Thread by @Finology_Quest

How to analyse Banking Stocks?

• Net Interest Margin(NIM)
• Return on Assets(ROA)
• Non Performing Assets(NPAs)
• CASA Ratio

Let's analyse each one in detail 🧵⤵️

#StockMarketindia #banks

The business of bank is quite different frm the rest.

Banks accept deposits from common people & promise a certain rate of interest in return. It lends this money to borrowers & charges higher interest.

The diff between both is called spread which is bank’s actual profit

For Eg, a bank offers 6% interest to its depositors & charges 10% from its borrowers.

The diff between the two 4% (called spread) will be bank’s profit.

As the business stands unique, the analysis of these stocks is also unique.

So, let's break them down one by one⤵️

1⃣Net Interest Margin(NIM):

NIM is tool used by both investors & bankers to measure profitability. It is diff betwn interest earned frm loans & the intrst paid out to depositors.

It can be used as parameter to measure fund manager’s efficiency in managing firm’s assets.

NIM can be calculated as

= (Investment returns - Interest expenses)/Average earning assets

Higher NIM shows good demand for loans or other financial products of the banks.

Negative or declining NIM must trigger caution as it reflects poor allocation or handling of assets.

2⃣Return on Asset(ROA):

Every business has assets. The efficiency & profitability of any firm depends on its efficient usage of assets.

ROA tells how efficiently a bank is generating cash out of its assets. It can be calculated as:

ROA = Net Income/Total no of assets

The assets of the banks are mainly composed of cash, which is collected from their depositors.

ROA tells how effectively banks work to find new borrowers. It demonstrates how much the bank makes on every single penny it has invested in assets.

Higher ROA is usually preferred as it shows bank has effectively pull all its assets to work.

Negative or low ROA might point out the bank’s inefficiency in the allocation of resources.

Hence, it's always better to compare 2 competitive banks to get clear picture.

3⃣Net Non-Performing Assets(Net NPA):

Net NPA is a category of loans or advances that were given away by banks in the past but are still in arrears or are yet to be paid.

It is the amt of money loaned to others that would never come back to the bank.

It can be calculated as:

Net NPA = Gross NPAs - Provisions

Net NPA helps in determining how well a bank can differentiate between good & bad borrowers.

High Net NPA means the bank is inefficient in analysing its lenders & the lower the Net NPA, the better the situation.

4️⃣CASA Ratio:

CASA ratio, also known as the current account to savings account ratio, is a financial metric used to measure the proportion of a bank's deposits that are in the form of savings or current accounts.

This ratio provides insight into a bank's liquidity and the safety of its deposits.

A healthy casa ratio is generally considered to be around 70%, which indicates that the bank has a good amount of liquid assets on hand to meet the demands of its depositors.

However, analysing a company based on only 1 ratio can be misleading. So always take ROE, ROA, NIM, NPA and other relevant ratios into consideration before investing.

This will shed light on how well the bank is performing.

Also, we have analysed the banking stocks with the very unique model through which you can learn which bank performs with full efficiency & we have revealed this unique method in our Value Investing course on Quest -

The best part is the report can be downloaded from the 𝙍𝙚𝙨𝙤𝙪𝙧𝙘𝙚 𝙨𝙚𝙘𝙩𝙞𝙤𝙣 of the course - bit.ly/quest-advanced…

Here is how you can access the report⤵️