Here are the key terms one must know while analysing a banks financial performance

With the rising interest rates and looming recession, it becomes of utmost importance to analyse a bank’s ‘health condition’.

Analysing the financial report of any financial institution, such as banks, is quite different and cumbersome from any other manufacturing or IT company.  

Banks are the backbone of the growing Indian economy and have a long road to cover. With the rising interest rates and looming recession, it becomes of utmost importance to analyse a bank’s ‘health condition’. Thus, in this educative article, we shall introduce you to the basic banking terms that are a ‘must-know’ in analysing financial reports.  

1.       Deposits: Deposits are the money that we put in our savings accounts or in the form of fixed deposits, recurring deposits, etc. One must understand that banks use these deposits to lend loans and also, pay interest to their depositors. Higher deposits lead to more loans as well as higher liquidity.  

2.     Advances: Advances are nothing but the loans that the banks lend to their borrowers. These are the main revenue generators as interest is generated on the loans lent by a bank, which acts as a regular source of income. Higher advances lead to higher interest income. 

3.      Net interest income (NII) & net interest margin (NIM): NII is the difference between the interest earned through loans and interest paid on deposits. The marginal difference in the above is termed NIM. Higher NII leads to more profitability. 

4.      Capital adequacy ratio (CAR): It is the ratio of a bank’s capital with respect to its risk-weighted assets and current liabilities. This measures the capacity that the banks are able to bear against the risk of their loans. Higher CAR is considered to be safe. As per RBI, private banks need to maintain a CAR above 15 per cent. 

5.      Non-performing assets (NPA): NPAs are often talked about when a bank reports its quarterly numbers. They are loans that are unable to generate income or remain overdue for more than 90 days. Such loans are called NPAs, and they determine the asset quality of a bank. Banks with lower NPAs are favourable over others having higher NPAs. 

6.      CASA ratio: CASA stands for the current account to savings account ratio. Generally, banks have to pay interest on deposits of saving accounts and not current accounts. Banks can use deposits from current accounts without paying interest, which ultimately, improves their NII. Thus, a higher CASA ratio is good for banks. 

7.      Segmental revenue: Banks work across many segments like retail, wholesale, corporate, treasury, etc. Segment revenue is important to analyse as it talks about the banks’ performance across segments and asset performance associated with it. The retail segment is considered to be safer and banks having a higher retail presence tend to perform better. 

8.     Presence: Some banks work Pan-India while others have regional significance. For e.g. Bandhan Bank prominently operates in eastern India while HDFC Bank works Pan-India. 

Now that you have understood the basic terms, let us compare these two leading private sector banks of India.* 

The below figures are in Rs crore. 

*Please note that these numbers do not directly compare the two companies. While these numbers provide useful insights, other valuable information such as management commentary and the overall industry conditions should also be analysed. 

Now that you are acquainted with these terms, go and check the financial report of the bank that you are invested in!  

Hope you liked this educative article! Comment if you find it insightful!