5 Metrics You Should Know Before Investing in Banks

Net Interest Margin (NIM)

Purpose: It gauges profitability. The higher the margin, the more profitable the bank. Formula: (Interest income - Interest expenses)/average earning assets

Gross non-performing asset (GNPA) ratio

Purpose: It shows the amount of bad loans. If the ratio is low, it means the bank is financially healthy. Formula: Gross NPA/ Gross advances

Provision Coverage Ratio (PCR)

Purpose: It indicates how secure the bank is against defaults. The higher the ratio, the more secure the bank Formula: Total Provision/ Gross NPAs

Return on assets (ROA)

Purpose: It shows how efficiently the bank is using its assets. A high ROA means the bank is efficient. Formula: Profit after tax/ Total assets

Capital Adequacy Ratio (CAR)

Purpose: It gauges the bank's readiness for losses. A high CAR means it is well prepared. Formula: Bank’s capital/Risk-weighted assets