Method of Banks Valuation

                  Method of Banks Valuation 

Introduction:-

First of all we will know what is valuation This valuation can be of ghost type like

 valuation of a company's valuation bank. I have told in the previous article that how

 you can check the valuation of a company.

so basically valuation is a professional judgement about how much money

 something is worth.In this article, we will know what is the method of valuing the

 bank, what are the things that are kept in mind and on which basis you should

 choose the bank.

PREFACE 

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VALUATION OF BANKS

NIM (net interest margin)

CASA ratio (current and savings account ratio)

Cost to income ratio

Capital Adequacy

Gross NPA and Net NPA

Return on Assets

 Price to book Value

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VALUATION OF BANKS -:

So whenever talk about valuation of banks what you think it may be hdfc banks may

 be icici so these banks are very big how what is the reason why these banks are big 

banking has nearly 25% weightage in nifty 50. some top constituents can be seen

 below . it contains  4 banks (around 25% weightage)

• HDFC bank ltd.
• ICICI bank ltd.
• KOTAK MAHINDRA bank ltd.
• AXIS bank ltd.

that's why these are big banks but some are like Infosys ltd. , tata consultancy,

 reliance industries etc having not much weightage 

If we talk about these 4 banks which are better for valuation in high weightage on

 what parameters can i decide whether hdfc bank is good or icici or kotak or axis so i

 am going to share 7 parameters while you value the banks read carefully these

 are most important parameters for you if you are intermediate or beginner level

 stock marketer

#1 NIM (net interest margin)

the first thing you have to understand while value any bank is NIM which is net interest margin 

what is net interest margin?

It is nothing but the simple formula of this is 

" net interest income-net interest expense/average interest asset earning "

suppose example 

"

assume a bank pays interest worth rupees 1 crore but receive interest 1.2 crore

 banks pays interest mean if you want to take loan from bank then bank pays

 interest to you when you deposit your money to bank then they receive interest

 from you difference between paid and received is called net interest so here in

 case of depositing 1,2 crore and bank pays interest of 1 crore then what will be the

 net interest that is o.2 crore

                                                         "

but when we divide 0.2 crore to interest earning asset first of all what is interest

 earning asset now for a bank gives a loan then it's an asset why because money is

 receivable so basically this is denominator 

#2 CASA ratio (current and savings account ratio)

so, whenever i talk about casa a bank is more and more casa that's always gonna be

 better for bank why let's understand as an example-

          if i am a bank i have lots of money in the current account am i gonna pay

 interest for this answer is no but if i have an savings account am i gonna pay

 interest for this answer is yes but not more bank always love if casa current account

 saving account itself is higher

now understand why a bank  want to people open more and more current

 account and saving account why because its cost of funding raising money on a

 lower side the bank which has high casa will get access to fund at a very cheap rate.

here is a question for you to understand casa

based of casa ratio tell me which bank is better given below -:

                                        hdfc bank     -         46.10%

                                       icici              -         41.80%

                                       kotak           -          60.40%

                                       axis              -          42%

                                      induslnd      -           40%

kotak bank is performed better based on casa ratio

#3 Cost to income ratio

•         again cost to income ratio is nothing but ratio of their cost and income the

 cost income ratio is one of the efficiency ratios used to gauge an banks efficiency.it

 is used to compare the operating expenses of a bank.

•            The lower a bank's cost to income ratio, the more efficiently a

 bank operators which result in increased profitability, on the other hand,

 if the ratio rises yearly means cost are rising at a higher rate then income which

 affects the profitability of a bank.

•            now understand if the cost is higher and the income is lower then the

 efficiency of the bank is considered to be lower side banks don't like that but

 whenever income side is higher and cost side is lower then the efficiency of bank

 will be higher 

again based of cost to income ratio which bank is best performed listed below-:

                                      hdfc bank     -         36.32

                                       icici              -           37.2

                                       kotak           -           41.27

                                       axis              -          41.69

                                      induslnd      -           41.62

we know that the lower point of cost to income ratio is better again here hdfc is better performed 

#4 Capital Adequacy

• the capital adequacy ratio (CAR), also known as capital assets ratio, measures

 a bank's financial strength by using its capital ans assets. it is used to  protect

depositors and promote the stability and efficiency of financial system around

 the world.

so if i have more capital then it is good or i have less capital ratio that is good 

• as per RBI norms, Indian scheduled commercial banks are required to

 maintain a CAR of 9% while indian public sector banks are emphasized to

 maintain car of 12% 

that means you have to maintain you CAR  as to be at 9% that is the minimum CAR that you have to be maintain 

• the capital adequacy ratio is calculated by dividing a banks capital by it's risk-weighted assets.

so understand here higher the CAR is better for you 

again which bank performing better based on CAR ?

                                          bank                        car %

                                      hdfc bank     -         18.80%

                                       icici              -           19.51%

                                       kotak           -           23.40%

                                       axis              -          19.31%

                                      induslnd      -           16.34%

based on CAR kotak bank is performing better 

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#5  Gross NPA and Net NPA

Gross NPA

example-:

"

If someone takes loan and the person doesn't repay loan for a bank that amount is a

 bad dead but that becomes a bad dead at a very lateral stage 

when does it become NPA happens when the person doesn't repay bank for a period

 of three months so it is become due's then bank thinks chances of In such a

 situation, banks think that there is no intention to repay your loan, then they use

 NPA, this is called Gross NPA.

                                                                 "

simple terms NPA indicate how much of a bank's loan are in danger of not being

 repaid . if interest is not received for 3 months ,then loan turns into an NPA 

a very high gross NPA ratio means the bank's asset quality is in very poor  shape. at

 the end of  march 2021, the gross npa ratio stood at 7.48% for the banking sector 

Net NPA

bank provides for some loans going bad. the net NPA is that portion of bad loans which has not been provided for in the books 

Net NPA = Gross NPA - Provisions

so in this case gross npa and net npa higher is better or lower the better ?

answer the lower is better 

now based on gross npa and net npa which bank is performing better 

               GROSS NPA                                                 

                                           bank                       gross npa

                                      hdfc bank     -         1.32%

                                       icici              -           4.38%

                                       kotak           -           3.25%

                                       axis              -          3.44%

                                      induslnd      -           1.74%

 

            NET NPA 

                                             bank                        net npa

                                      hdfc bank     -         0.40%

                                       icici              -           0.63%

                                       kotak           -           1.21%

                                       axis              -          0.74%

                                      induslnd      -           0.22%

we know lower is better then hdfc is performing better in gross npa 

induslnd performing better in net npa 

#6  Return on Assets

it shows how profitable a banks assets are in generating revenue. a lower ROA

 means that bank is not able to utilise assets efficiently. Negative ROA implie's the

 banks assets are yielding negative return 

if i am talk about return on assets which is better higher or lower is better 

answer is higher is better 

again based on return on assets which bank is performing better listed below 

                                          bank                        

                                      hdfc bank     -         1.88

                                       icici              -           1.38

                                       kotak           -           2.16

                                       axis              -          0.75

                                      induslnd      -           0.87

so kotak is performing better cause higher the return of assets is better 

#7  Price to book Value

• A banking business is all about managing their books (loan book, investments

 book) efficiently. needless to say that it doesn't involve any manufacturing or

 trading activity 

• for a bank macroeconomic condition like inflation rate, rate of interest and

 liquidity are approximately same for most of the banks 

• the reason a kotak or hdfc bank having higher p/bv is not about 

or overvaluation at all. infact , p/bv allows banks to be classified based on efficiency

 of use of funds that is why the p/bv ratio matters

CONCLUSION

 

I hope you all guys understand perfectly method of valuation of a bank the 7

 parameters matters in every case hdfc or kotak bank is performing well and good 

no doubt why these two banks are in high demand 

FAQ

• which bank we should apply ?

        answer - kotak, hdfc 

• What valuation is used for banks?

       answer -The normal metrics used to value a company or to compare valuations

 is the Price / Earnings ratio or the P/E ratio. The P/E ratio shows how much the

 market is willing to pay for each rupee earned by the company

• Is book value a good indicator?

     answer- BVPS is a good baseline value for a stock