Category Archives: Investments

Compounding Interest Simplified

Compounding Interest


Analyzing banking sector shares

What is a bank?

A bank is essentially a financial institution that acts as an intermediary between those who need money and those who have an excess of it. Banks accept deposits from companies and the general public and make loans to companies and individuals who need money. Banks offer interest on the deposits made with it and charge interest on the loans lent out. The rate of interest offered on deposits is less than the interest charged on loans lent out. The difference between these interests is the main source of income for a bank. Apart from depositors’ money, a bank has access to other sources of funds like borrowing from the RBI (Reserve Bank of India), from corporate bodies and from foreign sources.

Analyzing banking sector shares in India

Analyzing banking sector shares in India

RBI (Reserve Bank of India)

The Reserve Bank of India (RBI) is a government body that oversees the banking system in India and is in charge of regulating the affairs of the banks.

The banking sector in India

Banking is probably the most important sector in any country. A country cannot grow without a healthy and robust banking sector. Loans (credit) are the lifeblood of any economy. Companies need loans to take up new projects, to bridge short term liquidity gaps and for working capital. People need loans to buy houses, cars, educate their children and a myriad of other things. Some of the best paid executives in the world are bankers.

The banking sector in India is well regulated by the RBI and is considered to be fairly conservative compared to its global peers. India has 2 categories of banks – Public sector banks and Private sector banks. It is possible to invest in the shares of both private sector and public sector banks as most of the major banks’ shares trade on the BSE and NSE.

Types of banks

Public sector banks (e.g. SBI, Andhra Bank) are owned at least partially by the Government of India. They tend to be conservative and have higher needs for documentation and collateral for making loans. Some people have the opinion that they are more slow and bureaucratic in their style of functioning and are more difficult for individuals to do business with.

Private banks are purely privately owned. They tend to be more aggressive and give out loans a little more easily than public sector banks. Some people feel that private sector banks are more focussed on sales than public sector banks and tend to close deals faster.

Factors that affect bank shares

As always, the key factors to consider while evaluating any company’s shares are growth potential, profitability and quality of management. The following factors tend to influence the growth and profitability of banks. The operations and share prices of all banks are influenced by these factors.

1. Interest Rates

( In general, the lower the interest rates, the better for the bank’s share price)

in credit uptake. The inability of a bank to deploy loans in turn effect its

Definition: The bank rate is the rate at which RBI lends funds to commercial banks.

Source: RBI website


When the RBI increases the Bank Rate, the rate at which banks borrow funds increases. An increase in bank rate is usually accompanied by a simultaneous increase in deposit rates (to encourage customers to deposit more cash as deposits are a cheaper source of funds than borrowing) and lending rates (The increase cost of borrowing is passed onto debtors of the bank).

One should be careful when the prevailing bank rates are high because an increase in bank rate beyond a certain point can have negative effects like:

A. Higher NPAs:

When a customer defaults on a loan (interest is outstanding for more than 90 days), the bank writes off the loans from its books and the loan is termed as a Non-Performing Asset (NPA). An increase in the bank rate leads to an increase in interest borne by the borrower which in turn can lead to an increase in loan defaults.

B. Credit Crunch:

At high interest rates, banks might find it tough to borrow which can lead to a credit crunch (reduction in availability of loans) and in turn hurt general lending operations of the bank.

C. Decrease in credit uptake:

The increased rates discourage borrowers from taking fresh loans, thus leading to a decrease profitability as interest on loans is a major source of income for a bank.

2. Net Interest Margin

(The higher the Net Interest Margin of a bank, the better for its share price)


Net interest margin is the percentage difference between income generated from loans made by the bank and the interest paid on loans taken by the bank. It is expressed as a percentage of what the financial institution earns on loans and other assets in a time period minus the interest paid on borrowed funds divided by the average amount of the assets on which it earned income in that time period (the average earning assets).

Source: Footnotes of company financials and conference calls.


Net interest margin (NIM) is an indicator of the ability of a bank to generate returns. Higher the NIM, the more profit a bank can earn from a given pool of funds. There is no benchmark number which is considered as an ideal level to maintain. While assessing NIM, an investor should do a relative comparison of NIMs of different banks to get an idea of how good or bad a given bank is performing.

3. Provisions and Non-Performing Assets (NPA)

(The lower NPAs for a bank, the better for its share price)


When a bank does not expect a customer to repay the loan, it sets aside a certain sum of money for the expected loss. This is known as a provision. When a customer defaults on a loan (interest is outstanding or more than 90 days), the bank writes it off from its books and the loan is termed as a Non-Performing Asset (NPA).There are 2 forms of NPAs:-

Gross NPA:

The amount outstanding against the borrowers account (with the outstanding interest)

Net NPA:

Gross NPA – Provisions made on the loan – Recoveries made on the loan – other adjustments


Profit and Loss statement


Provisions and NPAs are a reflection of the healthiness of a bank’s loan portfolio book. Higher ratio reflects rising bad quality of loans. Generally private banks have higher ratio of provisions and NPAs as compared to public banks because

  1. Private banks are known be more aggressive than public banks while dispersing loans
  2. Private banks charge a higher rate of interest as compared to public banks. Thus, the chances of interest/ loan defaults are higher.

Hence it would be a good idea to avoid comparing public banks versus private banks. Also amongst the two NPAs- Gross NPA vs Net NPA, give more weightage to Gross NPAs.

4. Capital Adequacy Ratio (CAR) )

(The higher the CAR of a bank, the better for the its shareprice)


Capital adequacy ratios are a measure of the amount of a bank’s capital expressed as a percentage of its risky loans. It is a measure of how well capitalized a bank is, i.e. how easily it can withstand losses. Applying minimum capital adequacy ratios serves to protect depositors and improve the stability and efficiency of the financial system. The RBI specifies the minimum capital adequacy ratios that all banks have to maintain. As investors, we have to expect more than just the minimum.

There are 2 types of CAR:

Tier-I Capital Ratio: The level at which a bank can absorb losses without being required to cease trading.

Tier-II Capital Ratio: The level at which a bank can absorb losses in the event of a winding-up. It provides a lesser degree of protection to depositors, e.g. subordinated debt.


Profit and Loss statement


The higher the CAR, the safer are the depositors’ funds. Considering that banks have been expanding their operations very aggressively, it is important to keep an eye out for whether they are adequately capitalized. A bank which maintains its CAR a few percentage points above the prescribed level is considered safe.

5. CASA Ratio

(The higher the CASA ratio of a bank, the better for its share price)


This is the ratio of current account and savings account deposits to the total deposit base of the bank.


Footnotes of company financials and conference calls.


The bank pays out much lower interest rates on savings accounts and current accounts than other types of deposits such as fixed deposits. Raising money this way is also cheaper than loans from other sources like RBI, money market or other banks. Hence for a given sum of money, higher the ratio more profitable is the bank.

6. Number of branches

(The more branches a bank has, the bigger and better it is)

The greater the number of branches, the better connected the bank is to its customers. This gives it a:

  1. Better ability to generate funds via deposits.
  2. Better ability to disperse loans.


GOLD: Its Importance in an investment decision.

For thousands of years Gold has been a pillar of tangible, storable and transportable wealth. Gold has always been a staple of global currency, a commodity, an object of beauty and an investment. During the late 80s and 90s financial markets rapidly developed and liquidity poured into stocks and mutual funds at an alarming rate. Gold, during this economically robust period, fell out of favor as the “safe haven” or “flight to quality” asset that it was through the 70s and early 80s when it was used as an inflation hedge. In recent years there has been a major resurgence in interest and investor demand in gold as an alternative asset class to paper based investments, the failing US dollar and even Real Estate. The current price rally from Gold’s turn-of-the-century lows to its current levels has clearly awoken awareness about the shiny yellow metal. There are many reasons, both fundamental and psychological, that individuals as well as institutions around the globe are once again becoming very serious about investing in hard gold. In this column we will examine some of the more fundamental reasons investors are looking again at gold, examine the psychology of today’s market and then, based on the data, you can decide if you should convert some of your paper savings to hard Gold…

GOLD: Its Importance in an investment decision.

GOLD: Its Importance in an investment decision.

Why are investors running for Gold?

Risk Reduction:

Gold is unique in that it does not carry a credit risk. Gold is no one’s liability. There is no risk that a coupon or a redemption payment will not be made, as for a bond, or that a company will go out of business, as for an equity. And unlike a currency, the value of gold cannot be affected by the economic policies of the issuing country or undermined by inflation in that country. At the same time, 24-hour trading, a wide range of buyers – from the jewelry sector to financial institutions to manufacturers of industrial products – and the wide range of investment products available, including coins and bars, make liquidity risk very low. The gold market is deep and liquid, as demonstrated by the fact that gold can be traded at narrower spreads and more rapidly than many competing diversifiers or even mainstream investments.

Gold and the dollar

Gold is often used as an effective hedge against fluctuations in the US dollar, the world’s main trading currency. If the dollar appreciates, the dollar gold price falls, while a fall in the dollar relative to the other main currencies produces a rise in the gold price. While this may also be true of other assets, gold has consistently proved among the most effective in protecting against dollar weakness.

Gold and Inflation:

Market cycles may come and go, but – over the long term – gold keeps its purchasing power. Its value, in terms of the real goods and services that it can buy, has remained remarkably stable. In contrast, the purchasing power of many currencies has generally declined due to the impact of rising prices for goods and services. As a result, gold is often bought to counter the effects of inflation and currency fluctuations. Investors in gold can point to a growing body of research supporting gold’s reputation as a protector of wealth against the ravages of inflation. In the short run, experience has shown that gold can deviate from its long-run inflation-hedge price.

 Portfolio Diversification:

Asset allocation is an important aspect of any investment strategy. By balancing asset classes of different correlations, investors hope to maximize returns and minimize risk. However, while many investors may believe that their portfolios are adequately diversified, they typically contain only three asset classes – stocks, bonds and cash. There are a wide range of reasons and motivations for people and institutions seeking to invest in gold. And, clearly, a positive price outlook, underpinned by expectations that the growth in demand for the precious metal will continue to outstrip that of supply, provides a solid rationale for investment. Of the other key drivers of investment demand, one common thread can be identified: all are rooted in gold’s abilities to insure against uncertainty and instability and protect against risk.


One Idiot – An IDFC Foundation Initiative to educate the youth of India to be financially independent.

This Short movie will definitely blow your mind, your way of looking at “Money” and “Wealth”. It teaches how One can become Wealthier with some simple rules !! It’s simply awesome!

Five Reasons that Buy and Hold is Better than Trading for Small Investors

Alternative Investments: What, Why and Who?

An investment that is not one of the three traditional asset types (stocks, bonds and cash). Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of their complex nature, limited regulations and relative lack of liquidity. Alternative investments include hedge funds, managed futures, real estate, commodities and derivatives contracts.

Alternative Investments: What, Why and Who?

Alternative Investments: What, Why and Who?


Yesterday’s portfolios may no longer be enough for today’s challenges. In many cases, the traditional mix of stocks, bonds and cash – the core of modern portfolio theory – has proven more correlated than not in the new global economy.


  • Alternative investments offer the ability to extract better
    relative returns with less correlation to the markets
  • Market dislocations and regulations are creating opportunities
    across the spectrum of alternatives
  • In some instances, investors need to expand their investment
    horizon to capture an illiquidity premium
  • A well constructed, diversified portfolio of alternatives can provide
    attractive risk-adjusted returns with downside and inflation protection
    and less correlation to traditional market indices.


Non-traditional asset classes, such as hedge funds, real estate, commodities and private equity, follow different rules than equities and bonds. This is precisely why they can help improve a portfolio’s risk/return profile.

  • Risk/return characteristics are above average: Non-traditional investments can offer above-average returns with comparatively low volatility.
  • It pays to adopt a longer investment horizon: Some non-traditional investments are long-term, calling for an investment horizon of several years or a holding period corresponding to the length of an economic cycle.
  • Stability for the portfolio: Because returns on non-traditional investments depend upon different facts than those influencing traditional instruments, they have a balancing effect on a portfolio.
  • Know-how makes the difference: Many non-traditional strategies and investments require solid specialist know- how, excellent market expertise and many years of experience. For this reason, manager selection is critical.

courtesy:montage investments

%d bloggers like this: