Bank and NBFC Stock Analysis FAQ: Key Ratios, Valuation, NPA

"Get clear answers to your top questions about analyzing bank and NBFC stocks. Learn key financial ratios like NIM, ROE, NPA, and Price-to-Book, plus valuation tips for smarter investing."

Bank and NBFC Stock Analysis FAQ: Key Ratios, Valuation, NPA


Analyzing Bank and NBFC stocks involves evaluating specific financial ratios and metrics that reflect their financial health, profitability, and risk exposure. Here's a structured framework to analyze them:

1. Key Financial Ratios

a. Profitability Ratios

  • Net Interest Margin (NIM)

    • Formula: (Net Interest Income / Average Earning Assets)

    • Indicates the efficiency of core lending operations.

  • Return on Assets (ROA)

    • Formula: Net Profit / Total Assets

    • Measures how efficiently a company is using its assets to generate profit.

  • Return on Equity (ROE)

    • Formula: Net Profit / Shareholder's Equity

    • Indicates how well the bank is using shareholder money.

b. Valuation Metrics

  • Price to Book Value (P/BV)

    • Formula: Market Price / Book Value per Share

    • Useful for valuing financial institutions.

    • Ideal Range: <1.5 for undervalued banks/NBFCs (with good asset quality)

  • Price to Earnings (P/E)

    • Formula: Market Price / Earnings Per Share

    • Lower P/E with good growth is attractive.

c. Asset Quality Ratios (Very Important for Banks/NBFCs)

  • Gross NPA (%): Total Gross Non-Performing Assets / Total Advances

  • Net NPA (%): (Gross NPA – Provisions) / Total Advances

  • Provision Coverage Ratio (PCR): Provisions / Gross NPAs

    • A high PCR (>70%) shows strong buffer against defaults.

  • Slippage Ratio: Fresh NPAs / Standard Advances

    • Lower the better.

2. Capital Adequacy and Liquidity

  • Capital Adequacy Ratio (CAR):

    • Measures a bank’s capital buffer as per Basel norms (should be >11.5% in India).

  • Credit to Deposit Ratio (CD Ratio):

    • Formula: Total Advances / Total Deposits

    • High CD ratio can mean aggressive lending.

  • Liquidity Coverage Ratio (LCR):

    • High LCR means strong liquidity position to handle short-term shocks.

3. Growth Metrics

  • Loan Book Growth: Indicates lending performance.

  • Deposit Growth: Indicates customer trust and funding strength.

  • Net Profit Growth (YoY/QoQ): Healthy profit growth reflects operational efficiency.

4. Management & Risk Metrics

  • Cost to Income Ratio: Operating Expense / Operating Income

    • Lower the better; indicates operational efficiency.

  • CASA Ratio (for Banks):

    • Formula: Current & Savings Account Deposits / Total Deposits

    • Higher CASA = Lower cost of funds.

5. Regulatory & Other Factors

  • RBI and SEBI norms, audit red flags, promoter reputation, sector tailwinds (e.g., credit growth), and macroeconomic data like inflation, interest rates, etc.

6. Sample Interpretation

Bank/NBFC     NIM        ROA  Gross NPA    P/BVCARComment
HDFC Bank      4.1%        2.1%   1.2%                  3.2          18%               Expensive but high-quality
SBI     3.3%        0.8%       2.3%       1.5          14.6%Improving asset quality
Bajaj Fin    10.2%       3.4%       0.4%       6.5           25%Strong growth but richly valued
Bandhan     7.2%        2.8%        6.1%       0.9           20%High NPA risk, low valuation

FAQ

1. What are the most important financial ratios for analyzing banks and NBFCs?

  • Net Interest Margin (NIM) – shows lending profitability.

  • Gross & Net NPA – indicates asset quality and risk.

  • Price to Book Value (P/BV) – used for valuation.

  • Return on Assets (ROA) and Return on Equity (ROE) – profitability indicators.

  • Capital Adequacy Ratio (CAR) – shows financial buffer strength.

  • Provision Coverage Ratio (PCR) – ability to cover bad loans.

  • Cost-to-Income Ratio – operational efficiency.

  • CASA Ratio (Banks only) – proportion of low-cost deposits.

2. How is P/B (Price to Book) ratio useful for bank/NBFC valuation?

Banks and NBFCs hold large amounts of financial assets, so their book value (net assets) is a good proxy for intrinsic value.

  • P/B < 1: May be undervalued or facing risk.

  • P/B > 2: May be overvalued or reflecting premium quality.

3. Why is Net Interest Margin (NIM) important?

It reflects the bank’s efficiency in earning from lending after paying for deposits.
Higher NIM = better profit from core banking activities.

4. What is NPA and why does it matter?

  • NPA (Non-Performing Asset): Loans overdue >90 days.

  • Gross NPA: Total bad loans as % of total advances.

  • Net NPA: Net of provisions; shows real risk.

High NPAs = weak loan book and potential losses.

5. How to judge asset quality?

Use a mix of:

  • Gross & Net NPA ratios

  • Slippage Ratio

  • Provision Coverage Ratio

  • Write-offs and recoveries

6. How is ROA different from ROE?

  • ROA = Net Profit / Total Assets → measures total asset efficiency.

  • ROE = Net Profit / Shareholder’s Equity → shows returns to investors.
    Banks usually operate on low ROA (0.5–2%), but leverage boosts ROE.

7. What makes a strong bank or NBFC stock for long-term investing?

  • Consistent NIM and profit growth

  • Low NPAs and high PCR

  • Healthy ROE (>15%) and ROA (>1%)

  • Reasonable P/B (<3 for stable banks, <5 for fast-growing NBFCs)

  • Regulatory compliance and strong promoter backing

8. What are some red flags in bank/NBFC analysis?

  • Sharp increase in NPAs or credit costs

  • High exposure to risky sectors (e.g., real estate, unsecured loans)

  • Falling CASA ratio

  • High cost-to-income ratio

  • Low provision coverage (<50%)

9. How do rising interest rates affect banks and NBFCs?

  • Banks: May benefit short-term from better NIM if lending rates rise faster than deposit rates.

  • NBFCs: Typically hurt as cost of funds rises, squeezing margins (they rely heavily on borrowings).

10. How often should one review bank/NBFC stocks?

  • Quarterly: Post earnings

  • Annually: For balance sheet and capital adequacy review

  • Anytime major RBI policy changes or macroeconomic events happen

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