Fundamental analysis of banks: the use of financial statement information to screen winners from losersThis study investigates the efficacy of a fundamental analysis-based approach to screen U.S. bank stocks
We construct an index (BSCORE) based on fourteen bank-specific valuation signals. We document a positive association between BSCORE and future profitability changes, as well as current and one-year-ahead stock returns, implying that BSCORE captures forward looking information that the markets are yet to impound. A hedge strategy based on BSCORE yields positive hedge returns for all but two years during our 1994-2014 sample period. Results are robust to partitions of size, analyst following, and exchange listing, and persist after adjusting for risk factors. We further document a positive relation between BSCORE and future analyst forecast surprises as well as earnings announcement period returns, and a negative relation between BSCORE and future performance-based delistings. Overall, our results show that a fundamental analysis-based approach can provide useful insights for analyzing banks.