Chapter 18. The FIG Special

Financial Institutions Group Coverage Universe Everything you need to master the most regulated sector in investment banking

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 to 3.5% for Tier 1 banks. Cost-to-Income Ratio: Opex / Net revenue. Lower is better. Top-tier: 40 to 50%. Stressed: 80%+ CET1 Ratio: Common Equity Tier 1 as % of RWA.

Minimum requirement ~4.5%, plus buffers = 13 to 15% target for Tier 1 banks. Loan Deposit Ratio (LDR): Total loans / total deposits. 80 to 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 to 2%. Above 3% = concern. Coverage Ratio: Loan Loss Provisions / NPLs. Target: 50 to 100%. Low coverage = future charge. Cost of Risk (CoR): Impairment charges / average loans. 20 to 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.