April 7, 2018

Can we Assess a Bank's Financial Position from its Reported Financials, How to Safeguard Stocks with Discount Brokers, How is Total Interest Outgo different from Interest Expense in P&L (Q&A)

www.drvijaymalik.com has a section dedicated to answering queries from readers: “Ask Your Queries”. Over time, many readers have asked their queries related to many aspects of stock analysis and sought clarifications about investing. We have responded to these queries as replies to their comments.

“Q&A” series is an attempt to share the queries & their responses, which have featured on “Ask Your Queries” section, with all the readers. The primary aim of this new feature is to share the knowledge with other readers of the website, who might have similar queries.

The current article in this series provides responses related to the following queries:
  • Can we know the true financial position of a Bank by reading its reported financials?
  • How to safeguard stocks lying with Discount Brokers?
  • Is interest expense in P&L equal to the total interest outflow of the company? If not, then how to calculate total interest outflow? 

Can we assess financial position of Bank from its reported financials?
Safeguard your stocks, Discount Brokers,
interest expense, total interest outflow

Can we assess the true financial position of a Bank by reading its reported financials?

Hello Dr. Vijay Sir,

I had done some little analysis on Karnataka Bank.

Net interest margin (NIM) was in the range of 2.5% until 2016-17. Now we are seeing NIM being an improvement in range of above 3%. GNPA and NNPA are decreasing from a 2016-17 yearly peak of 4.21% and 2.64%.

Recently they have collaborated with BCG firm for the transformation of the bank. MD and CEO Mahabaleshwara M S looks aggressive to me. Moreover, they are intending to create some wealth for shareholders and investors now. Branches and ATM networks are at good stage ~800 and 1382. Other operational efficiency numbers are improving quarter after quarter. Capital adequacy ratio looks somewhat concern at ~12.2% in 2017-18 TTM. However, I think Bank is maintaining their CAR at ~12.5%. They do not have any aim to improve on that front. Biggest improve we see is in NIM margins and NPA improvement.

As we know, they have transformational targets of doubling their business and decreasing NPA percentage significantly in 2020. In addition, as far as I have seen their targets are being fulfilled in time. Some of the concern may rise for banking sector while rising bond yield. However, I do not think KTK bank has much exposure to bond side.

I agree ROA is lower than 1% at ~0.65% currently and ROE as well. However, if we see business improvement and NIM margins improvement steadily and loan growth at around 25%. They can go beyond 1% as well. In addition, the Bank, recently, had a rights issue that is why we see a drop in ROE percentage significantly; otherwise, they were in line with another old private bank ~10%. I believe going forward they will also improve to the original level of 10% and furthermore.

As we talked about business. Now let me come to the valuation of the bank.

P/E is around ~7 TTM at 9-3-2018 price. P/B is ~0.66 for the same date.
At this valuation, looks cheapest from privet sector banks. I would agree price might discount previous results hurdles. However, from last 2 quarters, the numbers are good and are better than the banking sector numbers as well. I believe if they can go by their targets and doubling business, improving numbers efficiency, then after 2 years or so, bank valuation may also demand some premium, which is not there at all. I would like to know is this opportunity for great investment having great valuation safety in this costly market valuation. Or is this some of the traps. Any information/foreside that I do not know.

I request you to help me, with the little analysis that I have done. I would also like to hear what you believe about Karnataka Bank and about its business and valuation.

Hope to hear from you soon.

Thank you.

Author’s Response:


Thanks for writing to us and sharing your views on Karnataka Bank.

Looking at the outcomes in the banking companies in the last couple of years, it comes out that almost all the banks were hiding many NPAs/bad assets in their beautifully prepared audited financials, which were certified by the best of the auditors in the world. NPAs of banks initially always seemed to be within 1-2%, whereas now most of the private sector banks are accepting that NPAs are above 5% and PSU banks are accepting that NPAs are mostly above 10%. In addition, no one knows about the true extent of bad assets the banks hold in their books.

In light of the above developments, wherein the hindsight, it seems that almost all the banks lied to the stakeholders in their audited financials. Therefore, we believe that it is difficult to have an opinion on the financial position of a bank by relying on the audited financials prepared by it.

Almost all the analysts in different brokerage houses/research companies, who used to cover banks and used to read every line of the annual reports of the banks and used to have direct conversations with the management of the banks. Now the analysts also seem to have learned that it is difficult to opine about the health of the bank by relying on the information supplied by the bank.

Therefore, in light of these developments, we find ourselves unable to provide any opinion about Karnataka Bank and your analysis.

All the best for your investing journey!


Dr. Vijay Malik

How to safeguard stocks lying with Discount Brokers?

Hi Vijay,

Hope you are doing well.

How secure are the low-cost trading accounts and DMAT like Zerodha and CDSL?

As the wealth grows, our portfolio will grow more than ₹1 cr, which will represent a large part of our net worth. Therefore, we need to be sure that the shares are in safe custody.

Please let me know your thoughts and share your experience.

Thanks in advance,

Author’s Response:


Thanks for writing to us!

We have no experience of dealing with Zerodha or any other discount brokers. However, we notice that most of the frauds related to brokers selling shares from investors' accounts originate from two aspects:

  • Investors keep shares in the broker's pool account and do not shift them to their demat account with NSDL or CDSL
  • There are two kinds of power of attorney, which can be entered between investors and brokers. Investors who look for margin funding/leverage from the broker and therefore, the power of attorney (POA), which these investors enter with brokers usually allows brokers to withdraw shares from investors CDSL/NSDL account without their permission. This is a big risk.
    • it is advised that investors should enter such POA with the broker, which allows the broker to withdraw shares from NSDL/CDSL account only on the sale of shares and in no other condition.

The above two steps should save investors from most of the issues. Rest no one can predict what kind of new strategies; the fraudster may be thinking of to bypass all the safeguards.

All the best for your investing journey!


Dr. Vijay Malik

Is interest expense in P&L equal to the total interest outflow of the company? How to calculate total interest outflow?

Q. 1)

Hi Vijay,

I observed that the in your excel template the interest expense and interest outgo are differing. What is the reason behind it?

How are you calculating the Cash + Investment in the same excel?


Q. 2)

Dr Vijay,

Good morning. How to calculate Interest outgo. What are the parameters used for Interest Outgo?


Author’s Response:


Thanks for writing to us.


The interest expense in the P&L is net of capitalized interest. Therefore, to calculate the overall interest outflow (including the P&L interest expense and capitalized interest), we have assumed an interest rate of 12% and then calculated the total interest outflow.

In the Screener export to excel "Data Sheet", it provides the data for "Cash & Bank" and "Investments". We sum these two items in the datasheet to arrive at Cash & Investments.


Interest outgo can be calculated as total debt * interest rate

Total debt can be calculated from the annual report as short-term debt + Long-term debt + current maturity of long-term debt

Total debt is also available in the datasheet of the Screener export to excel as "Total borrowings".

You may get the interest rate from the annual report in the detailed notes to financial statements.

All the best for your investing journey!


Dr. Vijay Malik

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Registration Status with SEBI:

I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013

Details of Financial Interest in the Subject Company:

Currently, I do not own stocks of any of the companies discussed above