Metrics and Trends: June 2019

All of the metrics on the site have just been refreshed with the latest data! So, it seems like a good time to review some metrics and consider the trends. The following five metrics currently published on this site will be reviewed on a generally subjective ordering based on the assessed importance of the newly updated information. So, let's begin!

1. Dow to GDP Indicator

Dow Jones Industrial Average to Nominal GDP indicator

Let's be honest - the stock market sucks up a huge amount of financial air. Valuations have stretched increasingly since the financial crisis but we finally have a little pause. The economy as measured by nominal GDP has continued to plug away for the last few quarters while the stock market has been...mostly flat.

It has been a while since there has been a new all-time high. When (if?) that occurs, it will be interesting to see if there is another leg up to push this indicator past the high set during the tech bubble. Either way, it's quite healthy and encouraging to see equities take a breather.

2. Return on Equity

Return on Equity for the banking industry

Banks got a big tax break. In the few quarters since, ROE has been lifted to a new normal.

Yet, with as much fanfare as the corporate tax cuts received from the media, it is still shocking to compare ROE today with pre-financial crisis levels. Leverage remains low. That's a good thing when it comes to preventing another banking catastrophe.

3. Interest Income to Interest Expense Ratio

Interest Income Over Interest Expense

This is one to watch. The trend continues downward and, at the current rate, will hit the previous pre-recession low point in the second half of 2020. Between this and the yield curve, indications suggest we could be looking at only one more year of good expansionary times. seems like economic forecasters are always predicting a recession "in about one to two years" and it's now been ten years of getting it wrong!

4. Revenue to Assets

Revenue Over Assets Ratio

Check this out - banks are bringing in more money on their asset base. Unfortunately, a rising pattern occurred at the end of the previous two economic cycles. All else equal, this trend is a good thing when one considers how low this metric has been compared to history.

My take? Banks are embracing increasingly risky assets with bigger payoffs. If we were above the historical trend, I would say that was a bad thing. Right now, probably a case where some more risk taking is warranted.

5. "Too Big to Fail"

Too Big to Fail Index

It's actually shocking how flat this has been. Politically, attention seems to be turning toward too-big-to-fail in the tech world with Amazon, Facebook, Microsoft, Google, Apple. Considering it takes two to three of the largest banks to match one of those companies from a market capitalization perspective, there is merit to the idea.

From a risk management perspective, regulation provides good opportunity for the profession but it's important to recognize when one is fighting the last war. Ten years of industry change and regulation has helped make banks safer and improved the financial system. Letting the pendulum naturally swing back toward deregulation is least until banks get in trouble again!

Coming Soon

In the next few site updates, I will be adding some new metrics based on feedback I have received through email and discussions. If there is a trend or topic that is not covered here that is of interest, please drop me a note and I will do my best to add coverage as soon as possible!

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