Systematic guide to spotting value in beaten-down lenders

AS we look back at the financial crises that the world has seen in the last 10 years, we might think that bankers never learn from their past mistakes. It's not that. Banks, like a good many other businesses, just want to cash in on the good times. So they lend aggressively when the economy is booming. But by doing so, they can get caught when the economy takes a turn for the worse.

Thing is, when times are looking good, central banks, such as the US Federal Reserve, like to crank up their lending rates. The idea behind that is quite simple. In a strong economy, where wages are rising, consumer prices could rise. But central bankers want to be ahead of inflation. So, they try to ensure that base rates stay above the pace of rising prices.

There is another reason why central banks raise borrowing costs when the economy is strong. They want to keep something in reserve when the economic cycle reverses, which always happens. They want to be able to stimulate the economy with interest rate cuts, when that happens.