Equity Research Banking Coverage - Financial Statements and Valuation Practice Questions

To crack an Equity Research interview for a banking role, you need more than just textbook definitions. Real success comes down to practical application like calculating efficiency ratios on the fly, building three-statement models, and assessing portfolio risk in real-time.

I’ve write 15 essential financial analysis questions that interviewers actually use to separate candidates who just know the theory from those who can truly value a bank. These aren't just theoretical prompts; they are deep dives accompanied by step-by-step calculations using real numbers.

We’ll cover specific scenarios you will likely face on the job, such as how to value a bank with negative cash flows, why EV/EBITDA is essentially useless for financial institutions, and how to build projections based on actual data like JPMorgan’s Q3 2025 results. We will even look at calculating risk-adjusted returns when comparing PSU vs. Private banks.

This guide is structured to take you from DCF modeling adjustments and income statement calculations all the way to comparative valuation. These are the exact quantitative skills required whether you are applying to a bulge bracket investment bank, a boutique firm, or the buy-side.

Ultimately, interviewers want to see that you can handle the math with confidence and connect those numbers back to the business fundamentals. This post shows you exactly how to do that.

Tips and Tricks for Interview Success

Preparation Strategies: How to Win Before You Walk In

Get Comfortable Without Excel Here is the reality: you won’t have a spreadsheet in the interview. You need to practice calculating efficiency ratio impacts, WACC, and ROE changes by hand or on a whiteboard until the math feels automatic. If you rely on Excel for simple arithmetic, you will freeze up under pressure.

Formulas You Must Own Don't waste brainpower trying to recall basic equations. Have these locked in your memory so you can focus on the application:

• Efficiency Ratio = Expenses / Revenue

• WACC = (E/V × Re) + (D/V × Rd × (1-T))

• ROE = Net Income / Shareholders Equity

• FCFE for Banks = Net Income - (Increase in Required Capital)

• Sustainable Growth = ROE × (1 - Payout Ratio)

Know the Current Landscape Before you step into the room, know the numbers. Check the recent efficiency ratios, ROEs, and Price-to-Book (P/B) multiples for the major players. Being able to casually mention that "JPMorgan’s efficiency ratio is currently hovering around 55%" proves you actually follow the market.

Master Bank-Specific Accounting This is where candidates usually slip up. Be crystal clear on the differences: banks don’t have traditional working capital, EBITDA is virtually meaningless for them, and interest expense is COGS, not a financing cost. Understanding these nuances distinguishes a prepared candidate from a generic one.

Crushing the Calculation Questions

• Narrate Your Process Don't just do the math in silence. Talk through your approach before you dive in. Say something like, "I'll calculate the efficiency ratio impact by first determining expenses at each level, then finding the delta." This buys you thinking time and involves the interviewer in your logic.

• Structure Saves You Always write the formula down before plugging in the numbers. It shows structured thinking and makes it easier to catch your own mistakes.

• Round Numbers are Your Friend If they give you messy figures, ask if you can round them. Calculating with $5 billion is much faster than $4.87 billion, and interviewers rarely care about decimal-level precision they care about the logic.

• Sanity Check Your Answers Once you have a number, pause and ask: Does this make sense? If you calculate a 200% efficiency ratio or a 50% ROE, you’ve definitely made an error. Know the typical ranges (50-65% efficiency, 10-18% ROE) so you can catch outliers immediately.

Handling Complex Multi-Step Problems

• Eat the Elephant One Bite at a Time For three-statement modeling questions, don't try to solve everything at once. Tackle the Income Statement first, move to the Balance Sheet, and finish with the

• Cash Flow.

• Work from Knowns to Unknowns Start with what you have. If you have Revenue and the Efficiency Ratio, you can derive Expenses. If you have ROE and Book Value, you can back into Earnings.

• Show Your Work for Partial Credit Even if you run out of time or fumble the arithmetic, showing a clear, correct methodology often gets you full marks. Interviewers value the process over the product.

• Use Strategic Approximations If a calculation requires complex assumptions (like exact quarterly loan growth), state a reasonable approximation "I'll assume 2-3% quarterly growth, or roughly 10% annually" and keep moving.

Common Mistakes (Red Flags to Avoid)

• Never Use EBITDA: This is an instant disqualifier. Banks are valued on earnings or book value, not EBITDA.

• Don't Forget Taxes: A $100M expense reduction isn't $100M in profit. Remember to apply the tax rate.

• Respect the Balance Sheet: In modeling, don't forget that loan growth consumes capital. You cannot grow assets without retaining equity.

• Deposits are Not Debt: For WACC, remember that deposits are operating liabilities. Only bonds and subordinated debt count as financial debt.

• Ditch the Corporate Finance Playbook: Do not value a bank like an industrial company. They require specialized techniques.

Advanced Moves for Top Candidates

• Master Terminal Value Terminal value often accounts for 60-75% of a bank's value in a DCF. Be ready to defend your growth rate or exit multiple, because small tweaks here swing the valuation wildy.

• Practice Reverse Engineering If an interviewer says a bank trades at 1.5x Book Value, can you mentally work backward to see what ROE and growth rate the market is implying? This is a senior-level skill.

• Precision vs. Naivety Calculating WACC to two decimal places (9.27%) shows detail. Projecting revenue five years out to the exact dollar ($48.742B) just looks naive. Know the difference.

Post-Answer Techniques: The "Value Add"

• Connect to Valuation Don't just give the number; explain the impact. "Improving the efficiency ratio adds $200M pre-tax, which boosts EPS by $0.50 and could support a 5-7% stock appreciation.

• Acknowledge Limitations Show professional maturity by admitting where the model is weak. "This WACC assumes a stable capital structure, but regulatory changes could shift that."

• Reference Real World Examples Tie it back to reality. "This reminds me of when Citigroup improved efficiency under Jane Fraser small percentage gains translated to hundreds of millions in earnings."

Interview question answers for Financial Statements, Valuation and Practical Analysis:

1. Walk through a DCF valuation for a bank with negative historical cash flows. What adjustments would you make?

Suggested Answer: "I wouldn't use a traditional Free Cash Flow model here because banks treat loans as inventory, not Capex. Negative cash flow often just means they are aggressively growing their loan book, which is a good thing.

Instead, I would use the Free Cash Flow to Equity (FCFE) method. The formula is Net Income minus the Increase in Required Regulatory Capital.

I'd make three specific adjustments:

1. Ignore working capital and traditional Capex; focus purely on regulatory capital retention.

2. Normalize earnings for the credit cycle if provisions are unusually high right now, I'd adjust them back to a mid-cycle average.

3. Check dividend capacity. I’d calculate the cash flow available to be paid out while still meeting regulatory minimums, rather than just using accounting cash flow."

Calculation Breakdown:

• Formula: FCFE = Net Income - (Change in Risk-Weighted Assets × Tier 1 Capital Ratio)

• Example:

  • Net Income: $500 Million

  • Loan Growth (Change in RWA): +$2 Billion

  • Required Tier 1 Ratio: 10%

  • Capital Needed to Retain: $2 Billion × 10% = $200 Million

  • FCFE: $500M - $200M = $300 Million (Positive cash flow, despite loan growth).

Candidate Tip: The "negative cash flow" part is a trap. If you say the bank is performing poorly because cash flow is negative, you fail. Pivot immediately to regulatory capital—that is the language bankers speak.

2. If a bank's efficiency ratio improved from 64% to 60%, calculate the impact on pre-tax income assuming revenue of $5 billion.

Suggested Answer: "The efficiency ratio is essentially the cost to generate a dollar of revenue. At a 64% ratio on $5 billion, expenses are $3.2 billion. At a 60% ratio, expenses drop to $3.0 billion.

That is a $200 million reduction in costs, which flows directly to pre-tax income. So, we see an 11% jump in profitability just by tightening operations, with zero revenue growth."

Calculation Breakdown:

• Scenario A (64%): $5.0B Revenue × 64% = $3.2B Expenses.

• Scenario B (60%): $5.0B Revenue × 60% = $3.0B Expenses.

• Impact: $3.2B - $3.0B = $200 Million savings.

• Pre-Tax Income Increase:

  • Original Pre-Tax Income: $5.0B - $3.2B = $1.8B.

  • New Pre-Tax Income: $5.0B - $3.0B = $2.0B.

  • % Growth: ($2.0B / $1.8B) - 1 = 11.1%.

Candidate Tip: Don't just do the math in your head and blurt out "200 million." Walk them through the "Before" and "After" expenses. It shows you understand the mechanics, not just the arithmetic.

3. How would you calculate the terminal value in a bank DCF model? Why might you use an exit multiple instead of perpetuity growth?

Suggested Answer: "I would calculate it two ways, but I generally prefer the Exit Multiple method using Price-to-Book (P/B).

The problem with the Perpetuity Growth method is that it assumes stable margins forever. In banking, regulations and competition change constantly, making a 'forever' growth rate risky.

Using an Exit Multiple (like 1.3x Book Value) grounds the valuation in market reality. It’s easier to defend to an investment committee that 'the bank will trade in line with peers' than to defend a theoretical perpetuity calculation."

Calculation Breakdown:

• Method 1 (Exit Multiple):

  • Projected Book Value in Year 5: $10 Billion

  • Assumed P/B Multiple: 1.3x

  • Terminal Value: $13 Billion.

• Method 2 (Perpetuity Growth):

  • Terminal FCFE: $1 Billion

  • Cost of Equity (Ke): 10%

  • Growth Rate (g): 3%

  • Formula: FCFE × (1+g) / (Ke - g)

  • Calculation: $1B × 1.03 / (0.10 - 0.03) = $14.7 Billion.

Candidate Tip: Practicality wins here. Admitting that "perpetuity growth assumes stability that rarely exists" shows maturity.

4. A bank reports rising accounts receivable and delayed payables. Explain the impact on cash flow from operations.

Suggested Answer: "For a bank, this is a major red flag for asset quality. Rising 'Accounts Receivable' usually refers to accrued interest receivable. If that is going up, it means borrowers aren't paying their interest in cash they are becoming delinquent.

Delayed payables might optically boost cash flow temporarily, but it suggests liquidity stress. So, while the math might show a net cash impact that looks neutral or slightly down, the business reality is that credit quality is deteriorating and funding is getting tight."

Calculation Breakdown:

• Cash Flow Operations Formula: Net Income + Non-Cash Charges - Increase in Receivables + Increase in Payables.

• Scenario:

  • Receivables increase by $50M (Cash OUT).

  • Payables increase by $50M (Cash IN).

  • Net Cash Impact: $0.

  • Impact: P&L records interest income that was never collected (fake revenue), and the bank is stiffing vendors to save cash (liquidity crisis).

Candidate Tip: Do not treat this like a manufacturing company question. If you say "rising receivables is just a working capital timing issue," you will look naive. Connect it to Non-Performing Loans (NPLs).

5. Compare EV/EBITDA versus Price-to-Book for valuing a mature retail bank vs. a high-growth NBFC.

Suggested Answer: "I would never use EV/EBITDA for either. EBITDA doesn't work for financial institutions because interest expense is a core cost of goods sold, not a financing choice.

For the mature retail bank, I’d use Price-to-Book (P/B). Since their ROE is likely stable and near their cost of equity, the book value is the best proxy for liquidation value and asset backing.

For the high-growth NBFC, I’d look at Price-to-Earnings (P/E) or a PEG ratio. Since they are growing book value rapidly through retained earnings, a simple P/B might look artificially expensive, whereas P/E captures their future earnings power."

Calculation Breakdown:

• Why EBITDA fails:

  • Industrial Co: Revenue - COGS - Opex = EBITDA -> Pay Interest from EBITDA.

  • Bank: Revenue (Interest Income) - COGS (Interest Expense) = Net Interest Income.

  • Result: Interest is already subtracted before you get to operating profit. Adding it back makes no sense.

Candidate Tip: Be absolute about the EBITDA rule. It is an instant strike-out if you suggest using it for a bank.

6. A bank transferred $240 million of payroll finance loans to "Held for Sale." What is the P&L and Balance Sheet impact?

Suggested Answer: "On the Balance Sheet, the loans move from 'Held for Investment' (amortized cost) to 'Held for Sale' (lower of cost or fair value).

If interest rates have risen or credit is weak, the Fair Value is likely lower than $240 million let's say $225 million. The bank must immediately recognize that $15 million loss on the Income Statement, likely under 'Other Non-Interest Expense.' This hits earnings immediately rather than over time."

Calculation Breakdown:

• Carrying Value (Book): $240 Million

• Fair Market Value (Market): $225 Million

• Required Write-down: $240M - $225M = $15 Million.

• P&L Impact: -$15 Million (Pre-tax Loss).

• Balance Sheet Impact: Assets decrease by $15 Million; Retained Earnings decrease by $15 Million (less tax).

Candidate Tip: The key concept here is Mark-to-Market. Moving assets to "Held for Sale" forces the bank to recognize losses now.

7. Calculate the impact on ROE if asset quality deteriorates and the provision coverage ratio increases from 65% to 75%.

Suggested Answer: "This is a double hit to ROE.

First, the Numerator impact: Increasing coverage requires a higher provision expense on the P&L, which directly reduces Net Income.

Second, the Denominator impact: That reduction in Net Income flows to Retained Earnings, which lowers

the Shareholders' Equity base. Depending on the size of the NPL book, a 10% increase in coverage could easily slash ROE by 2-3 percentage points."

Calculation Breakdown:

• Assumptions: Equity $100, Net Income $15, NPLs $20.

• Scenario A (65% coverage): Reserve = $20 × 65% = $13.

• Scenario B (75% coverage): Reserve = $20 × 75% = $15.

• Impact: Need to add $2 to reserves.

  • Numerator: Net Income drops from $15 to $13 (assuming tax impact ignored for simplicity).

  • Denominator: Equity drops from $100 to $98.

• Old ROE: 15 / 100 = 15%.

• New ROE: 13 / 98 = 13.2%.

Candidate Tip: Most candidates forget the balance sheet impact. Mentioning that equity also drops distinguishes you as a detail-oriented analyst.

8. When would you use revenue multiples instead of EBITDA multiples for valuing a bank or NBFC?

Suggested Answer: "Again, I’d avoid EBITDA entirely. But I would use Revenue Multiples (Price-to-Sales) for early-stage Fintechs or payment processors.

If a company is pre-profitable or reinvesting every dollar into growth (like a Stripe or Square competitor), P/E and P/B are meaningless. In that case, I'd value them based on Gross Transaction Volume or Revenue multiples, comparable to software companies."

Calculation Breakdown:

• Traditional Bank: Revenue is driven by Interest Rates (volatile). P/Sales is unreliable.

• Fintech/Payments: Revenue is driven by Transaction Volume (sticky). P/Sales is reliable.

• Example: Payment Co. has $100M revenue, -$10M Net Income.

  • P/E: N/A (Negative).

  • P/B: N/A (Asset light).

  • P/Sales: 10x (Valuation = $1 Billion).

Candidate Tip: Context is key. Revenue multiples are for disruptors and tech-enabled finance, not for your local community bank.

9. If a bank's investment banking fees rose 13% quarter-over-quarter, how would you project future fee income?

Suggested Answer: "I wouldn't just straight-line that 13% growth. I need to decompose it.

I'd look at the M&A pipeline deals announced but not closed to predict the next two quarters. I'd also check if the 13% came from gaining market share (sustainable) or just a general market upswing (cyclical).

For my model, I’d project a 'base case' growth of 5-8% aligned with GDP and market recovery, unless I see specific evidence of a structural shift in their deal team or strategy."

Calculation Breakdown:

• Decomposition of 13% Growth:

  • Market Beta (Overall Industry Growth): +8%

  • Alpha (Market Share Gain): +5%

• Projection Logic:

  • Market Beta usually reverts to mean (GDP+).

  • Alpha is hard to sustain every quarter.

  • Forecast: Reduce to 5-8% to be conservative.

Candidate Tip: Interviewers want to see that you understand the lumpy nature of investment banking fees. They don't grow in a straight line.

10. Explain how to analyze working capital changes on the cash flow statement for a bank vs. an industrial company.

Suggested Answer: "For an industrial company, working capital shows operational efficiency how fast they collect cash or pay suppliers.

For a bank, 'working capital' lines usually represent Loans and Deposits. A massive outflow in 'Cash from Operations' due to loans isn't bad efficiency it means the bank is growing its revenue-generating assets. I essentially ignore traditional working capital metrics like DSO/DPO and focus on loan growth and deposit mix."

Calculation Breakdown:

• Industrial: Cash Outflow in WC = Bad (Trapped cash).

• Bank: Cash Outflow in WC (Loans) = Good (Deployment of capital to earn interest).

Candidate Tip: The "Aha!" moment here is redefining working capital. Loans are the bank's product, not just a receivable.

11. JPMorgan reported revenues beating expectations. How would you build a 3-statement model to project next quarter?

Suggested Answer: "I’d start with the Income Statement. I’d look at guidance for Net Interest Income (NII) and adjust for any rate cuts. Then I’d layer in non-interest income based on recent trading volatility and deal flow.

From Net Income, I’d move to the Balance Sheet to forecast Equity (adding Retained Earnings).

Finally, I’d balance the cash flow. The key check is linking the Provision for Credit Losses from the P&L back to the Allowance for Loan Losses on the Balance Sheet. If those don't talk to each other, the model breaks."

Calculation Breakdown:

• The Golden Link:

  • Step 1: P&L calculates Provision Expense ($100).

  • Step 2: Balance Sheet Reserve = Old Reserve + Provision ($100) - Net Charge-offs.

  • Step 3: Cash Flow Statement adds back Provision ($100) to Net Income because it's non-cash.

Candidate Tip: You don't need to recite every line item. Focus on the linkages: Net Income -> Equity and Provisions -> Reserves.

12. A bank's loan portfolio shows stress in MFI and cards, but overall asset quality is benign. How do you quantify this?

Suggested Answer: "I would perform a Sum-of-the-Parts (SOTP) risk analysis. I can't apply a blanket risk weight.

I would isolate the MFI and Card portfolios (say, 25% of the book) and apply a higher Expected Credit Loss (ECL) rate maybe 8-12% to adjust their specific book value.

Then, I’d value the remaining 'healthy' 75% of the book at a standard multiple. The final valuation would be a weighted average, likely resulting in a discount to peers perhaps 1.4x Book instead of 1.8x."

Calculation Breakdown:

• Portfolio A (Stressed - 25%): Value at 0.8x Book (Distressed).

• Portfolio B (Healthy - 75%): Value at 1.6x Book (Premium).

• Weighted Valuation: (0.25 × 0.8) + (0.75 × 1.6) = 0.2 + 1.2 = 1.4x Book Value.

Candidate Tip: This demonstrates segmentation. You are showing you can surgically analyze risk rather than just applying a generic "risk discount."

13. Calculate WACC for a bank with 12% Cost of Equity, 4% Cost of Debt, and a 30% Debt Ratio.

Suggested Answer: "If that 30% 'Debt Ratio' includes deposits, I wouldn't use the standard WACC formula. Deposits are an operating liability, not financial debt.

For a bank, I prefer to use the Cost of Equity (12%) as the discount rate for FCFE.

However, if you strictly want the WACC calculation assuming the 30% is true borrowings (bonds): WACC = (70% Equity × 12%) + (30% Debt × 4% × (1 - Tax Rate)). Assuming a 25% tax rate, that’s roughly 9.3%."

Calculation Breakdown:

• Weight of Equity: 70% (0.70)

• Weight of Debt: 30% (0.30)

• Tax Shield: 4% Cost of Debt × (1 - 0.25) = 3%

• Math: (0.70 × 12%) + (0.30 × 3%)

• Result: 8.4% + 0.9% = 9.3%.

Candidate Tip: The trick is the definition of "Debt". Always clarify if "Debt" includes deposits. If you blindly plug numbers into the formula, you might look like you don't understand banking funding.

14. If a bank reports a 6% improvement in efficiency ratio, what revenue growth is required to keep absolute expenses flat?

Suggested Answer: "Let's do the algebra. If the ratio improves from 60% to 54% (a 6-point drop), and expenses stay flat:

Revenue Growth = (Old Ratio / New Ratio) - 1.

That means the bank needs 11.1% revenue growth to maintain the same absolute expense level while achieving that efficiency gain. It highlights the power of operating leverage."

Calculation Breakdown:

• Scenario A: Expenses 60 / Revenue 100 = 60%.

• Scenario B: Expenses 60 (Flat) / Revenue X = 54%.

• Solve for X: 60 / 0.54 = 111.1.

• Growth: (111.1 - 100) / 100 = 11.1%.

Candidate Tip: This is a math test. Using round numbers (like 60 and 54) makes it easy to visualize.

15. How would you compare a PSU bank growing at 15% vs. a Private bank growing at 18%, both trading at 1.5x Book?

Suggested Answer: "I would almost certainly favor the Private Bank.

First, the Private bank has a lower PEG ratio (trading at the same multiple for higher growth).

Second, I'd look at Risk-Adjusted Return. The PSU bank likely carries higher governance risk and typically has a lower sustainable ROE. Unless the PSU bank is undergoing a massive restructuring or re-rating event, the Private bank offers better growth quality and less risk for the exact same price."

Calculation Breakdown:

• Private Bank: 1.5x Book / 18% Growth = 0.083 PEG factor.

• PSU Bank: 1.5x Book / 15% Growth = 0.10 PEG factor.

• Logic: You are paying "less" per unit of growth for the Private Bank (Lower is better).

Candidate Tip: Investors pay for certainty and growth. If prices are equal, always take the higher growth and better governance (Private) over the discount option (PSU).

Bonus Section: The "Cheat Sheet" Formulas

Before you walk into the interview, you need these formulas locked in your memory. Do not rely on deriving them in the momentspeed and accuracy here will set you apart.

Valuation Metrics

• Price to Book (P/B): Market Cap / Book Value

• Price to Earnings (P/E): Market Cap / Net Income

• PEG Ratio: (P/E Ratio) / Growth Rate

• The "Shortcut" P/E: (P/B Ratio) / ROE

Profitability Metrics

• Return on Equity (ROE): Net Income / Shareholders' Equity

• Return on Assets (ROA): Net Income / Total Assets

• Efficiency Ratio: Non-Interest Expenses / Total Revenue

• Net Interest Margin (NIM): Net Interest Income / Average Earning Assets

Growth Metrics

• Sustainable Growth Rate: ROE × (1 - Dividend Payout Ratio)

• Revenue Growth Required for Flat Expenses: (Old Efficiency Ratio / New Efficiency Ratio) - 1

Valuation Models

• FCFE (Bank Specific): Net Income - (Increase in Required Regulatory Capital)

• WACC: (Weight of Equity × Cost of Equity) + (Weight of Debt × Cost of Debt × (1 - Tax Rate))

• Terminal Value (Perpetuity Method): [Final Year FCFE × (1 + g)] / (Cost of Equity - g)

• Terminal Value (Exit Multiple Method): Final Year Earnings × Exit P/E Multiple

Keep this reference handy during your preparation. If you can write these on a whiteboard without hesitating, you have already won half the battle.