Which financial ratios tell you best about the health of a bank




The banking sector truly wonders the health of the economy. A bank must maintain a balance between growth and gamble. Analysis of banking capitals is not like analyzing stocks of any other business. Banks get money through sediments or debt in order to have liquidity to extend as lends and to invest to generate treasury income.Before jumping in to understand how to analyze bank inventories, one needs to understand the business model of banks and how they make money. Banks mostly make money through a combination of spread income and fee income. One should always look at the core business of the bank, both retail and corporate banking. The proportions of these two in the bank’s total revenue should ever be very healthy. A bank’s presence across the market should be also evenly balanced.As banks have unique attributes, specific fiscal rates provide useful revelations, more so than the others. One needs to look at different parameters such as cyberspace interest income( NII ), net interest perimeter( NIM ), provisioning coverage fraction( PCR ), fund suitability rate( Auto ), Current Account-Savings Account( CASA) fraction , non-performing assets( NPA ), gross non-performing asset( GNPA) and slippages. A bank has to pay interest on the borrowed money, and makes interest on the money it has given. So, investors should analyse the difference between the interest earned by the bank and interest paid, which generates the net interest income( NII ). Investors should also minutely look at total accumulations, total boosts and net interest boundary. A bank that maintains a low-pitched ADR( Advance-Deposit Ratio) is considered safe. Eventually, investors should analyze the capital adequacy ratio( CAR ). Higher the capital adequacy ratio( CAR ), the more the chances of the bank being on the safer feature, symbolizing thereby, that the bank is strengthening its capital funds and monetary growth.Another important parameter is blatant NPA and net NPA. Basically , non-performing assets( NPAs) are recorded on a bank’s balance sheet after a prolonged period of non-payment by the borrower. One should ever look out for these multitudes and how they deepen with time. In case of higher NPA, the borrowings get riskier and the bank would need to focus on recovery of the borrowing amounts. Usually, if a bank is into retail borrowing business, then probably the NPA may be lower, whereas, in corporate banking, the NPA heights are generally higher, because if any company defaults, the NPA number shoots up. Another point to watch is the provision coverage rate( PCR ), which indicates the extent to which a bank provided for under the weaker one of the purposes of its lend portfolio. A high PCR shows the bank may further provisions in the coming years would be relatively low, unless the GNPAs rise at a faster time. Investors should also consider the slippage ratio, as a sharp rise in slippage can have a major impact on provisioning and net profit. Low slippage, or no slippage, reflects good quality of assets. Another important factor is the Casa ratio. It goes to show that much deposit a bank has in the form of the share of current and saving account deposits in total sediments. Investors is appropriate to look at the Casa ratio to understand a bank’s monetary health. Higher the Casa ratio, better is its operating effectivenes. NIM is yet another factor to look at, as it appraises the effectiveness of a company’s investment decision. A positive net interest boundary indicates that the bank is efficiently investing, whereas a negative net interest margin implies inefficient investing.Most importantly, a bank management’s forward guidance is an equally important event to watch before coming making an investment decision. Instead of looking at time the current counts, fractions is appropriate to be compared against their historic quantities. This will give an understanding as to whether those figures have improved or not. Moreover, these rates should be compared with peer banks and the industry average to decide the position of a bank with regards to its entrants and whether one should invest in that special bank asset or not .( DK Aggarwal is the CMD of SMC Investment and Advisors)




Read more: economictimes.indiatimes.com









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