How to Analyse Banks & NBFCs Like a Pro
- Understand the structure and functions of banks and NBFCs in India.
- Learn to evaluate banks using key metrics like NIM, ROE, ROA, NPAs, CASA, and CAR.
- Analyse regulatory impact and RBI policies on banking operations and stability.
- Assess growth, governance, and loan book quality for informed investment decisions.
Transcript
Umesh Tripathi:
Hello everyone, and welcome. In this video, we will learn how to analyse investable banks and NBFCs, focusing on the banking sector. We will understand the banking landscape, the role of private and public sector banks in India, the functions of the RBI, and the key regulations affecting banks. Most importantly, we will discuss how to evaluate banking stocks effectively.
Overview of the Indian Banking System:
The Indian banking system consists of banks and NBFCs (non-banking financial companies). NBFCs focus on lending and other financial activities, but unlike banks, they cannot accept cash deposits. Banks play a critical role in credit flow and overall economic development, providing loans to individuals and businesses.
Bank Categories:
Banks are divided into private and public sector banks. Major private banks include HDFC Bank, Kotak Mahindra Bank, and ICICI Bank, while public sector banks include SBI and Bank of Baroda. NBFCs include Bajaj Finance, Muthoot Finance, and Shriram Finance. Public sector banks are government-owned, while private banks operate as private entities but still follow RBI rules and guidelines. NBFCs are less regulated than banks but provide loans, leasing, and microfinance to individuals and businesses.
Role of the RBI:
The Reserve Bank of India (RBI) regulates the banking sector by creating and enforcing monetary policies. It manages interest rates through mechanisms such as repo rate adjustments, acts as the lender of last resort, and ensures liquidity ratios like CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio). RBI also sets NPA norms and capital adequacy standards under Basel III to maintain financial stability.
Key Metrics for Bank Analysis:
When analysing banks, focus on the following financial ratios and qualitative factors:
Net Interest Margin (NIM): Profitability on loans versus interest paid. For example, HDFC Bank’s NIM is around 4%, indicating healthy profit on loan deployment.
Gross and Net NPAs: Measure of asset quality. HDFC Bank’s gross NPA is ~1.2%, SBI’s ~2.8%. Lower NPAs indicate safer loan books.
Return on Equity (ROE) and Return on Assets (ROA): ROE above 15% and ROA above 1% are generally considered good.
Capital Adequacy Ratio: A higher ratio than the RBI minimum (11.5% under Basel III) indicates a safer bank. ICICI Bank’s CAR is around 17%.
CASA Ratio: Higher CASA ratio (Current + Savings accounts) indicates cheaper funds. Kotak Bank’s CASA is ~50%, reflecting excellent fund efficiency.
Cost-to-Income Ratio: Less than 50% indicates operational efficiency.
NBFC Metrics:
For NBFCs, key metrics include AUM growth (Assets Under Management), loan book quality, proportion of retail vs secured loans, and cost of funds versus yield. Efficient NBFCs maintain a healthy spread between cost of funds and income from lending.
Summary:
When analysing banks and NBFCs, look for:
Low NPAs
High ROE and ROA
Healthy CASA ratio
Strong capital adequacy
Consistent growth and strong governance
Staying updated with RBI guidelines and macroeconomic trends is essential.
This completes our overview of analysing investable banks and NBFCs.
Disclaimer: Investments in securities markets are subject to market risks. Read all related documents carefully before investing.