ValuePickr Forum

How to analyze NBFC companies?

Yes, you can look at Market cap / Total assets (lets call it M / A) or per share version of that, its usually a good indicator of market sentiment on a lender. Here is one way I look at it - the total asset book of a lender is like one giant loan, which earns a yield equal to the (ROA * (1+growth rate)) of the lender. Now, the present value of a loan, where discount rate = loan yield, is the loan amount itself. Given that we would be using cost of equity to discount a lender (WACC imo is not relevant because debt = raw material for lenders), and that in general cost of equity (~15%-20%) > ROA (usually between 1%-2% (banks); (2%-4%, NBFCs), EV of a lender should in general be much less than the total asset book. Higher values of M / A would therefore almost always be linked to expectations of high growth, for a fixed level of ROA. Higher ROA would also earn a higher M / A.


Very true - Asked this in the context of PnB Housing Fin. Clearly the market is pegging a huge growth tag to it.

Thanks for the note



Can you elaborate more on this point. From what I understood you mean to say the equity dilution for a bank will be in range of 15-20% while ROA is in range of 1-2%. How does this lessen EV (Market cap + debt) and thus effect M/A ?

Thanks in advance.

To clarify: It’s that the denominator when you discount cash flows is bigger when you use cost of equity. For a given loan, the PV of the loan is the loan itself, if we discount it at the loan interest rate. However, if we use a higher discount rate the PV of the loan will be less than the loan value itself. If we look at the book of a bank as a giant loan that returns the ROA as earnings, and since ROA for banks is typically single digits, ROA < cost of equity. So valuation of a bank = PV of its asset book, discounted by cost of equity < PV of its asset book discounted at its earnings rate i.e. ROA = Asset book of the bank. Hence, cases where EV > Asset book for a lender indicates v high growth expectations or exceptional margins - since the latter is more uniform across classes of lenders, it typically indicates high growth expectation.

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Is there any thread that explain about the indian banking industry [in detail] ?
Will appreciate any help. @vaedermacher @fabregas

@baba A simple search would have done the trick.

Anyway, here you go.

@VIFL, THANKS a lot Rajeev … I don’t know how I missed it. I have been searching this thread for a fews day. thanks a lot.

Would greatly appreciate it if anyone could let me know the general flowthrough/reconciliation between disbursements and AUM for a typical NBFC.

My understanding is that disbursements are the principal loan amounts disbursed during any particular period; this then gets aggregated into your AUM, which generally tends to get reflected in the BS as financial receivables. Is this right? Does it go anywhere else? Now part of these loans are also generally securitised and taken off balance sheet. The money from this securitisation goes back into the BS as assets or some place else and then I’m assuming the securitised inflow is amortised as income during the said period of the loan?

Also is it fair to say that the difference in the AUM between any two years is just the disbursement figure. Is there anything else I am missing?

Difference between AUM of any two years would be disbursement plus re/prepayments of loans. AUM at the end of the year = AUM at the beginning of the year plus disbursements during that year minus repayments or prepayments of loans. Every year you will disburse money and also some amount of loans will be paid back. The net figure will give you the AUM.

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Can someone please help me to understand below points…

  1. when to use P/E ratio and when to use Price to Book while analysing NBFCs?

  2. Is it a correct approach to ignore the P/B when company paying the Dividend regularly?

  3. What is the link of above two ratios with respect to RoE? Specially if a company is generating a good RoE (e.g > 25) and healty NIM and low GPA/NPA?


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Hi, you should look at both, but not rely on either one. P/E is impacted by provisioning policies and leverage, and similarly P/B doesn’t accurately reflect leverage - and it is subject to regulatory shifts so P/B in different regulatory regimes will be different, doesn’t necessarily mean company is a value buy.For ex a bank with 100 of loan book, 100 of market cap and 10 in earnings and 20 in shareholder equity has P/E of 10 and P/B of 5 and leverage (equity to loan book) of 5x. If regulations require the bank to require only 2x of leverage it needs to have shareholder equity of 50, which would show P/B of 2 - this is not necessarily a value buy as there are now large dilution and growth concerns to be factored. Instead of P/B, you can think of Market Cap to Operating Assets (loan book + investment book) - captures leverage and you can apply portfolio quality measures to this ratio easily, by deducting them from operating assets for example or applying a hair cut based on provisioning / recovery trend.

Not sure if there’s any technical reason for ignoring P/B when dividends are paid out.

RoE is distorted in banks and NBFCs because of leverage, instead use RoA. NIM can also be overstated because of low leverage. Healthy level of leverage is desirable so low leverage is a sign of inefficient capital use.


@vaedermacher thanks for the reply. Understood the point.

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One can use Operating Cash for non-financial companies and Operating Assets for banking and financial companies…

Is this understanding correct?

Dear all,

With the recent episode of Asset-Liability mismatch risk coming to the fore in the event of rising interest rate regime, please find below how different NBFC’s are stacked. Without sticking my neck out on any company specific recommendations, in my opinion sticking to 1) Market leaders 2) Higher-rated (albeit bad reputation for credit rating agencies) 3) lower ALM mismatch could be a prudent approach for risk-averse investors.

While various NBFC related threads are active today :slight_smile: hope the below crux is beneficial for our forum members.

Thank You

Disclosure: long-term holding (since 2010-2013) BFinan, CAPF, M&M Finance and Piramal including rights.


Hi, yes, you can think of it that way. It is similar to considering asset efficiency and RoCE for asset heavy manufacturing businesses.

You can actually derive the operating cash flow, so to speak, for a financial entity, but it is quite tricky considering the cash in cash out nature of the business - and one typically needs to know the repayment schedules of both their assets and liabilities for that, which are not disclosed in detail. One can study the accounting practices and cash flow statement to see how revenues are amortized to get a sense of this.

Can anyone help me to understand how to find how much a bank or nbfc has distribute as a loan to corporate under debt restructuring schemes ? Since 25-30 percent of the restructured assets, in the event of a delayed economic recovery, can turn bad, which is the case as of now. So this is equally dangerous as NPA.


Good Article around current situation in NBFC and changes needed

Probable changes suggested by RBI for NBFCs