The Complete Guide to Financial Services: Everything Investors Need to Know
Financial services is the largest sector by number of public companies on U.S. exchanges, and it is the most misunderstood by investors trained on standard industrial-company analysis. Banks, insurers, brokerages, payment processors, and asset managers all carry the "financial services" label, but they have fundamentally different business models, risk profiles, and appropriate valuation frameworks. Treating them interchangeably is the first mistake most investors make.
This guide covers each major subsector, the metrics that matter within each one, and how to use the ValueMarkers screener to find quality opportunities across 73 global exchanges.
Key Takeaways
- Financial services is not one sector. Banks, insurers, asset managers, and payment processors each require different valuation frameworks.
- EBITDA margin is largely meaningless for banks because interest expense is a revenue driver, not a cost. Use net interest margin (NIM) and return on equity (ROE) instead.
- For insurance companies, the combined ratio tells you more than any earnings figure. Below 100% means the underwriting business is profitable before investment income.
- Payment processors like Visa (V) and Mastercard (MA) trade at premium multiples for a reason: they carry almost no credit risk and generate capital-light recurring revenue.
- JPMorgan Chase (JPM) at a P/B near 2.0 is a useful benchmark for evaluating whether any large bank is cheap or expensive relative to quality.
- Berkshire Hathaway (BRK.B) at a P/B near 1.5 shows that even the most complex financial conglomerate can be analyzed with simple asset-value logic.
What Financial Services Actually Includes
The GICS definition of financial services covers six main subsectors: commercial banks, investment banks and brokerages, diversified financials (which includes Berkshire Hathaway), insurance (split into life, property-casualty, and reinsurance), mortgage REITs, and asset management and custody banks.
Each subsector has a different relationship between interest rates, credit quality, and market conditions. This means the sector does not move as a monolith. In rising-rate environments, commercial bank net interest margins typically expand while bond-heavy life insurers reprice their books. In falling-rate environments, the dynamic reverses.
| Subsector | Primary Revenue Driver | Key Risk | Core Valuation Metric |
|---|---|---|---|
| Commercial Banks | Net interest income | Credit losses / default rates | Price-to-Book, ROE |
| Investment Banks | Fee income, trading | Market volatility, deal flow | Price-to-Book, ROE |
| Insurance (P&C) | Premiums minus claims | Catastrophic events | Combined ratio, P/B |
| Insurance (Life) | Premiums, investment spread | Interest rate duration risk | Embedded value, P/B |
| Asset Management | AUM-based fees | Market drawdowns, outflows | P/E, operating margin |
| Payment Networks | Transaction volume | Regulatory change | P/E, net margin |
| Mortgage REITs | Net interest spread | Interest rate spikes | Price-to-Book, dividend yield |
How to Analyze Banks
Traditional valuation metrics break down for banks because interest expense sits inside revenue rather than below it. A bank borrows money (deposits, wholesale funding) at one rate and lends it at a higher rate. The spread is net interest income, which is the core of the revenue line. You cannot strip it out as a cost the way you would with a manufacturing company.
The metrics that work for bank analysis:
Net Interest Margin (NIM). NIM is net interest income divided by average earning assets. A NIM above 3.5% is generally considered healthy for a U.S. commercial bank. JPMorgan Chase has maintained a NIM above 2.7% even in compressed rate environments because its deposit base is large, cheap, and diversified.
Return on Equity (ROE). The single most useful profitability metric for banks. A bank earning above 15% ROE consistently is compounding book value at a rate that eventually shows up in share price. JPMorgan's ROE has averaged above 16% for the last five years.
Price-to-Book (P/B). Banks with high ROE deserve to trade above book value. The rough rule: P/B = ROE / Cost of equity. A bank with 16% ROE and a 10% cost of equity should trade at roughly 1.6x book. A bank trading at 2.0x P/B with 16% ROE is slightly overvalued on this logic; one trading at 1.0x book with the same ROE is cheap.
Non-Performing Loan Ratio (NPL). Credit quality is the primary risk for any bank. NPL ratios above 2% warrant scrutiny. NPL ratios above 4% in a non-recessionary environment suggest underwriting problems.
How to Analyze Insurance Companies
Insurance companies collect premiums upfront and pay claims later. The delay between collection and payment means insurers get to invest the float. Warren Buffett built Berkshire Hathaway around this concept: GEICO's float funds Berkshire's equity portfolio. At a P/B of 1.5, Berkshire is arguably cheap given the quality of the underlying equity portfolio and the insurance float generating investment income at no cost.
The core metric: combined ratio. The combined ratio is claims plus expenses divided by premiums earned. A combined ratio below 100% means the insurer makes money on underwriting before counting investment income. A ratio above 100% means the insurer is subsidizing underwriting losses with investment income. For property-casualty insurers, a combined ratio consistently below 95% is excellent. Progressive (PGR) has maintained a combined ratio near 92% over the last decade, which is why the stock trades at a premium P/B to peers.
Investment yield matters more for life insurers, which hold long-duration bond portfolios. Rising rates help new money rates but can create unrealized losses on existing portfolios. The 2022 rate surge created exactly this dynamic for several regional life insurers.
How to Analyze Asset Managers
Asset management is a fee-on-assets-under-management (AUM) business. Revenue is proportional to AUM, which depends on both market performance (beta) and net fund flows (alpha of distribution). The key risk is AUM outflow, which can be triggered by poor performance, fee competition, or broad market drawdowns.
Operating margin is the most useful metric for asset managers. A well-run active manager should achieve operating margins above 35%. BlackRock runs above 40%. Passive-heavy managers (Vanguard, BlackRock's iShares business) trade volume for margin, so lower margins with enormous AUM can still produce excellent returns on equity.
AUM growth rate is the revenue growth proxy. Track it separately from market-driven AUM growth. A manager growing AUM at 12% per year while the market returns 10% is taking in net new flows, which is the sustainable driver. A manager showing 12% AUM growth in a year when markets return 15% is actually experiencing net outflows.
Payment Processors: The Capital-Light Financial Services Model
Payment processors are the anomaly in financial services. Visa and Mastercard carry almost no credit risk (the issuing banks take the credit exposure), generate recurring revenue from transaction volume, and require almost no capital to grow. This combination produces net margins above 50% and ROICs that would be considered extraordinary in any other sector.
Visa at a P/E around 30 and Mastercard near 35 look expensive relative to banks or insurers. They are not expensive relative to their own earnings quality. Both companies have grown EPS at above 15% per year for a decade with minimal capital reinvestment requirements.
The risk for payment processors is regulatory and competitive. Interchange fee caps, central bank digital currencies, and direct account-to-account payment systems (like FedNow) all represent threats to the network toll-road model. These risks have been visible for 10 years and have not materially dented volumes because card network switching costs are enormous.
What Metrics to Use in ValueMarkers for Financial Services
Standard screens built for industrial companies miss most of what matters in financial services. EBITDA margin and capex-to-revenue ratios are near-meaningless for banks and insurers.
When screening financial services in our screener, use:
- Price-to-Book (P/B) below 2.5 combined with ROE above 12%
- Net margin above 20% for asset managers and payment processors
- Dividend yield above 2.5% for income-oriented financial holdings
- Revenue growth consistency over five years (identifies managed-growth institutions over cyclical ones)
Filter by sector to avoid mixing bank metrics with insurance company metrics. Running a NIM filter on an asset manager produces a meaningless result. The ValueMarkers screener lets you apply sector-specific filters once you set the industry filter.
Berkshire Hathaway as a Financial Services Benchmark
Berkshire Hathaway (BRK.B) is worth examining as a reference point for the whole sector. It is classified as a diversified financial but contains insurance operations (GEICO, Gen Re, BHRG), banking holdings (through its equity portfolio), and operating businesses. At a P/B near 1.5, it is cheap relative to its insurance float advantage and equity portfolio quality.
Buffett's benchmark for Berkshire is gain in per-share book value relative to S&P 500 total return. That benchmark has been met or exceeded in 39 of the last 58 years. The methodology matters: it tells you Berkshire is managed to compound absolute value, not to beat a risk-adjusted benchmark.
For investors building a financial services position, BRK.B at 1.5x book is the quality floor reference. Any bank or insurer you buy at a higher multiple should justify that premium with a higher ROE or better credit quality track record.
Common Mistakes When Investing in Financial Services
Most mistakes investors make in financial services trace back to applying industrial-company logic to financial institutions.
The first mistake: using EBITDA. Banks and insurers do not have meaningful EBITDA because interest expense is a revenue driver. The correct profitability measure is ROE.
The second mistake: ignoring the interest rate sensitivity. A bank or life insurer that looks cheap in a flat-rate environment may have hidden duration risk that surfaces when rates move 200 basis points. Always check the asset-liability duration gap in the notes to the financial statements.
The third mistake: treating reported earnings as cash earnings. Insurers especially use reserve assumptions that can be manipulated short-term. Check loss development factors over five years. A pattern of favorable reserve development that reverses is a red flag for earnings quality.
Further reading: SEC EDGAR · Investopedia
Why financial services stocks Matters
This section anchors the discussion on financial services stocks. The detailed treatment, formula, and worked examples appear in the body of this article above. The points below summarize the most important takeaways for value investors who want to apply financial services stocks in real portfolio decisions. ValueMarkers exposes the underlying data on every covered ticker via the screener and stock profile pages, so the concepts in this article translate directly into actionable filters.
Key inputs for financial services stocks
See the main discussion of financial services stocks in the sections above for the full treatment, including the inputs, the calculation methodology, the typical sector benchmarks, and the most common pitfalls to avoid. The ValueMarkers screener lets value investors filter the full universe of 100,000+ stocks across 73 exchanges using financial services stocks alongside the rest of the 120-indicator composite, with sector percentiles and historical trends shown on every stock profile.
Sector benchmarks for financial services stocks
See the main discussion of financial services stocks in the sections above for the full treatment, including the inputs, the calculation methodology, the typical sector benchmarks, and the most common pitfalls to avoid. The ValueMarkers screener lets value investors filter the full universe of 100,000+ stocks across 73 exchanges using financial services stocks alongside the rest of the 120-indicator composite, with sector percentiles and historical trends shown on every stock profile.
Related ValueMarkers Resources
- Capex To Revenue — Glossary entry for Capex To Revenue
- EBITDA Margin — EBITDA Margin is the metric used to how efficiently a company converts capital into earnings
- Net Margin — Glossary entry for Net Margin
- Financial Services Earnings — related ValueMarkers analysis
- Earnings Analysis — related ValueMarkers analysis
- Cash Flow Statement — related ValueMarkers analysis
Frequently Asked Questions
what is the financial services sector
The financial services sector encompasses companies that manage money, extend credit, facilitate transactions, or provide risk management products. It includes commercial banks (JPMorgan Chase, Bank of America), investment banks (Goldman Sachs), insurance companies (Berkshire Hathaway's insurance subsidiaries, Progressive), asset managers (BlackRock, T. Rowe Price), payment networks (Visa, Mastercard), and consumer finance companies. The sector represents approximately 13-15% of the S&P 500 by weight as of early 2026.
how do you value a bank stock
Bank stocks are typically valued on price-to-book (P/B) and return on equity (ROE). A bank with ROE above 15% historically trades at 1.8 to 2.5 times book value. Price-to-earnings applies but requires adjusting for credit cycle position, because bank earnings swing significantly during recessions as loan loss provisions rise. Net interest margin (NIM) is the key revenue quality indicator. A bank with NIM above 3.5% and NPL ratio below 1.5% is operating well regardless of what the P/E says.
is financial services a good sector to invest in
Financial services companies performed well in the rising-rate environment of 2022-2023, as bank NIMs expanded and pricing power improved. The sector underperforms in recessions when credit losses rise and investment banking activity collapses. For long-term investors, high-quality banks and insurers with conservative underwriting histories have compounded capital at above-average rates over full cycles. BRK.B is the clearest example: 20.1% annualized book value growth since 1965, versus 10.2% for the S&P 500.
what is a combined ratio in insurance
The combined ratio measures insurance underwriting profitability. It is calculated as (claims paid plus operating expenses) divided by premiums earned, expressed as a percentage. A combined ratio of 95% means the insurer pays out $0.95 in claims and expenses for every $1.00 in premiums collected, leaving $0.05 from underwriting before counting investment income. A ratio below 100% signals underwriting profit. Progressive has maintained a combined ratio near 92% for a decade, which is among the best in the property-casualty industry and explains its premium valuation.
how do rising interest rates affect financial services stocks
Rising rates have opposite effects across financial services subsectors. Commercial banks benefit because NIMs expand as lending rates rise faster than deposit rates. The benefit is strongest in the first 12-24 months of a rate hiking cycle. Property-casualty insurers benefit because they reinvest short-duration bond portfolios at higher yields quickly. Life insurers face mixed effects: new money rates improve but existing long-duration portfolios develop unrealized losses. Payment processors are largely rate-insensitive because their revenue is tied to transaction volume, not interest spreads.
what is the difference between banking and financial services
Banking is one component of financial services. Banks specifically take deposits, extend loans, and operate the payment system. Financial services is the broader category that includes banking plus insurance, asset management, investment banking, consumer lending, mortgage origination, payment processing, and financial technology companies. When someone says they work in financial services, they might be a bank teller, an insurance actuary, a hedge fund manager, or a payments engineer. When analyzing stocks, the distinction matters because valuation and risk frameworks differ significantly across these subsectors.
Screen 6,000+ financial services stocks across 73 global exchanges with sector-specific filters.
Written by Javier Sanz, Founder of ValueMarkers. Last updated April 2026.
Ready to find your next value investment?
ValueMarkers tracks 120+ fundamental indicators across 100,000+ stocks on 73 global exchanges. Run the methodology above in seconds with our stock screener, or see today's top-ranked names on the leaderboard.
Related tools: DCF Calculator · Methodology · Compare ValueMarkers
Disclaimer: This content is for informational and educational purposes only and does not constitute investment advice, a recommendation, or an offer to buy or sell any security. Past performance does not guarantee future results. Consult a licensed financial advisor before making investment decisions.