Evaluation of Bank Stocks

Evaluation of Bank Stocks

INTRODUCTION:

Finance sector is divided into 2 groups.

            1. BANKS

            2. NON Banking Financial Company  (NBFC).

Primary business of these companies is Money Lending and not maintaining savings account

Financial companies are different from other manufacturer company because their fundamentals  are totally different.

Banks are again classifieds into 2 categories.

            A. Public Sectors Bank

            B. Private Banks

A. PSU banks are SBI, PNB, IDBI

            PSU bank’s main aim is to provide services and sustain, similar to Other Sarkari dept ,                      PSU banks are also बिगड़ेहूएबच्चेहै . They are least bothered about Value creation to share holders.

            Corruption is rampant.

            Employees take more salaries and work less.

            All these factors are reflected in their less Profitability and less growth.

B. Private banks are HDFC bank, ICICI bank etc.

            These banks are better than Sarkari. However, some of them are also infected by Sarkari Virus . Corruption has entered in some banks.

Analysis of Banks is much more complicated but we will try to make it simple.

Five important ratios needs to be considered are as follows

1. Net interest margin

2. Return on Asset (ROA)

3. Return on Equity (ROE)

4. NPA

5. Provisions.

1. Net interest margin

= (Interest Earned – Interest paid)/ Asset      ×  100

More the NIM , better the company

2. Return of Asset

= Net profit/ Total Asset    × 100

3. Return on Equity

= Net profit/ Equity   × 100

These are straightforward.

These numbers are available in Balance sheet and PL statement.

More ROE and ROA, better the company

4. Non performing asset ratio

=  Non performing asset/ Average asset    × 100

Non performing asset means payment of interest or principal is delayed by more than 90 days, by the borrower

5. Provisions and contingency :

Company has to keep aside certain portion of profit to cover  non performing assets.

If NPA become default or loss asset then provisions are used to Write off those bad loans

Good company shall have.

1. More NIM, ROA, ROE

2. Less NPA and Provision.

LESSONS LEARNT:

 1. Key difference in balance sheet reading is

            1Classification of Assets.

                        Banks have different types of asset than manufacturer company.

            2. Financial Leverage.

                        Banks have more Financial leverage.

We must see that whether company is generating more profit by more leverage.

2. Turnaround in stocks can be guessed from four sources

            1. Allegations against top management in news.

            2. RBI warnings and fights

            3. Share Price Erosion

            4. Profit Erosion and Raising NPA/ Provision

3. ’Combination of high Leverage with High NPA’ is bad despite of increasing profits.

4. The role of TDS in selection criteria of banks:

            Tax paid

            Dividend per share             Interest Earned (Top line)