and secondaries. ~5–10% of capital markets revenue.
DCM (Debt Capital Markets): Bond issuance advisory. 5–8% of capital markets revenue.
M&A Advisory: 10–15% of total revenue. More stable, less capital-intensive, but cyclical.
Compensation Ratio: Typically 40–50% of division revenue goes to comp. Compete hard for top talent = variable cost base.
RoTE by Division: IB/Capital Markets: 12–20% RoTE. Deposit-gathering retail: 15–25% RoTE. Asset management: 20–35% RoTE.

INSURANCE: Life Insurance Key Metrics

Life insurers are long-duration asset managers with embedded optionality. Very different from P&C.

Embedded Value (EV): PV of future profits from in-force business plus net worth. Growing EV = value creation.
Value of New Business (VNB): PV of profits on new policies sold in a period. 15–25% VNB margin is strong for life insurers.
VNB Margin: VNB / New Annual Premium Income. Indicates pricing discipline and cost control.
Solvency II SCR Ratio: Own funds / Solvency Capital Requirement. Minimum 100%, typically 150–200% for Tier 1 insurers. Higher = more capacity to grow.
Embedded Value = Net Worth + PV(Future Profits on In-Force Book) Example: NW €5bn + PV(future profits) €8bn = €13bn EV If next year EV grows to €14bn, value creation = €1bn
Key Sensitivity: Long-duration books = huge interest rate risk. 100 bps yield drop = 10–15% EV gain (but negative for profitability).

INSURANCE: P&C/General Insurance Fundamentals

Simpler than life, but catastrophe-driven. Pure insurance business model.

Combined Ratio = Loss Ratio + Expense Ratio: Below 100% = underwriting profit. Above 100% = underwriting loss.
Loss Ratio: Claims / Earned Premium. 60–80% for healthy books. Fire/motor higher; specialty lower.
Expense Ratio: Opex / Earned Premium. 25–35% for efficient players; 40%+ = under pressure.
Reserve Development: Run-off of prior-year reserves. Positive = prior-year reserves were conservative (good). Negative = adverse development (red flag).
CAT Exposure: Max probable loss from single catastrophe. 5–10% of equity is typical. 20%+ = speculative positioning.
Worked Example: P&C insurer: - Earned premium: €500m - Claims paid: €360m (loss ratio 72%) - Operating expenses: €140m (expense ratio 28%) - Combined ratio: 100% = break-even underwriting - Profit from investment yield on float (must be positive to offset)

INSURANCE: Valuation Frameworks

Price-to-Embedded Value for life; Price-to-Book for general. DCF of distributable earnings is the gold standard.

P/EV Multiple (Life Insurers): Share Price / Embedded Value per Share. 0.8–1.2x normal range. Below 1x = discount to embedded value.
P/TBV Multiple (General Insurers): Share Price / Tangible Book Value. 1.0–1.5x normal. Below 1x during stress.
Distributable Earnings (DEC): Expected profits on in-force (EPI) + investment return on reserves. DCF of DEC with long-duration risk is the most rigorous valuation.
DCF(Distributable Earnings) = ∑[DEC_t / (1+WACC)^t] - Long-duration bond-like cash flows require 4–5% WACC - Terminal growth typically 2–3%
Critical Interview Mistake: Using 8–10% WACC for a long-duration insurer. These are quasi-fixed-income businesses. Use 4–5% WACC or you'll overpay massively. Discount rate assumption = everything.

REINSURANCE: Structure, Cycle & Pricing

The shock absorber for the insurance system. Highly cyclical and structured.

Treaty Reinsurance: Automatic cover for large portion of portfolio. Catastrophe-driven pricing. 5–15% of premium is typical cost.
Facultative Reinsurance: Case-by-case. Higher margins, more flexible, but slower.
ILS (Insurance-Linked Securities) / Cat Bonds: Capital market reinsurance. Transfers risk to investors. 4–6% annual yield typical.
Retrocession: Reinsurers buy reinsurance themselves to cap tail risk. 2–4% of reinsurer premium.
Reinsurance Cycle: Post-CAT event = hardening (prices spike 20–50%). 3–4 years of calm = softening. Affects profitability predictability.
Reserve Triangles: Run-off of historical loss triangles shows ultimate loss development. Reinsurers live by these.

Key Insight: Reinsurers are economic shock absorbers. In bull markets, Cat bond issuance soars (cost falls). In stress (post-CAT), reinsurance becomes expensive and scarce.

ASSET MANAGEMENT: AUM Growth & Economics

Fee-based, scalable, high-margin business model. But passive competition is relentless.

AUM Growth Decomposition: Net flows + market returns. In down market, even with positive net flows, AUM shrinks.
Revenue Yield (bps): Total fees / average AUM. 30–80 bps for diversified AM. Passive funds: 5–15 bps. Alternatives: 100–200 bps.
Operating Margin: (Gross revenue − OpEx) / Gross revenue. 30–50% for large, efficient players. Scale = huge leverage.
Fee Pressure: Passive ETFs grow faster than active. AUM shifts to lower-fee products = revenue yield compression.
Net Flows Margin = (New Inflows − Outflows) / Opening AUM Example: €500bn AUM, €50bn inflows, €30bn outflows = €20bn net flows Net flows margin = 20/500 = 4% Revenue = AUM × Revenue Yield (bps) / 10,000 Example: €500bn AUM × 50 bps = €250m fees

WEALTH MANAGEMENT: The Advisory Model

High touch, high fees, recurring revenue. HNW/UHNW segments are the crown jewels.

AUM per Adviser: $50–100m per advisor for UHNW teams; $20–30m for mid-market. Productivity = economics of the whole division.
Net New Money (NNM) / AUM Margin: 2–5% annually is healthy. Driven by organic growth + client acquisition.
Recurring Revenue Mix: AUM-based fees are recurring (60–80%). Transactional fees are lumpy (20–40%). More recurring = higher valuation multiple.
Client Segment Economics: UHNW (€10m+) can support €5–10m AUM per advisor. Mass affluent (€500k–5m) = €20–40m per advisor.
Revenue Yield: 50–100 bps on AUM for developed market wealth. 150–250 bps emerging market wealth.
Worked Example: Wealth division: - 500 advisers, €100m AUM per adviser = €50bn total AUM - Revenue yield 75 bps = €375m revenue - 40% margin on recurring fees = €150m EBIT - Operating leverage = 30–35% EBIT margin growth YoY if you recruit 10% more advisers

PRIVATE EQUITY & ALTERNATIVES: Fund Economics

Carried interest is where PE practitioners make their fortunes. Fund-level economics are the thesis driver.

Fundraising: Management collects commitments for fund (e.g., Fund X: €5bn target). Typical mgmt fee: 2–2.5%.
FRE (Floating Rate Equivalent) / DRE (Dry Return Equivalent): Returns to LPs from fees/carry alone, excluding base investment performance. 2–4% typical.
Carried Interest ("Carry"): 20% of profits above a hurdle (usually 8%). Waterfall matters (LP preferred return first, then GP gets carry).
Management Fees: 2% of committed capital yr 1–5 (investment phase), 1.5–1% of remaining capital yr 6–10 (hold phase).
Deployment Pace: 5 years to deploy €5bn fund = €1bn/year. Slow deployment = dead capital, lower realized returns.
DPI / TVPI / IRR: Distributions Per Investment Dollar / Total Value Per Investment Dollar / Internal Rate of Return. 1.5x DPI, 2.5x TVPI, 15–20% IRR = strong fund.
Carry Generated = Max(0, (Exit Multiple − Hurdle) × Investment) × 20% Example: €500m investment at 3.5x MOIC, 8% hurdle rate Profit = €500m × (3.5 − 1.08) = €1.21bn Carry = €1.21bn × 20% = €242m

EXCHANGES & MARKET INFRASTRUCTURE

Oligopoly business models with exceptional margins. Regulatory moat is the key value driver.

Trading Revenue: Transaction fees on equity/derivative trades. Volume-sensitive. 40–50% of total revenue for equity exchanges.
Clearing Revenue: Per-contract fees for clearing. Higher margins than trading. 20–30% of revenue.
Data Revenue: Real-time quotes, historical data, indices. Highest margin (80%+ EBIT margin). 10–20% of revenue but growing fastest.
Volumes vs. Pricing: Volumes decline in bear markets but can recover. Pricing power on data is structural (oligopoly).
Regulatory Moat: Exchanges can't be created overnight (regulatory approval, liquidity network effects). Switching costs are high.
Case: LSE Group: - Total revenue ~€2.3bn (30% from trading, 25% from clearing, 20% from data, 25% other) - EBIT margin: 55–60% - Key risk: Brexit impact on volume migration to EU exchanges - Thesis: Protect data business, grow indices, consolidate in Europe

PAYMENTS & FINTECH: The Disruption Narrative

TPV (Total Payment Volume) is NOT revenue. Take rates, net revenue retention, and unit economics are what matter.

TPV (Total Payment Volume): Gross transaction value. Not revenue. €10bn TPV at 1.5% take rate = €150m revenue.
Take Rate: Revenue / TPV. 1–2% for fintech payments; 0.2–0.5% for mature card networks.
Revenue per Transaction: More meaningful than take rate. Includes subscription + transaction fees.
Net Revenue Retention (NRR): (Revenue this year + expansion − churn) / Revenue last year. 110%+ = strong SaaS; 90%+ = okay for fintech.
Rule of 40: Growth rate + EBIT margin = 40+ is sustainable. 50% growth at 0% margin = unsustainable.
Critical Trap: Confusing TPV with revenue. Payment startups often cite massive TPV to impress. Then revenue growth misses because take rate is being compressed. Always calculate implied take rate from TPV and revenue.

SPECIALTY FINANCE: Consumer Finance & Leasing

Simpler credit models than banks, but with laser-focused economics and leverage.

Net Interest Margin (NIM): 8–15% for consumer finance (auto loans, personal loans). Much higher than banks due to higher credit risk premium.
Cost of Risk: Impairment / avg portfolio. 150–400 bps for consumer finance (higher than banks).
Cost of Funds: Fintech = funding from platforms + securitizations. Traditional specialty = deposit funding. Spread to cost of funds = key value driver.
Leverage / Equity Ratio: Often run at 5–10x leverage (vs. banks at ~10–15x with regulatory constraints). Higher leverage = higher ROE but lower safety margin.
Origination Volume Growth: Year-on-year growth in new loans/leases. 20–30% YoY = strong growth. 5% = maturity.
ROE (DuPont) = Net Margin × Asset Turnover × Equity Multiplier Example: Specialty finance: 12% × 0.8x × 8x leverage = 76.8% ROE (pre-tax) High leverage + tighter credit spreads = attractive returns for equity

MORTGAGE LENDERS & BUILDING SOCIETIES

Duration mismatch and prepayment risk are the defining features. UK building societies are unique structures.

SVR vs Tracker Book Split: Standard Variable Rate (sticky, profitable) vs. Tracker (reprices immediately). More SVR = better NII resilience.
Mortgage Margin (basis points): SVR mortgages: 200–400 bps over SONIA. Tracker: 100–150 bps. Mix determines average margin.
Cost of Funds: Retail deposits (sticky), wholesale funding (SONIA + spread). Higher retail %= lower funding risk.
Prepayment Risk: If rates fall, borrowers refinance early (lose future NII). If rates rise, borrowers stay (lock in low rates). Option cost = significant.
LTV Distribution: Loan-to-Value of mortgages. Higher LTV (90%+) = higher credit risk and regulatory scrutiny. <80% LTV is blue-chip.
Building Societies (UK): Mutual structures. Surplus capital can be returned to members or retained for growth. Simpler capital regime than banks (no Basel IV initially).

FIG M&A: Regulatory, Structural & Integration Challenges

The holy grail for FIG bankers. But regulatory complexity + cultural integration = execution minefield.

Regulatory Approvals: PRA (Prudential Regulation Authority), FCA (Financial Conduct Authority), ECB for major EU deals. Timeline: 6–18 months. Approval not guaranteed.
Stress Testing Requirements: Acquirer must demonstrate combined entity meets capital/liquidity ratios post-acquisition. Failed stress test = deal blocked.
Book Value Adjustments: IFRS 9 loans carried at amortized cost. Acquirer marks portfolio to ECL (expected credit loss) model. Can create day-one losses (badwill).
Badwill in Distressed Deals: When target's tangible book value is negative or distressed valuations create immediate gains. Regulatory approval easier when target is rescue case.
Cost of Risk on Acquired Portfolio: Target's NPLs migrate to acquirer's books. Must reserve for latent losses. Integration risk = 5–15% of deal value.
Integration Math: Acquire €50bn loan book at 0.90x TBV: - Announcement: Day 1 ECL provisioning = €500m charge - 18-month integration: System consolidation €100m, duplicate costs €300m - Synergies: Cost cuts €200m/yr, revenue synergies €100m/yr - Payback: ~2 years if execution perfect

FIG DCF / Dividend Discount Model

Banks pay out 40–60% of earnings as dividends + buybacks. DDM captures this better than traditional FCF DCF.

Dividend Payout Ratio: Dividends per share / Net earnings per share. 40–60% for Tier 1 banks (regulatory capital constraint limits excess).
Excess Capital Return: Beyond regulatory minimum, extra capital can be returned as special dividends or accelerated buybacks.
Terminal Value Formula (Gordon Growth): TV = DPS_terminal × (1 + g) / (COE − g). Long-term dividend growth typically 2–3%.
Dividend Discount Model: Price = ∑[Dividend_t / (1+COE)^t] + TV / (1+COE)^n Where: - Forecast dividends 5–10 years explicitly - Terminal payout ratio = 50% (normalize) - COE = 9–10% for developed market bank - g = GDP growth rate (2–3%)
Worked Example: Bank trading at €15/share - Current DPS: €0.80 - Forecast 5-year DPS growth: 5% CAGR - Year 5 DPS: €1.02 - Terminal payout ratio: 50% - Year 5 EPS: €2.04 - Terminal EPS growth: 2.5% TV = (€2.04 × 0.5) × (1.025) / (0.09 − 0.025) = €1.05 / 0.065 = €16.15 PV of TV (5 years at 9%): €10.50 PV of explicit 5-year divs: €3.75 Fair value: €14.25. Stock at €15 = slight premium.

Bank Stress-Testing & Resolution Frameworks

Every bank runs through ECB/Fed stress tests annually. Understanding scenarios + capital adequacy = interview gold.

SREP (Supervisory Review and Evaluation Process): ECB/PRA assesses capital adequacy. Determines Pillar 2 requirement (P2R) above statutory minimums.
Pillar 2 Requirement (P2R): Additional capital banks must hold beyond pillar 1. Typical 1–3% of RWA for well-capitalized banks; 4–5% for weaker ones.
Stress Test Scenarios: Adverse scenario = recession + credit losses. Severe scenario = 2008-style shock. Banks must pass capital ratios under stress.
Bail-In Mechanics: Failed bank's debt holders (creditors) absorb losses in resolution order: equity → AT1 → senior unsecured → deposits. TLAC/MREL ensures enough loss-absorbing capacity.
Gone-Concern Loss-Absorbing Capacity (GLAC): MREL requirement for systemically important banks. 16–20% of RWA must be in instruments that can absorb losses.

Interview Key: Regulators want to ensure no taxpayer bailouts. Banks must hold enough capital + loss-absorbing debt so creditors absorb failure costs. This limits bank leverage and capital returns.

Solvency II: The Insurance Regulatory Framework

Replaced Solvency I in 2016. Economic balance sheet approach with risk-based capital requirements. Complex and essential for insurance valuation.

SCR (Solvency Capital Requirement): Capital needed to cover tail risk (99.5% VaR over 1 year). Typically 20–40% of technical provisions.
MCR (Minimum Capital Requirement): Floor below SCR. 25–45% of SCR. Fall below MCR = license revoked.
Technical Provisions: Economic value of liabilities (discounted future claims). Interest rate sensitive.
Matching Adjustment (MA): Reduces discount rate for long-duration liabilities matched with long-duration assets. Increases SCR but makes capital ratio look better.
Volatility Adjustment (VA): Increases discount rate during credit spread widening. Reduces SCR mechanically (controversial).
Transitional Measures: Phase-in of SII rules over 16 years. Banks using transitional = different capital ratios than full SII.
Critical Understanding: Solvency II SCR can be manipulated via MA/VA usage. Insurers with highest SCRs may actually have lowest economic risk (long-duration matched portfolios). Always adjust for MA/VA usage when comparing insurers.

IFRS 17: New Insurance Accounting Standard (2023+)

Replaced IFRS 4. Huge impact on reported earnings and balance sheet. Many insurers still transitioning.

CSM (Contractual Service Margin): Represents insurer's profit locked in at contract inception. Amortized over contract lifetime as "contract service expense release."
Risk Adjustment: Explicit charge for non-financial risk (mortality, morbidity, lapse). Locked in at inception, unwinds over time.
GMM (General Measurement Model): For most insurance contracts. Balance sheet = Liability for Remaining Coverage (LRC) + Liability for Incurred Claims (LIC).
PAA (Premium Allocation Approach): Simplified method for short-duration contracts (most P&C). Balance sheet = Liability for Remaining Coverage simplified.
Earnings Impact: Under IFRS 4, insurers front-loaded profit via technical provisions. IFRS 17 spreads earnings ratably over contract lifetime. Reported earnings more stable but lumpy at contract inception.
Impact Example: Life insurer writes €100m 20-year contracts with 15% CSM margin - Year 1 (IFRS 4): Large upfront profit recognition - Year 1 (IFRS 17): €100m × 15% CSM amortized over 20 years = €7.5m/year from CSM unwinding + cost of services - Reported earnings now more aligned with economic performance

FIG Equity Research: What Drives Share Prices

Understanding the trading drivers is essential for pitch preparation and sell-side analysis.

Interest Rate Expectations: Higher rates = higher NIMs for banks (0.5–1% change in rates = 2–5% change in stock). But also increases default risk.
Credit Cycle: Recession expectations = rising NPL fears = multiple compression. Expansion = multiple expansion + NIM pressure.
Capital Return Expectations: Dividend/buyback guidance changes = stock re-rating. CET1 release (through lower RWA or capital build) = buyback upside.
Regulatory Changes: Basel IV finalization, leverage ratio tightening, Solvency II review = multiple compression.
M&A Thesis: Consolidation stories drive re-rating. "Bank X is an acquisition target" = premium valuation.
Sector Rotation: Value trades when rates are expected to rise (financials outperform growth). Growth wins in low-rate, high-growth scenarios.

Key Insight: FIG stocks are not efficient. Thematic narratives (fintech disruption, rates higher for longer) drive 20–30% swings. Data + narrative = winning thesis.

Fintech Disruption: Incumbent Responses

Neobanks, BNPL, embedded finance, open banking/PSD2. The incumbents are adapting—mostly successfully.

Neobanks (Revolut, N26, etc.): Digital-first, low cost of acquisition via social, but unit economics poor (high CAC, low LTV). Profitability elusive.
BNPL (Buy Now, Pay Later): Fintech lenders (Klarna, Affirm) take credit risk. Take rates 2–4% from merchants. High loss rates (15–25% default rates in downturns) limit profitability.
Embedded Finance: Banks providing finance via third-party platforms (Stripe Capital, etc.). Revenue share model. Huge TAM but commoditizing.
Open Banking / PSD2: EU regulation forces banks to open APIs. Third parties can access customer data (with consent). Enables new fintech players but erodes bank moats.
Incumbent Response: Build digital channels (BBVA, ING), acquire fintech players (PayPal/iZettle, JPM/You Invest), or white-label solutions (Solarisbank model).
Emerging Winner Pattern: Capital-light platforms (payment networks, lending marketplaces) > capital-heavy lenders. Embedded finance > standalone neobanks.

Red Flags: Warning Signs in FIG Analysis

The tells that something is rotting beneath the surface. Essential for due diligence and interview rigor.

Rapid RWA Migration: RWA per unit of assets rising sharply. Indicates: (1) Book quality deterioration, (2) Model changes favoring higher RWA, (3) Acquisition of riskier assets. Flag concentration risk.
Declining Coverage Ratios: NPL coverage falling while NPL ratios stable/rising. Indicates: bank reserves being released prematurely, or complacency on loss severity. Loan loss reserves will spike next downturn.
Heavy Reliance on IFRS 9 Model Overlays: If "Post-Model Overlays" (subjective additions to ECL model) exceed model output by >50%, management is adjusting provisions for narrative, not economics. Red flag on model integrity.
Opaque Level 3 Assets: Assets marked at "fair value" using unobservable inputs. Banks increase Level 3 classifications in down markets to avoid mark-to-market losses. Verify Level 3 sensitivity disclosures.
Rising Cost-to-Income Ratios: Despite efficiency initiatives, operating leverage not materializing. Indicates: structural cost issues, revenue headwinds, or integration gone wrong.
Mortgage Book Pre-Payment Risk Unhedged: Rising rate environment + fixed-rate mortgages = refinance risk. If bank hasn't hedged, NII will collapse if rates fall. Ask about hedge ratios.

FIG Key Ratios Cheat Sheet

One-page reference for all major FIG subsectors. Memorize these benchmarks.

BANKS (Tier 1): NIM: 1.5–3.5% | Cost-to-Income: 40–50% | CET1: 13–15% | NPL: 0.5–2% | P/TBV: 0.8–1.2x
LIFE INSURANCE: VNB Margin: 15–25% | Solvency II SCR: 150–200% | P/EV: 0.8–1.2x | Embedded Value Growth: 5–10% CAGR
GENERAL/P&C INSURANCE: Combined Ratio: <100% (profit) | Loss Ratio: 60–80% | Expense Ratio: 25–35% | P/TBV: 1.0–1.5x | Reserve Development: 0–3% positive
REINSURANCE: Operating Ratio: 85–95% (profit) | Cat exposure: 5–10% of equity | Retrocession: 2–4% of premium | Cycle: 3–4 year hardening / softening
ASSET MANAGEMENT: Revenue Yield: 30–80 bps | EBIT Margin: 30–50% | Net Flows: 2–5% p.a. | NNM growth: higher of NIM growth or 3%
WEALTH MANAGEMENT: AUM per Adviser: $50–100m (UHNW) | Revenue Yield: 50–100 bps | EBIT Margin: 40–50% | NNM: 3–5% p.a.
PRIVATE EQUITY: DPI: 1.2–1.5x (interim) | TVPI: 2.0–2.5x | IRR: 15–20% | Deployment pace: €1bn/year per fund size class
SPECIALTY FINANCE: NIM: 8–15% | Cost of Risk: 150–400 bps | ROE: 20–40% | Leverage: 5–10x

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