Investing in the stock market may be profitable in the long run if informed choices are adopted. Here are a few key metrics to consider before investing in banking companies.
Net Interest Income (NII): It is the difference between the interest a bank earns on loans after subtracting the interest it pays on deposits and other sources of capital.
Net interest margin (NIM): calculated by dividing NII by the average earning assets. A higher net interest margin is better. It indicates a bank is bringing in more money on the interest it earns on loans than it is paying out in interest on bank deposits. Punjab National Bank has 2.34 percent and State Bank of India has 2.7 percent, indicating that State Bank of India earns more in net interest income than Punjab National Bank.
CASA Ratio: The CASA ratio indicates total bank deposits are in both current and savings accounts.
A high CASA ratio indicates a lower cost of funds. It helps to determine the bank’s liquidity position
CASA Ratio = CASA Deposits ÷ Total Deposits
The CASA ratio of the State Bank of India is 42.66, which is greater than the 41.92 of the Punjab National Bank.
Credit Deposit Ratio (CDR): It defines how much of the money banks have raised in the form of deposits has been deployed as loans. A low CDR ratio suggests relatively poor credit growth compared to deposit growth.
A high CDR ratio means strong demand for credit in a market of slower deposit growth.
Typically, the ideal loan-to-deposit ratio is 80% to 90%. A loan-to-deposit ratio of 100% means that a bank lent one dollar to each customer for every dollar in deposit received. Axis Bank has a CDR ratio of 89.26%.
Non-performing asset (NPA): It is the total value of all unpaid loans that are classified as non-performing loans. Higher Non-performing assets results in Reduced profitability, Lower lending capacity, Increased provisioning, and Reduced investor confidence.
A low Net NPA ratio suggests the bank has made appropriate provisions for non-performing loans, decreasing the bank’s actual financial loss. This indicates excellent risk management practices and a strong financial position.
A high Net NPA ratio indicates that the bank may have under-provisioned for non-performing loans, subjecting it to losses. This has the potential to have an adverse effect on the bank’s profitability, capital adequateness and overall financial health.
The NPA of the State Bank of India is 2.24%, which is lower than the NPA of Punjab National Bank, that is 8.74%.
Capital Adequacy Ratio: It helps ensure banks have enough capital to secure depositors’ funds
A high capital adequacy ratio is favourable since it implies that the bank is better positioned to deal with unexpected losses because appropriate capital is available. When a bank’s capital adequacy ratio is low, it is more likely to fail, implying that regulatory authorities may need to act and inject capital.
Punjab National Bank, has a higher capital adequacy ratio of 15.50% than the State Bank of India, at 14.68%.
Return on Asset (RoA) – It indicates a lender’s capacity to generate money after deducting all operating and non-cash credit costs.
The ROA of a business is derived by dividing its net income by its total assets. The greater the ROA, the better, because the firm can generate more money with less investment. In simple terms, a higher ROA represents greater asset utilisation.
State Bank of India has a better ROA of 0.93% than Punjab National Bank, which has a ROA of 0.22%.
Written by Omkar Chitnis
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