How to analyze banking stocks

May 31, 2012

Banking is one of the most important part of any economy without which the country’s progress will definitely reach an impasse. The raw material and product in case of bank is money itself, unlike any other typical firm where raw material maybe coconut and the product obtained is hair oil. In our country the banks though autonomous work under the guidance of RBI (reserve bank of India). For a bank the asset is the money it lends and liability is the money deposited by the common man.

The 3 important Ns (numbers) to be noted for selecting a banking stock are...
• NII (net interest income),
• NIM (net interest margin) and
• NPA (non performing asset)

NII is the net interest income i.e. the total money it obtains as interest from the people who have taken loan. A continuous increase in it over longer period is a good sign that the bank has been able to market its products. NIM is another lead indicator. It is difference of interest income and interest expenses over average earning assets. An increase in it over the longer term is sanguine sign that the company is able to squeeze the margin for its growth. The third is NPA, it is a case where recovery of the money lent by the bank is doubtful and it is here that the provisions come into play. An increase in NPA over longer term should be a red signal as it indicates that the bank is unable to marshal its funds to the right people.

Naturally the good old indicators like EBITDA, operating income, management, type of bank (public or private) etc are also helpful in value buying , but the above given indicators provide a more intrinsic view of the stock. Since banks work under the guidance of RBI, decisions made by the apex bank is also crucial to ponder whether the banking stocks are worth buying or not. Going by the ratios P/B ratio governs over the other ratios. CASA ratio is another significant number with its increase the profit visibility increases. The loan book growth and with advanced technology number of ATMs are also helping to indicate the growth of bank as a whole.

Editor: Pakshaal

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