Analysing Bank Stocks

The cover story published in the previous issue has rightly enlightened my perspective regarding the outlook for the equity markets post-Diwali. The story highlights that among the sectors, investing in banking stocks is advisable in the coming period, but analysis of correct banking stock is surely not a cakewalk. Can you brief me regarding the basic parameters one should consider while analysing a stock in the banking sector? - Arvik M

Editor Responds: Dear Sir, thank you for the appreciative words. The business model of a bank differs from other businesses and hence the way of evaluating different banking stocks is also different. To give a brief outline, some of the parameters which need to be considered include the credit-to-deposit ratio which shows funds lent to the customers out of the total amount raised through cash deposits and the capital adequacy ratio which shows sufficient availability of capital with the banks. Earning and paying interest is like the bread and butter of the banks, hence the next important ratio to look at is net interest margin which shows how positive a bank’s deposit generating and lending operations are. Perhaps, the detailed analysis of the banks covers a lot more parameters which need to be dug deeper into while analysing a banking stock. We hope we have answered your query. Keep writing to us!