Sector-Specific Ratios & Metrics

Banking is the only sector where standard corporate finance metrics, revenue growth, EBITDA margin, asset turnover, are completely meaningless. A bank's "revenue" is net interest income plus fees. Its "cost of goods sold" is interest expense. Its "inventory" is its loan book. Its "accounts receivable" are simultaneously its assets and its primary risk. Every metric must be relearned from scratch. More importantly, banking metrics are interconnected in circular ways: NIM affects provisioning capacity, provisioning affects capital adequacy, capital adequacy affects loan book growth, loan book growth affects NPA formation, NPA formation affects NIM.

Income Metrics

1. Net Interest Margin (NIM)

The master profitability metric of banking. NIM equals (Interest Income minus Interest Expense) divided by Average Interest-Earning Assets. It measures the spread between what the bank earns on its loans and investments and what it pays on its deposits and borrowings. Every 10 basis points of NIM improvement, on a 10 lakh crore loan book, adds approximately 1,000 crore to annual pre-tax profit.

2. Net Interest Income (NII)

The absolute rupee amount of interest income minus interest expense. NII growth of 15%+ YoY for a PSU bank signals genuine franchise improvement, not just loan book expansion.

3. Non-Interest Income (Fee Income)

Income from fees, commissions, treasury operations, and cross-sell (insurance, mutual funds). PSU banks typically generate 15 to 25% of total income from fees (versus 30 to 40% for private banks). Rising fee income ratio signals improving franchise quality and reduced dependence on NIM alone.

4. Cost-to-Income Ratio

Operating Expenses divided by Total Income (NII plus Non-Interest Income). The efficiency metric. PSU banks historically run 50 to 60% cost-to-income (versus 35 to 45% for private banks). The gap reflects higher employee costs (pension liabilities, union agreements), larger branch networks per unit of business, and legacy IT systems.

Asset Quality Metrics

5. Gross NPA Ratio (GNPA)

Gross Non-Performing Assets as a percentage of Gross Advances. The headline risk metric. An account becomes NPA when interest or principal payment is overdue by more than 90 days (RBI's recognition norm). GNPA peaked at 14.6% for the PSU bank system in FY2018. Current SBI GNPA is approximately 2.2% (FY25).

6. Slippage Ratio

Fresh additions to NPA in a period divided by the opening standard loan book. This is the flow metric (versus GNPA which is the stock metric). Slippage ratio is the single best leading indicator of the NPA cycle direction. Slippage rate turning down means the worst of new NPA formation is behind. Slippage rate turning up means the cycle is deteriorating regardless of what the headline GNPA shows.

7. Credit Cost

Total provisions and write-offs during the period divided by average advances. This is the direct P&L impact of asset quality. PSU bank credit cost peaked at 3 to 4% during FY2017 to 2019 (versus a normalised level of 0.5 to 1.0%). Current SBI credit cost is approximately 0.3 to 0.4%, reflecting the post-cleanup NPA cycle trough.

8. Provision Coverage Ratio (PCR)

Total provisions held against NPAs divided by total GNPA amount. PCR above 70% means the bank has provisioned for 70% of its NPAs, leaving only 30% as net exposure. SBI maintains approximately 75 to 80% PCR. PCR above 80% provides a significant earnings buffer: if NPAs resolve, provisions reverse into profits.

Liability & Franchise Metrics

9. CASA Ratio

Current Account plus Savings Account deposits as a percentage of total deposits. This is the franchise quality metric. A bank with 45% CASA versus one with 30%, on a 10 lakh crore deposit base, saves approximately 8,500 crore annually in interest costs. This advantage flows entirely to NIM and earnings.

Capital & Solvency Metrics

10. Capital Adequacy Ratio (CAR/CRAR)

Total Capital (Tier 1 + Tier 2) divided by Risk-Weighted Assets. RBI minimum requirement is 11.5% for PSU banks (including capital conservation buffer). PSU banks with CAR below 12% are on the edge. CET1 (Common Equity Tier 1) of 9%+ signals genuine solvency strength versus regulatory minimum compliance.

The capital constraint is the single most important limitation on PSU bank growth. Banks that cannot generate sufficient internal capital through profitable operations must either raise expensive market capital (diluting minorities) or reduce asset growth.

Profitability & Return Metrics

11. Return on Assets (ROA)

Net Profit After Tax divided by Average Total Assets. ROA is the primary profitability benchmark for banks (not ROE), because ROE can be inflated by leverage. PSU bank system ROA trough was approximately -0.1% in FY2018 (loss-making). Current SBI ROA is approximately 0.95 to 1.0%. Bank of Maharashtra at 1.3 to 1.4% is the best-performing PSU bank.

12. Return on Equity (ROE)

ROE decomposes as: NIM minus Credit Cost minus Operating Cost Ratio plus Non-Interest Income Ratio, all multiplied by Leverage (Assets/Equity). The key is which lever drives ROE. ROE driven by NIM improvement (sustainable) is fundamentally different from ROE driven by leverage increase (unsustainable).

The ROE to P/B relationship is the most important valuation framework in banking. A PSU bank sustainably achieving 15% ROE mathematically justifies a 1.3 to 1.8x P/B multiple, representing a 60 to 120% re-rating from current 0.8x levels.

Where to Find Every Metric