- 1Financials are heavily influenced by interest rates and economic cycles
- 2Banks, insurance, and asset management have very different risk profiles
- 3Book value and ROE are the most important metrics for financial stocks
- 4Financials often provide attractive dividends and buyback yields
#The Financial Sector Landscape
The financial sector includes banks, insurance companies, asset managers, fintech firms, and real estate investment trusts. It's the backbone of the economy — every business and consumer interacts with financial services.
Sub-Sectors
| Sub-Sector | Key Driver | Risk Level | Examples |
|---|---|---|---|
| Money Center Banks | Net interest margins, loan growth | Moderate | JPMorgan, Bank of America |
| Regional Banks | Local economy, CRE exposure | Higher | PNC, U.S. Bancorp |
| Insurance (Life) | Investment returns, mortality tables | Moderate | MetLife, Prudential |
| Insurance (P&C) | Underwriting discipline, catastrophe risk | Moderate | Progressive, Chubb |
| Asset Management | AUM growth, market returns | Moderate | BlackRock, T. Rowe Price |
| Exchanges | Trading volume, data revenue | Lower | CME, ICE, NASDAQ |
| Fintech/Payments | Transaction growth, merchant adoption | Varies | Visa, Mastercard, PayPal |
#Key Metrics for Financial Stocks
Standard metrics like P/E ratio work differently for financials. Here's what to focus on:
| Metric | What It Measures | Good Range |
|---|---|---|
| Price-to-Book (P/B) | Premium/discount to net assets | Banks: 1.0-2.0x |
| Return on Equity (ROE) | Profitability of shareholder capital | > 12% for banks |
| Net Interest Margin | Spread between lending and borrowing rates | > 2.5% |
| Efficiency Ratio | Non-interest expense / revenue | < 60% |
| Tier 1 Capital Ratio | Balance sheet strength | > 10% |
| Combined Ratio | Insurance profitability | < 95% |
#Interest Rate Sensitivity
Interest rates are the single biggest macro driver for financial stocks:
- Rising rates: Generally positive for banks (wider net interest margins), negative for bond-heavy insurers
- Falling rates: Negative for bank earnings, positive for bond portfolios
- Flat curve: Compresses bank margins, negative for profitability
Our momentum factor captures rate-driven trends in real time, helping identify which financials are benefiting from the current rate environment.
#Financials and Dividends
Financial stocks are among the best dividend payers in the market. After passing Federal Reserve stress tests, banks return significant capital:
- Many large banks yield 2-4%
- Insurance companies often yield 2-3%
- Exchanges and payment processors yield less but grow dividends faster
Read: Dividend Investing Guide →
#How Our Model Evaluates Financials
Value
Financials frequently score well on value metrics. Banks trading at 1.0x book value are common, and P/E ratios tend to be lower than the broader market. This makes the sector a natural home for value-oriented investors.
Profitability
Well-run banks and insurance companies generate strong returns on equity. Our profitability factor rewards financial firms with consistent, above-average ROE — a sign of superior underwriting or lending discipline.
Stability
Large-cap financials (JPMorgan, Berkshire Hathaway) score well on stability. Regional banks and fintech companies tend to be more volatile.
#Common Risks in Financials
- 1Credit risk — Loan losses can spike during recessions
- 2Regulatory risk — Capital requirements and compliance costs
- 3Concentration risk — Commercial real estate or sector-specific lending
- 4Liquidity risk — As demonstrated by SVB in 2023
- 5Tail risk — Financial crises can be catastrophic
Our stability and short interest factors help flag financial stocks with elevated risk profiles.
#How to Use Our Rankings
Last updated: February 10, 2026