The first step is to take a look at a bank's balance sheet.
Loans are the heart of a traditional bank. The greater a bank's loans as a percentage of assets, the closer it is to a traditional savings and loan. For example, a quick look at U.S. Bancorp's (USB -0.34%) balance sheet from the fourth quarter of 2024 shows total assets of $678.3 billion and loans of $372.3 billion, meaning that about 55% of the bank's assets are loans. This makes sense because U.S. Bancorp focuses much more on traditional consumer banking than many of its big-bank peers.
On the other hand, some banks are more focused on investment banking. For example, on Goldman Sachs' (GS -0.10%) balance sheet from the same period, we can see that just under 12% of its assets are loans.
If a bank isn't holding loans, it's most likely holding securities. Most of Goldman Sachs' non-cash assets are securities, trading assets, and investments.
There are many possible reasons a bank might not have a high proportion of loans. In the case of Goldman Sachs, its business model simply isn't loan-driven, although it does provide some lending services to its clients. A bank may be losing loan business to other banks, or it may just be conservative when it can't find favorable loan terms. In any case, looking at loans as a percentage of assets may give you questions to explore more deeply.
The next step is looking at the types of loans a bank makes. Is it primarily a mortgage lender? A small-business lender? Does it have a lot of auto loans? Or does it focus mostly on credit card lending like Capital One Financial (COF +0.78%)? You should be able to find this information on the bank's balance sheet or in its most recent earnings release.
This can tell you quite a bit about a bank's credit risk. While not all loans of the same type are the same, credit card and personal loans tend to have significantly higher default rates than asset-backed loans like mortgages and auto loans.
It's also worth noting that the value of banks' loan portfolios can fluctuate over time on a mark-to-market basis. When interest rates rise, it can make the value of loans drop, which can create the risk of loss if the bank is forced to sell assets. Longer-maturity loans (like mortgages) tend to be far more rate-sensitive than short-term loans.
Liabilities
In banking terms, "liabilities" often refer to the deposits that everyday customers put into bank accounts, among other things.
Deposits are great for banks for the same reason that you complain about getting low interest rates on your checking and savings accounts: Via these deposit accounts, you're essentially lending the bank money cheaply.
If a bank can't attract a lot of deposits, it has to take on debt (or issue stock on the equity side), which is generally much more expensive. That can lead to risky lending behavior -- e.g., chasing yields to justify the costs.
Deposits can be further broken down into interest-bearing and non-interest-bearing. If a bank can attract a large number of non-interest-bearing deposits (common in checking accounts, for example), it can be a major cost advantage over peers. This is especially true in relatively high-rate environments.
It's also important to consider the proportion of insured vs. uninsured deposits, which became a significant risk factor in the 2023 banking crisis. The median U.S. bank has about 60% of its deposit base not insured by the FDIC. To be sure, the U.S. government is unlikely to let any customers lose money in a bank failure, but FDIC-insured deposits are guaranteed to be made whole, no matter what.
One important metric to use is the deposits/liabilities ratio. If a bank's deposits make up a high percentage of its total liabilities, it's a good sign that the bank has sufficient access to low-cost capital. But if more of its liabilities are in the form of debt, it could indicate an unfavorable cost structure and more risk. Looking at one example, U.S. Bancorp's deposits make up 81% of its liabilities -- a very healthy capital structure.
Income
There are two main categories of bank income: interest income and noninterest income. Interest income is self-explanatory, but noninterest income can take several forms. Banks collect origination fee income on mortgages, service charges on deposit accounts, investment banking fees, payment processing fees, and much more.
Banks report their net interest income, which is the difference between the interest they collect and the interest they pay on deposits. Noninterest income is everything else. Banks generally break this out line by line on their income statements, and you can get a good feel for how a bank makes its money.
There's no right or wrong mix of interest and noninterest income. This is just an important step in understanding how a particular bank's business works.
