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How to analyse Banking Stocks

8 Mins 31 Oct 2023 0 COMMENT

Analyzing a bank stock requires you to be aware of various terminologies. We will try to explain the important terms used and the key values. First of all, let's understand the types of banks, Scheduled Commercial Banks: PSU Banks, Private Banks, Foreign Banks, and Small Finance Banks. It is advisable to park your money in the Scheduled Commercial Banks.

Here is a list of Scheduled Commercial Banks:

Sr No.

Name of the Bank

1

Axis Bank Ltd.

2

Bandhan Bank Ltd.

3

CSB Bank Ltd.

4

City Union Bank Ltd.

5

DCB Bank Ltd.

6

Federal Bank Ltd.

7

HDFC Bank Ltd.

8

ICICI Bank Ltd.

9

IndusInd Bank Ltd.

10

IDFC First Bank Ltd.

11

Jammu & Kashmir Bank Ltd.

12

Dhanlaxmi Bank Ltd.

13

Karnataka Bank Ltd.

14

Karur Vysya Bank Ltd.

15

Kotak Mahindra Bank Ltd.

16

Lakshmi Vilas Bank Ltd.

17

Nainital Bank Ltd.

18

RBL Bank Ltd.

19

South Indian Bank Ltd.

20

Tamilnad Mercantile Bank Ltd.

21

Yes Bank Ltd.

22

IDBI Bank Ltd.

23

Bank of Baroda

24

Bank of India

25

Bank of Maharashtra

26

Canara Bank

27

Central Bank of India

28

Indian Bank

29

Indian Overseas Bank

30

Punjab & Sind Bank

31

Punjab National Bank

32

State Bank of India

33

UCO Bank

34

Union Bank of India

Another type of bank is Cooperative or Regional Banks. Parking money in these Banks has a bit of higher risk. What do banks really do when you deposit money in a bank, the bank gives you interest of 4% and the bank lends this money at 12%. So, the difference of 8% is the profit of the bank this is called the net interest margin.

Let's understand structure of a bank:

  1. Asset for a bank:

    The asset portion of a Bank's capital includes cash, government securities, and interest earning loans; example, mortgages, letters of credit, and interbank loans.

  2. Liabilities of a bank:

    The bank's main liabilities are its capital including cash reserves and often subordinated debt and deposits. The latter may form domestic or foreign source, corporations and firms, private individuals and other Banks and even governments. Banks are required to maintain liquidity with the Reserve Bank of India.

  3. Statutory Liquidity Ratio (SLR):

    It is the money a bank needs to preserve in the form of cash, gold or government bonds before providing credit to the customers. The limitation is added by RBI on banks to make funds available to the customers on demand at your earliest convenience. Banks are required to maintain SLR of 18%.

  4. Cash Reserve Ratio (CRR):

    Banks are required to hold a certain proportion of their deposits in the form of cash. Banks don't hold these as cash with themselves but deposit such amounts with RBI or currency chest. CRR rate is at 4.5% currently.

  5. Repo Rate:

    It is the rate at which the RBI lends short-term money to the banks. The RBI changes the repo rate to balance growth and inflation.

  6. Reverse Repo Rate:

    It is the rate at which banks park their short-term excess liquidity with the RBI.

Now let us understand various terminologies for Banks:

  1. Net Interest Income:

    This is the spread the banks make on its lending. It is calculated as interest income- interest expended.

  2. Net Interest margin:

    This is the spread the banks make on its lending. It is the earning which is left after deducting the cost paid to the depositors from its yields on the loan. This is denoted in percentage terms. NIM= yield on loans - the cost of funds.

  3. Capital Adequacy Ratio (CAR):

    The capital adequacy ratio is a measure of a bank's available capital expressed as a percentage of a bank's risk weighted credit exposure. Let me explain, basically capital available to lend is of two types:

  • Tier-1 Capital:

    In simple words this capital is freely available with a bank to lend.

  • Tier-2 Capital:

    This is the capital tied up somewhere and is less freely available to lend and is used mostly in adverse events.

Under Basel III norms, a bank's Tier 1 + Tier 2 capitals must be a minimum of 8% of its risk weighted holdings. The minimum capital adequacy ratio also including the capital conservation buffer is 10.5%.

  1. Current Account Saving Account (CASA):

    There is no interest paid on the current accounts and a small interest paid on savings account. The combination of both is called CASA and it indicates the number of liabilities on which the bank pays relatively less interest.

  2. Deposits:

    Bank deposits are a savings product that customers can use to hold an amount of money at a bank for a specified length of time. In return the financial institution will pay the customer the relevant amount of interest based on how much they choose to deposit it and for how long.

  3. Gross Non-Performing Assets (GNPA):

    It is the total loans on which no payment has been paid for 90 days or more. GNPA percentage is usually shown in each bank's quarterly results. The percentage is basically GNPA amount as a percentage of the total advances.

  4. Slippages:

    Slippages denote the fresh amount of loan that have turned bad in a year. The slippage ratio of a bank is calculated as Fresh accretion of NPS during the year divided by the total standard assets at the beginning of the year multiplied by 100.

  5. Provisioning Coverage Ratio (PCR):

    This is the ratio of provisioning to GNPA and indicates the extent of funds a bank has kept aside to cover loan losses. For instance, a company has GNPAs of 100 and they have set aside Rs. 50, then the PCR is 50%.

  6. Net NPA (NNPA):

    The total figure left after deducting provisions made for bad loans from GNPA. GNPA - Provisions + upgrades or write offs = NNPA.

  7. Special Mention Accounts (SMA):

  • SMA 0:

    It is a category in which stress with respect to the principal and interest has remained overdue for a period of 0 to 30 days.

  • SMA 1:

    It is a category in which stress with respect to the principal and the interest has remained overdue for a period of 30 to 60 days.

  • SMA 2:

    It is a category in which stress with respect to the principal and interest has remained overdue for a period of 60 to 90 days. The loans that do not pay interest for 90 days are known as non-performing assets. Banks has to provide for such bad loans.
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