In this lesson we will study financial ratios which are used to analyse banking and NBFC Sector.
NET INTEREST INCOME :
Total Interest Income – Total Interest Expenditure
Interest income includes interest from loans
given, interest from investments including fixed deposits. It does not include dividend or
profit / (loss) accrued / received from any form of investments. Interest expenditure includes
interest on borrowings.
CAPITAL ADEQUACY RATIO (CAR):
Capital Adequacy Ratio (CAR) is a measure of the degree to which the company’s capital is
available to absorb unexpected losses; High CAR indicates the ability of the company to undertake
additional business.
Overall Capital Adequacy = (Tier 1 capital + Tier 2 Capital ) /Total Risk weighted Assets
- High CAR indicates the ability of the company to undertake additional business.
- Lower CAR indicates lower loss absorption capabilities.
Tier 1 -CAR = Tier 1 capital /Total Risk weighted Assets
Gross NPA % = Gross NPA/Gross Advances
Gross NPA % denotes the percentage of advances which have turned into NPA as against the total outstanding loan book.
Net NPA% = Net NPA/Net Advances
Net NPA% denotes the proportion of advances which turned into NPA after adjusting for the provisions already made by the bank/financial institution.
Provision Coverage Ratio = Provision for NPA / Gross NPA
It indicates extent of provisioning already done on the existing NPAs, thereby indicating the future provisioning requirement in the event of no recovery from the stock of NPAs
Return on Total Assets (ROA) = PAT/Average assets
ROA is a single, ultimate indicator of the overall profitability of the bank/financial institution. Impact of
non- interest income, asset quality, fixed cost like employee cost etc. are all factored into this ratio.
Net Interest Margin (NIM) =Net Interest Income/ Average assets
It indicates overall spread earned on the total assets of the entity.
Cost to Income (%) =Operating expenses / [Total Income – interest paid]
It can be looked at as the cost involved in generating a unit of revenue.
Yield on advances = Interest income/Average advances
The ratio gives the average lending rate of the portfolio. High yield on advances is an indication that the entity is into financing riskier assets and may see asset quality issues. It also indicates whether the pricing of the loan is in line with underlying risk
Cost of deposits or Borrowings = Interest paid on deposits / Average Deposits(or borrowings)
It highlights cost of borrowed funds for the entity.Cost of funds gives a competitive advantage to the
financial institution in terms of its ability to grow, apart from profitability, asset quality, customer base etc.