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 Banking operations 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 or vision statement To achieve this purpose, organisations need finance, which is raised from the capital market through debt or equity and such capital is raised either directly from the investors or through intermediary institutions like Banks Once capital is raised, the capital is invested in assets, which can be broadly classified into fixed and current assets
UNIT FINANCIAL ANALYSIS OF BANKS 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 Banking operations 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 or vision statement To achieve this purpose, organisations need finance, which is raised from the capital market through debt or equity and such capital is raised either directly from the investors or through intermediary institutions like Banks Once capital is raised, the capital is invested in assets, which can be broadly classified into fixed and current assets Several factors determine the choice of assets and proportion of investments in different types of assets For instance, banking industry will invest less on real fixed assets whereas automobile manufacturer would invest substantial part of the capital to buy fixed assets After raising capital and acquiring assets, the business unit runs the operations and generates revenue Since most business units are started with an objective of making profit, many of them might report profit What is the role of accounting in general when firm performs certain activities to achieve the goal? Accounting statements typically reflect the above activities and allow the managers to examine whether their plan or strategy has resulted in positive impact on the company or not Balance Sheet, Profit and Loss Account and Cash Flow Statements are three principal financial statements and they reflect the above activities Balance Sheet explains where from the organisation has raised money and where they have invested the money Profit and Loss account explains how efficiently the assets of an organisation have been used and what is the net outcome of the operations in monetary terms Cash Flow Statement provides operational outcome, capital raised and where they are used but all in terms of cash While the principal financial statements provide wealth of information to investors and others, there is no ready answer to the question whether the Organisation has achieved the goal/mission or not Financial Statements are analysed further to get such an insight on the performance of the Organisation and its various parts or division Conceptual Framework 3.2 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 how profitably or productively the assets of the company are used Lenders and Suppliers of goods look for the ability of the firm to repay the dues on time For instance, as a deposit holder of a Bank, you would be interested in liquidity of the Bank and would expect the Bank to pay you the amount when you need Customers would like to know the long-term solvency of the Bank to get continued support For example, as a borrower, you would like your bank to be healthy and profitable since you will be depending on the Bank for your future needs Of course, employees would be interested in the profitability as well as liquidity of the bank Financial managers not only prepare financial statements but also analyse the same to get further insight on the performance of the Organisation They need to examine the organisation from the perspective of several users so that they can follow the needs of them and satisfy several stakeholders Sometimes, profitability might be affected when the managers try to satisfy the needs of various stakeholders but if you focus too much on profitability, it might affect the organisation in other ways For instance, we would expect that our deposit holders need liquidity If we plan for more liquidity, it might affect profitability On the other hand, if we continue to have low liquidity, we may not 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 Financial analysis provides linkage between operating activities and funding activities Normally, top management sets the goal and operational managers then determine the level of operations required to achieve the goal It would be difficult to increase the level of operations without any investments unless there is a huge idle capacity Thus increased activity demands more addition to assets and this in turn puts a demand for capital The first step in this process is to know how much of additional assets we need and how much of capital we need to mobilise from various sources Financial analysis, which provides historical linkage between various financial components, is useful Suppose the top management fixes a goal to increase the net income by another 20% for the coming year Using profit to sales linkage, we can estimate additional turnover required to achieve the goal Once we know additional turnover, it is possible for us to assess how much of additional assets are required (fixed and current assets in the case of manufacturing companies) and then additional funds that are required to buy 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 are listed below along with the relevant techniques used for the same: (a) How my company is different from other companies in the industry on distribution of assets, liabilities and cost? Since size of the companies compared will 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 are able to reduce the financial statements into percentage basis This is called ‘common size statement analysis’ Common size statement analysis performed on 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 longterm survival, managers would be interested to assess the growth of the company on various components This is achieved by taking base year values as 100 and then subsequent years values are adjusted to show the growth rate This type of analysis is called ‘Trend Analysis or Time Series Analysis’ Financial Analysis of Banks (c) How my company has performed on profitability, productivity of assets and risk? Performance of companies on these parameters is normally assessed through computation 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 Banking Industry, State Bank of India, HDFC Bank Ltd and Corporation Bank Balance Sheet and Profit and Loss Account of these banks are given in Table-3.1 to 3.4 While State Bank of India is the largest public sector bank, HDFC Bank is a leading hi-tech private sector bank Corporation Bank is one of the best performing PSU Bank and comparable to HDFC Bank in terms of size Industry figures are based on all the banks including public sector, private sector, and foreign banks Activity 1) Go through Table-3.1 and highlight your important observations of banking industry 2) Go through Table-3.2 to 3.4 (P&L account) of three banks and highlight your important observations 3) Based on Balance Sheet of the three banks, highlight your important observations a) Common Size Financial Statements Analysis As mentioned earlier, the common size financial statement expresses each items of the balance sheet or profit and loss statement as a percentage of total assets and net sales respectively 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 loss account over the years for each bank and between the banks provides certain important insights While interest is important source of income, its dominance has come down over the years except for Corporation Bank In Corporation Bank, interest income contribution has gone up from 46% in 1999 to 80% in 2000 Investment and dividend income has almost equal share in SBI and HDFC Bank whereas it was at equal level in 1999 in the case of Corporation Bank but declined to less than 1% in 2002 & 2003 This sudden change could be purely an accounting issue than real change in the nature of business model of Corporation Bank For instance, while SBI and HDFC Bank might recognise interest earned on government securities as income from investments, whereas Corporation Bank may show the same under interest Conceptual Framework income Other income, which mainly consists of fee based income has increased over a period of time and is in the range of 15% to 18% The hi-tech HDFC Bank reports highest other income compared to the two PSU banks It is natural that banks spend large amount towards interest expenditure and a declining trend is witnessed on account of general reduction in interest rates in the market Next to interest expense, personnel expenditure share major component Thanks to VRS schemes and increase in business volume, the personnel expenditure has come down from 19% to 5% in the last five years for SBI While HDFC Bank spends about 6% for employees, Corporation Bank spends more than 10% toward employees’ cost Other operation expenditure ranges from 5% to 15% and economies of scale clearly show the importance of cost control Provision for NPA is lower for newer banks, whereas PSU banks spend almost two times of HDFC Bank Being a hitech bank, HDFC Bank spends more on capital equipment and hence larger depreciation Despite such higher spending, profit for the HDFC and Corporation Bank are significantly higher than SBI Activity-2 1) Highlight strong and weak points of SBI based on common size P&L account 2) Repeat the above for HDFC Bank and Corporation Bank 3) Why the profitability of SBI is significantly lower despite enjoying economies of scale? While deposit constitutes significant portion of sources of capital for all banks, you can observe major differences in components of deposits While Corporation Bank enjoys 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 liquidity risk is low and banks can use the amount for longer period The distribution of funds among various assets is by and large same In terms of importance, Investments constitute major uses of funds followed by loans and advances However, in Corporation Bank, loans and advances is more than investments for the year 2003 Investment in fixed assets is relatively small in banking industry A detailed discussion on the Disabilities and Assets of the banks is presented in Blocks and of this course respectively b) Trend Analysis Trend analysis shows the level of growth that banks have achieved over the years on each 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 One can perform such analysis by observing the trends on each one of financial parameters Table-3.6 (a) to (c) show the trends in financial variables While SBI and Corporation Bank has reported around 68% income growth in the last five years, HDFC Bank has seen a growth rate of more than 500% during the same period It doesn’t mean that HDFC Bank will continue to grow at this rate in the future since a substantial part of the growth arises from the smaller base Similarly, asset base has gone up around 65%-70% for SBI and Corporation Bank, HDFC Bank reported a growth rate of 700% during the same period While SBI has started concentrating on Treasury activities, Corporation Bank is focussing more on lending Again, Term Deposits has seen major growth in Corporation Bank compared to other two banks Financial Analysis of Banks Activity-3 1) Examine Table-3.6 and show how Corporation Bank is different from SBI? 2) Growth ratio of HDFC Bank is significantly larger than other two banks? Why? Is it sustainable? 3) How the three banks performed on personnel cost and other operating expenses? c) Ratio Analysis Ratios are aimed to assess profitability, productivity of assets/capital and risk associated with operations Though one can get some basic idea about the bank or a company from the above ratios while evaluating percentage statement and trend analysis, the level of comparison is restricted to few ratios Ratio analysis integrates financial statements to assess financial health of the firm Some of the important ratios in general are discussed below (Refer to MS-4 course material for detailed discussion) However, many of these ratios require modification or are not relevant for banking industry and therefore, we will discuss the ratios relevant to banking industry separately 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 the ratios are low then it means that money is tied up in stocks and debtors Thus, money is not available to make payments This may cause considerable problems for firms in the short run It is often viewed that a value less than 1.5 implies that the company may run out of money as its cash is tied up in unproductive assets Conceptual Framework The current ratio shows the relationship between the current assets and the current liabilities Current Assets Current Ratio = ———————– Current Liabilities ii) Quick Ratio: The acid test ratio is similar to the current ratio as it highlights the liquidity of the company A ratio of 1:1 (i.e a value of approximately 1) is satisfactory However, if the value is significantly less than it implies that the company has a large amount of its cash tied up in unproductive assets, so the company may struggle to raise money in the short term Quick Assets Quick Ratio = ——————— Current Liabilities Quick Assets = Current Assets – Inventories iii) Net Working Capital Ratio: The working capital ratio can give an indication of the ability of your business to pay its bills Generally a working capital ratio of 2:1 is regarded as desirable A stronger ratio indicates a better ability to meet ongoing and unexpected bills therefore taking the pressure off your cash flow Being in a liquid position can also have advantages such as being able to negotiate cash discounts with your suppliers A weaker ratio may indicate that your business is having greater difficulties meeting its short-term commitments and that additional working capital support is required Having to pay bills before payments are received may be the issue in which case an overdraft could assist Alternatively building up a reserve of cash investments may create a sound working capital buffer Ratios should be considered over a period of time (say three years), in order to identify trends in the performance of the business The calculation used to obtain the ratio is: Net Working Capital Net Working Capital Ratio = ————————— Total Assets Net Working Capital = Current Assets – Current Liabilities Profitability Analysis Ratios Profitability ratios are the most significant of the financial ratios Similar to income ratios, profitability ratios provide a definitive evaluation of the overall effectiveness of management based on the returns generated on sales and investment The adequacy of your company’s earnings can be measured in terms of (1) the rate earned on average total assets; (2) the rate earned on sales; (3) the rate earned on average common stockholders’ equity; and (4) the availability of earnings to common stockholders The most widely used profitability measurements are profit margin on sales, return-on-investment ratios, and earnings per share i) Return on Assets (ROA) Net Income Return on Assets (ROA) = ————————— Average Total Assets Average Total Assets = (Beginning Total Assets + Ending Total Assets) / ii) Return on Equity (ROE) Net Income Return on Equity (ROE) = ————————————— Average Stockholders’ Equity Financial Analysis of Banks Average Stockholders’ Equity = (Beginning Stockholders’ Equity + Ending Stockholders’ Equity) / iii) Profit Margin Net Income Profit 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 will consistently cover expenses, therefore resulting in the desired profit If gross profit rate is continually lower than your average margin, something is wrong! Be on the lookout for downward trends in gross profit rate This is a sign of future problems for bottom line Net Sales – Cost of Goods Sold Gross 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, and intensity of competition are the factors that can affect the gross profit rate v) Net Profit on Net Sales Earnings after Taxes Net Profit Rate = ————————— Net Sales This ratio provides a primary appraisal of net profits related to investment Once the basic expenses are covered, profits will rise disproportionately greater than sales above the break-even point of operations Note: Sales expenses may be substituted out of profits for other costs to generate even more 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 are defined as the sum of tangible fixed assets and net working capital Operating Income Rate of Return = ——————————————— Fixed Assets + Net Working Capital This rate determines whether assets are efficiently used This ratio can be calculated for the entire company or for each of its divisions or operations The percentage should be compared with a target rate of return that you have set for the business vii) Net Sales to Tangible Net Worth Net Sales Net Sales to Tangible Net Worth Ratio = ————————— Tangible Net Worth Tangible Net Worth = owners’ equity – intangible assets Conceptual Framework This ratio indicates whether investment in the business is adequately proportionate to sales volume It may also uncover potential credit or management problems, usually called 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 from considerable management skill, but outside creditors must furnish more funds to carry on daily operations Under trading is usually caused by management’s poor use of investment money and their general lack of ingenuity, skill or aggressiveness viii) Earnings Per Share (EPS) The earnings per share ratio is mainly useful for companies with publicly traded shares 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 a whole lot But if you compare it to the EPS from a previous quarter or year, it indicates the rate of growth that a company is earning Net Income Earnings Per Share (EPS) = —————————————————————— Weighted Average No of Common Shares Outstanding Activity Analysis Ratios i) Assets Turnover Ratio The asset turnover ratio simply compares the turnover with the assets that the business has used to generate that turnover In its simplest terms, we are just saying that for every Re of assets, the turnover is Rs x The formula for total asset turnover is: Sales Assets Turnover Ratio = —————————— Average Total Assets Average Total Assets = (Beginning Total Assets + Ending Total Assets) / ii) Accounts Receivable Turnover Ratio The debtor turnover ratio indicates the average time to collect debts A ratio that is lengthening can be the result of some debtors slowing down in their payments Economic factors, such as a recession, can also influence the ratio Tightening your business’ credit control procedures may be required in these circumstances The debtor ageing ratio has a strong impact on business operations particularly working 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 are getting paid for the work or goods you are supplying but also in managing your working capital Debtor Ageing Ratio (in days) = No of days (365)/Accounts receivables turnover ratio Sales Accounts Receivable Turnover Ratio = ————————————— Average Accounts Receivable Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 4 iii) Inventory Turnover Ratio Financial Analysis of Banks 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 as the presence of obsolete stock or good presentation A low ratio can also be indicative of potential stock valuation issues The calculation used to obtain the ratio is: Cost of Goods Sold Inventory Turnover Ratio = ————————— Average Inventories Average Inventories = (Beginning Inventories + Ending Inventories) /2 Capital Structure (Leverage) Analysis Ratios (i) Debt to Equity Ratio Also called as gearing ratio Gearing is concerned with the relationship between the long term liabilities that a business has and its capital employed The idea is that this relationship ought to be in balance, with the shareholders’ funds being significantly larger 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 company could make its interest payments with its earnings before interest and taxes; the lower the ratio, the higher the company’s debt burden As a general rule of thumb, interest coverage ratio above is good An interest coverage ratio below 1.0 indicates that the business is having difficulties generating the cash necessary to pay its interest obligations The history and consistency of earnings is tremendously important The more consistent a company’s earnings, the lower the interest coverage ratio can be Income Before Interest and Income Tax Expenses Interest 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 with industry average? 2) Compare the Productivity of assets/capital of SBI, HDFC Bank and Corporation Bank with industry average? Conceptual Framework 3) Compare the liquidity/solvency of SBI, HDFC Bank and Corporation Bank with industry average? 3.4 DUPONT MODEL OF FINANCIAL ANALYSIS While ratio analysis helps to a great extent in performing the financial statement analysis, most of the time, one would be left in confusion with umpteen ratio calculation in hand Hence one has to have a guided and structured form of ratio analysis to get a complete picture of the overall performance and risk of the company in a nut shell The DuPont System of Analysis merges the income statement and balance sheet into two summary measures of profitability: Return on Assets (ROA) and Return on Equity (ROE) The system uses three financial ratios to express the ROA 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 Total Income Personnel Operating Exp PBIT Interest PBT Tax PAT 2002 2003 34422.89 5152.78 4506.63 24763.48 20728.84 4034.64 1603.02 2431.62 37582.8 5688.72 6214.84 25679.24 21109.46 4569.78 1464.78 3105.00 Balance sheet 2002 2003 Net Worth Loan Total Liabilities 15555.23 333837.44 349392.67 16802.19 359846.50 376648.70 F.A Receivables Investments Other current assets Cash Total Assets Current assets 2415.23 14857.92 145993.55 121195.81 64930.16 349392.67 346588.10 2388.54 17416.31 173552.50 138110.30 45181.03 376648.70 373908.30 6.20% 5.87% Cost of debt DuPont chart Financial Statement Analysis (Template) Return on Networth PBT/Networth Impact of leverage (ROI-Kd)* Debt/NW Return on Investment PBIT/Total assets Asset Turnover Ratio (ATO) Sales/Total Assets Leverage or financial risk Debt to Networth Profit Margin PBIT/Sales Fixed Asset TO Sales / Fixed Assets Current Asset TO Sales / Current Assets Employee Cost to Sales Employee Cost/Sales Current ratio CA/CL Inventory TO Sales / Inventory Operating Expenses to sales Operating Expenses/Sales Debtors TO Sales/Debtors Collection Period 365 or 12 / Debtors TO Interest on Sales Interest / Sales DuPont chart Financial Statement Analysis of State Bank of India 2002 Financial Analysis of Banks 2003 Return on Networth 25.94 27.20 Impact of leverage 18.85 20.78 Return on Investment 7.09 6.82 Asset Turnover Ratio (ATO) 0.10 0.10 Leverage or financial risk 21.46 21.42 Profit Margin 71.94 68.33 Fixed Asset TO 14.75 15.73 Current Asset TO 0.10 0.10 Employee Cost to Sales 14.97 15.14 Current ratio Not Applicable Inventory TO Not Applicable Operating Expenses to sales 13.09 16.54 Debtors TO 2.32 2.18 Collection Period 157 days 169 days Interest on Sales 60.22 56.17 The above DuPont chart shows an improvement in Return on Equity or Return on Net Worth but profit margin has declined The primary reason for improvement in ROE is on account of lower interest rate The average cost of debt was 6.21% in 2002 but it has declined to 5.87% in 2003 Though Profit Margin has come down in 2003, the profit margin net of interest liability (Income-Interest/Sales) has increased from 11.72% to 12.16% in 2003 This might be purely on account of existing loans carrying higher interest rates Both employee cost and operating expenses as a percentage of sales have gone up In other words, there is no major improvement in SBI’s performance during 2002-03 but decline in interest cost helped SBI to improve profitability This inference is not apparent when we looked into financial statements in its raw form Actually, the growth in PAT gives us an impression that everything is good at SBI A simple DuPont analysis gives entirely different picture The management of SBI needs to concentrate on ways to reduce the cost to sustain such higher 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? 2) Perform DuPont Analysis for HDFC Bank and Corporation Bank and summarize your observations 3) Perform DuPont Analysis for Banking Industry and then compare SBI, HDFC Bank and Corporation Bank ratios Highlight the strong and weak areas for each bank Conceptual Framework 3.5 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 the ratios developed for manufacturing industry are not relevant For example, though we computed fixed asset ratio, the fixed assets are not used to process the material and generate income Similarly, there is no inventory turnover ratio While some of the ratios are not relevant, there are ratios which require some modification For instance, we computed profit margin without considering interest expenses For SBI, the ratio works out to 68% for 2003 Is it possible for a firm to report such a huge profit margin? The ratio is high because the principal expense namely interest expense is omitted for computing the ratio Interest expenses are minor for a manufacturing industry whereas for banking industry, it is a major expense item There are some items, which are difficult to measure For instance, if you want to measure liquidity, normally we compute current ratio, which requires current assets and current liabilities The definition of current asset and liabilities is assets and liabilities, which matures or converts within a year But this data is not apparently available in the financial statements and one has to collect from the internal sources To give an example, we need to know the term structure of Term Deposit and similarly loans and advances to classify whether they are current or not Considering the special nature of banking industry, we list the following ratios, which are relevant for the banking industry 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 pieces that interrelate and affect each other It would lead to wrong conclusion and strategy if the analysis is done on a piecemeal basis For instance higher interest spread does not mean that the bank is in good position It could be simply due to aggressive lending leading to higher NPA or simply on account of higher asset-liability mismatch We need to look for five important things when we analyse the financial positions of the bank Financial Analysis of Banks a) Whether the bank is growing or not? We use trend analysis to answer this question b) Whether the bank is able to get leverage that is equal to industry average? Since profitability of bank is primarily on account of ability to use leverage, this ratio assumes importance c) Whether the bank is able to increase non-fund based income (i.e fee based income)? This shows the capability of offering services and leveraging customer base 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 What we achieve by analysing financial statements that we are not able to achieve while reading financial statements? Differentiate between common size analysis and trend analysis Explain three important profitability ratios with examples drawn from bank statements How financial statement analysis of banks differs from similar analysis of manufacturing companies? Debt to equity ratio of banks is very high compared to other industries Is it good? Is it possible for banks to operate with low debt to equity ratio? Suppose a bank raises deposits at 6% and lends at 8% The debt to equity ratio of the bank is 20:1 Find the impact of leverage on return on equity Suppose in the above example, the debt to equity ratio of the bank is 10:1 What is the impact of such lower debt to equity ratio on return on equity? Identify at least five ratios that are not relevant for banking industry but are important for other industries What is DuPont Analysis? Perform DuPont Analysis based on the inputs given below: 2002 2003 Sales Income Statement 8674.57 37582.48 Balance sheet 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 7240.26 521.69 773.89 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 Net Worth F.A 2002 2003 3359.93 5443.91 Other current assets 26178.29 44747.74 Cash 14024.91 14638.65 Total Assets 75468.82 122034.18 Current assets 74947.13 121260.29 7.24% 6.21% Cost of debt 10 Refer to the Financial statements of HDFC given in Table-3.3 (a) and (b) And answer the following questions: Conceptual Framework Suppose you are the Financial Manager of HDFC and you are being asked to report to the Management on the performance of the company You are being asked to prepare a bank performing analysis for the years ending 2003 Using balance sheet and income statement data create a bank analysis and performance report for your supervisor that addresses the following issues: a) Using the balance sheet for each year: Prepare the common size financial statement analysis In other words, prepare the balance sheet showing all assets as a percentage of total assets and liabilities as a percentage of total liabilities Report as to which of the assets on the bankís balance sheet increased over the last years? Which assets on the bank’s balance sheet declined over the last years? b) Examine the liquidity position of the bank over the last years How has the liquidity position of the bank changed over time? How does the liquidity position of the bank compare to the other public sector banks in year 5? (You could use the financial statements of SBI, Corporation Bank data from the tables provided in 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.) Using the income statement for each year: a) Create an income statement with operating income items expressed as a percentage of total operating income Which items improved over the year period? Which trends need to be reversed? How does the bank performed compare to the public sector banks? b) Create an income statement with operating expenses expressed as a percentage of total operating expenses Which items improved over the years? Which trends need to be reversed? How does the bank performed in comparison to the PSU banks? 3.8 Analyze the performance of the bank for each year: a) Calculate the return on assets (ROA) for each year How has the ROA trend changed over the years? How Compare the Bank’s performance with the public sector banks? b) Calculate the return on equity (ROE) for each year How has the ROE trend changed over the years? Compare the Bank’s performance with the public sector banks? c) Identify the strengths and weaknesses of the HDFC bank relative to the trends over time and in year for all regional banks What is the relationship between the HDFC bank trends and the year comparison with the PSUs? 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, Sixth Edition, 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, Irwin Professional Press TABLES Financial Analysis of Banks Table 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 Interest income 44197.41 Investment / dividend income 29608.12 Others 11135.15 Gain on security transactions 1863.30 Leasing & hire services 366.50 Bills discounting 16.71 Gain on forex transactions 2334.39 Commission & brokerage 6476.02 Others 78.23 Other income 1066.53 Non-recurring income 2712.70 98860.92 51091.97 36290.49 11478.46 1005.30 424.16 12.41 2587.48 7395.74 53.37 1395.72 904.38 114255.64 58400.06 41804.69 14050.89 3063.29 540.26 6.05 2139.30 7898.77 403.22 1705.79 1192.58 130899.34 68034.25 47969.79 14895.30 3136.73 470.64 2.91 2321.03 8923.86 40.13 2138.15 509.36 150693.04 90849.64 38160.97 21682.43 9558.17 366.54 0.00 2464.53 9245.01 48.18 2273.25 1345.15 88719.91 101161.02 117154.01 133546.85 154311.44 50265.32 14098.85 6284.79 380.27 5941.65 227.83 11521.20 1069.03 10452.17 3915.43 6536.74 60767.28 16609.60 7247.85 440.92 6798.43 973.09 8323.85 1427.72 6896.13 2654.19 4241.94 69564.58 18536.45 7308.09 479.21 8093.19 88.68 13083.81 1670.22 11413.59 4103.35 7310.24 78629.67 21184.80 8158.51 540.78 11937.13 207.94 12888.02 2007.14 10880.88 4400.05 6480.83 88752.85 20721.68 11719.96 630.63 12098.63 1270.99 19116.70 2202.32 16914.38 6481.27 10433.11 950.24 5586.50 1003.07 3238.87 1288.22 6022.02 1492.67 4988.16 1569.58 8863.53 Total Expenditure: Interest expended Personnel cost Prov for contingencies, NPA Insurance premium Other expenses Non-recurring expenses PBDT Depreciation PBT Tax provision PAT Appropriation of profits Dividends Retained earnings 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 642426.98 769093.05 901760.81 1059733.65 1211429.77 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 60984.38 988.20 180.94 1197.99 529.16 1130.10 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 115529.20 246.24 254.48 1414.41 2363.99 3977.58 784899.64 940552.32 1105840.22 1297361.66 1541976.83 Deposits Demand deposits Government Foreign borrowings Provisions Total liabilities 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 41575.99 62552.60 70290.87 81495.29 95548.23 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 0.00 0.00 0.00 0.00 1910.47 219.58 216.90 230.41 231.67 227.72 45379.59 49681.64 60293.95 58060.71 64987.30 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 Net fixed assets 5329.31 12956.93 7094.49 14636.31 8570.51 15751.53 10118.18 16579.22 11925.09 20537.33 10.62 25.78 34.89 6951.82 3949.78 784899.64 940552.32 1105840.22 1297361.66 1541976.83 Debentures / PSU bonds Others Deferred tax assets Other assets / stocks Receivables Future lease rent receivable Intangible/ DRE not written off Total assets 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 Interest income Investment / dividend income Others Other income Non-recurring income 22311.16 11522.23 7647.75 3141.18 82.25 13.10 25649.31 12694.76 9571.00 3383.55 111.33 539.19 29755.66 14957.45 11258.18 3540.03 270.89 140.22 33781.48 15538.21 14374.54 3868.73 233.61 407.80 36621.87 15829.39 15394.85 5397.63 252.17 708.76 Total 22406.51 26299.83 30166.77 34422.89 37582.8 13044.44 4147.40 1570.02 74.32 1086.85 622.36 1861.12 310.57 1550.55 522.75 1027.80 15272.58 4477.87 1319.53 98.30 1583.17 0.00 3548.38 356.85 3191.53 1139.98 2051.55 17756.02 5158.46 1470.48 107.94 2691.40 0.00 2982.47 406.86 2575.61 971.36 1604.25 20728.84 5152.78 2204.73 142.50 1689.16 19.20 4485.68 451.04 4034.64 1603.02 2431.62 21109.46 5688.72 2797.10 151.44 2028.14 703.05 5104.89 535.11 4569.78 1464.78 3105.00 233.68 794.12 306.57 1744.98 289.99 1314.26 315.78 2115.84 504.68 2600.32 Expenditure: Interest expended Personnel cost Prov for contingencies, NPA Insurance premium Other expenses Non-recurring expenses PBDT Depreciation PBT Tax provision PAT Appropriation of profits Dividends Retained earnings Table 3.2 (b): Balance Sheet Summary of State Bank of India (Rs in crores) Mar-1999 Mar-2000 Mar-2001 Mar-2002 Mar-2003 526.30 526.30 526.30 526.30 526.30 Reserves & surplus 9876.01 11620.98 12935.24 14698.08 16677.08 Free reserves 4714.14 4967.06 4588.26 4235.27 3613.94 Specific reserves 5161.87 6653.92 8346.98 10462.81 13063.14 169041.93 196821.07 242828.37 270560.14 296123.28 30692.03 36182.05 40328.08 42312.79 44772.38 Financial Analysis of Banks Liabilities + Equity: Paid-up equity capital Deposits Demand deposits Saving deposits 34321.25 41506.53 47893.42 56396.36 65782.71 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 222509.03 261504.95 315644.19 349392.67 377356.74 Cash & bank balance 53212.60 47136.44 60709.18 64930.16 45181.03 Investments 71286.52 91878.68 122876.48 145993.55 173552.52 Advances & loans 82359.84 98101.97 113590.27 120806.47 137758.46 0.00 0.00 0.00 312.90 275.63 Term deposits Total liabilities Assets: Deferred tax assets Other assets / stocks 69.67 67.97 74.18 76.44 75.22 13386.74 21842.28 13529.53 14857.92 17416.31 2193.66 2477.61 2593.31 2415.23 2388.54 0.00 0.00 2271.24 0.00 709.03 222509.03 261504.95 315644.19 349392.67 377356.74 Receivables Net fixed assets Intangible/ DRE not written off Total assets Table 3.3 (a): Profit and Loss Account for HDFC Bank Ltd (Rs in cr.) Mar-1999 Mar-2000 Mar-2001 Mar-2002 Mar-2003 Income Interest income Investment / dividend income Others Other income Non-recurring income 444.08 193.88 182.20 68.00 0.06 0.01 805.24 313.09 366.78 125.37 0.08 0.00 1444.92 623.87 635.59 185.46 0.67 0.74 2035.41 839.02 863.97 332.42 1.64 14.38 2492.62 910.02 1112.95 469.65 2.37 1.08 Total 444.15 805.32 1446.33 2051.43 2496.07 229.18 22.06 8.37 1.58 51.07 0.00 131.89 15.02 116.87 34.47 82.40 374.28 48.53 58.86 2.95 99.26 0.10 221.34 26.46 194.88 74.84 120.04 753.75 78.00 52.96 6.23 185.54 0.60 369.25 53.94 315.31 105.19 210.12 1073.74 109.24 85.77 8.36 264.55 0.81 508.96 69.02 439.94 142.90 297.04 1191.96 151.95 88.39 12.26 374.05 0.00 677.46 106.14 571.32 183.72 387.60 28.60 53.80 36.21 83.83 53.69 156.43 70.34 226.70 95.93 291.67 Expenditure: Interest expended Personnel cost Prov for contingencies, NPA Insurance premium Other expenses Non-recurring expenses PBDT Depreciation PBT Tax provision PAT Appropriation of profits Dividends Retained earnings Conceptual Framework Table 3.3 (b): Balance Sheet Summary of HDFC Bank Ltd (Rs in cr.) Mar-1999 Mar-2000 Mar-2001 Mar-2002 Mar-2003 Liabilities + Equity: Paid-up equity capital Reserves & surplus Free reserves Specific reserves Deposits Demand deposits Saving deposits Term deposits Borrowings Other liabilities & provisions 200.00 138.93 88.19 50.74 2915.11 981.52 346.51 1587.08 582.88 513.04 243.28 508.24 391.16 117.08 8427.72 2779.91 1124.95 4522.86 1578.74 973.05 243.60 680.16 511.61 168.55 11658.11 2855.98 1903.00 6899.13 1432.90 1602.56 281.37 1669.96 1168.48 501.48 17653.81 4220.18 2957.45 10476.18 2023.02 2159.22 282.05 1969.69 1383.19 586.50 22376.07 4950.96 4663.14 12761.97 2284.65 3511.62 Total liabilities 4349.96 11731.03 15617.33 23819.11 30482.45 Cash & bank balance Investments Advances & loans Deferred tax assets Other assets / stocks Receivables Net fixed assets Intangible/ DRE not written off 539.51 1928.80 1400.56 0.00 0.42 349.12 131.55 0.00 1617.64 5753.28 3462.34 0.00 0.41 660.60 236.76 0.00 3059.53 7145.14 4636.66 0.00 0.56 485.70 289.74 0.00 3863.72 12005.02 6813.72 62.46 0.34 702.75 371.10 0.00 3463.67 13388.58 11754.86 78.11 0.94 1267.71 528.58 0.00 Total assets 4349.96 11731.03 15617.33 23819.11 30482.45 Assets: Table 3.4 (a): Profit and Loss Account for Corporation Bank Ltd (Rs in cr.) Income Mar-1999 Mar-2000 Mar-2001 Mar-2002 Mar-2003 1521.07 1835.86 2049.24 2275.69 2562.91 Interest income 721.88 915.34 1060.69 1945.69 2102.53 Investment / dividend income 634.42 697.86 754.36 18.07 37.40 Others 164.77 222.66 234.19 311.93 422.98 31.45 39.24 47.37 27.14 37.61 2.29 14.43 0.01 25.58 33.76 1554.81 1889.53 2096.62 2328.41 2634.28 Interest expended 978.16 1146.09 1223.21 1320.48 1310.38 Personnel cost 164.95 177.26 200.00 213.90 255.91 46.88 70.00 98.77 128.67 174.19 Other income Non-recurring income Total Expenditure: Prov for contingencies, NPA Insurance premium Other expenses Non-recurring expenses PBDT Depreciation PBT Tax provision PAT 6.29 7.65 8.57 9.37 10.89 98.10 122.40 148.07 163.67 207.44 0.00 5.51 0.00 0.00 0.00 260.43 360.62 418.00 492.32 675.47 18.48 21.78 21.51 31.97 48.86 241.95 338.84 396.49 460.35 626.61 67.05 105.40 134.65 152.25 210.62 174.90 233.44 261.84 308.10 415.99 Appropriation of profits Dividends Retained earnings 46.20 56.34 52.90 52.11 72.82 128.70 177.10 208.94 255.99 343.17 Table 3.4 (b): Balance Sheet Summary of Corporation Bank Ltd (Rs in cr.) Financial Analysis of Banks Liabilities + Equity: Paid-up equity capital 119.99 120.00 120.00 143.44 143.44 Reserves & surplus 854.61 1024.76 1227.70 1902.80 2226.76 Free reserves 641.84 730.66 871.49 1386.75 1463.48 Specific reserves 212.77 294.10 356.21 516.05 763.28 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 15526.63 197.63 296.28 Deposits Borrowings Other liabilities & provisions Total liabilities 1209.43 1041.62 594.95 1423.54 803.35 1200.42 1281.60 1440.22 26367.52 14983.09 16762.28 19703.20 23690.71 Cash & bank balance 2447.79 2453.33 3184.37 3346.12 2429.05 Investments 5510.69 5790.93 6860.34 8143.00 10765.44 Advances & loans 6286.20 7777.47 8666.11 10987.42 12029.17 Deferred tax assets 0.00 0.00 0.00 0.00 0.00 Other assets / stocks 1.34 1.52 1.08 1.41 1.44 Assets Receivables 620.38 595.56 819.33 1013.42 909.47 Net fixed assets 116.69 143.47 171.97 199.34 232.95 0.00 0.00 0.00 0.00 0.00 14983.09 16762.28 19703.20 23690.71 26367.52 Intangible/ DRE not written off Total assets Table 3.5 (a): Common Size Financial Statements of State Bank of India 1999 2000 2001 2002 2003 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% 100.00% 100.00% 100.00% 100.00% 100.00% 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% 8.31% 13.49% 9.89% 13.03% 13.58% 1.39% 1.36% 1.35% 1.31% 1.42% 6.92% 12.14% 8.54% 11.72% 12.16% 2.33% 4.33% 3.22% 4.66% 3.90% 4.59% 7.80% 5.32% 7.06% 8.26% Income Total Expenditure: PBDT Depreciation PBT Tax provision PAT 5 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% 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% 4.52% 4.28% 4.79% 3.66% 3.38% 14.83% 15.81% 14.01% 14.45% 13.50% 100.00% 100.00% 100.00% 100.00% 100.00% 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% 100.00% 100.00% 100.00% 100.00% 100.00% Deposits Borrowings Other liabilities & provisions Total liabilities Assets: Total assets Table 3.5 (b): Common Size Financial Statements of HDFC Bank 1999 2000 2001 2002 2003 99.98% 99.99% 99.90% 99.22% 99.86% Interest income 43.65% 38.88% 43.13% 40.90% 36.46% Investment / dividend income 41.02% 45.54% 43.95% 42.12% 44.59% Others 15.31% 15.57% 12.82% 16.20% 18.82% Other income 0.01% 0.01% 0.05% 0.08% 0.09% Non-recurring income 0.00% 0.00% 0.05% 0.70% 0.04% 100.00% 100.00% 100.00% 100.00% 100.00% 51.60% 46.48% 52.11% 52.34% 47.75% Personnel cost 4.97% 6.03% 5.39% 5.33% 6.09% Prov for contingencies, NPA 1.88% 7.31% 3.66% 4.18% 3.54% Insurance premium 0.36% 0.37% 0.43% 0.41% 0.49% 11.50% 12.33% 12.83% 12.90% 14.99% 0.00% 0.01% 0.04% 0.04% 0.00% 29.69% 27.48% 25.53% 24.81% 27.14% 3.38% 3.29% 3.73% 3.36% 4.25% 26.31% 24.20% 21.80% 21.45% 22.89% 7.76% 9.29% 7.27% 6.97% 7.36% 18.55% 14.91% 14.53% 14.48% 15.53% Income Total Expenditure: Interest expended Other expenses Non-recurring expenses PBDT Depreciation PBT Tax provision PAT Liabilities + Equity: Paid-up equity capital 4.60% 2.07% 1.56% 1.18% 0.93% Reserves & surplus 3.19% 4.33% 4.36% 7.01% 6.46% Free reserves 2.03% 3.33% 3.28% 4.91% 4.54% Specific reserves 1.17% 1.00% 1.08% 2.11% 1.92% 67.01% 71.84% 74.65% 74.12% 73.41% 22.56% 23.70% 18.29% 17.72% 16.24% 7.97% 9.59% 12.19% 12.42% 15.30% 36.48% 38.55% 44.18% 43.98% 41.87% Borrowings 13.40% 13.46% 9.18% 8.49% 7.49% Other liabilities & provisions 11.79% 8.29% 10.26% 9.07% 11.52% 100.00% 100.00% 100.00% 100.00% 100.00% Cash & bank balance 12.40% 13.79% 19.59% 16.22% 11.36% Investments 44.34% 49.04% 45.75% 50.40% 43.92% Advances & loans 32.20% 29.51% 29.69% 28.61% 38.56% Deferred tax assets 0.00% 0.00% 0.00% 0.26% 0.26% Other assets / stocks 0.01% 0.00% 0.00% 0.00% 0.00% 8.03% 5.63% 3.11% 2.95% 4.16% Net fixed assets 3.02% 2.02% 1.86% 1.56% 1.73% Intangible/ DRE not written off 0.00% 0.00% 0.00% 0.00% 0.00% 100.00% 100.00% 100.00% 100.00% 100.00% Deposits Demand deposits Saving deposits Term deposits Total liabilities Financial Analysis of Banks Assets: Receivables Total assets Table 3.5 (c): Common Size Financial Statements of Corporation Bank 1999 2000 2001 2002 2003 97.83% 97.16% 97.74% 97.74% 97.29% Interest income 46.43% 48.44% 50.59% 83.56% 79.81% Investment / dividend income 40.80% 36.93% 35.98% 0.78% 1.42% 10.60% 11.78% 11.17% 13.40% 16.06% Other income 2.02% 2.08% 2.26% 1.17% 1.43% Non-recurring income 0.15% 0.76% 0.00% 1.10% 1.28% 100.00% 100.00% 100.00% 100.00% 100.00% Interest expended 62.91% 60.65% 58.34% 56.71% 49.74% Personnel cost 10.61% 9.38% 9.54% 9.19% 9.71% Prov for contingencies, NPA 3.02% 3.70% 4.71% 5.53% 6.61% Insurance premium 0.40% 0.40% 0.41% 0.40% 0.41% Other expenses 6.31% 6.48% 7.06% 7.03% 7.87% Non-recurring expenses 0.00% 0.29% 0.00% 0.00% 0.00% 16.75% 19.09% 19.94% 21.14% 25.64% 1.19% 1.15% 1.03% 1.37% 1.85% 15.56% 17.93% 18.91% 19.77% 23.79% 4.31% 5.58% 6.42% 6.54% 8.00% 11.25% 12.35% 12.49% 13.23% 15.79% Income Others Total Expenditure: PBDT Depreciation PBT Tax provision PAT Conceptual Framework Liabilities + Equity: Paid-up equity capital 0.80% 0.72% 0.61% 0.61% 0.54% Reserves & surplus 5.70% 6.11% 6.23% 8.03% 8.45% Free reserves 4.28% 4.36% 4.42% 5.85% 5.55% Specific reserves 1.42% 1.75% 1.81% 2.18% 2.89% 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% Other liabilities & provisions 8.07% 6.21% 6.09% 5.41% 5.46% 100.00% 100.00% 100.00% 100.00% 100.00% Cash & bank balance 16.34% 14.64% 16.16% 14.12% 9.21% Investments 36.78% 34.55% 34.82% 34.37% 40.83% Advances & loans 41.96% 46.40% 43.98% 46.38% 45.62% Deferred tax assets 0.00% 0.00% 0.00% 0.00% 0.00% Other assets / stocks 0.01% 0.01% 0.01% 0.01% 0.01% Receivables 4.14% 3.55% 4.16% 4.28% 3.45% Net fixed assets 0.78% 0.86% 0.87% 0.84% 0.88% Intangible/ DRE not written off 0.00% 0.00% 0.00% 0.00% 0.00% 100.00% 100.00% 100.00% 100.00% 100.00% Deposits Total liabilities Assets: Total assets Table 3.6 (a): Trend Analysis of Financial Statements of State Bank of India 1999 2000 2001 2002 2003 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% Non-recurring income 100.00% 4115.95% 1070.38% 3112.98% 5410.38% Total 100.00% 117.38% 134.63% 153.63% 167.73% Interest expended 100.00% 117.08% 136.12% 158.91% 161.83% Personnel cost 100.00% 107.97% 124.38% 124.24% 137.16% Prov for contingencies, NPA 100.00% 84.05% 93.66% 140.43% 178.16% Insurance premium 100.00% 132.27% 145.24% 191.74% 203.77% Other expenses 100.00% 145.67% 247.63% 155.42% 186.61% Non-recurring expenses 100.00% 0.00% 0.00% 3.09% 112.97% 100.00% 190.66% 160.25% 241.02% 274.29% 100.00% 114.90% 131.00% 145.23% 172.30% 100.00% 205.83% 166.11% 260.21% 294.72% 100.00% 218.07% 185.82% 306.65% 280.21% 100.00% 199.61% 156.09% 236.58% 302.10% Income Expenditure: PBDT Depreciation PBT Tax provision PAT Liabilities + Equity: Paid-up equity capital 100.00% 100.00% 100.00% 100.00% 100.00% Reserves & surplus 100.00% 117.67% 130.98% 148.83% 168.86% Free reserves 100.00% 105.37% 97.33% 89.84% 76.66% Specific reserves 100.00% 128.91% 161.70% 202.69% 253.07% 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% Other liabilities & provisions 100.00% 125.28% 134.00% 153.01% 154.41% Total liabilities 100.00% 117.53% 141.86% 157.02% 169.59% Cash & bank balance 100.00% 88.58% 114.09% 122.02% 84.91% Investments 100.00% 128.89% 172.37% 204.80% 243.46% Advances & loans 100.00% 119.11% 137.92% 146.68% 167.26% Other assets / stocks 100.00% 97.56% 106.47% 109.72% 107.97% Receivables 100.00% 163.16% 101.07% 110.99% 130.10% Net fixed assets 100.00% 112.94% 118.22% 110.10% 108.88% 100.00% 117.53% 141.86% 157.02% 169.59% Deposits Financial Analysis of Banks Assets: Deferred tax assets Intangible/ DRE not w/o Total assets Table 3.6 (b): Trend Analysis of Financial Statements of HDFC Bank 1999 2000 2001 2002 2003 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% Non-recurring income 100.00% 0.00% Total 100.00% 181.32% 325.64% 461.88% 561.99% Interest expended 100.00% 163.31% 328.89% 468.51% 520.10% Personnel cost 100.00% 219.99% 353.58% 495.19% 688.80% Prov for contingencies, NPA 100.00% 703.23% 632.74% 1024.73% 1056.03% Insurance premium 100.00% 186.71% 394.30% 529.11% 775.95% Other expenses 100.00% 194.36% 363.31% 518.01% 732.43% 100.00% 167.82% 279.97% 385.90% 513.66% 100.00% 176.17% 359.12% 459.52% 706.66% 100.00% 166.75% 269.80% 376.44% 488.85% 100.00% 217.12% 305.16% 414.56% 532.99% 100.00% 145.68% 255.00% 360.49% 470.39% Income 7400.00% 143800.00% 10800.00% Expenditure: Non-recurring expenses PBDT Depreciation PBT Tax provision PAT Conceptual Framework Liabilities + Equity: Paid-up equity capital 100.00% 121.64% 121.80% 140.69% 141.03% Reserves & surplus 100.00% 365.82% 489.57% 1202.02% 1417.76% Free reserves 100.00% 443.54% 580.12% 1324.96% 1568.42% Specific reserves 100.00% 230.74% 332.18% 988.33% 1155.89% 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% Other liabilities & provisions 100.00% 189.66% 312.37% 420.87% 684.47% Total liabilities 100.00% 269.68% 359.02% 547.57% 700.75% Cash & bank balance 100.00% 299.84% 567.09% 716.15% 642.00% Investments 100.00% 298.28% 370.44% 622.41% 694.14% Advances & loans 100.00% 247.21% 331.06% 486.50% 839.30% Other assets / stocks 100.00% 97.62% 133.33% 80.95% 223.81% Receivables 100.00% 189.22% 139.12% 201.29% 363.12% Net fixed assets 100.00% 179.98% 220.25% 282.10% 401.81% 100.00% 269.68% 359.02% 547.57% 700.75% Deposits Assets: Deferred tax assets Intangible/DRE not w/o Total assets Table 3.6 (c): Trend Analysis of Financial Statements of Corporation Bank 1999 2000 2001 2002 2003 100.00% 120.70% 134.72% 149.61% 168.49% Interest income 100.00% 126.80% 146.93% 269.53% 291.26% Investment / dividend income 100.00% 110.00% 118.91% 2.85% 5.90% Others 100.00% 135.13% 142.13% 189.31% 256.71% Other income 100.00% 124.77% 150.62% 86.30% 119.59% Non-recurring income 100.00% 630.13% 0.44% 1117.03% 1474.24% Total 100.00% 121.53% 134.85% 149.76% 169.43% Interest expended 100.00% 117.17% 125.05% 135.00% 133.96% Personnel cost 100.00% 107.46% 121.25% 129.68% 155.14% Prov for contingencies, NPA 100.00% 149.32% 210.69% 274.47% 371.57% Income Expenditure: Insurance premium 100.00% 121.62% 136.25% 148.97% 173.13% Other expenses 100.00% 124.77% 150.94% 166.84% 211.46% 100.00% 138.47% 160.50% 189.04% 259.37% 100.00% 117.86% 116.40% 173.00% 264.39% 100.00% 140.05% 163.87% 190.27% 258.98% 100.00% 157.20% 200.82% 227.07% 314.12% 100.00% 133.47% 149.71% 176.16% 237.84% Non-recurring expenses PBDT Depreciation PBT Tax provision PAT Liabilities + Equity: Paid-up equity capital 100.00% 100.01% 100.01% 119.54% 119.54% Reserves & surplus 100.00% 119.91% 143.66% 222.65% 260.56% Free reserves 100.00% 113.84% 135.78% 216.06% 228.01% Specific reserves 100.00% 138.22% 167.42% 242.54% 358.73% 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% Other liabilities & provisions 100.00% 86.12% 99.26% 105.97% 119.08% Total liabilities 100.00% 111.87% 131.50% 158.12% 175.98% Cash & bank balance 100.00% 100.23% 130.09% 136.70% 99.23% Investments 100.00% 105.09% 124.49% 147.77% 195.36% Advances & loans 100.00% 123.72% 137.86% 174.79% 191.36% Other assets / stocks 100.00% 113.43% 80.60% 105.22% 107.46% Receivables 100.00% 96.00% 132.07% 163.35% 146.60% Net fixed assets 100.00% 122.95% 147.37% 170.83% 199.63% 100.00% 111.87% 131.50% 158.12% 175.98% Deposits Financial Analysis of Banks Assets: Deferred tax assets Intangible/ DRE not written off Total assets Table 3.7: Important Financial Ratios relevant for Banking Industry for the year 2003 Ratios SBI HDFC Corporation Bank 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% -1.40% -0.92% 3.00% 5.58% 5.20% 1.89% 56.00% 63.50% 18.90% (a) Return on Equity (f) Net Interest Income to Average Assets [(d) – (e)] (g) Non-interest income to Average Assets (h) Non-interest income to Total income (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) 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% 0.94% 0.02% 0.66% Growth Rate of Assets (o) Provision for NPA to Total Loan * This ratio may be low due to accounting treatment on interest received on investments