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3.2.2 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|
|7||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 colour coding for the following-
|Financial Factor||Assessment of Colour 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.