Quantitative Analysis of Private Bank Sector
In this blog, we will do a quantitative analysis of private bank sector.Currently India has 21 private sector banks and 27 public sector banks. Banks had posted healthy credit growth of ~6.64%, however this growth is expected to decline because of the current pandemic.
Please note that we have done this analysis with the only purpose of screening good banks. Analysis done is completely on quantitative basis. No suggestions are being made to directly go and invest in the top scoring bank stocks of this analysis. We suggest that one should perform a qualitative analysis of top scoring bank stocks in this analysis and take investment decision based on risk profile.
Private Banks Quantitative Analysis
Private Banks selected for analysis
We have selected the following ten private banks for our quantitative analysis.
Procedure of Analysis and its Interpretation
- These 10 banks are analysed on following parameters and ranked and scored accordingly. For example, if a bank has higher PE ratio, it has a lower rank , hence has scored lesser points. Similarly, if a bank has higher RoE, it has higher rank and has scored higher points.
- Here , 1 means that the bank has scored lowest points and 10 means the bank has scored highest points.
- At the end, we have added all the points together and banks are ranked accordingly.
- PE is basically how much an investor pays for each rupee of profit earned.
- Here, IDFC First bank has negative PE, as it has currently incurred losses. Hence it is ranked at last and scored lowest points.
- As we can see, Federal bank has lowest PE ratio and hence is ranked at first position.
- PB is basically the price that an investor pays for book value of the bank per share.
- It is also a valuation metric and it is more relevant in case of banks as banks have most of their assets and liabilities listed at market price.
- According to PB, Federal bank is the cheapest bank and Kotak Mahindra Bank is the most expensive bank.
- The main reason why Kotak Mahindra Bank is expensive is because of its premium valuation of its subsidiaries.
3. Return on Equity (RoE)
- One of return ratios that is used widely in fundamental analysis is Return on Equity (RoE) which is Net Income/ Total Shareholder’s equity (Equity share capital + Reserves/Surplus).
- For banks, RoCE is usually not that relevant. Hence we have not considered RoCE in this analysis.
- Here, Bandhan Bank has the highest RoE of 22% and hence it has first rank.
- As IDFC Bank has incurred losses, its RoE is negative hence it has lowest points.
4. Return on Assets (RoA)
- For Banks, core assets are mainly the loans it has given to its customers. Its core operating income is basically interest earned on these loans.
- Hence, it is important to look at how much income these assets are earning for the bank.
- Return on Assets (RoA) is Net Income/Total Assets.
- In terms of RoA also, Bandhan Bank has highest points and IDFC Bank has lowest points (mainly because of losses).
5. 5- Year Sales and Net Profit growth
- Here, data is not available for Bandhan Bank and IDFC Bank .
- If we take a look at 5 year Sales growth, RBL Bank has highest sales growth , whereas ICICI Bank has lowest.
- Similarly, for Net Profit growth, Kotak Mahindra Bank has highest sales growth, on the other hand Axis Bank has lowest growth.
- However, it is better to look at these ratios in consistency over a period
6. 3- Year Net profit growth
- Here, Bandhan Bank ranks first as it has highest sales, whereas City Union Bank is last.
- Similarly, w.r.t Net Profit growth, Bandhan Bank is at highest rank and IDFC bank at lowest as it has incurred losses over past years.
7. Consistency in Sales and Net Profit over 5 year and 3 year period
- Here, if we look at consistency of sales and profit growth, it gives us a different picture.
- Here, HDFC bank has given a consistent growth performance over the period.
9. Net Interest Income (NII) as a % of operating income
- This data is as per Q4FY20.
- Net Interest Income (NII) is Interest Income – Interest Expended. Banks usually earn interest on loans and have to pay interest on deposits (liabilities).
- Here, Bandhan Bank has highest Net Interest Income/ Operating income and hence has maximum points. On the other hand,Federal Bank and Axis Bank have lowest NII/Operating income, hence have minimum points.
10. Retail Loans as a % of Total Loan Book
- Retail Loans are usually considered safer as compared to wholesale loans. Hence, higher proportion of retail loans is considered good during normal circumstances.
- Here, ICICI Bank has highest retail loan book, comprising 64% of the total loans.
- Surprisingly, HDFC bank has comparatively lower retail loans as compared to other banks.
- Also, Federal bank has lowest retail loans as a % of total loans and hence has lowest points.
- CASA is basically the proportion of current and saving account deposits as a % of total deposits. Bank has to pay no interest on current accounts and lower interest on savings account.
- Hence, higher the CASA ratio, better is the profitability of the bank.
- Kotak Mahindra Bank has highest CASA ratio on the back of its successful retail campaign. Here, City Union Bank has lowest CASA ratio and hence has lowest rank.
Asset Quality Ratios
12. Gross and Net NPA
- NPAs stand for Non- Performing Assets. These are the loans which have turned into bad-loans, thus affecting bank’s profitability.
- On asset quality front, HDFC bank has lowest NPAs and hence better asset quality.
- While ICICI bank as highest Gross- NPAs, however since it has higher provision coverage ratio, its Net NPAs are lower.
13. Provision Coverage Ratio (PCR)
- ICICI Bank has highest Provision Coverage Ratio (PCR) among the other banks, which implies it has covered most of its bad loans. Hence, despite having highest gross NPAs, ICICI bank has decent valuations.
- On the other hand, Bandhan Bank has lowest provision coverage ratio and hence has lowest points.
- If the NPAs increase, banks will have to increase their provisions which will ultimately affect their profitability.
14. Moratorium as a % of total loans
- Moratorium is the period in which borrower can skip EMIs. Once the moratorium is over, borrower will start paying in EMIs. However borrower has to pay interest on the period of moratorium as well.
- Currently, till 31st August ’20, RBI has mandated all banks to provide moratorium to the customers if required.
- However since pandemic has affected salaried , self employed personnel as well as corporates, chances of loans under moratorium turning to bad loans is higher.
- Thus, lower the loans under moratorium, the better.
- HDFC Bank has lowest Loans under moratorium owing to its prudent underwriting and due diligence. Hence it has highest rank.
- IDFC First Bank on the other hand has highest % of loans under moratorium, hence it is at lowest rank.
- Even Bandhan Bank has higher loans under moratorium. Currently the bank has good profitability metrics, however how the asset quality turns out post moratorium period, will be a thing to watch out.
15. Cost to Income Ratio
- Cost to income is another efficiency ratio which affects the profitability. The lower the cost to income ratio, better it is.
- Here, Bandhan Bank has lowest Cost to Income ratio, which implies that bank has highest operating efficiency. Hence it is ranked at highest position.
- Even HDFC Bank has healthy C-I ratio, given its huge deposit base.
- IDFC First Bank has highest Cost to Income ratio, implying that bank’s operating efficiency is lower. This can be one of the reasons for bank’s negative profitability (losses).
16. Net Interest Margin (NIM)
- Net Interest Margin (NIM) is Net Interest Income/ Total income bearing assets.
- Here, Bandhan Bank has highest NIM in the industry mainly because of its lower cost to income ratio and higher proportion of retail loans.
- These NIMs do not seem sustainable and will come down as the bank scales to higher level
- Federal Bank has lowest NIMs and hence has lowest rank.
17. Capital Adequacy Ratio
- Capital Adequacy ratio is basically capital available as compared to bank’s risk weighted assets. Higher the CAR, the better.
- Here also, Bandhan bank is leading with highest CAR followed by Kotak Mahindra Bank , HDFC Bank and others.
- Federal Bank has lowest CAR, hence it is ranked lowest.
18. Size of the bank
- Higher the number of branches, better the geographical diversification a bank has.
- This also plays a part in keeping asset quality under check. However it comes with the cost of increased operating expenses.
- Here HDFC Bank has highest branch, hence it has highest rank. RBL bank has fewer branches across India and hence it is ranked at last position.
As seen, HDFC Bank has maximum points based on its good fundamentals, followed by Bandhan Bank, Kotak Mahindra Bank , IndusInd Bank and other.