Here's how you can check the financial

health of your bank

With more worms crawling out of the PSU bank can, it’s time to check the health of
banks in your portfolio. ET Wealth shows you how to understand the ratios that are
critical indicators.

 Gross NPA Ratio

Formula: (Gross NPA/Total Advances) X 100

Why it is important
Non-performing assets (NPA) are loans the bank has not received interest payment on
for the last three months. A very high gross NPA ratio means the asset quality is in very
poor shape.

Vulnerable banks with high gross NPAs

24.72% IDBI Bank
21.95% IOB
20.64% Uco Bank
20.10% United Bank
19.56% Dena Bank

 Net NPA Ratio

Formula: (Net NPA/Total Advances) X 100

Why it is important
Banks write off some NPAs and net NPA is calculated after deducting them. Higher net
NPA means the bank’s profi ts will be under pressure in future too.

Future profits under threat due to high net NPAs

16.02% IDBI Bank
13.02% IOB
12.17% Bank of Maharashtra
11.96% United Bank (I)
11.52% Dena Bank
  Provisioning Coverage Ratio (PCR)

Formula: (Total provisions made/Gross NPA) X 100

Why it is important
High PCR (ideally above 70%) means most asset quality issues have been taken care
of and therefore, there is no big threat.

Banks at less risk from future asset quality issues

73.49% Dhanlaxmi Bank
73.36% DCB Bank
70.00% Federal Bank
69.51% J&K Bank
68.03% Bank of Baroda

 Total Capital Adequacy Ratio (CAR)

Formula: (Total capital/ Total risk weighted asset) X 100

Why it is important
Risk weighted assets are calculated after considering all risks. Indian banks are
supposed to maintain a CAR of 9%. A high ratio means the bank is safe. It also means
the bank can grow faster without diluting capital.

High growth possible without equity dilution

18.90% IDFC Bank
17.39% ICICI Bank
17% Yes Bank
16.77% Kotak Mah. Bank
15.83% City Union Bank

Tier 1 CAR
Formula: ( Tier 1 capital/Total risk weighted assets) X 100

Why it is important
Tier 1 capital forms the base and comprise products like equity capital plus reserves,
noncumulative non-redeemable preference shares and innovative perpetual bonds. As
per norms, Tier 1 capital CAR has to be 7% and the remaining 2% can be in Tier 2
capital.

18.54% IDFC Bank

15.90% Kotak Mah. Bank
15.35% City Union Bank
14.72% IndusInd Bank
14.36% ICICI Bank

Tier 2 CAR
Formula: (Tier 2 capital/ Total risk weighted assets) X 100

Why it is important
Tier 2 capital comprises products like cumulative or redeemable preference shares,
normal long dated bonds, etc.

3.70% Yes Bank

3.24% Bank of India
3.21% Andhra Bank
3.09% Canara Bank
3.08% Axis Bank

 CASA Ratio

Formula: (Total current and savings accounts/ Total deposits) X 100

Why it is important
A higher CASA share means the cost of funds will be less for the bank and therefore,
translate to higher margin.

Banks with large share of low cost deposits

50.40% ICICI Bank
49.87% J&K Bank
49% Axis Bank
46.70% Kotak Mah. Bank
45.52% Punjab National Bank

 Net Interest Margin

Formula: ((Interest received – interest paid)/ Average interest earning assets) X 100

Why it is important
NIM will be high for banks with higher low cost deposits or which command higher
lending rates. High NIM and low NPA is a good combination.

Banks with high margin between lending rates and cost of funds
4.5% Kotak Mah. Bank
4.17% City Union Bank
4.04% DCB Bank
3.99% IndusInd Bank
3.70% Karur Vysya Bank

 Non Interest Income

Formula: (Non-interest Income/ Average total funds) X 100

Why it is important
In addition to several fees charged on customers, banks also have other sources of
income like commission. This ratio represents all non-interest income represented as a
percentage of total funds. Higher the better.

Banks with high cushion against interest rate

2.61% ICICI Bank
2.60% IndusInd Bank
2.19% Yes Bank
2.05% Axis Bank
1.72% RBL Bank

 Return on Assets (ROA)

Formula : (Profit after tax/ Average total assets) X 100

Why it is important
Since a bank’s main business is leverage, RoA is a better profi tability indicator. Higher
RoA indicates a bank is able to utilize its assets well.

Banks that utilise their assets well

2.04% J&K Bank
1.88% HDFC Bank
1.86% IndusInd Bank
1.81% Yes Bank
1.73% Kotak Mah. Bank