How to Analyse Financial Reports of Banking and NBFC Companies

Hello, I am Umesh Tripathi and we are learning the concepts of fundamental analysis. In this video, we are going to learn about how to analyze the financial reports and annual reports of banking and NBFC companies. Here we will discuss the important ratios while analyzing the banking and NBFC companies, go through a real-life annual report and financial statement components, and see what are the important parameters related to banks and NBFCs that we need to check when analyzing the financial statements. 

So if we talk about what banks are—what are banks? Banks are basically the entities which are regulated by the RBI, and these are the financial bodies which can accept cash deposits, provide loans to their customers, and even issue cheques. Certain examples of banking sector companies are like HDFC Bank, ICICI Bank—these certain banks are the ones which provide banking solutions to their customers. 

If we talk about NBFCs, then an NBFC is also a financial body, but it is a Non-Banking Financial Company which is not holding a banking license. It is also regulated by the RBI, but unlike banks, it cannot accept any sort of cash from its customers, though it can lend to its customers and offer other financial services. Certain examples of NBFC companies are Bajaj Finance and LIC Housing Finance. 

Here, let’s talk about some important ratios. Actually, when we are analyzing the banking and NBFC sector companies, we need to focus on certain finance-related ratios which are not part of general financial statements. As we saw in previous videos, for non-banking companies we had different ratios to look into. Here, NPA is a certain ratio. NPA basically is a type of loan or advance which the borrower fails to repay—interest or principal—for more than 90 days. Generally, when we analyze banks, there NPA—Non-Performing Asset—becomes an important ratio. Basically, many times it happens that some customers take loans but they are not able to pay the interest or the principal amount. So if they are not able to repay for continuously 90 days, the amount actually comes under NPA. 

So Gross NPA and Net NPA are important ratios. Here, the Gross NPA ratio basically Gross NPA is divided by Gross Advances. So whatever gross advances data we have, we use that to calculate the Gross NPA ratio. So when we divide Gross NPA by Gross Advances and multiply by 100, we basically get a Gross NPA ratio. Okay? In the Gross NPA ratio, provisions are not taken into account. When we take the provisions also into account, it actually turns into the Net NPA ratio. So here, after deducting the provisions made from the NPAs, we get the actual loss. The actual loss is in the form of Net NPA. Okay? 

Along with this, we have an important ratio which is called the CASA ratio Current Account Savings Account ratio. So basically, the CASA ratio measures the proportion of a bank’s total deposits that come from current and savings accounts. A simple example here is: Current Account deposits plus Savings Account deposits divided by the total deposits of the company; when we multiply by 100, we get the CASA ratio. Okay? 

So now let’s talk about the key financial statement components to analyze when we are analyzing banks and NBFCs. So basically, whenever we analyze any Non-Banking Financial Companies or banking companies, in their annual reports or financial statements there are some key ratios related to banks and NBFCs which we need to look at when we are analyzing companies belonging to these sectors. 

Here, if we look at the income statement, then basically we need to see Net Interest Income, because mostly banks rely on interest income. So we need to look at the Net Interest Income ratio. Along with this, we need to see the information on commissions or fee-based income. We also see the data for provisions for NPAs there. Along with that, Net Profit and EPS—just as we see in other companies in their Profit and Loss statement or income statement—we get to see that as well. 

If we talk about the balance sheet, then in the balance sheet basically we get to see the loan book growth, and in the case of banks in particular, we see information about the deposit base. The Cash Reserve Ratio is an important ratio; we also need to look at that. So basically, “Cash and balances with Reserve Bank of India”—this is also called the Cash Reserve Ratio—which is the percent of a bank’s total deposits that is required to be held as reserves with the RBI. Along with this, liquidity coverage and advances are also parts of the balance sheet. 

If we talk about the cash flow statement, here we get to see information on the increase and decrease in advances and deposits. Along with that, we also get to see the information on net proceeds or repayments in borrowings. 

Now let’s see a real-life example of a certain annual report of a particular bank, which is called IDFC First Bank, and go through its financial statements and also talk about the financial ratios related to banks which are produced in the financial statements or the annual report. 

So here, on your screen you are seeing that financial statements are of two types: standalone financial statements and consolidated financial statements. So basically, whenever we are doing analysis, we should focus on consolidated financial statements, because they include their subsidiary companies as well in the financial statements. Okay? 

So here we are looking at the consolidated balance sheet as on March 31, 2024. If you pay attention, then in the “Capital and Liabilities” section you can see any capital-related information or reserves and surplus information. Along with that, you can see information on deposits and borrowings. So these are all banking-related terms. Now, the information about the deposits in banking—what customers deposit—you can see that here. 

If you pay attention to the assets column, you can see “Cash and balances with Reserve Bank of India”—you can see this information. Along with that, you can see information on advances and fixed assets. So if we pay attention, here the total capital and liabilities are 296 crores. Now, generally when we see the consolidated balance sheet of non-finance companies, instead of “Capital and Liabilities” we get to see information on “Equity and Liabilities.” 

Now here, under assets, if you see, the total assets are around 296 crores that we get to see. The number written here is in thousands—please keep this in mind. So at any given point of time, in this balance sheet, capital and liabilities are equivalent to total assets for this particular bank. Okay? 

Along with this, if we pay attention to the Profit and Loss statement, then again, what is their income coming from? Their income is from interest earned. So the income here is actually from interest; expenditures are the interest expended, operating expenses, and other provisions and contingencies. So here, the total income after expenditure is around 33 crores. Now since this is a bank’s Profit and Loss account statement, you can see that the consolidated profit or loss for the year attributable to the group is also considered in this particular statement. And if you pay attention, you can see that the brought forward consolidated profit/loss attributable to the group has to be actually subtracted from this number so that we get the amount available for appropriation. 

So in banking, if you pay attention to appropriations, you can see that basically “Transfer to the Investment Reserves,” “Transfer to the Capital Reserves,” “Dividend paid,” and the total earning per share of this particular bank is around ₹4 per share. Now here we have an income column, an expenditure column, and an appropriations column. So we have these enumerations as far as the Profit and Loss account statement is concerned. 

If you pay attention here, then in annual reports you also have some other enumerations around the interest earned part. So under Schedule 13 of this particular annual report, you can see the company has shown its interest earned data, whereas it has Schedule 14 where it is showing other income statements as well. So from here you can see that from commission, exchange, and brokerages it is getting a certain amount; from profit/loss on the sale of investments it is getting a certain amount. So these are the other income sources of this particular bank. 

Along with this, if we see the cash flow statement the cash flow statement of this particular bank—we can see that cash from operating activities has certain information on provisions for tax, on profit after tax, net profit before taxes, and certain adjustments. So adjustments here are basically advances, deposits, and other liabilities. So in this case, the net cash flow generated from operating activity turns out to be around 11 crore 54 lakh again, this amount is in thousands. If we look at the “Cash flow from investing activities” section, then here the net cash flow used in investing activities turns out to be a negative number. “Cash flow from financing activities,” which are proceeds from the issue of additional Tier 2 bonds, net proceeds or repayments in the borrowings—so basically cash flow from financing activities again is a negative number in this case. 

If you pay attention, then there is a column column D which is “Net increase in cash and cash equivalents,” which is the sum of all the three columns A, B, C, which are cash flow from financing activities, cash flow from investing activities, and cash flow from operating activities. So here, “Cash and cash equivalents at the end of the year” is mentioned. Okay? 

Along with this, there are certain financial ratios related to banks which are presented in this particular annual report. So on page number 38, if you see, you can see the Capital Adequacy Ratio here is mentioned about 16.1% and on page number 38 you can see that loans and advances figure is here, total deposits number is here. Along with this, what are the Net NPAs of this particular bank? What are the Gross NPAs? You can see information on all these ratios here. Okay? 

When analyzing a bank and NBFC sector company, we need to include asset quality ratios, capital adequacy ratios, and operational performance-related ratios. So here, all in all, we have to look beyond profits and see the risk part, the provisions part, and the long-term sustainability part when it comes to analyzing banks and NBFC companies. 

So that’s it in this video. See you in the next video.  

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