performance evaluation of a bank (cbm).docx

7/29/2019 performance evaluation of a bank (cbm).docx

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ACKNOWLEDGEMENT

I take this opportunity to express my profound gratitude and deep regards to my project guide

Mrs. Aarti Kalyanraman for his exemplary guidance, monitoring and constant

encouragement throughout the course of this project. The blessing, help and guidance given

by him time to time shall carry me a long way in the journey of life on which I am about to

embark.

I also take this opportunity to express a deep sense of gratitude to the principal Dr. Minu

Thomas for her cordial support and guidance, which helped me in completing this task

through various stages.

I am obliged to my course coordinator Mrs.Shailashri Uchil, for the valuable information

provided by her in respective fields. I am grateful for their cooperation during the period of

my assignment.

Lastly, I thank almighty, my parents, brother, sisters and friends for their constant

encouragement without which this assignment would not be possible.

(Name of the student)

(Mudaliyar Vineeth Rajkumar)


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Sr. No. Topics Page no.

1. Objectives of the project study 3

2. Genesis 5

3. The CAMELS framework 6

4. Introduction to the banking sector 13

5. Banks chosen for the study 19

6. Data interpretation & Analysis 24

7. Findings 31

8. Suggestions & Recommendations 32

9. Conclusion 33

10. Bibliography 34


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OBJECTIVES OF THE PROJECT STUDY

To study the Financial Performance of the banks

To study the strength of using CAMELS framework as a tool of Performanceevaluation for Commercial banks

To describe the CAMELS model of ranking banking institutions, so as to analyze theperformance of various bank.

Rationale

In the recent years the financial system especially the banks have undergone numerous

changes in the form of reforms, regulations & norms. The attempt here is to see how various

ratios have been used and interpreted to reveal a banks performance and how this particular

model encompasses a wide range of parameters making it a widely used and accepted model

in todays scenario.

Data Collection

Primary Data: Primary data was collected from the Banks balance sheets and profitand loss statements.

Secondary Data: Secondary data on the subject was collected from ICFAI journals,Banks annual reports and RBI website.

Methodology

As long as the methodology is concerned, we have made use of a framework called

CAMELS FRAMEWORK. There are so many models of evaluating the performance of the

banks, but I have chosen the CAMELS Model for this purpose. I have gone through several

books, journals and websites and found it the best model because it measures the

performance of the banks from each parameter i.e. Capital, Assets, Management, Earnings,

Liquidity and Sensitivity to Market risks.


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CAMELS evaluate banks on the following six parameters:-

Capital Adequacy (CRAR) Asset Quality (GNPA) Management Soundness (MGNT) Earnings & profitability (ROA) Liquidity (LQD) Sensitivity to Market Risks ()


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GENESIS

The banking sector has been undergoing a complex, but comprehensive phase of

restructuring since 1991, with a view to make it sound, efficient, and at the same time it is

forging its links firmly with the real sector for promotion of savings, investment and growth.

Although a complete turnaround in banking sector performance is not expected till the

completion of reforms, signs of improvement are visible in some indicators under the

CAMELS framework. Under this bank is required to enhance capital adequacy, strengthen

asset quality, improve management, increase earnings and reduce sensitivity to various

financial risks. The almost simultaneous nature of these developments makes it difficult to

disentangle the positive impact of reform measures.

In 1994, the RBI established the Board of Financial Supervision, which operates as a unit of

the RBI. The entire supervisory mechanism was realigned to suit the changing needs of a

strong and stable financial system. The supervisory jurisdiction of the BFS was slowly

extended to the entire financial system barring the capital market institutions and the

insurance sector. Its mandate is to strengthen supervision of the financial system by

integrating oversight of the activities of financial services firms. The BFS has also established

a sub-committee to routinely examine auditing practices, quality, and coverage. In 1995, RBI

had set up a working group under the chairmanship of Shri S. Padmanabhan to review thebanking supervision system. The Committee gave certain recommendations and based on

such suggestions a rating system for domestic and foreign banks based on the international

CAMELS model combining financial management and sensitivity to market risks element

was introduced for the inspection cycle commencing from July 1998. It recommended that

the banks should be rated on a five point scale (A to E) based on the lines of international

CAMELS rating model. The CAMELS rating model measures the relative soundness of a

bank.


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THE CAMELS FRAMEWORK

During an on-site bank exam, supervisors gather private information, such as details on

problem loans, with which to evaluate a bank's financial condition and to monitor its

compliance with laws and regulatory policies. A key product of such an exam is a

supervisory rating of the bank's overall condition, commonly referred to as a CAMELS

rating. The acronym "CAMEL" refers to the five components of a bank's condition that are

assessed: Capital adequacy, Asset quality, Management, Earnings, and Liquidity. A sixth

component, a bank's Sensitivity to market risk was added in 1997; hence the acronym was

changed to CAMELS.

The CAMELS model is basically a ratio-based model for evaluating the performance of

banks. Various ratios forming this model are explained below:

1. Capital Adequacy Ratio

Capital base of financial institutions facilitates depositors in forming their risk perception

about the institutions. Also, it is the key parameter for financial managers to maintain

adequate levels of capitalization. The most widely used indicator of capital adequacy is

capital to risk-weighted assets ratio (CRWA). According to Bank Supervision Regulation

Committee (The Basle Committee) of Bank for International Settlements, a minimum 9

percent CRWA is required. Thus, it is useful to track capital-adequacy ratios that take into

account the most important financial risksforeign exchange, credit, and interest rate risks

by assigning risk weightings to the institutions assets. A sound capital base strengthens

confidence of depositors. This ratio is used to protect depositors and promote the stability and

efficiency of financial systems around the world.

CRAR is a ratio of Capital Fund to Risk Weighted Assets. Reserve Bank of India prescribes

Banks to maintain a minimum Capital to risk-weighted Assets Ratio (CRAR) of 9 % with

regard to credit risk, market risk and operational risk on an ongoing basis, as against 8 %

prescribed in Basel documents.


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2. Asset Quality

Asset quality determines the robustness of financial institutions against loss of value in the

assets. The deteriorating value of assets, being prime source of banking problems, directly

pour into other areas, as losses are eventually written off against capital, which ultimately

jeopardizes the earning capacity of the institution. With this backdrop, the asset quality is

gauged in relation to the level and severity of non-performing assets, adequacy of provisions,

recoveries, distribution of assets etc. Popular indicators include non-performing loans to

advances, loan default to total advances, and recoveries to loan default ratios.

One of the indicators for asset quality is the ratio of non-performing loans to total loans

(GNPA). The gross non-performing loans to gross advances ratio is more indicative of the

quality of credit decisions made by bankers. Higher GNPA is indicative of poor credit

decision-making.

NPA: Non-Performing Assets

Advances are classified into performing and non-performing advances (NPAs) as per RBI

guidelines. NPAs are further classified into sub-standard, doubtful and loss assets based on

the criteria stipulated by RBI. An asset, including a leased asset, becomes non-performing

when it ceases to generate income for the Bank.

An NPA is a loan or an advance where:

1. Interest and/or installment of principal remains overdue for a period of more than 90days in respect of a term loan;

2. The account remains "out-of-order'' in respect of an Overdraft or Cash Credit(OD/CC);

3.

The bill remains overdue for a period of more than 90 days in case of bills purchasedand discounted;

4. A loan granted for short duration crops will be treated as an NPA if the installments ofprincipal or interest thereon remain overdue for two crop seasons; and

5. A loan granted for long duration crops will be treated as an NPA if the installments ofprincipal or interest thereon remain overdue for one crop season.


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The Bank classifies an account as an NPA only if the interest imposed during any quarter is

not fully repaid within 90 days from the end of the relevant quarter. This is a key to the

stability of the banking sector. There should be no hesitation in stating that Indian banks have

done a remarkable job in containment of non-performing loans (NPL) considering the

overhang issues and overall difficult environment. For 2008, the net NPL ratio for the Indian

scheduled commercial banks at 2.9 per cent is ample testimony to the impressive efforts

being made by our banking system. In fact, recovery management is also linked to the banks

interest margins. The cost and recovery management supported by enabling legal framework

hold the key to future health and competitiveness of the Indian banks. No doubt, improving

recovery-management in India is an area requiring expeditious and effective actions in legal,

institutional and judicial processes.

3. Management Soundness

Management of financial institution is generally evaluated in terms of capital adequacy, asset

quality, earnings and profitability, liquidity and risk sensitivity ratings. In addition,

performance evaluation includes compliance with set norms, ability to plan and react to

changing circumstances, technical competence, leadership and administrative ability. In

effect, management rating is just an amalgam of performance in the above-mentioned areas.

Sound management is one of the most important factors behind financial institutions

performance. Indicators of quality of management, however, are primarily applicable to

individual institutions, and cannot be easily aggregated across the sector. Furthermore, given

the qualitative nature of management, it is difficult to judge its soundness just by looking at

financial accounts of the banks.

Nevertheless, total expenditure to total income and operating expense to total expense helps

in gauging the management quality of the banking institutions. Sound management is key to

bank performance but is difficult to measure. It is primarily a qualitative factor applicable to

individual institutions. Several indicators, however, can jointly serveas, for instance,

efficiency measures do-as an indicator of management soundness.

The ratio of non-interest expenditures to total assets (MGNT) can be one of the measures to

assess the working of the management. . This variable, which includes a variety of expenses,

such as payroll, workers compensation and training investment, reflects the management

policy stance.


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Efficiency Ratios demonstrate how efficiently the company uses its assets and how

efficiently the company manages its operations.

Indicates the relationship between assets and revenue.

Companies with low profit margins tend to have high asset turnover, those with highprofit margins have low asset turnover - it indicates pricing strategy.

This ratio is more useful for growth companies to check if in fact they are growingrevenue in proportion to sales.

Asset Turnover ratio is useful to determine the amount of sales that are generated from each

rupee of assets. As noted above, companies with low profit margins tend to have high asset

turnover, those with high profit margins have low asset turnover.

4. Earnings and Profitability

Earnings and profitability, the prime source of increase in capital base, is examined with

regards to interest rate policies and adequacy of provisioning. In addition, it also helps to

support present and future operations of the institutions. The single best indicator used to

gauge earning is the Return on Assets (ROA), which is net income after taxes to total asset

ratio.

Strong earnings and profitability profile of banks reflects the ability to support present and

future operations. More specifically, this determines the capacity to absorb losses, finance its

expansion, pay dividends to its shareholders, and build up an adequate level of capital. Being

front line of defense against erosion of capital base from losses, the need for high earningsand profitability can hardly be overemphasized. Although different indicators are used to

serve the purpose, the best and most widely used indicator is Return on Assets (ROA).

However, for in-depth analysis, another indicator Net Interest Margins (NIM) is also used.

Chronically unprofitable financial institutions risk insolvency. Compared with most other

indicators, trends in profitability can be more difficult to interpret-for instance, unusually

high profitability can reflect excessive risk taking.


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ROA-Return on Assets is an indicator of how profitable a company is relative to its total

assets. ROA gives an idea as to how efficient management is at using its assets to generate

earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is

displayed as a percentage. Sometimes this is referred to as "return on investment".

ROA tells what earnings were generated from invested capital (assets). ROA for public

companies can vary substantially and will be highly dependent on the industry. This is why

when using ROA as a comparative measure, it is best to compare it against a company's

previous ROA numbers or the ROA of a similar company.

The assets of the company are comprised of both debt and equity. Both of these types of

financing are used to fund the operations of the company. The ROA figure gives investors an

idea of how effectively the company is converting the money it has to invest into net income.

The higher the ROA number, the better, because the company is earning more money on less

investment. For example, if one company has a net income of $1 million and total assets of

$5 million, its ROA is 20%; however, if another company earns the same amount but has

total assets of $10 million, it has an ROA of 10%. Based on this example, the first companyis better at converting its investment into profit. When you really think about it,

management's most important job is to make wise choices in allocating its resources.

Anybody can make a profit by throwing a ton of money at a problem, but very few managers

excel at making large profits with little investment.

5. Liquidity

An adequate liquidity position refers to a situation, where institution can obtain sufficient

funds, either by increasing liabilities or by converting its assets quickly at a reasonable cost.

It is, therefore, generally assessed in terms of overall assets and liability management, as

mismatching gives rise to liquidity risk. Efficient fund management refers to a situation

where a spread between rate sensitive assets (RSA) and rate sensitive liabilities (RSL) is

maintained. The most commonly used tool to evaluate interest rate exposure is the Gap

between RSA and RSL, while liquidity is gauged by liquid to total asset ratio.


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Initially solvent financial institutions may be driven toward closure by poor management of

short-term liquidity. Indicators should cover funding sources and capture large maturity

mismatches. The term liquidity is used in various ways, all relating to availability of, access

to, or convertibility into cash.

An institution is said to have liquidity if it can easily meet its needs for cash eitherbecause it has cash on hand or can otherwise raise or borrow cash.

A market is said to be liquid if the instruments it trades can easily be bought or sold inquantity with little impact on market prices.

An asset is said to be liquid if the market for that asset is liquid.The common theme in all three contexts is cash. A corporation is liquid if it has ready access

to cash. A market is liquid if participants can easily convert positions into cashor

conversely. An asset is liquid if it can easily be converted to cash. The liquidity of an

institution depends on:

the institution's short-term need for cash; cash on hand; available lines of credit; the liquidity of the institution's assets; The institution's reputation in the marketplacehow willing will counterparty is to

transact trades with or lend to the institution?

The liquidity of a market is often measured as the size of its bid-ask spread, but this is an

imperfect metric at best. More generally, Kyle (1985) identifies three components of market

liquidity:

Tightness is the bid-ask spread; Depth is the volume of transactions necessary to move prices; Resiliency is the speed with which prices return to equilibrium following a large

trade.

Examples of assets that tend to be liquid include foreign exchange; stocks traded in the Stock

Exchange or recently issued Treasury bonds. Assets that are often illiquid include limited

partnerships, thinly traded bonds or real estate.


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Cash maintained by the banks and balances with central bank, to total asset ratio (LQD) is an

indicator of bank's liquidity. In general, banks with a larger volume of liquid assets are

perceived safe, since these assets would allow banks to meet unexpected withdrawals.

Credit deposit ratio is a tool used to study the liquidity position of the bank. It is calculated

by dividing the cash held in different forms by total deposit. A high ratio shows that there is

more amounts of liquid cash with the bank to met its clients cash withdrawals.

6. Sensitivity to Market Risks

It refers to the risk that changes in market conditions could adversely impact earnings and/or

capital.

Market Risk encompasses exposures associated with changes in interest rates, foreign

exchange rates, commodity prices, equity prices, etc. While all of these items are important,

the primary risk in most banks is interest rate risk (IRR), which will be the focus of this

module. The diversified nature of bank operations makes them vulnerable to various kinds of

financial risks. Sensitivity analysis reflects institutions exposure to interest rate risk, foreign

exchange volatility and equity price risks (these risks are summed in market risk). Risk

sensitivity is mostly evaluated in terms of managements ability to monitor and control

market risk.

Banks are increasingly involved in diversified operations, all of which are subject to market

risk, particularly in the setting of interest rates and the carrying out of foreign exchange

transactions. In countries that allow banks to make trades in stock markets or commodity

exchanges, there is also a need to monitor indicators of equity and commodity price risk.

Sensitivity to Market Risk is a recent addition to the ratings parameters and reflects the

degree to which changes in interest rates, exchange rates, commodity prices and equity pricescan affect earnings and hence the banks capital. It is measured by Beta ().

1. 1, depicts that changes in the firm are more than the changes in the market. HighlySensitive.


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INTRODUCTION TO THE BANKING SECTOR

The Bank

The word bank means an organization where people and business can invest or borrowmoney; change it to foreign currency etc. According to Halsbury A Banker is an individual,

Partnership or Corporation whose sole pre-dominant business is banking, that is the receipt of

money on current or deposit account, and the payment of cheque drawn and the collection of

cheque paid in by a customer.

The Origin and Use of Banks

The Word Bank is derived from the Italian word Banko signifying a bench, which waserected in the market-place, where it was customary to exchange money. The Lombard Jews

were the first to practice this exchange business, the first bench having been established in

Italy A.D. 808. Some authorities assert that the Lombard merchants commenced the business

of money-dealing, employing bills of exchange as remittances, about the beginning of the

thirteenth century.

About the middle of the twelfth century it became evident, as the advantage of coined money

was gradually acknowledged, that there must be some controlling power, some corporation

which would undertake to keep the coins that were to bear the royal stamp up to a certain

standard of value; as, independently of the sweating which invention may place to the credit

of the ingenuity of the Lombard merchants- all coins will, by wear or abrasion, become

thinner, and consequently less valuable; and it is of the last importance, not only for the credit

of a country, but for the easier regulation of commercial transactions, that the metallic

currency be kept as nearly as possible up to the legal standard. Much unnecessary trouble and

annoyance has been caused formerly by negligence in this respect. The gradual merging of

the business of a goldsmith into a bank appears to have been the way in which banking, as we

now understand the term, was introduced into England; and it was not until long after the

establishment of banks in other countries-for state purposes, the regulation of the coinage,

etc. that any large or similar institution was introduced into England. It is only within the last

twenty years that printed cheques have been in use in that establishment. First commercial

bank was Bank of Venice which was established in 1157 in Italy.


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The banking reforms

In 1991, the Indian economy went through a process of economic liberalization, which was

followed up by the initiation of fundamental reforms in the banking sector in 1992. The

banking reform package was based on the recommendations proposed by the Narasimham

Committee Report (1991) that advocated a move to a more market oriented banking system,

which would operate in an environment of prudential regulation and transparent accounting.

One of the primary motives behind this drive was to introduce an element of market

discipline into the regulatory process that would reinforce the supervisory effort of the

Reserve Bank of India (RBI). Market discipline, especially in the financial liberalization

phase, reinforces regulatory and supervisory efforts and provides a strong incentive to banks

to conduct their business in a prudent and efficient manner and to maintain adequate capital

as a cushion against risk exposures. Recognizing that the success of economic reforms was

contingent on the success of financial sector reform as well, the government initiated a

fundamental banking sector reform package in 1992.

Banking sector, the world over, is known for the adoption of multidimensional strategies

from time to time with varying degrees of success. Banks are very important for the smooth

functioning of financial markets as they serve as repositories of vital financial information

and can potentially alleviate the problems created by information asymmetries. From a

central banks perspective, such high-quality disclosures help the early detection of problems

faced by banks in the market and reduce the severity of market disruptions. Consequently, the

RBI as part and parcel of the financial sector deregulation, attempted to enhance the

transparency of the annual reports of Indian banks by, among other things, introducing

stricter income recognition and asset classification rules, enhancing the capital adequacy

norms, and by requiring a number of additional disclosures sought by investors to make

better cash flow and risk assessments.

BASEL - II ACCORD

Bank capital framework sponsored by the world's central banks designed to promote

uniformity, make regulatory capital more risk sensitive, and promote enhanced risk

management among large, internationally active banking organizations. The International

Capital Accord, as it is called, will be fully effective by January 2008 for banks active in

international markets. Other banks can choose to "opt in," or they can continue to follow the

minimum capital guidelines in the original Basel Accord, finalized in 1988. The revised


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accord (Basel II) completely overhauls the 1988 Basel Accord and is based on three mutually

supporting concepts, or "pillars," of capital adequacy. The first of these pillars is an explicitly

defined regulatory capital requirement, a minimum capital-to-asset ratio equal to at least 8%

of risk-weighted assets. Second, bank supervisory agencies, such as the Comptroller of the

Currency, have authority to adjust capital levels for individual banks above the 9% minimum

when necessary. The third supporting pillar calls upon market discipline to supplement

reviews by banking agencies.

Basel II is the second of the Basel Accords, which are recommendations on banking laws and

regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II,

which was initially published in June 2004, is to create an international standard that banking

regulators can use when creating regulations about how much capital banks need to put aside

to guard against the types of financial and operational risks banks face. Advocates of Basel II

believe that such an international standard can help protect the international financial system

from the types of problems that might arise should a major bank or a series of banks collapse.

In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital

management requirements designed to ensure that a bank holds capital reserves appropriate to

the risk the bank exposes itself to through its lending and investment practices.

It aims at:1. Ensuring that capital allocation is more risk sensitive;2. Separating operational risk from credit risk, and quantifying both;3. Attempting to align economic and regulatory capital more closely to reduce the scope

for regulatory arbitrage.

While the final accord has largely addressed the regulatory arbitrage issue, there are still

areas where regulatory capital requirements will diverge from the economic.

Basel II has largely left unchanged the question of how to actually define bank capital, which

diverges from accounting equity in important respects. The Basel I definition, as modified up

to the present, remains in place.

The Accord in operation

Basel II uses a "three pillars" concept

minimum capital requirements (addressing risk),

supervisory review and market disciplineto promote greater stability in the financial system.


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The Basel I accord dealt with only parts of each of these pillars. For example: with respect to

the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner while

market risk was an afterthought; operational risk was not dealt with at all.

The First Pillar

The first pillar deals with maintenance of regulatory capital calculated for three major

components of risk that a bank faces: credit risk, operational risk and market risk. Other risks

are not considered fully quantifiable at this stage.

The credit risk component can be calculated in three different ways of varying degree of

sophistication, namely standardized approach, Foundation IRB and Advanced IRB. IRB

stands for "Internal Rating-Based Approach".

For operational risk, there are three different approaches - basic indicator approach,

standardized approach and advanced measurement approach. For market risk the preferred

approach is VaR (value at risk).

As the Basel II recommendations are phased in by the banking industry it will move from

standardized requirements to more refined and specific requirements that have been

developed for each risk category by each individual bank. The upside for banks that do

develop their own bespoke risk measurement systems is that they will be rewarded with

potentially lower risk capital requirements. In future there will be closer links between the

concepts of economic profit and regulatory capital.

Credit Risk can be calculated by using one of three approaches:

1. Standardized Approach

2. Foundation IRB (Internal Ratings Based) Approach

3. Advanced IRB Approach

The standardized approach sets out specific risk weights for certain types of credit risk. The

standard risk weight categories are used under Basel 1 and are 0% for short term government

bonds, 20% for exposures to OECD Banks, 50% for residential mortgages and 100%

weighting on commercial loans. A new 150% rating comes in for borrowers with poor credit

ratings. The minimum capital requirement (the percentage of risk weighted assets to be held

as capital) has remains at 8%.


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For those Banks that decide to adopt the standardized ratings approach they will be forced to

rely on the ratings generated by external agencies. Certain Banks are developing the IRB

approach as a result.

The Second Pillar

The second pillar deals with the regulatory response to the first pillar, giving regulators much

improved 'tools' over those available to them under Basel I. It also provides a framework for

dealing with all the other risks a bank may face, such as systemic risk, pension risk,

concentration risk, strategic risk, reputation risk, liquidity risk and legal risk, which the

accord combines under the title of residual risk. It gives banks a power to review their risk

management system.

The Third Pillar

The third pillar greatly increases the disclosures that the bank must make. This is designed to

allow the market to have a better picture of the overall risk position of the bank and to allow

the counterparties of the bank to price and deal appropriately. The new Basel Accord has its

foundation on three mutually reinforcing pillars that allow banks and bank supervisors to

evaluate properly the various risks that banks face and realign regulatory capital more closely

with underlying risks. The first pillar is compatible with the credit risk, market risk and

operational risk. The regulatory capital will be focused on these three risks. The second pillar

gives the bank responsibility to exercise the best ways to manage the risk specific to that

bank. Concurrently, it also casts responsibility on the supervisors to review and validate

banks risk measurement models. The third pillar on market discipline is used to leverage the

influence that other market players can bring. This is aimed at improving the transparency in

banks and improves reporting.


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BANKS CHOSEN FOR THE STUDY

State Bank of India is the largest banking and financial services company in India, by almost

every parameter - revenues, profits, assets, market capitalization, etc. The bank traces its

ancestry to British India, through the Imperial Bank of India, to the founding in 1806 of the

Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent. The

Government of India nationalized the Imperial Bank of India in 1955, with the Reserve Bank

of India taking a 60% stake, and renamed it the State Bank of India. In 2008, the Government

took over the stake held by the Reserve Bank of India.

SBI provides a range of banking products through its vast network of branches in India and

overseas, including products aimed at NRIs. The State Bank Group, with over 16,000

branches, has the largest banking branch network in India. With an asset base of $260 billion

and $195 billion in deposits, it is a regional banking behemoth. It has a market share among

Indian commercial banks of about 20% in deposits and advances, and SBI accounts foralmost one-fifth of the nation's loans.

SBI has tried to reduce over-staffing by computerizing operations and "golden handshake"

schemes that led to a flight of its best and brightest managers. These managers took the

retirement allowances and then went on to become senior managers in new private sector

banks. The State bank of India is the 29th most reputed company in the world according to

Forbes

ICICI Bank (formerly Industrial Credit and Investment Corporation of India) is a major

banking and financial services organization in India. It is the 4th largest bank in India and the

largest private sector bank in India by market capitalization. The bank also has a network of

1,700+ branches (as on 31 March 2010) and about 4,721 ATMs in India and presence in 19

countries, as well as some 24 million customers (at the end of July 2007). ICICI Bank is also


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the largest issuer of credit cards in India. ICICI Bank's shares are listed on the stock

exchanges at Kolkata and Vadodara, Mumbai and the National Stock Exchange of India

Limited; its ADRs trade on the New York Stock Exchange (NYSE).

The Bank is expanding in overseas markets and has the largest international balance sheet

among Indian banks. ICICI Bank now has wholly-owned subsidiaries, branches and

representatives offices in 19 countries, including an offshore unit in Mumbai. This includes

wholly owned subsidiaries in Canada, Russia and the UK (the subsidiary through which the

Hi SAVE savings brand is operated), offshore banking units in Bahrain and Singapore, an

advisory branch in Dubai, branches in Belgium, Hong Kong and Sri Lanka, and

representative offices in Bangladesh, China, Malaysia, Indonesia, South Africa, Thailand, the

United Arab Emirates and USA. Overseas, the Bank is targeting the NRI (Non- Resident

Indian) population in particular.

HDFC Bank was incorporated in the year of 1994 by Housing Development Finance

Corporation Limited (HDFC), India's premier housing finance company. It was among the

first companies to receive an 'in principle' approval from the Reserve Bank of India (RBI) to

set up a bank in the private sector. The Bank commenced its operations as a Scheduled

Commercial Bank in January 1995 with the help of RBI's liberalization policies.

In a milestone transaction in the Indian banking industry, Times Bank Limited (promoted by

Bennett, Coleman & Co. / Times Group) was merged with HDFC Bank Ltd., in 2000. This

was the first merger of two private banks in India. As per the scheme of amalgamation

approved by the shareholders of both banks and the Reserve Bank of India, shareholders of

Times Bank received 1 share of HDFC Bank for every 5.75 shares of Times Bank.

In 2008 HDFC Bank acquired Centurion Bank of Punjab taking its total branches to more

than 1,000. The amalgamated bank emerged with a strong deposit base of around Rs. 1,

22,000 crores and net advances of around Rs. 89,000 crores. The balance sheet size of the

combined entity is over Rs. 1, 63,000 crores. The amalgamation added significant value to

HDFC Bank in terms of increased branch network, geographic reach, and customer base, anda bigger pool of skilled manpower.


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HDFC Bank Ltd. is a major Indian financial services company based in Mumbai,

incorporated in August 1994, after the Reserve Bank of India allowed establishing private

sector banks. The Bank was promoted by the Housing Development Finance Corporation, a

premier housing finance company (set up in 1977) of India. HDFC Bank has 1,412 branches

and over 3,295 ATMs, in 528 cities in India, and all branches of the bank are linked on an

online real-time basis.

The Industrial Development Bank of India Limited commonly known by its acronym IDBI is

one of India's leading public sector banks and 4th largest Bank in overall ratings. RBI

categorized IDBI as an "other public sector bank". It was established in 1964 by an Act of

Parliament to provide credit and other facilities for the development of the fledgling Indian

industry. It is currently 10th largest development bank in the world in terms of reach with

1210 ATMs, 720 branches and 486 centers.

Some of the institutions built by IDBI are the National Stock Exchange of India (NSE), the

National Securities Depository Services Ltd (NSDL), the Stock Holding Corporation of India

(SHCIL), the Credit Analysis & Research Ltd, the Export-Import Bank of India (Exim Bank),

the Small Industries Development bank of India(SIDBI), the Entrepreneurship Development

Institute of India, and IDBI BANK, which today is owned by the Indian Government, though

for a brief period it was a private scheduled bank. The Industrial Development Bank of India

(IDBI) was established on July 1, 1964 under an Act of Parliament as a wholly owned

subsidiary of the Reserve Bank of India. In 16 February 1976, the ownership of IDBI was

transferred to the Government of India and it was made the principal financial institution forcoordinating the activities of institutions engaged in financing, promoting and developing

industry in the country. Although Government shareholding in the Bank came down below

100% following IDBIs public issue in July 1995, the former continues to be the major

shareholder (current shareholding: 52.3%).

During the four decades of its existence, IDBI has been instrumental not only in establishing

a well-developed, diversified and efficient industrial and institutional structure but also

adding a qualitative dimension to the process of industrial development in the country. IDBI


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has played a pioneering role in fulfilling its mission of promoting industrial growth through

financing of medium and long-term projects, in consonance with national plans and priorities.

Over the years, IDBI has enlarged its basket of products and services, covering almost the

entire spectrum of industrial activities, including manufacturing and services. IDBI provides

financial assistance, both in rupee and foreign currencies, for green-field projects as also for

expansion, modernization and diversification purposes. In the wake of financial sector

reforms unveiled by the government since 1992, IDBI evolved an array of fund and fee-based

services with a view to providing an integrated solution to meet the entire demand of

financial and corporate advisory requirements of its clients

Axis Bank, formally UTI Bank, is a financial services firm that had begun operations in 1994,

after the Government of India allowed new private banks to be established. The Bank was

promoted jointly by the Administrator of the Specified Undertaking of the Unit Trust of India

(UTI-I), Life Insurance Corporation of India (LIC), General Insurance Corporation Ltd.,

National Insurance Company Ltd., The New India Assurance Company, The OrientalInsurance Corporation and United India Insurance Company UTI-I holds a special position in

the Indian capital markets and has promoted many leading financial institutions in the

country. The bank changed its name to Axis Bank in April 2007 to avoid confusion with

other unrelated entities with similar name.

After the Retirement of Mr. P. J. Nayak, Shikha Sharma was named as the bank's managing

director and CEO on 20 April 2009. As on the year ended March 31, 2009 the Bank had a

total income of Rs 13,745.04 crore (US$ 2.93 billion) and a net profit of Rs. 1,812.93 crore

(US$ 386.15 million). On February 24, 2010, Axis Bank announced the launch of 'AXIS

CALL & PAY on atom', a unique mobile payments solution using Axis Bank debit cards.

Axis Bank is the first bank in the country to provide a secure debit card-based payment

service over IVR. Axis Bank is one of the Big Four Banks of India, along with ICICI Bank,

State Bank of India and HDFC Bank Branch Network At the end of March 2009, the Bank

has a very wide network of more than 835 branch offices and Extension Counters. Total

number of ATMs went up to 3595. The Bank has loans now (as of June 2007) account for as


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much as 70 per cent of the banks total loan book of Rs 2,00,000 crore. In the case of Axis

Bank, retail loans have declined from 30 per cent of the total loan book of Rs 25,800 crore in

June 2006 to around 23 per cent of loan book of Rs.41,280 crore (as of June 2007). Even over

a longer period, while the overall asset growth for

Axis Bank has been quite high and has matched that of the other banks, retail exposures grew

at a slower pace. The bank, though, appears to have insulated such pressures. Interest

margins, while they have declined from the 3.15 per cent seen in 2003-04, are still hovering

close to the 3 per cent mark.


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DATA INTERPRETATION AND ANALYSIS

Particulars 2007-08 2008-09 2009-10 2010-01 2011-12

SBI 11.88% 12.34% 13.47% 14.25% 13.39%

ICICI Bank 13.35% 11.69% 13.97% 15.53% 19.41%

HDFC Bank 11.40% 13.10% 13.60% 15.10% 17.40%

IDBI Bank 14.80% 13.73% 11.95% 11.57% 11.31%

AXIS Bank 11.08% 11.57% 13.73% 13.69% 15.80%

Reserve Bank of India prescribes Banks to maintain a minimum Capital to risk weighted

Assets Ratio (CRAR) of 9 percent with regard to credit risk, market risk and operational risk

on an ongoing basis, as against 8 percent prescribed in Basel Documents. Capital adequacy

ratio of the ICICI Bank was well above the industry average of 13.97% t. CAR of HDFC

bank is below the ratio of ICICI bank. HDFC Banks total Capital Adequacy stood at 15.26%

as of March 31, 2010. The Bank adopted the Basel 2 framework as of March 31, 2009 and

the CAR computed as per Basel 2 guidelines stands higher against the regulatory minimum of

9.0%.

HDFC CAR is gradually increased over the last 5 year and the capital adequacy ratio of Axis

bank is the increasing by every 2 year. SBI has maintained its CAR around in the range of 11

% to 14 %. But IDBI should reconsider their business as its CAR is falling YOY (year on

year). Higher the ratio the banks are in a comfortable position to absorb losses. So ICICI and

HDFC are the strong one to absorb their losses.


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Particulars 2007-08 2008-09 2009-10 2010-11 2011-12

SBI 2.80% 3.21% 3.04% 2.84% 3.05%

ICICI Bank 2.90% 3.30% 3.30% 4.32% 5.06%

HDFC Bank 1.32% 1.32% 1.30% 1.98% 1.43%

IDBI Bank 2.11% 1.97% 1.90% 2.00% 1.99%

AXIS Bank 0.82% 0.72% 0.72% 0.96% 1.13%

Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI

guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by

banks. It consists of all the non standard assets like as substandard, doubtful, and loss assets.

It can be calculated with the help of following ratio:

SBI maintained its GNPA to 3% which is very good sign of performances as SBI is the

largest lender in INDIA. HDFCs GNPA is quite good as it is low with compared to ICICI

and SBI but in 2008-09 GNPA rises. The reason may be economic crises. AXIS bank has

lowest GNPA which shown its management ability. ICICI has the highest GNPA in banking

industry and rising YOY (year on year).


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Particulars 2007-08 2008-09 2009-10 2010-11 2011-12

SBI 1.35% 1.44% 1.78% 1.76% 1.72%

ICICI Bank 2.00% 0.70% 1.12% 2.09% 2.12%

HDFC Bank 0.44% 0.43% 0.50% 0.60% 0.50%

IDBI Bank 1.01% 1.15% 1.30% 0.92% 1.02%

AXIS Bank 0.98% 0.72% 0.36% 0.35% 0.36%

Net NPAs are those type of NPAs in which the bank has deducted the provision regarding

NPAs. Net NPA shows the actual burden of banks.Since in India, bank balance sheetscontain a huge amount of NPAs and the process of recovery and write off of loans is very

time consuming, the provisions the banks have to make against the NPAs according to the

central bank guidelines, are quite significant. That is why the difference between gross and

net NPA is quite high.

It can be calculated by following:

AXIS Bank has least Net NPA and ICICI has highest NNPA among group. HDFC shown its

management quality as it maintained its NNPA YOY (year on year). SBI has to keep NNPA

below. IDBI has successful to control NNPA YOY.


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Particulars 2007-08 2008-09 2009-10 2010-11 2011-12

SBI 5.32% 5.40% 5.81% 5.45% 6.25%

ICICI Bank 2.94% 4.52% 5.61% 5.58% 6.21%

HDFC Bank 3.50% 4.33% 5.18% 5.59% 5.86%

IDBI Bank 3.45% 3.40% 3.80% 4.20% 4.31%

AXIS Bank 4.00% 4.97% 6.32% 6.48% 6.70%

It indicates the relationship between assets and revenue. The formula for calculating this ratio

is as follows:

Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue -

the higher the number the better.

From the above information, it is clear that the asset turnover ratio of axis bank is increasing

every year and highest in comparison with its peers. It shows the banks efficiency in using

its assets to generate high revenue. SBI, ICICI and HDFC are its major competitors showing

almost same trend but differ in quantum.


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Particulars 2007-08 2008-09 2009-10 2010-11 2011-12

SBI 0.92% 0.98% 1.01% 1.04% 0.88%

ICICI Bank 1.21% 1.04% 1.12% 0.98% 1.13%

HDFC Bank 1.39% 1.39% 1.42% 1.42% 1.45%

IDBI Bank 0.66% 0.66% 0.67% 0.62% 0.53%

AXIS Bank 1.11% 1.07% 1.24% 1.44% 1.67%

Where asset turnover tells an investor the total sales for each $1 of assets, returnon assets, or

ROA for short, tells an investor how much profit a companygenerated for each $1 in assets.

The return on assets figure is also a sure-fire wayto gauge the asset intensity of a business.

ROA measures a companys earningsin relation to all of the resources it had at its disposal

(the shareholders capitalplus short and long-term borrowed funds).

Thus, it is the most stringent andexcessive test of return to shareholders. If a company has no

debt, the return onassets and return on equity figures will be the same. HDFC has shown

remarkable ROA over 5 years but AXIS bank will attract more eyes as its ROAincreases for

last 5 year. SBIs ROA is slightly low as compared to HDFC;reason is the SBI has highest

assets in Indian bank industry thats why its ROA is low as compared to AXIS bank and

HDFC bank. IDBI is out performed in ROA but ICICIs ROA is quite enough to attract

investors. Its rise and fallalternatively YOY.


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Particulars 2007-08 2008-09 2009-10 2010-11 2011-12

SBI 62.11 73.44 77.51 74.97 75.96

ICICI Bank 87.59 83.83 84.99 91.44 90.04

HDFC Bank 65.79 66.08 65.28 66.64 72.44

IDBI Bank 238.79 166.12 124.35 100.13 86.28

AXIS Bank 52.79 59.85 65.94 68.89 71.87

It is the proportion of loan-assets created by banks from the deposits received. The higher the

ratio, the higher the loan-assets created from deposits.

Consider Bank X which has deposits worth Rs. 100 crores and a credit-deposit ratio of 60 percent. That means Bank X has used deposits worth Rs. 60 crores to create loan-assets. Only

Rs. 40 crores is available for other investments.

Now, the Indian government is the largest borrower in the domestic credit market. The

government borrows by issuing securities (G-secs) through auctions held by the RBI. Banks,

thus, lend to the government by investing in these G-secs. And Bank X has only Rs. 40 crores

to invest in G-secs. If more banks like X have lesser money to invest in G-Secs, what will the

government do? After all, it needs to raise money to meet its expenditure.

If the money so released is large, ``too much money will chase too few goods'' in the

economy resulting in higher inflation levels. This would prompt investors to demand higher

returns on debt instruments. HDFC, SBI and AXIS bank has CDR in equal range from last 5

year. IDBI has highest CDR all 5 year but good thing is that is gradually fall YOY. ICICI

banks CDR is slightly higher than SBI, AXIS and HDFC but it also maintained its CDR

YOY.


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Particulars 2007-08 2008-09 2009-10 2010-11 2011-12

SBI 1.08 1.08 1.08 1.08 1.08

ICICI Bank 1.38 1.38 1.38 1.38 1.38

HDFC Bank 0.92 0.92 0.92 0.92 0.92

IDBI Bank 1.06 1.06 1.06 1.06 1.06

AXIS Bank 1.1 1.1 1.1 1.1 1.1

Sensitivity to Market Risk is a recent addition to the ratings parameters and reflects the

degree to which changes in interest rates, exchange rates, commodity prices and equity prices

can affect earnings and hence the banks capital. It is measured by Beta (). Beta () is a

measure of systematic risk of a company. Risk profile of a company incorporates two kinds

of Risks:

(a)Unsystematic Risk, and(b)Systematic Risk

From the analysis it is clear that, ICICI Bank is most sensitive among other banks. SBI is

almost equally sensitive while HDFC Bank is less sensitive with changes in the Market. The

stock of ICICI bank is highly volatile and that of HDFC is least volatile.


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FINDINGS

Capital adequacy

HDFC BANK has shown best performance in CARas its gradually rising YOY and IDBIs

decreasing YOY. IDBI should reconsider their business tactics.

Asset Quality

Gross NPA: AXIS bank has least GNPA and ICICI has highest among peers.

Net NPA: AXIS Bank again performed better than others and ICICI has maintained its

position. SBI has rise in NNPA over the GNPA.

Management Soundness

Asset turnover: Asset turnover measures a firm's efficiency at using its assets in generating

sales or revenue - the higher the number the better. The asset turnover ratio of AXIS Bank is

increasing every year and highest in comparison with its peers. SBI, ICICI and HDFC are its

major competitors showing almost same trend but differ in quantum.

Earnings and Profitability

Return on Assets: HDFC tops the group and IDBI again at last but this tie IDBI shown

consistent performance as compared to ICICI having higher ROA.

Liquidity

Credit Deposit Ratio: HDFC maintains its CDR and tops the group. IDBI again on worst

side but good thing is that its decreasing YOY.

Sensitivity to Market Risks

Beta (): ICICI Bank with beta > 1 is highly sensitive while HDFC Bank is least sensitive

among its peers since its beta


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SUGGESTIONS AND RECOMMENDATIONS

The Asset Quality of ICICI Bank is not good as represented by its GNPA & NPA.Suitable measures like KYC should be undertaken to identify credit worthiness of

borrowers.

IDBI Bank has to improve its efficiency for optimum utilization of its assets as theirasset turnover ratio is very less. New and efficient plans, methods and techniques

should be devised.

The Earnings of ICICI and IDBI are very less in comparison to their competitors.They should invest in growth and income generating securities. They also need to

revise their portfolio.

ICICI Bank should find more avenues to hedge risks as the market is very sensitive torisk of any type.


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CONCLUSION

In todays scenario, the banking sector is one of the fastest growing sectors and a lot of funds

are invested in Banks. Also todays banking system is becoming more complex. So, I thought

of evaluating the performance of the banks. There are so many models available for thispurpose, but I have chosen the CAMELS Model to evaluate the performance of the banks. I

have gone through several books, journals and websites and found it the best model because

it measures the performance of the banks from each parameter i.e. Capital, Assets,

Management, Earnings, Liquidity and Sensitivity to Market risk.

This report makes an attempt to examine and compare the performance of the five different

Commercial banks of India. Data is collected from reliable sources. They were then

interpreted and analyzed with the help of significant ratios. All the ratios being calculated in

order to determine the strength and weaknesses of the sample banks. The findings are

justified with the interpretation and analysis and on that basis appropriate suggestions are

given to the banks to improve upon some parameters which are major part of their financial

performance.


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BIBLIOGRAPHY

Books:

Financial Markets and Institutions by L.M. Bhole Kothari, C.R., Research Methodology: Methods and Techniques, Wishwa

Publication, Delhi

CMIE Database, 2011

Websites Visited:

http://www.rbi.orghttp://www.statebankofindia.comhttp://www.icicibank.comhttp://www.hdfcbank.comhttp://www.idbi.com

http://www.idbibank.comhttp://www.moneycontrol.comhttp://www.rbidocs.rbi.org
http://www/http://www.statebankofindia.com/http://www.icicibank.com/http://www.hdfcbank.com/http://www.idbi.com/http://www.idbibank.com/http://www.moneycontrol.com/http://www.moneycontrol.com/http://www.idbibank.com/http://www.idbi.com/http://www.hdfcbank.com/http://www.icicibank.com/http://www.statebankofindia.com/http://www/

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