How to pick a Good Bank?

Banking is a very risky business where the inherent nature of the business is such that leverage is used to the extent of 5-10 times.

#Banking

So it goes without saying that banks are expected to lend conservatively, do excellent underwriting and not miss the forest for the trees (meaning not missing balance sheet strength for just P&L. We all know of a bank who did things simply for P&L and ended up capital-starved).

So here is the checklist -

1. Lend Conservatively

Source - Q1FY20 concall

2. Excellent Underwriting Standards

Source - Q2FY14 concall

3. Risk Discipline

Source - Q4FY16 concall

4. Not missing the forest for the trees (meaning not missing balance sheet strength for just P&L )

Source - Q4FY19 concall

5. Doesn’t debate its shortcomings, instead works hard on it

Source - Q4FY14 Concall

6. No Funny Accounting/Only Conservative Accounting

Source - Q2FY18 Concall

7. Strong Liability Franchise

CASA (low cost deposits) represented 32% of Kotak Mahindra Bank's total deposits in FY12 which increased to 56.2% in FY20! This helped them to lower cost of funds and grow the bank!

8. Excellent level of Disclosures

Source - Q1FY17 concall

9. Return of Capital > Return on Capital

Source - Q1FY18 concall

10. Doing what is right for business

Source - Q3FY20 Concall

11. ALM (Asset Liability Management)

The bank should be very careful/diligent on its assets/liabilities management ( as well as the mismatch or the negative mismatch around it.)

Source - Q2FY19 concall

To conclude, Banks with strong underwriting practices and conservative managements will get stronger (Strong will get stronger). Also, Banks with high capital base (Tier 1 Ratio) will weather the storm relatively better.

Stocks mentioned above are not a recommendation.

End.