How to select a stock?

3.1.2 Analyze financial track record of a Bank

Banking industry operates differently from manufacturing, IT or other industries.

Let us consider an analogy with manufacturing to understand banking operation.

A bank's raw material is the money deposited by individuals, corporate and institutions in different types of accounts such as-current, savings etc. These accounts are created based on the customer's choice and interest is paid accordingly; this interest is the main cost component for a bank.

The final product for a bank is loans. It charges interest on loans which is the main source of income for the bank. It also provides different types of fee-based services. Hence, a bank generates its revenue from interest on loans and fee-based income.

Many a times customers default on loan repayment. Such loans are classified as Non-Performing Assets. Banking is considered as a risky business as most of its assets are in financial form. To cover this risk banks are required to maintain a capital of minimum 9% of its total weighted risky assets according to Basel Norm II. This is called Capital Adequacy Ratio (CAR). If this ratio is less than 9% it implies that the bank is not efficient to carry out its operations.

Thus, we have 7 necessary and sufficient financial factors that speak about a bank's performance.

	Financial Factor	Measure of
1	Net Interest Income	Profit from interest spread
2	Total Income	Demand of products & services
3	EPS	Profit per share
4	BVPS	Reinvestment done to increase its capacity
5	Net Profit/Total fund	Management's efficiency of using money
6	% of Net Non-performing Assets to Net Advances	Quality of assets
6	Capital Adequacy Ratio for Current Year	Risk coverage

To know a bank's real strength, we need to study the bank's performance through a full economic cycle, thro' good and bad times. So, we need to Evaluate a bank on above factors for a period of 10 years.
The 10 YEAR X-RAY designed by MoneyWorks4me will help to assess a bank's financial track record with ease. Click on the link to know more.

This is how the 10 YEAR X-RAY OF A BANK looks on MoneyWorks4me-



Let us understand how MoneyWorks4me has come up with the color coding for the following-

Financial Factor	Assessment of Color Coding
Year-On-Year growth rates of Net Interest Income, EPS and BVPS	Inflation in India has been growing at a CAGR of around 6%. Hence, we put our lower limit as twice that at 12% as good consistent growth and this is coded as green as reflected in the 10 YEAR X-RAY above. If the year-on-year growth rate is 8-12% which just covers the inflation the bank is considered somewhat good and is coded orange. A growth rate below 8% is considered not good and is coded red.