Bank Nbfc Analysis

Banks and NBFCs (India)

For a lender, debt is raw material, not financing. That single fact invalidates most of the standard toolkit: EBITDA is meaningless, enterprise value is meaningless, and FCFF is meaningless. Work with equity-side metrics only.

Never use on a lender: EV/EBITDA, EV/Sales, net debt, FCFF-based DCF, Altman Z-Score (manufacturing variant), working capital cycle.

Use instead: RoA and RoE decomposition, P/ABV, residual income / excess return models, dividend discount, and asset-quality trend analysis.

Step 1 — Know which regime the entity sits in

Scale-Based Regulation matters: an NBFC classified in the Upper Layer faces bank-like requirements including a CRAR floor, common equity tier-1 requirement, large-exposure norms, and mandatory listing within a defined period. Check the RBI's published NBFC-UL list for the current year before assuming the layer.

Confirm current thresholds and lists against RBI's Master Directions — these change with almost every policy cycle.

Step 2 — Asset quality

Build the full ladder, 8 quarters minimum:

Gross NPA (GNPA) %      = Gross NPAs / Gross advances
Net NPA (NNPA) %        = (Gross NPAs − provisions) / Net advances
Provision Coverage (PCR)= Total NPA provisions / Gross NPAs
Slippage ratio          = Fresh slippages in the quarter / Opening standard advances (annualised)
Credit cost             = Provisions & contingencies / Average advances (annualised, in bps)
Recovery + upgrades     = as a % of opening GNPA
Write-offs              = disclosed separately — see below

RBI IRACP classification: an account is NPA when interest or principal is overdue for more than 90 days. Before that, RBI's Special Mention Account framework tracks stress: SMA-0 (1–30 days overdue), SMA-1 (31–60), SMA-2 (61–90). SMA-2 is next quarter's slippage — track it as a leading indicator wherever disclosed.

Sub-classification after NPA: Substandard → Doubtful → Loss, with escalating provisioning requirements.

The write-off trap. GNPA falling while write-offs surge is not an improvement in asset quality; it is balance-sheet cleaning. Always compute:

Adjusted GNPA = (Gross NPA + cumulative write-offs over the period) / (Gross advances + cumulative write-offs)

Also track recoveries from written-off accounts, disclosed in other income. A bank whose "other income" is materially recoveries from written-off loans has weaker core earnings than it appears.

Also track: restructured standard advances, security receipts held against sales to ARCs (these are deferred losses), and the residual stock of any regulatory forbearance.

Step 3 — Margin decomposition

NIM = Net interest income / Average interest-earning assets

Yield on advances    = Interest income on advances / Average advances
Cost of funds        = Interest expended / Average interest-bearing liabilities
Spread               = Yield on advances − Cost of funds

Drivers to isolate:

• Loan mix — unsecured personal, credit card and microfinance carry high yields and high credit costs; home loans and corporate carry the opposite. A rising NIM from mix shift is not the same as a rising NIM from pricing power. Model the credit cost that comes with it.
• Repricing. Bank floating-rate retail and MSME loans are largely linked to an external benchmark (typically the RBI repo rate) under the EBLR framework, which reprices fast; deposits reprice slowly on contractual maturity. In a cutting cycle NIM compresses first and recovers as deposits reprice; in a hiking cycle the reverse. The RBI repo rate was held at 5.25% at the August 2026 policy — confirm the current rate and the direction of the cycle before writing about margin trajectory.
• CASA ratio = (current + savings deposits) / total deposits. Cheap, sticky funding. High-CASA banks structurally out-earn on NIM. Track CASA and the cost of deposits together — CASA can be defended by paying up on savings rates.
• Credit-deposit ratio. A high CD ratio limits loan growth without deposit growth, and deposit competition is the binding constraint for most Indian banks.

For NBFCs, the equivalent is spread over borrowing cost. NBFCs have no deposit franchise (except deposit-taking NBFCs), so funding is bank lines, NCDs, commercial paper and securitisation. Asset-liability mismatch is the core NBFC risk — read the ALM maturity bucket disclosure in the notes, especially the 1-month and 1–3 month buckets. Every Indian NBFC crisis has been a liability-side event, not an asset-side one.

Step 4 — RoA and RoE decomposition

The cleanest way to compare lenders. All items as a % of average assets:

  Net interest income / Avg assets           (NII margin)
+ Other income / Avg assets                  (fee + treasury)
= Total income
− Operating expense / Avg assets             (cost ratio)
= Pre-provision operating profit (PPOP) / Avg assets
− Provisions / Avg assets                    (credit cost)
= PBT / Avg assets
− Tax
= RoA

RoE = RoA × Leverage (Avg assets / Avg equity)

Benchmarks for a well-run Indian lender: RoA above 1.5% and RoE in the mid-to-high teens. Also track:

• Cost-to-income = opex / (NII + other income). Large private banks run in the high 30s to mid 40s; new-age and franchise-building lenders run far higher.
• PPOP / average assets — the buffer available to absorb credit cost before equity is hit. This is the single most useful stress metric.

Decompose other income into fees, treasury gains, and recoveries. Treasury gains are a bond-market call, not a banking franchise. Strip them before extrapolating.

Step 5 — Capital

CRAR (CAR)  = Total capital / Risk-weighted assets
CET1        = Common equity tier 1 / RWA
Tier 1      = CET1 + Additional Tier 1
Leverage    = Tier 1 / exposure measure

Indian scheduled commercial banks operate under Basel III as implemented by RBI, with a minimum total CRAR plus a capital conservation buffer on top; systemically important banks carry an additional D-SIB surcharge. NBFCs in the Upper Layer face their own CRAR and CET1 floors. Verify the current numeric minimums against RBI's Master Circular on Basel III Capital Regulations before quoting them — buffers and phase-ins have moved more than once.

What to actually do with capital:

• Compute headroom: how much loan growth the current CET1 supports before a raise, given internal accrual. Sustainable growth ≈ RoE × (1 − payout). A lender growing advances at 25% with a 14% RoE will dilute.
• Watch risk-weight changes. RBI has repeatedly changed risk weights on unsecured consumer credit and on bank lending to NBFCs; a risk-weight increase mechanically cuts CRAR and slows growth without anything happening to the loan book.
• AT1 bonds are loss-absorbing. Indian AT1 has been written down before. Do not treat AT1 as ordinary debt in a stress scenario.

Step 6 — Liquidity and funding

• LCR and NSFR for banks — disclosed quarterly.
• Deposit concentration: top-20 depositor share. High concentration plus a wholesale-funded balance sheet is fragility.
• NBFC borrowing mix: bank lines vs NCDs vs CP vs external commercial borrowings vs securitisation/direct assignment. A heavy CP reliance funding long-tenor assets is the classic NBFC failure mode.
• Securitisation and co-lending: off-book AUM. Compute AUM growth on a combined basis, and check the retained risk (minimum retention requirement) and the credit enhancement provided.

Step 7 — Valuation

Primary: P/ABV (price to adjusted book value)

Adjusted book value = Net worth − Net NPAs (and, if conservative, − security receipts − a haircut on restructured book)
P/ABV = Market cap / Adjusted book value

Anchor the multiple to sustainable RoE:

Justified P/B = (RoE − g) / (Ke − g)

With an Indian cost of equity around 13–15% (see dcf-india for Rf and ERP), a lender sustainably earning 18% RoE with 12% growth justifies a materially higher P/B than one earning 11%. The entire dispersion in Indian bank multiples is explained by sustainable RoE and credit-cost volatility. If your comp table cannot explain the spread with those two variables, the comp set is wrong.

Secondary:

• Residual income / excess return model: Value = Book value + Σ PV of (RoE − Ke) × Book value. This is the correct intrinsic model for a lender.
• Dividend discount, where the payout policy is stable.
• P/E — usable, but volatile because credit cost swings earnings. Use through-cycle normalised credit cost, not the current quarter's.
• SOTP for lenders with insurance, AMC, or broking subsidiaries — value each separately at its own multiple, then apply a holdco discount to the listed-subsidiary stakes.

Step 8 — The questions that actually matter

1. Is loan growth funded by deposits or by borrowings?
2. Where is incremental growth coming from — which product, at what yield, with what expected credit cost?
3. Is credit cost normalised or is the current quarter a cyclical low?
4. What is PPOP/assets, and how many years of normalised credit cost does it absorb?
5. Is the NIM change mix, pricing, or repricing lag?
6. How much capital does the stated growth ambition require, and when is the raise?
7. Is other income franchise fee income, or treasury?
8. For an NBFC: what happens to the 1–3 month ALM bucket if wholesale funding closes for one quarter?

Output format

# <Lender> — Q<n> FY<yy>

## Asset quality
| | Q-4 | Q-3 | Q-2 | Q-1 | Q |
| GNPA % | | | | | |
| NNPA % | | | | | |
| PCR % | | | | | |
| Slippage (ann.) | | | | | |
| Credit cost (bps) | | | | | |
| Write-offs ₹cr | | | | | |
| SMA-2 % | | | | | |

## Margin
| NIM | Yield on advances | Cost of funds | CASA % | CD ratio |

## RoA tree (% of avg assets)
| NII | Other income | Opex | PPOP | Provisions | PBT | RoA | Leverage | RoE |

## Capital & liquidity
| CRAR | CET1 | LCR | Growth headroom |

## Valuation
| P/B | P/ABV | Justified P/B at sustainable RoE | Implied |

## Read
<what changed, and whether the RoE is sustainable>

Hard rules

• Never apply EV/EBITDA, net debt or a FCFF DCF to a lender. If asked to, explain why and offer P/ABV and residual income instead.
• Always adjust GNPA for write-offs before describing asset quality as improving.
• State the reporting basis — standalone bank vs consolidated group including subsidiaries. Indian bank groups with insurance and AMC arms look very different on the two bases.
• Regulatory thresholds cited here move. Verify against the current RBI Master Direction or Master Circular and date the citation.
• Analysis, not investment advice.