In this blog, we will do a quantitative analysis of private banks in India. 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. The analysis done is completely on a 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 private banks in India stocks in this analysis and take investment decisions based on risk profile.
Private Banks in India – A Quantitative Analysis
We have selected the following ten private banks for our quantitative analysis:
The Procedure of Analysis and its Interpretation
- These 10 companies are analyzed on the following parameters and ranked and scored accordingly. For example, if a bank has a higher PE ratio, it has a lower rank, hence has scored lesser points.
- Similarly, if a bank has higher RoE, it has a higher rank and has scored higher points.
- Here, 1 means that the bank has scored the lowest points, and 5 means the bank has scored the highest points.
- In the end, we have added all the points together and banks are ranked accordingly.
Valuation Ratios of Private Banks in India
- 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 the lowest points.
- As we can see, the Federal bank has the lowest PE ratio and hence is ranked in the first position.
- PB is basically the price that an investor pays for the book value of the bank per share.
- It is also a valuation metric and it is more relevant in the case of banks as banks have most of their assets and liabilities listed at market price.
- According to PB, the 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 the premium valuation of its subsidiaries.
3. Return on Equity (RoE)
- One of the return ratios that are 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 the first rank.
- As IDFC Bank has incurred losses, its RoE is negative hence it has the 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 an 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 the highest points and IDFC Bank has the lowest points (mainly because of losses).
Also Watch: Comparison of Top 10 Private Banks in India
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 the highest sales growth, whereas ICICI Bank has the lowest.
- Similarly, for Net Profit growth, Kotak Mahindra Bank has the highest sales growth, on the other hand, Axis Bank has the lowest growth.
- However, it is better to look at these ratios inconsistency over a period
6. 3- Year Net profit growth
- Here, Bandhan Bank ranks first as it has the highest sales, whereas City Union Bank is last.
- Similarly, w.r.t Net Profit growth, Bandhan Bank is at the highest rank and IDFC bank at lowest as it has incurred losses over the past years.
7. Consistency in Sales and Net Profit over 5 years and 3 years period
- Here, if we look at the consistency of sales and profit growth, it gives us a different picture.
- Here, the HDFC bank has given a consistent growth performance over the period.
8. 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 the highest Net Interest Income/ Operating income and hence has maximum points. On the other hand, Federal Bank and Axis Bank have the lowest NII/Operating income, hence have minimum points.
9. Retail Loans as a % of Total Loan Book
- Retail Loans are usually considered safer as compared to wholesale loans. Hence, a higher proportion of retail loans is considered good during normal circumstances.
- Here, ICICI Bank has the highest retail loan book, comprising 64% of the total loans.
- Surprisingly, HDFC bank has comparatively lower retail loans as compared to other banks.
- Also, the Federal bank has the lowest retail loans as a % of total loans and hence has the 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 a savings account.
- Hence, the higher the CASA ratio, the better is the profitability of the bank.
- Kotak Mahindra Bank has the highest CASA ratio on the back of its successful retail campaign. Here, City Union Bank has the lowest CASA ratio and hence has the lowest rank.
Asset Quality Ratios
11. Gross and Net NPA
- NPA stands for Non- Performing Assets. These are the loans that have turned into bad loans, thus affecting the bank’s profitability.
- On the asset quality front, HDFC bank has the lowest NPAs and hence better asset quality.
- While ICICI Bank has the highest Gross- NPAs, however since it has a higher provision coverage ratio, its Net NPAs are lower.
12. Provision Coverage Ratio (PCR)
- ICICI Bank has the highest Provision Coverage Ratio (PCR) among the other banks, which implies it has covered most of its bad loans. Hence, despite having the highest gross NPAs, ICICI bank has decent valuations.
- On the other hand, Bandhan Bank has the lowest provision coverage ratio and hence has the lowest points.
- If the NPAs increase, banks will have to increase their provisions which will ultimately affect their profitability.
13. Moratorium as a % of total loans
- A moratorium is a period in which borrowers can skip EMIs. Once the moratorium is over, the borrower will start paying in EMIs. However, the borrower has to pay interest in the period of the moratorium as well.
- Currently, till 31st August ’20, RBI has mandated all banks to provide moratorium to the customers if required.
- However since the pandemic has affected salaried, self-employed personnel as well as corporates, chances of loans under moratorium turning to bad loans are higher.
- Thus, the lower the loans under a moratorium, the better.
- HDFC Bank has the lowest Loans under moratorium owing to its prudent underwriting and due diligence. Hence it has the highest rank.
- IDFC First Bank, on the other hand, has the highest % of loans under a moratorium, hence it is at the lowest rank.
- Even Bandhan Bank has higher loans under moratorium. Currently, the bank has good profitability metrics, however, how the asset quality turns outpost moratorium period, will be a thing to watch out for.
14. Cost to Income Ratio
- Cost to income is another efficiency ratio that affects profitability. The lower the cost to income ratio, the better it is.
- Here, Bandhan Bank has the lowest Cost to Income ratio, which implies that the bank has the highest operating efficiency. Hence it is ranked at the highest position.
- Even HDFC Bank has a healthy C-I ratio, given its huge deposit base.
- IDFC First Bank has the highest Cost to Income ratio, implying that the bank’s operating efficiency is lower. This can be one of the reasons for the bank’s negative profitability (losses).
15. Net Interest Margin (NIM)
- Net Interest Margin (NIM) is Net Interest Income/ Total income bearing assets.
- Here, Bandhan Bank has the highest NIM in the industry mainly because of its lower cost to income ratio and a higher proportion of retail loans.
- These NIMs do not seem sustainable and will come down as the bank scales to a higher level
- Federal Bank has the lowest NIMs and hence has the lowest rank.
16. Capital Adequacy Ratio
- Capital Adequacy ratio is basically capital available as compared to the bank’s risk-weighted assets. Higher the CAR, the better.
- Here also, Bandhan bank is leading with the highest CAR followed by Kotak Mahindra Bank, HDFC Bank, and others.
- Federal Bank has the lowest CAR, hence it is ranked lowest.
17. Size of the bank
- Higher the number of branches, the 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 the highest rank. RBL bank has fewer branches across India and hence it is ranked at last position.
Cover Image: ET