I would like to know what are the important factors to look for while selecting a bank stock.
Factors to look while selecting a stock in the banking sector is quite different than usual as bank’s business model is different from that of the manufacturing companies.
Banks generally have three types of risks: Credit risk, Liquidity risk, and Interest-rate risk. These can be evaluated with the help of few financial ratios.
One of the biggest factors that you need to check is the net non-performing asset (NPA) of the company. Net NPA ratio is a measure of the overall quality of the bank’s loan book. A higher ratio reflects rising incidence of bad loans. In short, look for the companies with low net NPA (less than 2% is decent, but prefer lower percentage).
Next is the Credit to deposit ratio (CDR). This ratio indicates the funds lent out of the total amount raised through deposits. A higher ratio indicates more utilization of funds.
Few other important ratios to check are Return on equity (RoE), Return on Assets (RoA), Operating profit margin (OPM) and Net interest margin (NIM). Besides, also keep an eye on the regular ratios like PE and PBV.
Further, here’s a detailed article on how to select banking stocks which I’m sure will be helpful to you – How to evaluate banking stocks
I hope it helps. Cheers!