Quantitative Analysis of Private Bank Sector (Based on Q2FY21 results)
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. Let us do a quantitative analysis of India’s top 5 private banks based on market capitalization.
Quantitative Analysis of Private Banks
Private Banks selected for analysis
Procedure for analysis and its interpretation
- These 5 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 5 means the bank has scored highest points.
- At the end, we have added all the points together and banks are ranked accordingly.
1. Price to Earnings (PE)
- PE is basically how much an investor pays for each rupee of profit earned. Lower the PE, the better it is
- Here, Bandhan Bank has lowest PE , hence it has scored highest points
2. Price to Book (PB)
- 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. Similar to PE, lower the PB better it is.
- Here, Axis Bank has lowest PB and hence has highest points.
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 with highest RoE has highest 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 as well, Bandhan Bank is ahead of the pack and hence has highest points.
Operating and Growth Ratios
5. Operating Profit Margin
- Here we have considered the operating profit before provisioning. Bandhan Bank with an operating profit margin of ~70% has highest points.
6. Sales and Net Profit growth over last 5 years
- Here, 5 year sales and profit growth data is not available for Bandhan Bank and hence it is given lowest rank.
- Kotak Mahindra Bank has highest sales and profit growth over 5 years and hence has highest points.
7. Sales & Net Profit growth over last 3 years
- Over 3 years, Bandhan Bank has highest sales and profit growth. Hence it is ranked and scored accordingly.
8. Net Interest Income (NII) as a % of Operating Income
- Net Interest Income (NII) is Interest Income – Interest Expended. Banks usually earn interest on loans and have to pay interest on deposits (liabilities).
- Here as well, Bandhan bank ranks first and hence has highest points.
9. Retail 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.
- Micro-finance is also a part of retail loans, however micro-financing is considered a bit riskier. Hence, Bandhan Bank has lowest rank.
- ICICI Bank has highest retail loans and hence has highest points.
10. Net Interest Margin (NIM) %
- Net Interest Margin (NIM) is Net Interest Income/ Total income bearing assets.
- Because of the micro-financing loan book, Bandhan Bank has highest NIM and hence it is ranked and scored accordingly.
11. Cost to Income
- Cost to income is another efficiency ratio which affects the profitability. The lower the cost to income ratio, better it is.
- Here as well, Bandhan Bank has lowest Cost to income ratio and hence has highest points.
12. CASA Ratio
- 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.
- Here, Kotak Mahindra Bank has highest points and hence leads the pack with highest points.
Asset Quality Ratios
13. 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. Lower the NPAs , the better it is.
- HDFC Bank has lowest gross and net NPAs and hence is ranked and scored accordingly.
14. Provision Coverage Ratio (PCR)
- Here as well, HDFC Bank has highest points on the back of a very strong provision coverage ratio of ~85%.
15. Capital Adequacy Ratio (CAR)
- Capital Adequacy ratio is basically capital available as compared to bank’s risk weighted assets. Higher the CAR, the better.
- In terms of CAR , Bandhan Bank leads the pack with highest CAR of ~26%.
16. Number of branches
- 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 tops the list with >5400 branches.
As seen, HDFC and Bandhan Bank have maximum points based on its good fundamentals, followed by Kotak Mahindra Bank ,ICICI bank and Axis Bank.