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Can we Assess a Bank’s Financial Position from its Reported Financials, How to Safeguard Stocks with Discount Brokers

Modified on March 17, 2020

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?


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.

An investor will appreciate that until very recent times, one of the private banks, Yes Bank Ltd, used to report low NPA numbers. However, it turns out that the bank had higher number of bad loans, which reached unmanageable proportions. As a result, the Govt. of India and RBI had to bail out Yes Bank.

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.

Further advised reading: Why Management Assessment is the Most Critical Factor in Stock Investing?

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.

Advised Reading: Selecting Top Stocks to Buy – A Step-by-Step Process of Finding Multibagger Stocks

All the best for your investing journey!


Dr. Vijay Malik

Related Query:

Hello sir,

Please give me a reference (any website, forum, books etc.) for analysis of micro-finance, finance and housing finance companies. I have gone through Peaceful Investing e-book. For general case, it helped me a lot. However, I want to do analysis of some housing finance company. I am not able to get any reliable material for this specific sector.

What fundamental factors should we look at while studying annual report and balance sheet of finance/housing finance sector companies?

I am from science background. Nevertheless, I have good interest in economics especially in last 3-4 year. I need your help please.

Author’s Response:


Thanks for writing to us!

We believe that it is very difficult to assess the true financial position of any financial institution by analysing its reported financial numbers. Almost entire analyst community has realized this aspect by looking at the sharp rise in NPAs reported by almost all the banks/financial institutions (FIs).

We are until now, not able to differentiate below two cases from the annual reports of financial institutions (FI):

1) Cases where FIs give genuine loans to one borrower, collect interest and principal repayments and then give genuine loans to other different borrowers and

2) Cases where FIs give first loan to one borrower, are not able to collect interest and principal repayments from the borrower as the borrower is under stress. Therefore, the FIs indulge in ever greening to give more loans to the same borrower/any of its related companies, so that the money goes to first borrower and then he pays back to the bank. In this fashion, the bank saves the NPA recognition of a stressed loan.

Hope it clarifies our views on Banks/financial institutions including HFC, NBFCs etc.

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



  • The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
  • I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
  • Currently, I do not own stocks of the companies mentioned above in my portfolio.

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