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Sunday, September 25, 2011

Analyzing banking stocks? Don't overlook this useful accounting information.

Standard banking equity analysis looks more into ratios(ROE, ROA, NIM, NPAs, CRAR, business ratios) than into any specific qualitative information. Thanks to the Indian banking regulator(RBI), all banks need to disclose standard information in their annual reports. The Master Circular(http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=6542) has a laundry list of information, which does some in handy at times. Do read it and get some insights of what matters to the RBI, but for now I suggest take a closer look at these ratios while analyzing any banking stock
  1. Concentration of Deposits, Advances, Exposures and NPAs:- The RBI mandates disclosing the percentage of top 20 depositors/borrowers(as % of total advances/total exposures/deposits) of the bank. This allows a bird eye view of concentration risk, and the risk of lowering pricing/bank runs. 
  2. Disclosure of Penalties imposed by RBI:-Few banks will trumpet this in their presentations, so this information is only in the annual report, and allows assessing the operational risk of the bank, and the contingent liability for later lawsuits. For instance, the RBI has fined a few banks recently for misselling deriavtives-you can be sure that the defaulting counterparties will use this as ammo in court to have those transactions declared void.
  3. Details of Single Borrower Limit (SGL)/ Group Borrower Limit (GBL):-  While this may be totally innocuous and to reputed parties(for example SBI exceeded this limit for a bluechip Reliance Industries), it does show that if the funding is suddenly reduced/withdrawn, it make adversely affect either party. Also, in case secondary market crashes affect that overextended borrower, then the bank stock may also tank in sympathy. 
  4. Disclosures on risk exposure in derivatives:- This note demands that besides MTM/Credit exposure details, the bank should also disclose Likely impact of one percentage change in interest rate exposuress and currency derivatives. This allows a very rough cut sensitivity analysis in case currency/interest rates fluctuate 
There are other useful information also, but this looks good for starters.

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