KEY Indicators While Picking Banking Stocks

Investment Learning
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  1. CAR (Capital Adequacy Ratio) - A vital indicator while picking a bank stock for investment. This ratio indicates can bank meet its’s obligation. This is a cushion every bank should have in their arsenal to keep the depositors’ funds safe. Bottom line more the CAR the better for the bank.

  2. Net NPA (Non - Performing Assets) - Non-Performing Assets are those assets when the borrowers of the bank fail to pay the Principal or Interest. Every bank aims to achieve the lowest possible Net NPA as it boosts investors’ confidence to invest and ensures depositors’ confidence too. The lowest the NPA the better it is.

  3. NIM (Net Interest Margin) - Net Interest Margin is the difference between the Interest income and Interest Expense. A bank gives out interest on savings and fixed deposits and charges interest from customers on loans and advances. Do keep an eye on NIM which tells if the bank has a higher spread or not.

  4. Leveraging Technology - In the era of METAverse, even banks should be upscaling technology as much as possible to ensure smooth and hindrance-free transactions.

  5. Primary Bankers - In the past few years we have seen new private banks coming and making their way into the market. To ensure more profitability, a bank should be a primary banker, meaning a customer should not just be your savings bank account holder but also use multiple banking products. While analyzing the financial statements you can see multiple headlines such as Wholesale Banking, Corporate Banking, and Other Retail Banking which tells you a complete story.

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Thanks a lot for the insights. Would be grateful if you could share your thoughts on a couple of points:

  1. How do we interpret the collection efficiency percentage shared by the banks and NBFCs? What should be a good collection efficiency percentage?
  2. How do we spot if banks or NBFCs are indulging in evergreening of loans to avoid showing stressed assets?
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@Vivek_Shetty

  1. Collection efficiency is more relevant in Microfinance, SFB, NBFC business models and not in large retail banks/corporate banks. There is no standard parameters for collection efficiency but we have to see the y-ooy/q-o-q collection % as declared in results. In some financial stocks, there might be collection from GNPA as well and collection can exceed 100%. Ideally 99-100% should be normal in a good macro scenario and many times in the small finance/micro finance there is delays in payment of EMI. So you should see overall collection efficiency alongwith GNPA formation, fresh slippages.

  2. For evergreening, you have to trust the professional Management. In banks there is no promoter generally and most of the shareholding is with FII/DII which have much stronger analysis teams and do their own Fraud accounting as well. Generally all the present banks/NBFC are highly regulated with frequent RBI Audits and with new Expected credit loss guidelines, you will appreciate that Indian financial sector (Pvt) is strongest globally. Compare with US and China Banks.

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