What are the factors to look out for before investing in Banking and NFBC stocks?

• Credit growth – One should look at advances growth on YoY (Yearly) and QoQ (Quarterly) basis as reported by the lender. Further, a look is needed at segment-wise growth to gauge segment contributing to credit growth. Broadly, there are 4 segments – Corporate, MSME, Retail and Agriculture. Retail growth is considered to be more beneficial as it offers relatively stable asset quality and higher margins.

• Liabilities growth (Deposits) – A lender needs to source funds in order to undertake lending activities. Thus, deposit growth is to be looked and specifically proportion of low cost deposits (CASA) i.e balance of savings and current account needs to be analysed.

• GNPA and NNPA ratio – One of the most important parameter in lending business is Gross Non-performing Asset (GNPA) and Net Non-performing Asset (NNPA) which indicates about the proportion of loans which are in default. A trend of reducing GNPA and NNPA ratio induces confidence on under-writing process and thus on earnings trajectory.

• Net Interest Income (NII) and Net Interest Margin (NIM) – NII growth is seen to analyse whether growth in advances is percolating to overall revenues. In addition, trend in NIM (Net Interest Margin) indicates amount of money the lender earns on its on loans after payment of interest on deposits.

• Cost to Income ratio (C/I ratio) – C/I ratio is defined as operating expense divided by Net total income. This parameter indicates operational efficiency of the lender and the lower it is, the better.

• Provisions  or Credit Cost – Provision is a non-cash expense by the lenders in lieu of defaults/ expected defaults i.e NPA. Lower credit cost is better as it provides confidence on underwriting capabilities of the lender.

• Return on Asset (RoA) – RoA is calculated as Net profit divided by total assets. It indicates earnings capability of a lender after all expenses – operational as well as non-cash credit cost.

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