Sectors and Stocks that are "Out of fashion" but on my buy-list

Banks basically make money by lending money at rate higher than cost of money they lend which is also calld Net interest income, for icici its 2.7% which is excellent number, then banks earn from fees like card, penalty, which would be categorized under non interest income( this may include trading gains). I believe NIIs are comparable with operating income for banks, also there are other measures to measure profitability like RoA, NIM etc

My questions still remain:

  1. If ICICI Bank has a good NiM of 2.7% as you put it.Why is Operational Income or Net Interest Income a negative number even after a decade long presence? My guess is: If ICICI is making profit from Non-Banking business then it is not a good bank anymore but a good fund-house.

  2. Why are promoters out of the company? Then, does it make much sense for general public to invest? Who will give support to the plummeting share-price when even FII decide to dump this stock? And if the bank has seen a comeback, then why have the promoters not re-invested; Do the promoters know something that Account Statements do not speak?

All in all, it is a risky proposition with a limited reward. Hence, I am not interested in this stock when I compare it with Axis or HDFC Bank.

sorry to confuse you Amit, Here you go!

Net Interest Income / Total funds:2.70 (core income, from lending)

Non Interest Income / Total Funds: 1.7 ( income from fees, penalty, everything else from coreactivity)

Net Profit / Total Funds (or RoA): 1.62

NIM:3.33%

Hope this solves concern # 1, regarding concern 2, Iā€™m not knowledgeable enough to answer your question. I understand there is RBI rule that restrict promoter holding in pvt bank above 10% ā€“ im not aware how it reached it near zero or absolute zero, maybe due to dilution of stake for fund raising!

But iā€™m not overly worried about promoters holding being zero, looking around you can find Federal bank, South Indian Bank, Karnataka bank , HDFC, parent company of HDFC Bank all have promoters holding at Zero or near zero.

Iā€™m also interested to know how promoter holding in above banks is at zero or near zero now.

funds:2.70 coreactivity)

NIM:3.33%

  1. Great point. Why is HDFC Ltd. have no promoter holding and 74% FII holding. That is tricky. I had narrowed down HDFC as good, due to the safe Housing Loan model.

  2. However, red flag #1 is still unresolved.

In Mar '13, the Operating Profit was a negative 12982, giving an operating margin of -29%. Whereas ā€œother incomeā€ was 29320ā€¦ giving a positive net profit. This was the story for the last 10 years.

Point of concern is, I want to see the Operating Profit as a strong positive figure. In case my numbers are incorrect please provide a link where I can find the correct numbers.

Thanks for a great conversation.

Morning Amit,

Iā€™ve uploaded screenshot of Annual report for your reference, for more detailed information, pls refer Annual report which is available in bank site.

Screenshot:http://db.tt/MVKtrkPa

If you need all data at your finger tip without going through several pages of Annual report, pls refer sites like moneycontrol or businessstandard -http://www.business-standard.com/stocks/company-overview/5418-icici-bank

Click financials for more financial details on above link!

Amit Sir,

You are clearly looking at wrong thing. Banking P&L and balance sheets are not to be analyzed as normal company. terms like operating profit margin and net profit margin makes zero sense for a bank. Hereā€™s how you read a banks P&L statement.

A. Interest income from all sources

B. Total Interest Expense (interest paid to depositors/bondholders etc)

C. Net Interest Income (NII) - A - B -> This is important figure.

D. Other Income

E. Net Income = C + D -> This is most relevant figure. Dont calculate any ratio without this.

F. Operating Expenses (All expenses)

G. Operating Profits (E - F)

H. Provisions (for NPA/reserves etc.) - Important figure

I. Net Profits (G -H - Tax)

The fundamental flaw in your #1 is you are calculating OPM as G/C. Which is not correct. Operating expenses are for lending business as well as business that generates other income. You cannot choose to separate them out. And in fact OPM/NPM makes no sense in banking.

Instead Cost to Income ratio (F/E) and NIM are used. Also most important are ROA (Net Profit / Total assets) and ROE.

Nikhilji,

Thank you for the write-up. It is informative enough for me to print-it and post-it on my green-board.

I have a few questions regarding the Annual Reports of Banks. Please oblige.

In the Balance Sheet, what is the nature of the heading ā€œInvestmentsā€. I ask because, in 2012 statements most banks showed negative Profits from Operations mainly due to a big negative Change In Investments Figure.

Please explain in as much detail. Thank you.

Please refer to this Link for Cash Flow statement of HDFC Bank.

http://craytheon.com/financials/cash_flow_statement_analysis.php?company=HDFCBANK

This is a pretty good link to understand and learn basic financial analysis for banks.

http://www.westga.edu/~rbest/GSBLSU/finanalysis/BankFinancialAnalysisPresentation.pdf

Hi Nikhil,

From the Annual Report of HDFC Bank:

The Cash From Operations has been negative for the last two years:

F.y 11-12 -9,602

F.y 12-13 -113,473

A deeper look revealed that this was due to Increase in Investments. For some reason this detail shows under the heading of ā€œCash Flow used In Operationsā€ and not in ā€œCash Flow used in Investing Activitiesā€. This is my first question.

My second question is, why did HDFC make such huge investments. And so did Axis. While other PSU did not. Did RBI impose some rules on private banks? This money could well be used to bring down the Leverage Ratio for HDFC and Axis both. But instead they chose to make fresh investments. Strange.

T.I.A.

Amit.

hi amit

Analysing banks is different from analysing other companies like manufacturing companies etc.

I suggest you go through Pat dorseyā€™s book ā€œFive rules for successful stock investingā€ (in case you already have not read it) and specifically the chapter on Banksā€¦It describes how to analyse banksā€¦

You seem to have gotten stuck in looking at cash flows of banks and comparing themā€¦I think for banks (and for financial institutions) there are more important things to look at ā€¦I will try to list them but you can refer to the book or someone ā€¦ experts like nikhil or someone else can chip in.

Banks are exposed to three types of risksā€¦credit risks, liquidity risks and interest rate risksā€¦if they manage to handle these risks efficiently they will keep on running smoothly.

What Dorsey mentions are hallmarks of great banks are.

1). Strong capital baseā€¦ Here one has to look at equity to assets ratioā€¦ higher the better. Plus have a look at the level of loan loss reserves relative to NPAā€¦ (provision coverage ratio) higher the better.

2). ROE and ROAā€¦return on equity and return on assetsā€¦ again higher the better.

3). Operating costs as percentage of net revenues.

4). Net interest margins.

5.Strong revenue growth

6). Price to Book ratio.

1 Like

1).

2).

3).

4).

6).

Good points Hitesh bhai. Interesting discussion going on. Keep throwing out knowledge, We are ready to catch.

1).

2).

3).

4).

6).

Gā€™Morning Hitesh Bhai,

I believe that the markets, at any given point in time, efficiently reflect the ā€œpopular ratiosā€ (searched by commonly used scanner settings) in the share price. Therefore, I get very attentive when I get to read a unique perspective from your posts. This unique perspective may not be a news item, but an interpretation of data from Annual Reports, because everything banal is already factored in.

For ex. currently popular sites are recommending purchase of LT as it looks cheap to them. This makes me think of one quote by Munger (or was it) which says that, if you come across a stock that is cheap, ask ā€œGod! Why meā€. In other words, what is the catch. With that motivation, I did an extensive research on LT. Only to find out that its fundamentals are deteriorated in an unprecedented manner. If the recession worsens, then we may even see the fall of this industrial behemoth. It posted a pretty profit, but the FCF is beyond imagination And the debt is burgeoning. LT is borrowing more and more cash, with the zenith reached in F.Y.2013 with highest borrowing in a single year of TEN THOUSAND CRORE. This was due to as much increases need for working capital due to negative FCF.

On similar lines, I wish to see the unique perspective in Banks. I have made a note of the ratios you have mentioned and most importantly the Risks: Credit, Interest Rate and Liquidity Risks.

I have seen that the banks almost always have a positive operating cash flow, due to the business model. So may be I need to see OCF in ratio with Lendings to see any weakness in asset quality; after all if Lending (and Borrowing) increase then so should OCF right.

The leading banks have their basic ratios, ROE, ROA, NPAs, NIM, NIIs well set. Now, I need to sieve out the ones which appear shady due to very high percentage of Other Income (non-core income of Fees and treasury) or aggressive borrowing stance but poor business model or too much exposure to non-performing sectors like Power, Infra etc.

Will keep the thread updated.

Regards,

Amit.

Amitji, Hitesh sirā€™s points are great to start with. You should really go through the book he suggested. My little knowledge is gained over years from banking experts at TED and internet. It takes time to get real hold of things. And you still are not guaranteed to take best decisions :slight_smile:

First point : someone should rename this Thread to ā€œBanking sector talkā€¦ā€

I am attaching performance of following banks (since 2000) for your reference. Over long period (above 5 years) Private sector bank perform better.

HDFC Bank
Axis Bank
Yes Bank
SBI
BOB
Indusind
Kotak
Jammu&Kashmir
PNB
Union


Now look at the performance even during BULL RUN.

Private sector beat PSU in all time. Short or long.