Aswath Damodaran 345
Analyzing Financial Service Firms
! The interest coverage ratios/ratings relationship is likely to be different for
financial service firms.
! The definition of debt is messy for financial service firms. In general, using all
debt for a financial service firm will lead to high debt ratios. Use only interest-
bearing long term debt in calculating debt ratios.
! The effect of ratings drops will be much more negative for financial service
firms.
! There are likely to regulatory constraints on capital
Financial service firms often do not consider debt to be a source of capital, as
much as they consider it to be raw material that they use to produce their
products.
Thus, most banks borrow, using the regulatory capital ratios as constraints,
rather than to minimize cost of capital.
