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  • 5 things to look for in Bank Quarterly Results

    The banking system is one of the most important parts of the economy. Banks perform two key functions - accepting money as deposit for safe-keeping and lending to individuals as well as government bodies. Major corporate companies also borrow from banks to fund their projects, keeping the economy running. This shows the sheer power the banking system wields

    This is why banks can act as an important indicator of the state of the economy. Every three months, banks report their financial performance. In July, we will see most banks announce their profits for the quarter to June 2015. However, you need to go beyond the profit numbers.

    Here are five indicators you need to look for while analysing bank results:

  • Net Interest Income

    When banks lend, they charge an interest fee. If you would have noticed, loans often attract double-digit interest rates. In comparison, you earn a paltry 4-6% interest on your savings account deposits. This difference in interest rates is the key source of bank income. There may be other profitable sources too like fees and special charges, but interest income happens to be the dominant source of income. On the income statement, this is measured by Net Interest Income or NII. It is quite simply the total income a bank earns through interest. Analysts usually give more importance to growth in NII over net profits.
    For example, let us suppose a bank lent Rs 1 crore to borrowers in a quarter. On these loans, it earned Rs 10 lakh as interest. Of this money, it paid Rs 6 lakh as interest to its depositors. The difference of Rs 4 lakh will be its Net Interest Income.

  • Net Interest Margin

    Sometimes, it is important to go beyond simple numbers to understand performance. The real story would be more easily understood in percentage formats. This is where Net Interest Margin or NIM plays a big role. While growth in NII shows a bank is earning more as interest. However, analysts often want to go beyond this simple data and understand what cause the growth. NIM represents banks' profitability. If NIM increases, it means banks are becoming more profitable. A rise in NIM means that banks are making more profits for every rupee lent. NIM is calculated by dividing NII by the total money lent. So, in the previous example, the bank's NIM would stand at 4%. A negative NIM suggests that the bank has many customers who have not paid their loans

  • Non-Performing Assets

    There may often be times when a borrower fails to pay back the bank's money. Such loans are classified as a Non-Performing Asset (NPA). So, NPAs represent all the bad loans in a bank's book. Since loans are a key source of income for banks, rise in NPAs is bad news for banks. Higher the NPAs, greater is the bank's loss. However, Indian banks have a seen a rise in bad loans due to the slowdown in the economy.

  • Provisioning

    Bad loans are unavoidable. This is why banks keep aside a portion of their money as a safety measure to combat bad loans. This is called provisioning. This money is then used to recover the losses from bad loans. The more a bank expects borrowers to not pay their loans, the more it will set aside money. Higher provisioning is not good for banks' financial strength. This is because the money cannot be used for any other purpose. So, it eats into bank profitability. Rise in provisioning shows bank expects more bad loans. This is bad news.

  • Loan Growth

    Advancing loans to customers is a fundamental job of a bank. If there is high demand for loans, then the banks are more likely to be profitable. This is why analysts closely monitor the rise in demand for loans. This is measured by 'Loan Growth'. Also, faster growth in loan advances shows the economy is improving. This is because companies and people borrow money and invest. This is good for the economy. A decline, on the other hand, signifies that the economy is lagging.

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  • Rs 2,60,571 crore

    Public sector banks have bad loans on their books worth Rs 2.6 lakh crore. Over one third or 36.5% of the total NPAs are owed by India's top 30 defaulters. This amounts to Rs 95,122 crore, as per RBI's December 2014 report.