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Quality in financials: which metrics could help identify quality in banks
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The following paper is an additional element of the collective Work Project “Decoding the Quality Factor”. Given that the latter focuses on non-financial firms, this paper centers the “search for quality” in financial firms, with an emphasis on the banking industry. Overall, this study attempts to improve the understanding of quality in banks. For this purpose, a regression analysis is built for global, American, and European sector ETFs, revealing that, generally, financial firms and bank sexhibit a negative exposure to quality. Further, a second regression analysis is undertaken for a sample of North American and European banks, determining that some individual banks can indeed show evidence of quality characteristics. Finally, a quality strategy is designed for banks(based on the metrics considered to flag quality), achieving higher risk-adjusted returns and quality exposure ,relatively to a benchmark(MSCI World Banks).
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Risk factors Factor models Quality factor Financial sector Banking industry