UNIT3

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Financial Analysisof BanksUNIT 3 FINANCIAL ANALYSIS OF BANKS

Objectives

The objectives of this unit are to:

l explain the role of financial analysis of Banks in managing finance

l illustrate different methods of analysing the financial statements

l understand how management can examine the performance of Bankingoperations

l highlight some of the special features in financial analysis related to Banks

Structure

3.1 Introduction

3.2 Role of financial analysis in financial management

3.3 Techniques of Financial Analysis

3.4 DuPont Model of Financial Analysis

3.5 Special issues in Financial Analysis of Banking Industry

3.6 Summary

3.7 Self-Assessment Questions

3.8 Further Readings

Tables

3.1 INTRODUCTION

Every organisation has a purpose and it is generally stated in the form of mission orvision statement. To achieve this purpose, organisations need finance, which is raisedfrom the capital market through debt or equity and such capital is raised either directlyfrom the investors or through intermediary institutions like Banks. Once capital israised, the capital is invested in assets, which can be broadly classified into fixed andcurrent assets. Several factors determine the choice of assets and proportion ofinvestments in different types of assets. For instance, banking industry will invest lesson real fixed assets whereas automobile manufacturer would invest substantial part ofthe capital to buy fixed assets. After raising capital and acquiring assets, the businessunit runs the operations and generates revenue. Since most business units are startedwith an objective of making profit, many of them might report profit. What is the roleof accounting in general when firm performs certain activities to achieve the goal?Accounting statements typically reflect the above activities and allow the managers toexamine whether their plan or strategy has resulted in positive impact on the companyor not. Balance Sheet, Profit and Loss Account and Cash Flow Statements are threeprincipal financial statements and they reflect the above activities. Balance Sheetexplains where from the organisation has raised money and where they have investedthe money. Profit and Loss account explains how efficiently the assets of anorganisation have been used and what is the net outcome of the operations in monetaryterms. Cash Flow Statement provides operational outcome, capital raised and wherethey are used but all in terms of cash. While the principal financial statementsprovide wealth of information to investors and others, there is no ready answer to thequestion whether the Organisation has achieved the goal/mission or not. FinancialStatements are analysed further to get such an insight on the performance of theOrganisation and its various parts or division.

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Conceptual Framework3.2 ROLE OF FINANCIAL ANALYSIS IN FINANCIAL

MANAGEMENT

Financial analysis today is performed by various users of financial statements.Investors and Management perform the financial analysis to understand howprofitably or productively the assets of the company are used. Lenders and Suppliersof goods look for the ability of the firm to repay the dues on time. For instance, as adeposit holder of a Bank, you would be interested in liquidity of the Bank and wouldexpect the Bank to pay you the amount when you need. Customers would like to knowthe long-term solvency of the Bank to get continued support. For example, as aborrower, you would like your bank to be healthy and profitable since you will bedepending on the Bank for your future needs. Of course, employees would beinterested in the profitability as well as liquidity of the bank. Financial managers notonly prepare financial statements but also analyse the same to get further insight onthe performance of the Organisation. They need to examine the organisation from theperspective of several users so that they can follow the needs of them and satisfyseveral stakeholders. Sometimes, profitability might be affected when the managerstry to satisfy the needs of various stakeholders but if you focus too much onprofitability, it might affect the organisation in other ways. For instance, we wouldexpect that our deposit holders need liquidity. If we plan for more liquidity, it mightaffect profitability. On the other hand, if we continue to have low liquidity, we maynot get funds or we need to pay more interest to attract funds.

While financial analysis is often used for evaluating current or historical performance,management uses the input of such analysis for future planning exercise. For instance,in preparing budgets, the inputs of financial analysis are extensively used. Financialanalysis provides linkage between operating activities and funding activities.Normally, top management sets the goal and operational managers then determine thelevel of operations required to achieve the goal. It would be difficult to increase thelevel of operations without any investments unless there is a huge idle capacity. Thusincreased activity demands more addition to assets and this in turn puts a demand forcapital. The first step in this process is to know how much of additional assets weneed and how much of capital we need to mobilise from various sources. Financialanalysis, which provides historical linkage between various financial components, isuseful. Suppose the top management fixes a goal to increase the net income by another20% for the coming year. Using profit to sales linkage, we can estimate additionalturnover required to achieve the goal. Once we know additional turnover, it is possiblefor us to assess how much of additional assets are required (fixed and current assets inthe case of manufacturing companies) and then additional funds that are required tobuy the assets. Thus financial analysis is a prerequisite for financial planning.

3.3 TECHNIQUES OF FINANCIAL ANALYSIS

Financial statements are analyzed to answer several questions. A few of them arelisted below along with the relevant techniques used for the same:

(a) How my company is different from other companies in the industry ondistribution of assets, liabilities and cost? Since size of the companies comparedwill be different, we need to bring them on certain common scale. For instance,SBI is several times more than Canara Bank. Comparison is possible if we areable to reduce the financial statements into percentage basis. This is called‘common size statement analysis’. Common size statement analysis performedon yearly basis explains changes in assets/liability mix and cost structure.

(b) How my company has grown over the years? Since growth is important for long-term survival, managers would be interested to assess the growth of the company

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Financial Analysisof Banks

on various components. This is achieved by taking base year values as 100 andthen subsequent years values are adjusted to show the growth rate. This type ofanalysis is called ‘Trend Analysis or Time Series Analysis’.

(c) How my company has performed on profitability, productivity of assets and risk?Performance of companies on these parameters is normally assessed throughcomputation of important ratios. This type of analysis if called ‘Ratio Analysis’or ‘Du Pont Chart Analysis’.

To illustrate financial statement analysis, we are using financial statements of BankingIndustry, State Bank of India, HDFC Bank Ltd. and Corporation Bank. Balance Sheetand Profit and Loss Account of these banks are given in Table-3.1 to 3.4. While StateBank of India is the largest public sector bank, HDFC Bank is a leading hi-techprivate sector bank. Corporation Bank is one of the best performing PSU Bank andcomparable to HDFC Bank in terms of size. Industry figures are based on all thebanks including public sector, private sector, and foreign banks.

Activity 1

1) Go through Table-3.1 and highlight your important observations of bankingindustry.

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2) Go through Table-3.2 to 3.4 (P&L account) of three banks and highlight yourimportant observations.

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3) Based on Balance Sheet of the three banks, highlight your importantobservations.

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a) Common Size Financial Statements Analysis

As mentioned earlier, the common size financial statement expresses each items of thebalance sheet or profit and loss statement as a percentage of total assets and net salesrespectively. Table-3.5 (a) to (c) provide the common size financial statements of SBI,HDFC Bank and Corporation Bank. An analysis of common size profit and lossaccount over the years for each bank and between the banks provides certainimportant insights. While interest is important source of income, its dominance hascome down over the years except for Corporation Bank. In Corporation Bank, interestincome contribution has gone up from 46% in 1999 to 80% in 2000. Investment anddividend income has almost equal share in SBI and HDFC Bank whereas it was atequal level in 1999 in the case of Corporation Bank but declined to less than 1% in2002 & 2003. This sudden change could be purely an accounting issue than realchange in the nature of business model of Corporation Bank. For instance, while SBIand HDFC Bank might recognise interest earned on government securities as incomefrom investments, whereas Corporation Bank may show the same under interest

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Conceptual Framework income. Other income, which mainly consists of fee based income has increased over aperiod of time and is in the range of 15% to 18%. The hi-tech HDFC Bank reportshighest other income compared to the two PSU banks.

It is natural that banks spend large amount towards interest expenditure and adeclining trend is witnessed on account of general reduction in interest rates in themarket. Next to interest expense, personnel expenditure share major component.Thanks to VRS schemes and increase in business volume, the personnel expenditurehas come down from 19% to 5% in the last five years for SBI. While HDFC Bankspends about 6% for employees, Corporation Bank spends more than 10% towardemployees’ cost. Other operation expenditure ranges from 5% to 15% and economiesof scale clearly show the importance of cost control. Provision for NPA is lower fornewer banks, whereas PSU banks spend almost two times of HDFC Bank. Being a hi-tech bank, HDFC Bank spends more on capital equipment and hence largerdepreciation. Despite such higher spending, profit for the HDFC and CorporationBank are significantly higher than SBI.

Activity-2

1) Highlight strong and weak points of SBI based on common size P&L account.

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2) Repeat the above for HDFC Bank and Corporation Bank.

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3) Why the profitability of SBI is significantly lower despite enjoying economies ofscale?

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While deposit constitutes significant portion of sources of capital for all banks, youcan observe major differences in components of deposits. While Corporation Bankenjoys largest percentage of term deposits (59%), HDFC could attract only 42%.Is it good or bad? Though interest rate for term deposits is more, the liquidityrisk is low and banks can use the amount for longer period. The distribution of fundsamong various assets is by and large same. In terms of importance, Investmentsconstitute major uses of funds followed by loans and advances. However, inCorporation Bank, loans and advances is more than investments for the year 2003.Investment in fixed assets is relatively small in banking industry. A detailed discussionon the Disabilities and Assets of the banks is presented in Blocks 2 and 3 of thiscourse respectively.

b) Trend Analysis

Trend analysis shows the level of growth that banks have achieved over the years oneach component of financial statements. Suppose a bank shows a growth rate of 20%in total income but its cost has increased by 26%, then its profitability is affected. Onecan perform such analysis by observing the trends on each one of financialparameters. Table-3.6 (a) to (c) show the trends in financial variables.

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While SBI and Corporation Bank has reported around 68% income growth in the lastfive years, HDFC Bank has seen a growth rate of more than 500% during the sameperiod. It doesn’t mean that HDFC Bank will continue to grow at this rate in thefuture since a substantial part of the growth arises from the smaller base. Similarly,assetbase has gone up around 65%-70% for SBI and Corporation Bank, HDFC Bankreported a growth rate of 700% during the same period. While SBI has startedconcentrating on Treasury activities, Corporation Bank is focussing more on lending.Again, Term Deposits has seen major growth in Corporation Bank compared toother two banks.

Activity-3

1) Examine Table-3.6 and show how Corporation Bank is different from SBI?

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2) Growth ratio of HDFC Bank is significantly larger than other two banks? Why?Is it sustainable?

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3) How the three banks performed on personnel cost and other operating expenses?

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c) Ratio Analysis

Ratios are aimed to assess profitability, productivity of assets/capital and riskassociated with operations. Though one can get some basic idea about the bank or acompany from the above ratios while evaluating percentage statement and trendanalysis, the level of comparison is restricted to few ratios. Ratio analysis integratesfinancial statements to assess financial health of the firm. Some of the important ratiosin general are discussed below. (Refer to MS-4 course material for detaileddiscussion). However, many of these ratios require modification or are not relevant forbanking industry and therefore, we will discuss the ratios relevant to banking industryseparately.

1) Liquidity Analysis Ratios

i) Current Ratio: A firm needs liquid assets to meet day to day payments. Therefore,liquidity ratios highlight the ability of the firms to convert its assets into cash. If theratios are low then it means that money is tied up in stocks and debtors. Thus, moneyis not available to make payments. This may cause considerable problems for firms inthe short run. It is often viewed that a value less than 1.5 implies that the companymay run out of money as its cash is tied up in unproductive assets.

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Conceptual Framework The current ratio shows the relationship between the current assets and the currentliabilities

Current AssetsCurrent Ratio = ———————–

Current Liabilities

ii) Quick Ratio: The acid test ratio is similar to the current ratio as it highlights theliquidity of the company. A ratio of 1:1 (i.e. a value of approximately 1) issatisfactory. However, if the value is significantly less than 1 it implies that thecompany has a large amount of its cash tied up in unproductive assets, so thecompany may struggle to raise money in the short term.

Quick AssetsQuick Ratio = ———————

Current Liabilities

Quick Assets = Current Assets – Inventories

iii) Net Working Capital Ratio: The working capital ratio can give an indication ofthe ability of your business to pay its bills. Generally a working capital ratio of 2:1 isregarded as desirable. A stronger ratio indicates a better ability to meet ongoing andunexpected bills therefore taking the pressure off your cash flow. Being in a liquidposition can also have advantages such as being able to negotiate cash discounts withyour suppliers. A weaker ratio may indicate that your business is having greaterdifficulties meeting its short-term commitments and that additional working capitalsupport is required. Having to pay bills before payments are received may be the issuein which case an overdraft could assist. Alternatively building up a reserve of cashinvestments may create a sound working capital buffer. Ratios should be consideredover a period of time (say three years), in order to identify trends in the performanceof the business.

The calculation used to obtain the ratio is:

Net Working CapitalNet Working Capital Ratio = —————————

Total Assets

Net Working Capital = Current Assets – Current Liabilities

2. Profitability Analysis Ratios

Profitability ratios are the most significant of the financial ratios. Similar to incomeratios, profitability ratios provide a definitive evaluation of the overall effectiveness ofmanagement based on the returns generated on sales and investment.

The adequacy of your company’s earnings can be measured in terms of (1) the rateearned on average total assets; (2) the rate earned on sales; (3) the rate earned onaverage common stockholders’ equity; and (4) the availability of earnings to commonstockholders. The most widely used profitability measurements are profit margin onsales, return-on-investment ratios, and earnings per share.

i) Return on Assets (ROA)

Net IncomeReturn on Assets (ROA) = —————————

Average Total Assets

Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2

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ii) Return on Equity (ROE)

Net IncomeReturn on Equity (ROE) = —————————————

Average Stockholders’ Equity

Average Stockholders’ Equity =

(Beginning Stockholders’ Equity + Ending Stockholders’ Equity) / 2

iii) Profit Margin

Net IncomeProfit Margin = —————–

Sales

Net Income could either be calculated with net profit or Gross Profit.

iv) Gross Profit on Net Sales

Gross profit ratio helps to determine whether average markup on goods willconsistently cover expenses, therefore resulting in the desired profit. If gross profitrate is continually lower than your average margin, something is wrong! Be on thelookout for downward trends in gross profit rate. This is a sign of future problems forbottom line.

Net Sales – Cost of Goods SoldGross Profit Rate = ——————————————

Net Sales

Note: This percentage rate can - and will - vary greatly from business to business,even for those within the same industry. Sales, location, size of operations, andintensity of competition are the factors that can affect the gross profit rate.

v) Net Profit on Net Sales

Earnings after TaxesNet Profit Rate = —————————

Net Sales

This ratio provides a primary appraisal of net profits related to investment. Once thebasic expenses are covered, profits will rise disproportionately greater than salesabove the break-even point of operations.

Note: Sales expenses may be substituted out of profits for other costs to generate evenmore sales and profits

The other types of profitability ratios that are in use include:

vi) Management Rate of Return

This profitability ratio compares operating income to operating assets, which aredefined as the sum of tangible fixed assets and net working capital.

Operating IncomeRate of Return = ———————————————

Fixed Assets + Net Working Capital

This rate determines whether assets are efficiently used. This ratio can be calculatedfor the entire company or for each of its divisions or operations. The percentageshould be compared with a target rate of return that you have set for the business.

vii) Net Sales to Tangible Net Worth

Net SalesNet Sales to Tangible Net Worth Ratio = —————————

Tangible Net Worth

Tangible Net Worth = owners’ equity – intangible assets

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Conceptual Framework This ratio indicates whether investment in the business is adequately proportionate tosales volume. It may also uncover potential credit or management problems, usuallycalled overtrading and under trading.

Overtrading, or excessive sales volume transacted on a thin margin of investment,presents a potential problem with creditors. Overtrading can come fromconsiderable management skill, but outside creditors must furnish morefunds to carry on daily operations.

Under trading is usually caused by management’s poor use of investment money andtheir general lack of ingenuity, skill or aggressiveness.

viii) Earnings Per Share (EPS)

The earnings per share ratio is mainly useful for companies with publicly tradedshares. Most companies will quote the earnings per share in their financial statements,saving you from having to calculate it yourself. By itself, EPS doesn’t really tell you awhole lot. But if you compare it to the EPS from a previous quarter or year, itindicates the rate of growth that a company is earning.

Net IncomeEarnings Per Share (EPS) = ——————————————————————

Weighted Average No. of Common Shares Outstanding

3. Activity Analysis Ratios

i) Assets Turnover Ratio

The asset turnover ratio simply compares the turnover with the assets that the businesshas used to generate that turnover. In its simplest terms, we are just saying that forevery Re. 1 of assets, the turnover is Rs. x. The formula for total asset turnover is:

SalesAssets Turnover Ratio = ——————————

Average Total Assets

Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2

ii) Accounts Receivable Turnover Ratio

The debtor turnover ratio indicates the average time to collect debts. A ratio that islengthening can be the result of some debtors slowing down in their payments.Economic factors, such as a recession, can also influence the ratio. Tightening yourbusiness’ credit control procedures may be required in these circumstances.

The debtor ageing ratio has a strong impact on business operations particularlyworking capital. Maintaining a running total of your debtors by ageing (eg. current,30 days, 60 days, 90 days) is a good idea, not just in terms of making sure you aregetting paid for the work or goods you are supplying but also in managing yourworking capital.

Debtor Ageing Ratio (in days) = No. of days (365)/Accounts receivables turnover ratio

SalesAccounts Receivable Turnover Ratio = —————————————

Average Accounts Receivable

Average Accounts Receivable =

(Beginning Accounts Receivable + Ending Accounts Receivable) / 2

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iii) Inventory Turnover Ratio

The inventory turnover ratio indicates how quickly your business is turning over stock.

A high ratio may indicate positive factors such as good stock demand and management.A low ratio may indicate that either stock is naturally slow moving or problems such asthe presence of obsolete stock or good presentation. A low ratio can also be indicative ofpotential stock valuation issues. The calculation used to obtain the ratio is:

Cost of Goods SoldInventory Turnover Ratio = —————————

Average Inventories

Average Inventories = (Beginning Inventories + Ending Inventories) /2

4. Capital Structure (Leverage) Analysis Ratios

(i) Debt to Equity Ratio

Also called as gearing ratio. Gearing is concerned with the relationship between thelong term liabilities that a business has and its capital employed. The idea is that thisrelationship ought to be in balance, with the shareholders’ funds being significantlylarger than the long term liabilities.

Total Liabilities (Long term debt)Debt to Equity Ratio = ——————————————

Total Stockholders’ Equity

(ii) Interest Coverage Ratio

The interest coverage ratio is a measurement of the number of times a companycould make its interest payments with its earnings before interest and taxes; thelower the ratio, the higher the company’s debt burden. As a general rule of thumb,interest coverage ratio above 2 is good. An interest coverage ratio below 1.0indicates that the business is having difficulties generating the cash necessary to payits interest obligations. The history and consistency of earnings is tremendouslyimportant. The more consistent a company’s earnings, the lower the interest coverageratio can be.

Income Before Interest and Income Tax ExpensesInterest Coverage Ratio = —————————————————————

Interest Expense

Income Before Interest and Income Tax Expenses = Income Before Income Taxes +Interest Expense

Activity-4

1) Compare the Profitability of SBI, HDFC Bank and Corporation Bank withindustry average?

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2) Compare the Productivity of assets/capital of SBI, HDFC Bank andCorporation Bank with industry average?.........................................................................................................................

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Conceptual Framework 3) Compare the liquidity/solvency of SBI, HDFC Bank and Corporation Bank withindustry average?

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3.4 DUPONT MODEL OF FINANCIAL ANALYSIS

While ratio analysis helps to a great extent in performing the financial statementanalysis, most of the time, one would be left in confusion with umpteen ratiocalculation in hand. Hence one has to have a guided and structured form of ratioanalysis to get a complete picture of the overall performance and risk of the companyin a nut shell. The DuPont System of Analysis merges the income statement andbalance sheet into two summary measures of profitability: Return on Assets (ROA)and Return on Equity (ROE). The system uses three financial ratios to express theROA and ROE: Operating Profit Margin Ratio (OPM), Asset Turnover Ratio (ATR),and Equity Multiplier (EM).

The table given below shows the financial statements of SBI, in a condensed format,which will be used to explain DuPont Analysis.

Profit and Loss Account and Balance Sheet of State Bank of India

P&L A/c 2002 2003 Balance sheet 2002 2003

Total Income 34422.89 37582.8 Net Worth 15555.23 16802.19Personnel 5152.78 5688.72 Loan 333837.44 359846.50Operating Exp. 4506.63 6214.84 Total Liabilities 349392.67 376648.70PBIT 24763.48 25679.24Interest 20728.84 21109.46 F.A. 2415.23 2388.54PBT 4034.64 4569.78 Receivables 14857.92 17416.31Tax 1603.02 1464.78 Investments 145993.55 173552.50PAT 2431.62 3105.00 Other current assets 121195.81 138110.30

Cash 64930.16 45181.03Total Assets 349392.67 376648.70Current assets 346588.10 373908.30

Cost of debt 6.20% 5.87%

DuPont chart Financial Statement Analysis (Template)

Return on NetworthPBT/Networth

Impact of leverage Leverage or financial risk(ROI-Kd)* Debt/NW Return on Investment Debt to Networth

PBIT/Total assets

Asset Turnover Ratio (ATO) Profit MarginSales/Total Assets PBIT/Sales

Fixed Asset TO Current Asset TO Employee Cost to SalesSales / Fixed Assets Sales / Current Assets Employee Cost/Sales

Current ratio Inventory TO Operating Expenses to salesCA/CL Sales / Inventory Operating Expenses/Sales

Debtors TO Interest on SalesSales/Debtors Interest / Sales

Collection Period365 or 12 / Debtors TO

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The above DuPont chart shows an improvement in Return on Equity or Return on NetWorth but profit margin has declined. The primary reason for improvement in ROE ison account of lower interest rate. The average cost of debt was 6.21% in 2002 but ithas declined to 5.87% in 2003. Though Profit Margin has come down in 2003, theprofit margin net of interest liability (Income-Interest/Sales) has increased from11.72% to 12.16% in 2003. This might be purely on account of existing loanscarrying higher interest rates. Both employee cost and operating expenses as apercentage of sales have gone up. In other words, there is no major improvement inSBI’s performance during 2002-03 but decline in interest cost helped SBI to improveprofitability. This inference is not apparent when we looked into financial statementsin its raw form. Actually, the growth in PAT gives us an impression that everything isgood at SBI. A simple DuPont analysis gives entirely different picture. Themanagement of SBI needs to concentrate on ways to reduce the cost to sustain suchhigher profitability, which is the permanent source of improvement.

Activity-5

1) What is the basic benefit of using the DuPont form of financial statement analysis?

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2) Perform DuPont Analysis for HDFC Bank and Corporation Bank andsummarize your observations.

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3) Perform DuPont Analysis for Banking Industry and then compare SBI, HDFCBank and Corporation Bank ratios. Highlight the strong and weak areas for eachbank.

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DuPont chart Financial Statement Analysis of State Bank of India

2002 2003

Return on Networth25.94 27.20

Impact of leverage Leverage or financial risk18.85 20.78 Return on Investment 21.46 21.42

7.09 6.82

Asset Turnover Ratio (ATO) Profit Margin0.10 0.10 71.94 68.33

Fixed Asset TO Current Asset TO Employee Cost to Sales14.75 15.73 0.10 0.10 14.97 15.14

Current ratio Inventory TO Operating Expenses to salesNot Applicable Not Applicable 13.09 16.54

Debtors TO Interest on Sales2.32 2.18 60.22 56.17

Collection Period157 days 169 days

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Conceptual Framework3.5 SPECIAL ISSUES IN FINANCIAL ANALYSIS OF

BANKING INDUSTRY

Banking industry is like trading company, where banks trade on capital or funds.Unlike manufacturing industry, there is not much of processing. Hence some of theratios developed for manufacturing industry are not relevant. For example, though wecomputed fixed asset ratio, the fixed assets are not used to process the material andgenerate income. Similarly, there is no inventory turnover ratio. While some of theratios are not relevant, there are ratios which require some modification. For instance,we computed profit margin without considering interest expenses. For SBI, the ratioworks out to 68% for 2003. Is it possible for a firm to report such a huge profitmargin? The ratio is high because the principal expense namely interest expense isomitted for computing the ratio. Interest expenses are minor for a manufacturingindustry whereas for banking industry, it is a major expense item. There are someitems, which are difficult to measure. For instance, if you want to measure liquidity,normally we compute current ratio, which requires current assets and currentliabilities. The definition of current asset and liabilities is assets and liabilities, whichmatures or converts within a year. But this data is not apparently available in thefinancial statements and one has to collect from the internal sources. To give anexample, we need to know the term structure of Term Deposit and similarly loans andadvances to classify whether they are current or not. Considering the special nature ofbanking industry, we list the following ratios, which are relevant for the bankingindustry.

a) Return on Equity

b) Return on Investments

c) Leverage or Debt to Equity or Debt to Capital

d) Interest Income to Average Assets

e) Interest Expenses to Average Assets

f) Net Interest Income to Average Assets [(d) ñ (e)]

g) Non-interest income to Average Assets

h) Non-interest income to Total income

i) Income from Treasury activities/Investments

j) Operating Expenses to Average Assets

k) Provision for Loans and losses to Average Assets

l) Growth Rate of Assets

m) Growth Rate of Net Worth

n) Cash dividends to PAT

o) Provision for NPA to Total Loan

Table-3.7 provides these ratios for the year 2003 for the three banks.

3.6 SUMMARY

The analysis of Bank’s financial statements consists of a mixture of steps and piecesthat interrelate and affect each other. It would lead to wrong conclusion and strategy ifthe analysis is done on a piecemeal basis. For instance higher interest spread does notmean that the bank is in good position. It could be simply due to aggressive lendingleading to higher NPA or simply on account of higher asset-liability mismatch. Weneed to look for five important things when we analyse the financial positions of thebank.

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a) Whether the bank is growing or not? We use trend analysis to answer thisquestion.

b) Whether the bank is able to get leverage that is equal to industry average? Sinceprofitability of bank is primarily on account of ability to use leverage, this ratioassumes importance.

c) Whether the bank is able to increase non-fund based income (i.e. fee basedincome)? This shows the capability of offering services and leveraging customerbase for such services.

d) Whether the bank is able to contain the cost of its operations?

e) Whether the risk of the bank is within limits? Though not discussed here,measures like Value-at-Risk (VAR) are used.

3.7 SELF ASSESSMENT QUESTIONS

1. What do we achieve by analysing financial statements that we are not able toachieve while reading financial statements?

2. Differentiate between common size analysis and trend analysis.

3. Explain three important profitability ratios with examples drawn from bankstatements.

4. How financial statement analysis of banks differs from similar analysis ofmanufacturing companies?

5. Debt to equity ratio of banks is very high compared to other industries. Is itgood? Is it possible for banks to operate with low debt to equity ratio?

6. Suppose a bank raises deposits at 6% and lends at 8%. The debt to equity ratioof the bank is 20:1. Find the impact of leverage on return on equity.

7. Suppose in the above example, the debt to equity ratio of the bank is 10:1. Whatis the impact of such lower debt to equity ratio on return on equity?

8. Identify at least five ratios that are not relevant for banking industry but areimportant for other industries.

9. What is DuPont Analysis? Perform DuPont Analysis based on the inputs givenbelow:

Income Statement 2002 2003 Balance sheet 2002 2003

Sales 8674.57 37582.48 Net Worth 3359.93 5443.91

Personnel 1298.50 5688.40 Loan 72108.89 116590.27

Op.Exp. 1135.67 6214.52 Total Liabilities 75468.82 122034.18

PBIT 6240.40 25679.56

Interest 5223.67 7240.26 F.A. 521.69 773.89

PBT 1016.73 18439.31 Receivables 3209.31 5642.88

Tax 403.96 1464.46 Investments 31534.61 56231.02

PAT 612.77 16974.85 Other current assets 26178.29 44747.74

Cash 14024.91 14638.65

Total Assets 75468.82 122034.18

Current assets 74947.13 121260.29

Cost of debt 7.24% 6.21%

10. Refer to the Financial statements of HDFC given in Table-3.3 (a) and (b). Andanswer the following questions:

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Conceptual Framework Suppose you are the Financial Manager of HDFC and you are being asked to reportto the Management on the performance of the company. You are being asked toprepare a bank performing analysis for the 5 years ending 2003. Using balance sheetand income statement data create a bank analysis and performance report for yoursupervisor that addresses the following issues:

1. Using the balance sheet for each year:

a) Prepare the common size financial statement analysis. In other words, preparethe balance sheet showing all assets as a percentage of total assets and liabilitiesas a percentage of total liabilities. Report as to which of the assets on the bankísbalance sheet increased over the last 5 years? Which assets on the bank’s balancesheet declined over the last 5 years?

b) Examine the liquidity position of the bank over the last 5 years. How has theliquidity position of the bank changed over time? How does the liquidity positionof the bank compare to the other public sector banks in year 5? (You could usethe financial statements of SBI, Corporation Bank data from the tables providedin this unit). Would your bank have sufficient reserves if deposits increased 40%in year 6? (Assume that the desired reserve ratio is 8% on all deposits.)

2. Using the income statement for each year:

a) Create an income statement with operating income items expressed as apercentage of total operating income. Which items improved over the 5year period? Which trends need to be reversed? How does the bankperformed compare to the public sector banks?

b) Create an income statement with operating expenses expressed as apercentage of total operating expenses. Which items improved over the 5years? Which trends need to be reversed? How does the bank performed incomparison to the PSU banks?

3. Analyze the performance of the bank for each year:

a) Calculate the return on assets (ROA) for each year. How has the ROAtrend changed over the 5 years? How Compare the Bank’s performancewith the public sector banks?

b) Calculate the return on equity (ROE) for each year. How has the ROEtrend changed over the 5 years? Compare the Bank’s performance with thepublic sector banks?

c) Identify the strengths and weaknesses of the HDFC bank relative to thetrends over time and in year 5 for all regional banks. What is therelationship between the HDFC bank trends and the year 5 comparisonwith the PSUs?

3.8 FURTHER READINGS

Peter Atrill and Eddie McLaney, 1997, Accounting and Finance for Non-Specialists,Prentice Hall.

Leopold Bernstein and John Wild, 2000, Analysis of Financial Statements,McGraw-Hill.

Daniel L. Jensen, 1997, Advanced Accounting, McGraw-Hill College Publishing.

Fraser, L M and Ormiston, A, 2001, Understanding Financial Statements, SixthEdition, Prentice Hall of India Private Ltd, New Delhi.

Eric Press, 1999, Analyzing Financial Statements, Lebahar-Friedman.

Gerald I. White, 1997, The Analysis and Use of Financial Statements, John Wiley & Sons.

Martin Mellman et. al, 1994, Accounting for Effective Decision Making, IrwinProfessional Press.

5 1

Financial Analysisof BanksTable 3.1 (a): Profit and Loss Account of Banking Industry as at end March ........

(Rs. in cr.)

1998 1999 2000 2001 2002

Income 84940.68 98860.92 114255.64 130899.34 150693.04

Interest income 44197.41 51091.97 58400.06 68034.25 90849.64

Investment / dividend income 29608.12 36290.49 41804.69 47969.79 38160.97

Others 11135.15 11478.46 14050.89 14895.30 21682.43

Gain on security transactions 1863.30 1005.30 3063.29 3136.73 9558.17

Leasing & hire services 366.50 424.16 540.26 470.64 366.54

Bills discounting 16.71 12.41 6.05 2.91 0.00

Gain on forex transactions 2334.39 2587.48 2139.30 2321.03 2464.53

Commission & brokerage 6476.02 7395.74 7898.77 8923.86 9245.01

Others 78.23 53.37 403.22 40.13 48.18

Other income 1066.53 1395.72 1705.79 2138.15 2273.25

Non-recurring income 2712.70 904.38 1192.58 509.36 1345.15

Total 88719.91 101161.02 117154.01 133546.85 154311.44

Expenditure:Interest expended 50265.32 60767.28 69564.58 78629.67 88752.85

Personnel cost 14098.85 16609.60 18536.45 21184.80 20721.68

Prov. for contingencies, NPA 6284.79 7247.85 7308.09 8158.51 11719.96

Insurance premium 380.27 440.92 479.21 540.78 630.63Other expenses 5941.65 6798.43 8093.19 11937.13 12098.63

Non-recurring expenses 227.83 973.09 88.68 207.94 1270.99

PBDT 11521.20 8323.85 13083.81 12888.02 19116.70

Depreciation 1069.03 1427.72 1670.22 2007.14 2202.32

PBT 10452.17 6896.13 11413.59 10880.88 16914.38

Tax provision 3915.43 2654.19 4103.35 4400.05 6481.27

PAT 6536.74 4241.94 7310.24 6480.83 10433.11

Appropriation of profitsDividends 950.24 1003.07 1288.22 1492.67 1569.58Retained earnings 5586.50 3238.87 6022.02 4988.16 8863.53

Table 3.1 (b): Balance Sheet of Banking Industry as at end of March ........(Rs. in cr.)

1998 1999 2000 2001 2002

Paid-up equity capital 19323.02 18015.96 18384.95 19234.58 20038.94

Reserves & surplus 24894.73 29323.19 36696.45 43707.63 56676.88

Deposits 642426.98 769093.05 901760.81 1059733.65 1211429.77

Demand deposits 94930.65 108616.64 129156.52 140313.85 153866.04

Saving deposits 133851.58 158683.91 189138.47 219653.07 256583.30

Term deposits 413644.75 501792.50 583465.82 699766.73 800980.43

Borrowings 28790.89 41168.63 55856.28 71513.71 132413.81

RBI 836.10 5990.85 9261.36 6625.07 3650.27

Banks 5450.87 10507.25 9740.72 16787.97 20552.09

Financial institutional 7446.60 10728.19 12047.20 13880.20 14383.30

Debentures & bonds 2586.25 2588.41 8477.67 15474.84 60984.38

Government 988.20 180.94 1197.99 529.16 1130.10

Foreign borrowings 10856.75 10752.31 8899.79 9729.92 15536.14

Other borrowings 626.12 420.68 6231.55 8486.55 16177.53

Current liabilities 69217.78 82697.01 91727.32 100808.10 115529.20

Provisions 246.24 254.48 1414.41 2363.99 3977.58

Total liabilities 784899.64 940552.32 1105840.22 1297361.66 1541976.83

TABLES

5 2

Conceptual Framework Banking Services

Rs. Crore (Non-Annualised) 199803.00 199903.00 200003.00 200103.00 200203.00

Cash & bank balance 131206.82 169022.82 166800.37 191636.63 207130.56

Investments 270886.67 338064.10 414519.43 493633.00 591028.77

Government securities 185598.77 228968.02 269685.92 343005.32 431509.82

Approved securities 28701.52 26965.28 43901.97 32029.35 21913.80

Assisted companies 5.83 5.83 9.82 10.77 0.95

Subsidiaries / associates 2504.97 2873.23 5253.42 2968.13 3411.33

Other companies 4402.80 4988.17 8099.45 8027.23 10558.54

Mutual funds 1827.11 2993.80 5463.65 5088.98 1088.29

Debentures / PSU bonds 41575.99 62552.60 70290.87 81495.29 95548.23

Others 6269.68 8717.17 11814.33 21007.93 26997.81

Advances & loans 323931.47 368708.56 447991.51 529944.38 652204.90

Bills receivables 33812.96 36446.54 42804.78 49807.56 53704.27

Short term / demand advances 187981.61 202544.14 244619.72 288203.69 325593.93

Term advances 102136.90 129717.88 160567.01 191842.47 271959.15

Deferred tax assets 0.00 0.00 0.00 0.00 1910.47

Other assets / stocks 219.58 216.90 230.41 231.67 227.72

Receivables 45379.59 49681.64 60293.95 58060.71 64987.30

Future lease rent receivable 0.00 0.00 0.00 0.00 37.16

Gross fixed assets 18286.24 21730.80 24322.04 26697.40 32462.42

Less: cumulative depreciation 5329.31 7094.49 8570.51 10118.18 11925.09Net fixed assets 12956.93 14636.31 15751.53 16579.22 20537.33

Intangible/ DRE not written off 10.62 25.78 34.89 6951.82 3949.78

Total assets 784899.64 940552.32 1105840.22 1297361.66 1541976.83

Table 3.2 (a): Profit and Loss Account for State Bank of India (Rs. in crores)

Mar-1999 Mar-2000 Mar-2001 Mar-2002 Mar-2003

Income 22311.16 25649.31 29755.66 33781.48 36621.87Interest income 11522.23 12694.76 14957.45 15538.21 15829.39Investment / dividend income 7647.75 9571.00 11258.18 14374.54 15394.85Others 3141.18 3383.55 3540.03 3868.73 5397.63

Other income 82.25 111.33 270.89 233.61 252.17Non-recurring income 13.10 539.19 140.22 407.80 708.76

Total 22406.51 26299.83 30166.77 34422.89 37582.8

Expenditure:Interest expended 13044.44 15272.58 17756.02 20728.84 21109.46Personnel cost 4147.40 4477.87 5158.46 5152.78 5688.72Prov. for contingencies, NPA. 1570.02 1319.53 1470.48 2204.73 2797.10Insurance premium 74.32 98.30 107.94 142.50 151.44Other expenses 1086.85 1583.17 2691.40 1689.16 2028.14Non-recurring expenses 622.36 0.00 0.00 19.20 703.05

PBDT 1861.12 3548.38 2982.47 4485.68 5104.89Depreciation 310.57 356.85 406.86 451.04 535.11

PBT 1550.55 3191.53 2575.61 4034.64 4569.78Tax provision 522.75 1139.98 971.36 1603.02 1464.78

PAT 1027.80 2051.55 1604.25 2431.62 3105.00Appropriation of profits

Dividends 233.68 306.57 289.99 315.78 504.68Retained earnings 794.12 1744.98 1314.26 2115.84 2600.32

5 3


Table 3.2 (b): Balance Sheet Summary of State Bank of India

(Rs. in crores)


Liabilities + Equity:



Free reserves 4714.14 4967.06 4588.26 4235.27 3613.94

Specific reserves 5161.87 6653.92 8346.98 10462.81 13063.14

Deposits 169041.93 196821.07 242828.37 270560.14 296123.28

Demand deposits 30692.03 36182.05 40328.08 42312.79 44772.38

Saving deposits 34321.25 41506.53 47893.42 56396.36 65782.71

Term deposits 104028.65 119132.49 154606.87 171850.99 185568.19

Borrowings 10063.13 11193.41 15133.62 12781.61 12765.95

Other liabilities & provisions 33001.66 41343.19 44220.66 50495.69 50957.29


Assets:


Investments 71286.52 91878.68 122876.48 145993.55 173552.52

Advances & loans 82359.84 98101.97 113590.27 120806.47 137758.46



Receivables 13386.74 21842.28 13529.53 14857.92 17416.31

Net fixed assets 2193.66 2477.61 2593.31 2415.23 2388.54


Total assets 222509.03 261504.95 315644.19 349392.67 377356.74

Table 3.3 (a): Profit and Loss Account for HDFC Bank Ltd.(Rs. in cr.)


Income 444.08 805.24 1444.92 2035.41 2492.62

Interest income 193.88 313.09 623.87 839.02 910.02


Others 68.00 125.37 185.46 332.42 469.65

Other income 0.06 0.08 0.67 1.64 2.37


Total 444.15 805.32 1446.33 2051.43 2496.07

Expenditure:

Interest expended 229.18 374.28 753.75 1073.74 1191.96

Personnel cost 22.06 48.53 78.00 109.24 151.95

Prov. for contingencies, NPA. 8.37 58.86 52.96 85.77 88.39

Insurance premium 1.58 2.95 6.23 8.36 12.26

Other expenses 51.07 99.26 185.54 264.55 374.05


PBDT 131.89 221.34 369.25 508.96 677.46

Depreciation 15.02 26.46 53.94 69.02 106.14

PBT 116.87 194.88 315.31 439.94 571.32

Tax provision 34.47 74.84 105.19 142.90 183.72

PAT 82.40 120.04 210.12 297.04 387.60

Appropriation of profits

Dividends 28.60 36.21 53.69 70.34 95.93

Retained earnings 53.80 83.83 156.43 226.70 291.67

5 4

Conceptual Framework Table 3.3 (b): Balance Sheet Summary of HDFC Bank Ltd.

(Rs. in cr.)


Liabilities + Equity:Paid-up equity capital 200.00 243.28 243.60 281.37 282.05Reserves & surplus 138.93 508.24 680.16 1669.96 1969.69Free reserves 88.19 391.16 511.61 1168.48 1383.19Specific reserves 50.74 117.08 168.55 501.48 586.50Deposits 2915.11 8427.72 11658.11 17653.81 22376.07Demand deposits 981.52 2779.91 2855.98 4220.18 4950.96Saving deposits 346.51 1124.95 1903.00 2957.45 4663.14Term deposits 1587.08 4522.86 6899.13 10476.18 12761.97Borrowings 582.88 1578.74 1432.90 2023.02 2284.65Other liabilities & provisions 513.04 973.05 1602.56 2159.22 3511.62


Assets:

Cash & bank balance 539.51 1617.64 3059.53 3863.72 3463.67Investments 1928.80 5753.28 7145.14 12005.02 13388.58Advances & loans 1400.56 3462.34 4636.66 6813.72 11754.86Deferred tax assets 0.00 0.00 0.00 62.46 78.11Other assets / stocks 0.42 0.41 0.56 0.34 0.94Receivables 349.12 660.60 485.70 702.75 1267.71Net fixed assets 131.55 236.76 289.74 371.10 528.58Intangible/ DRE not written off 0.00 0.00 0.00 0.00 0.00

Total assets 4349.96 11731.03 15617.33 23819.11 30482.45

Table 3.4 (a): Profit and Loss Account for Corporation Bank Ltd.

(Rs. in cr.)


Income 1521.07 1835.86 2049.24 2275.69 2562.91

Interest income 721.88 915.34 1060.69 1945.69 2102.53


Others 164.77 222.66 234.19 311.93 422.98

Other income 31.45 39.24 47.37 27.14 37.61


Total 1554.81 1889.53 2096.62 2328.41 2634.28

Expenditure:

Interest expended 978.16 1146.09 1223.21 1320.48 1310.38

Personnel cost 164.95 177.26 200.00 213.90 255.91

Prov. for contingencies, NPA. 46.88 70.00 98.77 128.67 174.19

Insurance premium 6.29 7.65 8.57 9.37 10.89

Other expenses 98.10 122.40 148.07 163.67 207.44


PBDT 260.43 360.62 418.00 492.32 675.47

Depreciation 18.48 21.78 21.51 31.97 48.86

PBT 241.95 338.84 396.49 460.35 626.61

Tax provision 67.05 105.40 134.65 152.25 210.62

PAT 174.90 233.44 261.84 308.10 415.99

Appropriation of profits

Dividends 46.20 56.34 52.90 52.11 72.82

Retained earnings 128.70 177.10 208.94 255.99 343.17

5 5


Table 3.4 (b): Balance Sheet Summary of Corporation Bank Ltd.

(Rs. in cr.)




Free reserves 641.84 730.66 871.49 1386.75 1463.48

Specific reserves 212.77 294.10 356.21 516.05 763.28

Deposits 12601.43 14279.62 16560.13 18924.27 21724.57

Demand deposits 1647.28 1910.09 2136.66 2314.03 2922.44

Saving deposits 1599.58 1957.72 2246.90 2609.06 3275.50

Term deposits 9354.57 10411.81 12176.57 14001.18 15526.63

Borrowings 197.63 296.28 594.95 1423.54 803.35

Other liabilities & provisions 1209.43 1041.62 1200.42 1281.60 1440.22


Assets


Investments 5510.69 5790.93 6860.34 8143.00 10765.44

Advances & loans 6286.20 7777.47 8666.11 10987.42 12029.17



Receivables 620.38 595.56 819.33 1013.42 909.47

Net fixed assets 116.69 143.47 171.97 199.34 232.95


Total assets 14983.09 16762.28 19703.20 23690.71 26367.52

Table 3.5 (a): Common Size Financial Statements of State Bank of India

1999 2000 2001 2002 2003

Income 99.57% 97.53% 98.64% 98.14% 97.44%

Interest income 51.42% 48.27% 49.58% 45.14% 42.12%

Investment / dividend income 34.13% 36.39% 37.32% 41.76% 40.96%

Others 14.02% 12.87% 11.73% 11.24% 14.36%

Other income 0.37% 0.42% 0.90% 0.68% 0.67%

Non-recurring income 0.06% 2.05% 0.46% 1.18% 1.89%

Total 100.00% 100.00% 100.00% 100.00% 100.00%

Expenditure:

Interest expended 58.22% 58.07% 58.86% 60.22% 56.17%

Personnel cost 18.51% 17.03% 17.10% 14.97% 15.14%

Prov. for contingencies, NPA. 7.01% 5.02% 4.87% 6.40% 7.44%

Insurance premium 0.33% 0.37% 0.36% 0.41% 0.40%

Other expenses 4.85% 6.02% 8.92% 4.91% 5.40%

Non-recurring expenses 2.78% 0.00% 0.00% 0.06% 1.87%

PBDT 8.31% 13.49% 9.89% 13.03% 13.58%

Depreciation 1.39% 1.36% 1.35% 1.31% 1.42%

PBT 6.92% 12.14% 8.54% 11.72% 12.16%

Tax provision 2.33% 4.33% 3.22% 4.66% 3.90%

PAT 4.59% 7.80% 5.32% 7.06% 8.26%

5 6

Conceptual Framework Liabilities + Equity:

Paid-up equity capital 0.24% 0.20% 0.17% 0.15% 0.14%

Reserves & surplus 4.44% 4.44% 4.10% 4.21% 4.42%

Free reserves 2.12% 1.90% 1.45% 1.21% 0.96%

Specific reserves 2.32% 2.54% 2.64% 2.99% 3.46%

Deposits 75.97% 75.26% 76.93% 77.44% 78.47%

Demand deposits 13.79% 13.84% 12.78% 12.11% 11.86%

Saving deposits 15.42% 15.87% 15.17% 16.14% 17.43%

Term deposits 46.75% 45.56% 48.98% 49.19% 49.18%

Borrowings 4.52% 4.28% 4.79% 3.66% 3.38%

Other liabilities & provisions 14.83% 15.81% 14.01% 14.45% 13.50%

Total liabilities 100.00% 100.00% 100.00% 100.00% 100.00%

Assets:

Cash & bank balance 23.91% 18.03% 19.23% 18.58% 11.97%

Investments 32.04% 35.13% 38.93% 41.78% 45.99%

Advances & loans 37.01% 37.51% 35.99% 34.58% 36.51%

Deferred tax assets 0.00% 0.00% 0.00% 0.09% 0.07%

Other assets / stocks 0.03% 0.03% 0.02% 0.02% 0.02%

Receivables 6.02% 8.35% 4.29% 4.25% 4.62%

Net fixed assets 0.99% 0.95% 0.82% 0.69% 0.63%

Intangible/ DRE not written off 0.00% 0.00% 0.72% 0.00% 0.19%

Total assets 100.00% 100.00% 100.00% 100.00% 100.00%

Table 3.5 (b): Common Size Financial Statements of HDFC Bank

1999 2000 2001 2002 2003

Income 99.98% 99.99% 99.90% 99.22% 99.86%

Interest income 43.65% 38.88% 43.13% 40.90% 36.46%


Others 15.31% 15.57% 12.82% 16.20% 18.82%

Other income 0.01% 0.01% 0.05% 0.08% 0.09%


Total 100.00% 100.00% 100.00% 100.00% 100.00%

Expenditure:


Personnel cost 4.97% 6.03% 5.39% 5.33% 6.09%



Other expenses 11.50% 12.33% 12.83% 12.90% 14.99%


PBDT 29.69% 27.48% 25.53% 24.81% 27.14%

Depreciation 3.38% 3.29% 3.73% 3.36% 4.25%

PBT 26.31% 24.20% 21.80% 21.45% 22.89%

Tax provision 7.76% 9.29% 7.27% 6.97% 7.36%

PAT 18.55% 14.91% 14.53% 14.48% 15.53%

5 7





Free reserves 2.03% 3.33% 3.28% 4.91% 4.54%


Deposits 67.01% 71.84% 74.65% 74.12% 73.41%

Demand deposits 22.56% 23.70% 18.29% 17.72% 16.24%

Saving deposits 7.97% 9.59% 12.19% 12.42% 15.30%

Term deposits 36.48% 38.55% 44.18% 43.98% 41.87%

Borrowings 13.40% 13.46% 9.18% 8.49% 7.49%



Assets:


Investments 44.34% 49.04% 45.75% 50.40% 43.92%

Advances & loans 32.20% 29.51% 29.69% 28.61% 38.56%



Receivables 8.03% 5.63% 3.11% 2.95% 4.16%

Net fixed assets 3.02% 2.02% 1.86% 1.56% 1.73%


Total assets 100.00% 100.00% 100.00% 100.00% 100.00%

Table 3.5 (c): Common Size Financial Statements of Corporation Bank

1999 2000 2001 2002 2003

Income 97.83% 97.16% 97.74% 97.74% 97.29%

Interest income 46.43% 48.44% 50.59% 83.56% 79.81%


Others 10.60% 11.78% 11.17% 13.40% 16.06%

Other income 2.02% 2.08% 2.26% 1.17% 1.43%


Total 100.00% 100.00% 100.00% 100.00% 100.00%

Expenditure:


Personnel cost 10.61% 9.38% 9.54% 9.19% 9.71%



Other expenses 6.31% 6.48% 7.06% 7.03% 7.87%


PBDT 16.75% 19.09% 19.94% 21.14% 25.64%

Depreciation 1.19% 1.15% 1.03% 1.37% 1.85%

PBT 15.56% 17.93% 18.91% 19.77% 23.79%

Tax provision 4.31% 5.58% 6.42% 6.54% 8.00%

PAT 11.25% 12.35% 12.49% 13.23% 15.79%

5 8




Free reserves 4.28% 4.36% 4.42% 5.85% 5.55%


Deposits 84.10% 85.19% 84.05% 79.88% 82.39%

Demand deposits 10.99% 11.40% 10.84% 9.77% 11.08%

Saving deposits 10.68% 11.68% 11.40% 11.01% 12.42%

Term deposits 62.43% 62.11% 61.80% 59.10% 58.89%

Borrowings 1.32% 1.77% 3.02% 6.01% 3.05%



Assets:


Investments 36.78% 34.55% 34.82% 34.37% 40.83%

Advances & loans 41.96% 46.40% 43.98% 46.38% 45.62%



Receivables 4.14% 3.55% 4.16% 4.28% 3.45%

Net fixed assets 0.78% 0.86% 0.87% 0.84% 0.88%


Total assets 100.00% 100.00% 100.00% 100.00% 100.00%

Table 3.6 (a): Trend Analysis of Financial Statements of State Bank of India

1999 2000 2001 2002 2003

Income 100.00% 114.96% 133.37% 151.41% 164.14%

Interest income 100.00% 110.18% 129.81% 134.85% 137.38%

Investment/dividend income 100.00% 125.15% 147.21% 187.96% 201.30%

Others 100.00% 107.72% 112.70% 123.16% 171.83%

Other income 100.00% 135.36% 329.35% 284.02% 306.59%


Total 100.00% 117.38% 134.63% 153.63% 167.73%

Expenditure:


Personnel cost 100.00% 107.97% 124.38% 124.24% 137.16%



Other expenses 100.00% 145.67% 247.63% 155.42% 186.61%


PBDT 100.00% 190.66% 160.25% 241.02% 274.29%

Depreciation 100.00% 114.90% 131.00% 145.23% 172.30%

PBT 100.00% 205.83% 166.11% 260.21% 294.72%

Tax provision 100.00% 218.07% 185.82% 306.65% 280.21%

PAT 100.00% 199.61% 156.09% 236.58% 302.10%

5 9





Free reserves 100.00% 105.37% 97.33% 89.84% 76.66%


Deposits 100.00% 116.43% 143.65% 160.06% 175.18%

Demand deposits 100.00% 117.89% 131.40% 137.86% 145.88%

Saving deposits 100.00% 120.94% 139.54% 164.32% 191.67%

Term deposits 100.00% 114.52% 148.62% 165.20% 178.38%

Borrowings 100.00% 111.23% 150.39% 127.01% 126.86%



Assets:


Investments 100.00% 128.89% 172.37% 204.80% 243.46%

Advances & loans 100.00% 119.11% 137.92% 146.68% 167.26%

Deferred tax assets


Receivables 100.00% 163.16% 101.07% 110.99% 130.10%

Net fixed assets 100.00% 112.94% 118.22% 110.10% 108.88%

Intangible/ DRE not w/o

Total assets 100.00% 117.53% 141.86% 157.02% 169.59%

Table 3.6 (b): Trend Analysis of Financial Statements of HDFC Bank

1999 2000 2001 2002 2003

Income 100.00% 181.33% 325.37% 458.34% 561.30%

Interest income 100.00% 161.49% 321.78% 432.75% 469.37%

Investment/dividend Income 100.00% 201.31% 348.84% 474.19% 610.84%

Others 100.00% 184.37% 272.74% 488.85% 690.66%

Other income 100.00% 133.33% 1116.67% 2733.33% 3950.00%


Total 100.00% 181.32% 325.64% 461.88% 561.99%

Expenditure:


Personnel cost 100.00% 219.99% 353.58% 495.19% 688.80%



Other expenses 100.00% 194.36% 363.31% 518.01% 732.43%

Non-recurring expenses

PBDT 100.00% 167.82% 279.97% 385.90% 513.66%

Depreciation 100.00% 176.17% 359.12% 459.52% 706.66%

PBT 100.00% 166.75% 269.80% 376.44% 488.85%

Tax provision 100.00% 217.12% 305.16% 414.56% 532.99%

PAT 100.00% 145.68% 255.00% 360.49% 470.39%

6 0




Free reserves 100.00% 443.54% 580.12% 1324.96% 1568.42%


Deposits 100.00% 289.10% 399.92% 605.60% 767.59%

Demand deposits 100.00% 283.22% 290.98% 429.96% 504.42%

Saving deposits 100.00% 324.65% 549.19% 853.50% 1345.74%

Term deposits 100.00% 284.98% 434.71% 660.09% 804.12%

Borrowings 100.00% 270.85% 245.83% 347.07% 391.96%



Assets:


Investments 100.00% 298.28% 370.44% 622.41% 694.14%

Advances & loans 100.00% 247.21% 331.06% 486.50% 839.30%

Deferred tax assets


Receivables 100.00% 189.22% 139.12% 201.29% 363.12%

Net fixed assets 100.00% 179.98% 220.25% 282.10% 401.81%

Intangible/DRE not w/o

Total assets 100.00% 269.68% 359.02% 547.57% 700.75%

Table 3.6 (c): Trend Analysis of Financial Statements of Corporation Bank

1999 2000 2001 2002 2003

Income 100.00% 120.70% 134.72% 149.61% 168.49%

Interest income 100.00% 126.80% 146.93% 269.53% 291.26%


Others 100.00% 135.13% 142.13% 189.31% 256.71%

Other income 100.00% 124.77% 150.62% 86.30% 119.59%


Total 100.00% 121.53% 134.85% 149.76% 169.43%

Expenditure:


Personnel cost 100.00% 107.46% 121.25% 129.68% 155.14%



Other expenses 100.00% 124.77% 150.94% 166.84% 211.46%

Non-recurring expenses

PBDT 100.00% 138.47% 160.50% 189.04% 259.37%

Depreciation 100.00% 117.86% 116.40% 173.00% 264.39%

PBT 100.00% 140.05% 163.87% 190.27% 258.98%

Tax provision 100.00% 157.20% 200.82% 227.07% 314.12%

PAT 100.00% 133.47% 149.71% 176.16% 237.84%

6 1





Free reserves 100.00% 113.84% 135.78% 216.06% 228.01%


Deposits 100.00% 113.32% 131.41% 150.18% 172.40%

Demand deposits 100.00% 115.95% 129.71% 140.48% 177.41%

Saving deposits 100.00% 122.39% 140.47% 163.11% 204.77%

Term deposits 100.00% 111.30% 130.17% 149.67% 165.98%

Borrowings 100.00% 149.92% 301.04% 720.31% 406.49%



Assets:


Investments 100.00% 105.09% 124.49% 147.77% 195.36%

Advances & loans 100.00% 123.72% 137.86% 174.79% 191.36%

Deferred tax assets


Receivables 100.00% 96.00% 132.07% 163.35% 146.60%

Net fixed assets 100.00% 122.95% 147.37% 170.83% 199.63%

Intangible/ DRE not written off

Total assets 100.00% 111.87% 131.50% 158.12% 175.98%

Table 3.7: Important Financial Ratios relevant for Banking Industry for the year 2003

Ratios SBI HDFC Corporation Bank

(a) Return on Equity 26.56% 25.37% 26.44%

(b) Return on Investments 6.81% 5.78% 7.35%

(c) Leverage or Debt to Equity 20.94 12.54 10.12

(d) Interest Income to Average Assets 4.19% 2.99% 7.97%

(e) Interest Expenses to Average Assets 5.59% 3.91% 4.97%

(f) Net Interest Income to Average Assets [(d) – (e)] -1.40% -0.92% 3.00%

(g) Non-interest income to Average Assets 5.58% 5.20% 1.89%

(h) Non-interest income to Total income 56.00% 63.50% 18.90%

(i) Income from Treasury activities/Investments 8.87% 8.31% 0.35% *

(j) Operating Expenses to Average Assets 3.01% 2.06% 2.46%

(k) Provision for Loans and losses to Average Assets 0.74% 0.29% 0.66%

(l) Growth Rate of Assets 8.00% 27.97% 11.30%

(m) Growth Rate of Net Worth 13.46% 17.95% 17.03%

(n) Cash dividends to PAT 16.25% 24.75% 17.51%

(o) Provision for NPA to Total Loan 0.94% 0.02% 0.66%

* This ratio may be low due to accounting treatment on interest received on investments.

UNIT3

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