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 in India based on their market capitalization.
Quantitative Analysis of Top 5 Private Banks in India
The Private Banks selected for analysis
Procedure for analysis and its interpretation
- These 5 banks 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 have been ranked accordingly.
Price to Earnings (PE)
- PE is basically how much an investor pays for each rupee of profit earned. The lower the PE, the better it is.
- Here, Bandhan Bank has the lowest PE, hence it has scored the highest points
Price to Book (PB)
- 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. Similar to PE, the lower the PB better it is.
- Here, Axis Bank has the lowest PB and hence has the highest points.
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 with the highest RoE has the highest points.
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 the highest points.
Operating and Growth Ratios
Operating Profit Margin
- Here we have considered the operating profit before provisioning. Bandhan Bank with an operating profit margin of ~70% has the highest points.
Sales and Net Profit growth over last 5 years
- Here, 5-year sales and profit growth data are not available for Bandhan Bank and hence it is given the lowest rank.
- Kotak Mahindra Bank has the highest sales and profit growth over 5 years and hence has the highest points.
Sales & Net Profit growth over the last 3 years
- Over 3 years, Bandhan Bank has the highest sales and profit growth. Hence it is ranked and scored accordingly.
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 the highest points.
Retail 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.
- Micro-finance is also a part of retail loans, however, micro-financing is considered a bit riskier. Hence, Bandhan Bank has the lowest rank.
- ICICI Bank has the highest retail loans and hence has the highest points.
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 the highest NIM, and hence it is ranked and scored accordingly.
Cost to Income
- Cost to income is another efficiency ratio that affects profitability. The lower the cost to income ratio, the better it is.
- Here as well, Bandhan Bank has the lowest cost to income ratio and hence has the highest 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 the savings account.
- Hence, the higher the CASA ratio, the better is the profitability of the bank.
- Here, Kotak Mahindra Bank has the highest points and hence leads the pack with the highest points.
Asset Quality Ratios
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. Lower the NPAs, the better it is.
- HDFC Bank has the lowest gross and net NPAs and hence is ranked and scored accordingly.
Provision Coverage Ratio (PCR)
- Here as well, HDFC Bank has the highest points on the back of a very strong provision coverage ratio of ~85%.
Capital Adequacy Ratio (CAR)
- Capital Adequacy Ratio is basically capital available as compared to the bank’s risk-weighted assets. Higher the CAR, the better.
- In terms of CAR, Bandhan Bank leads the pack with the highest CAR of ~26%.
Number of Branches
- 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 tops the list with >5400 branches.
As seen, HDFC and Bandhan Bank have maximum points based on their good fundamentals, followed by Kotak Mahindra Bank, ICICI Bank, and Axis Bank.