Thinking of buying a bank stock?
How to read a bank stock
Their raw material is money, so they need their own set of numbers.
How they make money
Take deposits from people like you, and pay them some interest.
Lend that money for homes, cars and businesses at a higher rate.
Keep the gap, minus losses on loans that aren't repaid.
Numbers to check
Tap any number for a full lesson with pictures.
- Net Interest MarginThe bank's basic earning power: the gap between what it earns and what it pays.
- Gross NPA RatioBad loans are a bank's biggest risk. They eat profit and capital.
- CASA RatioCheap deposits mean a cheaper raw material and a wider margin.
- Capital Adequacy RatioThe cushion that keeps the bank safe when loans go bad.
- Return on EquityTells you how well the whole machine turns shareholders' money into profit.
- Price-to-Book RatioBanks are usually valued on book value, not earnings. Compare P/B with ROE.
Practice: Lotus Bank's numbers
Lotus Bank is a made-up company that takes deposits and gives loans. Here's how its key numbers read against the rough guides.
| Number | Lotus Bank | Rough guide says |
|---|---|---|
| NIM | 3% | Healthy |
| Gross NPA | 3% | Clean |
| CASA | 40% | Decent |
| Capital adequacy | 15.6% | Comfortable |
| ROE | 15% | Okay |
| P/B | 1.5x | Middle |
For a real company, check each number over at least five years and against its closest rivals. One year alone can mislead.
Also look at
- Loan growth: how fast the bank is lending more, compared with rivals.
- Net NPA: bad loans left after the money set aside to cover them.
- Credit cost: how much of the year's profit goes into covering bad loans.
Red flags
- Loans growing much faster than rivals' while bad loans creep up.
- Many loans being restructured (given new, easier terms) instead of being called bad.
- Capital adequacy close to RBI's minimum.
Numbers that mislead here
- Debt-to-Equity RatioDeposits count as borrowing, so every bank looks 'highly indebted'. It tells you nothing.
- Return on Capital EmployedBorrowing is the bank's business, so a measure that treats it as a cost doesn't fit.
Other sectors
IT services
Their product is people's time, sold mostly to clients abroad.
Sales growth · Operating margin · Attrition · ROE
Pharma
Medicines for India and the world, with regulators watching every factory.
Sales growth · Operating margin · R&D spend · ROCE
FMCG
Everyday products like tea, soap and biscuits, sold in every town.
Sales growth · Operating margin · ROCE · ROE
For learning only. Example companies are made up, and the rough guides are rules of thumb, not targets. Nothing here is advice to buy or sell any stock.