Learning objectives
By the end of the week you can:
- Explain from first principles why banks are different: why leverage is the product rather than a financing choice, why deposits are raw material rather than debt, why confidence is a balance-sheet input, and therefore why FCFF/WACC/EV multiples fail and equity-direct tools (P/B vs ROE, excess returns) take over.
- Rebuild a bank's P&L and balance sheet from a blank page: interest income → NII → PPOP → PAT on one side; loan book, investment book (SLR/CRR), deposits (CASA vs term), borrowings, and capital on the other. Then trace how one rupee of deposits becomes profit.
- Compute and interpret the full KPI panel from a bank's published financials: NIM, GNPA/NNPA, PCR, credit cost, slippage ratio, ROA, ROE, cost-to-income, CASA, CD ratio, CRAR/CET1, each against its healthy/stress threshold, with the NPA roll-forward that links them.
- Explain why bank earnings lag the truth (growth-denominator optics, vintage seasoning, recognition discretion, provisioning smoothing), and use SMA buckets, restructured books, and RBI divergence disclosures as your early-warning instruments.
- Navigate the regulatory map: RBI's IRAC norms, Basel III minima as applied in India (with buffers), PCA triggers, and priority-sector rules; and translate the panel into US terms (Fed/OCC/FDIC, CCAR/stress-capital buffers, efficiency ratio, net charge-offs).
- Value a bank two ways: a P/B-vs-ROE cross-sectional read (including the regression logic and adjusted book value), and a multi-stage excess-return model run end-to-end. Then reverse either into "what the price implies."
- Run the red-flag panel on any bank in fifteen minutes: rising SMA-2 + slippages, NIM compression alongside aggressive growth, falling PCR as GNPA rises, CD ratio above 90%, promoter/concentrated exposure, NPA divergence. Then explain, using Yes Bank and SVB, how each flag maps to a real failure mechanism.
- Deliver the Phase 5 bank workup: a full KPI panel, five-year trend read, valuation, and one-page verdict on one Indian and one US bank, graded against the mini-project rubric.
Prerequisites & connections
Builds on. M3.10 §4.2 is the direct parent: why lenders break the standard valuation machine, the dividend-discount variant with the regulatory-capital payout constraint (payout = 1 − g/ROE), the excess-return model, and the P/B-vs-ROE shortcut. Those tools are assumed here, and the time goes instead on what M3.10 deferred, the operating anatomy and the sector judgment. From Phase 1: M1.09 §4.9 (financial instruments, where amortized cost vs FVOCI/FVTPL matters enormously, and SVB is an accounting-classification story as much as a risk story) and M1.10 (the Indian annual-report anatomy, whose bank-specific schedules you will now read). From Phase 2: the quality-of-earnings reflexes (M2.06–M2.08), because a bank's stated book value is a hypothesis rather than a fact; and the DuPont habit (M2.02), which reappears here as the ROA tree. From Phase 3: cost of equity (M3.03) is the r every bank tool discounts at. From Phase 4: moat language. A CASA franchise is a switching-cost-plus-brand moat you can measure in basis points of funding advantage.
Feeds into. M5.02 (NBFCs/HFCs) strips away deposit insurance and the RBI liquidity backstop and shows what the same balance sheet looks like when the liability side can vanish in 90 days. Run this playbook first or that one won't land. M5.03 (insurance) reuses the "regulated financial with a levered investment book" pattern. Phase 7's macro work (rate cycles, liquidity) plugs directly into NIM and credit-cost forecasting. Phase 8's rapid teardown uses this playbook as the "financials" branch: when the two-minute triage says lender, this is the checklist you run. Competency C6 (analyze any industry with the right lens) begins its certification here.
4.1 Why banks are different: leverage is the product
Every non-financial business you have analyzed has the same deep structure: raise capital, buy assets, sell a product whose price exceeds cost, and the financing side (how much debt vs equity) is a separate, second-order choice. Damodaran's line, from M3.10: for a bank, debt is not financing — it is raw material.