10 ratios that you must know to analyse any banking stocks

The banking sector is considered one of the most crucial sectors of the economy and a sound understanding of the ratios and financial metrics that determine its performance is essential for making informed investment decisions. In this blog, we will discuss 10 ratios that are a must-know for any investor looking to analyze banking stocks. Whether you’re a beginner or an experienced investor, understanding these ratios will help you evaluate the financial health of a bank and make informed investment decisions. So, let’s get started and delve into the world of banking ratios!

To illustrate how numbers and ratios are inferred, we have used ICICI Bank’s data as a case study.

Net Interest Income

Net Interest Income = Interest Earned from lending activities – Interest Expended (paid to account holders)

We can see that the net interest income of ICICI bank grew from 230.26 billion in FY 2018 to 474.66 in FY2022.

Net Interest Margin (NIM)

Net Interest Margin = Net Interest Income / Average Earning Assets.

It is expressed as a percentage. Positive NIM shows that the bank is earning more interest than it is paying its account holders. 

Sustainable and high NIM shows that the bank is in a strong financial position and can explore more investment opportunities. 

Net Interest Margin is an important measure of a bank’s profitability and its ability to generate income from its existing assets.

Cost to Income ratio

Cost income ratio (Efficiency ratio) = Non-interest expenditure / Net Total Income * 100

It is also known as the Efficiency ratio because it reflects the operational efficiency of the bank. 

High CIR indicates that the bank is not very efficient and spends a major portion of its income on its expenses. The bank may need to review its cost structure and implement measures to reduce expenses in order to increase its efficiency and profitability.

The lower the CIR, the better the efficiency of the bank. 

Provision Coverage Ratio

Provision Coverage Ratio = Total provisions / Gross NPAs.

It is the amount set aside by the bank to cover potential losses that might arise in future from loans and credit related assets. 

A high PCR ratio is considered healthy for banks. 

Gross NPA

Gross Non-Performing Assets (GNPAs) refer to the total amount of loans or advances on which the borrower has defaulted or has not been able to make interest or principal repayments for a certain period of time, typically 90 days or more.

A low ratio of GNPA to total loans indicates a low level of credit risk and potentially stronger financial condition for the bank.


Net NPA= total amount of non-performing assets of the bank (Gross NPA) – provisions made for those assets

Non-performing assets are loans or advances that a borrower has not repaid for a specific period, typically 90 days or more.

When a borrower fails to make timely payments on a loan, the bank classifies that loan as a non-performing asset. The bank then makes provisions for such assets based on the risk involved and the likelihood of recovery. These provisions are set aside as a precautionary measure to cover potential losses if the loan defaults.

If the loan amount is unpaid more than 1 year from the due date then it’s a doubtful debt and if it’s unpaid for more than 3 years then loss of an asset or default account.

Net NPA is important for evaluating a bank’s asset quality and financial health. A higher net NPA indicates a higher level of risk and potential for losses, which can impact the bank’s profitability and ability to lend in the future.

Loan to Assets Ratio

Loan to assets ratio = Total loans / total assets

Loan to assets ratio in banking is a financial metric used to measure a bank’s lending activities and risk exposure. It is calculated by dividing the total loans held by the bank by its total assets. The resulting ratio indicates the proportion of a bank’s assets that are being financed by loans.

Loan to assets ratio is an important indicator of a bank’s risk level, as a higher ratio indicates that the bank is more heavily reliant on its lending activities to generate income and is therefore more exposed to potential loan defaults. Banks typically have a target loan-to-assets ratio that they aim to maintain in order to balance their risk and profitability objectives.

Return on Assets Ratio (ROA)

Return on Assets = Net Income / Total Assets

This ratio is useful to compare the performance of the company with its peers in the same industry. It is an important metric used to evaluate a company’s overall efficiency and performance but it’s important to keep in mind that a high ROA does not necessarily mean that the company has a strong financial position.

Return on assets (ROA) ratio is a financial metric used to evaluate a bank’s profitability. It measures the amount of net income a bank earns per dollar of assets it holds. 

A higher ROA indicates that a bank is more efficient in using its assets to generate profits, while a lower ROA indicates lower profitability. A high ROA indicates that the bank is generating strong profits relative to its asset base, which is a positive signal for investors and shareholders.

Capital Adequacy Ratio

Banks are required to maintain a certain level of Capital Adequacy Ratio as per the regulations set by the central bank to ensure that they have sufficient capital to meet the potential losses and continue their operations even in adverse situations.

The CAR is expressed as a percentage and is used by regulators to determine whether a bank has enough capital to cover its risks. A higher capital adequacy ratio indicates that a bank has a greater buffer to absorb losses and is therefore less likely to become insolvent.

CASA Ratio

CASA stands for Current Account Savings Account, and these are types of deposit accounts that typically pay little or no interest to the account holder. They are considered low-cost deposits for the bank, as they do not typically require high-interest payments, and they can be used to fund the bank’s lending activities.

CASA (Current Account and Saving Account) measures the ratio of a bank’s current account and savings account deposits to its total deposits.

A higher CASA ratio generally means that the bank has a lower cost of funds, which can lead to higher profitability. On the other hand, a lower CASA ratio can indicate a greater reliance on more expensive sources of funds, such as term deposits or wholesale funding.


What is Net Interest Income?

Net Interest Income (NII) is the difference between the interest earned on a bank’s loans and other interest-earning assets and the interest paid on its deposits and other interest-bearing liabilities.

What is Net Interest Margin (NIM)?

Net Interest Margin (NIM) is the ratio of a bank’s NII to its interest-earning assets. It measures the bank’s ability to earn interest income on its assets.

What is the Cost to Income ratio?

The Cost to Income ratio is the ratio of a bank’s operating expenses to its operating income. It measures the bank’s efficiency in managing its costs.

What is Provision Coverage Ratio?

Provision Coverage Ratio (PCR) is the ratio of a bank’s provisions for bad loans to its gross non-performing assets (NPAs). It measures the bank’s ability to cover potential losses on its bad loans.

What is Gross NPA?

Gross NPA (Non-Performing Assets) is the total value of a bank’s overdue loans or in default.

What is Net NPA?

Net NPA is the value of a bank’s gross NPA minus the provisions it has made for bad loans.

What is Loan to Assets Ratio?

Loan to Assets Ratio is the ratio of a bank’s loans to its total assets. It measures the proportion of the bank’s assets that are tied up in loans.

What is Return on Assets Ratio (ROA)?

Return on Assets Ratio (ROA) is the ratio of a bank’s net income to its total assets. It measures the bank’s profitability relative to the size of its assets.

What is Capital Adequacy Ratio?

Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital to its risk-weighted assets. It measures the bank’s ability to absorb losses and remain solvent.

What is CASA Ratio?

CASA Ratio is the ratio of a bank’s current account and savings account deposits to its total deposits. It measures the proportion of low-cost funds that the bank has available to lend.

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