Banks are institutions which are part of our daily lives. We have been witnessing growth in the size of the industry (many new players have entered in the past 10 years) and quality of services (more branches, better cust0mer dealings, internet banking & plastic money, improved loan and deposit products). In a sense, we have known how the industry has moved from a typical sarkari sector to a globally competitive playfield.
In this article, let us just look a bit deeper to how banking sector can be used for investment, by way of stocks. Many schedules banks are listed in India which makes it easier for us to compare their performance and know about the industry features. To begin with the analysis, it is convenient to understand the income & expenditure concepts and key ratios of banks.
CASA (Current Account Savings Account): People & institutions place money (Deposit) with a bank for a certain period and/or earn interest/avail services. Deposits can be Demand Deposits, Savings Bank Deposit & Term Deposit. Out of the total deposits that customers have kept with the bank, savings accounts cost just 3.5% to and current accounts are charged to the customers for services provided by the bank, whereas the term deposits (FD, RD, etc.) cost higher. Funds from any type of deposit are lent by bank at much higher rate. Therefore, the bank which has higher proportion of savings & current accounts money out of the total deposits is in a more profitable position from the one whose deposits consist more of term deposits. Industry measures this feature of a bank as CASA Ratio i.e. amount of savings and current accounts as a percentage of total deposits held with the bank.
NPAs (Non-Performing Assets): Banks lend to earn interest. Lending by banks is governed by regulations of RBI & its own lending policy mainly. Banks are required to do thorough due diligence before accepting the lending proposal. NPAs are such advances of a bank which have ceased to provide income to the bank. RBI stipulates a period of 90 days for identification of NPAs. NPAs could either become good entirely or partially or may result in 100% loss to the bank. Provisions are created as per RBI guidelines for NPAs. The lower the quantum of NPAs, the better.
NIM (Net Interest Margin): This is the ratio of net interest earned (Interest earned – Interest paid) by the bank as a % of interest-earning assets i.e. advances. The ratio helps us in assessing the efficiency of the bank. More NIM, better.
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Many other ratios like ROI, ROA, ROE, operating margins, etc. can’t be ignored.
Honestly, I haven’t seen banks moving up and down according to their fundamentals. Also there is no guarantee that stocks bought based on such analysis will yield green figures in your portfolio statement. But when we are in the market to buy shares without exactly knowing which stocks will be profitable, isn’t better to buy shares with strong fundamentals. SBI being the largest bank of India by assets. This feature of SBI is enough to make it a strong stock. Now even if an investor is having a long position in SBI at a price much higher than the prevailing market price, he can be reasonable assured that he has his money in a safe bet.
