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. |
Start Research-backed Investing ...Now. Subscribe to Sapphire
MoneyWorks4Me has been helping investors make better investment decisions since 2008.
MoneyWorks4Me Investment Advisers is the trade/brand name of The Alchemists Ark Pvt. Ltd., a SEBI-registered non-individual Investment Adviser (Registration No. INA000013323).
We began in 2008 as an equity research company, helping investors identify high-quality Indian businesses and understand what they were worth through deep fundamental research and intrinsic-value-based investing.
Over time, we learnt that successful investing requires much more than identifying good stocks.
Investors also need to know how much to invest, how to allocate money across different assets, how to construct a strong portfolio, when to act and, equally importantly, when not to.
That understanding shaped our evolution from an equity research company into a broader investment company built around research, portfolio strategy, technology and human judgement.
Today, our capabilities extend across Indian direct equities, mutual funds, global equities, fixed income, gold and REITs and other suitable investment opportunities.
We do not see these as separate investment products. They are different building blocks of one portfolio.
The starting point is the investor: their goals, required returns, time horizon, ability to take risk and the role each asset needs to play.
Asset allocation determines where the money should go.Research and valuation guide what we own. Portfolio construction determines how much we own.Periodic review and rebalancing help keep the portfolio aligned with its purpose.
This investment philosophy is applied in different ways across MoneyWorks4Me.
Through Omega Freedom and Omega Legacy, we work closely with investors who want comprehensive investment advice and guidance in managing their portfolios.
Through Third Rock Wealth, we bring the same investment thinking and research depth to investors who prefer mutual funds as their route to wealth creation.
We look at business quality, financial strength, competitive advantage, management, growth prospects and risks. But we always consider these alongside valuation.
A good company does not automatically make a good investment at every price.
Our Quality-at-a-Reasonable-Price approach seeks to bring quality and valuation together.
We do not begin by asking which stock, fund or asset looks attractive.
We begin by asking what the portfolio needs.
Indian equities may provide long-term growth. Global equities can broaden diversification. Fixed income can provide stability and liquidity. Gold has a different role to play.
Every investment should earn its place in the portfolio.
Markets cannot be predicted consistently. A sound investment process can be followed consistently.
We therefore focus on what can be controlled: asset allocation, quality, valuation, diversification, position sizing, risk management, review and taking action when required.
Long-term wealth is not created only by finding investments with spectacular returns.
It comes from putting money to work intelligently, earning satisfactory inflation-beating returns across the portfolio and staying invested long enough for compounding to make a meaningful difference.
Technology has been integral to MoneyWorks4Me from the beginning, from our financial X-Rays and valuation tools to portfolio analytics and research systems.
Over the years, we have accumulated company research, financial data, valuation work, investment frameworks and insights.
The aim is to make it easier for investors and our teams to work with years of MoneyWorks4Me research, data and investment thinking.
It is not intended to replace human judgement.
Investing still involves context, uncertainty and decisions for which there is not always an obvious answer.
Our advisory business operates in a fiduciary capacity, and the investor's interests come first.
We believe investors should understand the reasoning behind important investment decisions rather than simply follow recommendations.
That is the thinking behind our Do-It-With-Me approach.
It is designed to help investors remain in control of their money while benefiting from professional research, process and perspective.
Our vision is to build a trusted, research-powered investment company that helps investors make calm, informed and well-reasoned decisions throughout their investing journey.
Markets will change. Investment opportunities will change. Technology will change how investors access information and advice.
But the principles of successful investing are far more enduring:own quality assets at sensible prices, build portfolios intelligently, manage risk and give compounding enough time to work.
That is the investment discipline MoneyWorks4Me has been building since 2008 and continues to strengthen for the future.