How to analyze Bank Stocks - Fundamental Analysis of Banks

Parameters	Considerations
CAR	Capital adequacy ratio(Tier 1 and tier 2 capital/ Risk weighted assets) - RBI stipulates this at > 9%. Indian banks do have 12-14% mostly
Financial leverage	12 times is the average in the financial institutions
NPA	Non performing assets - Low NPA is good (Say gross <1.5% and net < 0.5%)
Provisional coverage ratio	Provisional expense/Gross NPA – greater the better (say greater than 100%)
NIM	Net Interest Margin - 3% or more is considered good. 4% is excellent. At least 2% is needed for reasonable profitability
Revenue growth	Just like any other sector, banks also need good revenue growth
RoE	15 to 20% return on equity is considered good. It is easy to boost returns by leveraging up the balance sheet or under provisioning. So, RoE should be seen in context of RoA. RoE is based on the levers – net margins, Asset turnover and financial leverage.
RoA	Greater than 1.2% return on assets is considered good. RoA is based on the levers – net margins, Asset turnover and financial leverage.
Efficiency ratio	This is the Cost to income ratio – operating expenses (non-interest expenses) as a percentage of income.
P/B	Price to book ratio is appropriate as book values are marked to market every quarter (acceptable value). Big banks trade at 2 to 4 times book value.