UNIT 3 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.
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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.
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(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

.... In Corporation Bank.. ................ Balance Sheet and Profit and Loss Account of these banks are given in Table-3..................... An analysis of common size profit and loss account over the years for each bank and between the banks provides certain important insights............................................. highlight your important observations......... ..4...................4 (P&L account) of three banks and highlight your important observations.1 and highlight your important observations of banking industry......................... interest income contribution has gone up from 46% in 1999 to 80% in 2000.............. 2) Go through Table-3..... private sector.................. . and foreign banks......................... a) Common Size Financial Statements Analysis As mentioned earlier................... its dominance has come down over the years except for Corporation Bank........................................................ Table-3.....1 to 3............................... .................................................................. HDFC Bank is a leading hi-tech private sector bank................................ we are using financial statements of Banking Industry........................................... Corporation Bank is one of the best performing PSU Bank and comparable to HDFC Bank in terms of size.................... .on various components................ and Corporation Bank.................. 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...... To illustrate financial statement analysis............ State Bank of India.............................................. 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............................ .5 (a) to (c) provide the common size financial statements of SBI.................... while SBI and HDFC Bank might recognise interest earned on government securities as income from investments........................................... HDFC Bank and Corporation Bank............. This is achieved by taking base year values as 100 and then subsequent years values are adjusted to show the growth rate............... While State Bank of India is the largest public sector bank....... Activity 1 1) Go through Table-3.... Industry figures are based on all the banks including public sector...................................... ........................................ whereas Corporation Bank may show the same under interest 3 9 ............ Financial Analysis of Banks (c) How my company has performed on profitability... ....... For instance........................................2 to 3........ This type of analysis is called ‘Trend Analysis or Time Series Analysis’.. This type of analysis if called ‘Ratio Analysis’ or ‘Du Pont Chart Analysis’................................................................................................ 3) Based on Balance Sheet of the three banks....................................... ............................................................. HDFC Bank Ltd......................................... This sudden change could be purely an accounting issue than real change in the nature of business model of Corporation Bank.......... While interest is important source of income........... productivity of assets and risk? Performance of companies on these parameters is normally assessed through computation of important ratios..............

. Table-3...................... In terms of importance...................... Other income........................... 2) Repeat the above for HDFC Bank and Corporation Bank..... Next to interest expense............ in Corporation Bank................................ ....... 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... Is it good or bad? Though interest rate for term deposits is more................ While deposit constitutes significant portion of sources of capital for all banks. ............ 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............................................................................... .... While HDFC Bank spends about 6% for employees. ............. then its profitability is affected............................................................. .............. Despite such higher spending.......... The hi-tech HDFC Bank reports highest other income compared to the two PSU banks........... One can perform such analysis by observing the trends on each one of financial parameters.. you can observe major differences in components of deposits....... Thanks to VRS schemes and increase in business volume........................................................ However................................................ ............... whereas PSU banks spend almost two times of HDFC Bank................................................. Provision for NPA is lower for newer banks............................................................... Suppose a bank shows a growth rate of 20% in total income but its cost has increased by 26%......... ................................................. the personnel expenditure has come down from 19% to 5% in the last five years for SBI.............Conceptual Framework income............. 4 0 b) Trend Analysis Trend analysis shows the level of growth that banks have achieved over the years on each component of financial statements.................................. Being a hitech bank........................................ .............. profit for the HDFC and Corporation Bank are significantly higher than SBI................ HDFC could attract only 42%.... personnel expenditure share major component.................. The distribution of funds among various assets is by and large same........................... While Corporation Bank enjoys largest percentage of term deposits (59%)............... Investments constitute major uses of funds followed by loans and advances.............................................. the liquidity risk is low and banks can use the amount for longer period............. loans and advances is more than investments for the year 2003.................. A detailed discussion on the Disabilities and Assets of the banks is presented in Blocks 2 and 3 of this course respectively..... Activity-2 1) Highlight strong and weak points of SBI based on common size P&L account.... HDFC Bank spends more on capital equipment and hence larger depreciation...... Investment in fixed assets is relatively small in banking industry........ 3) Why the profitability of SBI is significantly lower despite enjoying economies of scale? ... which mainly consists of fee based income has increased over a period of time and is in the range of 15% to 18%.................6 (a) to (c) show the trends in financial variables.................. ......................................................................................

......................... Corporation Bank is focussing more on lending........... .................................................... HDFC Bank reported a growth rate of 700% during the same period........................ Again........... we will discuss the ratios relevant to banking industry separately............................................................................................................... liquidity ratios highlight the ability of the firms to convert its assets into cash.................5 implies that the company may run out of money as its cash is tied up in unproductive assets................................. productivity of assets/capital and risk associated with operations.................................................................................. Thus.................................................. ....................... c) Ratio Analysis Ratios are aimed to assess profitability.............................................. .................................................................................. HDFC Bank has seen a growth rate of more than 500% during the same period........................ Some of the important ratios in general are discussed below................ the level of comparison is restricted to few ratios........................................................................... ........................ Therefore.... 4 1 ..................................................................... ................. (Refer to MS-4 course material for detailed discussion)..................................................... 2) Growth ratio of HDFC Bank is significantly larger than other two banks? Why? Is it sustainable? ............................................................ .................. Ratio analysis integrates financial statements to assess financial health of the firm........................................................ asset base has gone up around 65%-70% for SBI and Corporation Bank.. Financial Analysis of Banks Activity-3 1) Examine Table-3...... many of these ratios require modification or are not relevant for banking industry and therefore..................................... 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......................................................................... 1) Liquidity Analysis Ratios i) Current Ratio: A firm needs liquid assets to meet day to day payments............. If the ratios are low then it means that money is tied up in stocks and debtors..................................................... .......... It is often viewed that a value less than 1........ Term Deposits has seen major growth in Corporation Bank compared to other two banks.......... 3) How the three banks performed on personnel cost and other operating expenses? .......6 and show how Corporation Bank is different from SBI? ......... This may cause considerable problems for firms in the short run............... ............................................................... money is not available to make payments........... Though one can get some basic idea about the bank or a company from the above ratios while evaluating percentage statement and trend analysis................................................................ Similarly........................ While SBI has started concentrating on Treasury activities...While SBI and Corporation Bank has reported around 68% income growth in the last five years. ............................................................................... However............

However. 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. (2) the rate earned on sales. return-on-investment ratios. and earnings per share. (3) the rate earned on average common stockholders’ equity. a value of approximately 1) is satisfactory. i) Return on Assets (ROA) Net Income Return on Assets (ROA) = ————————— Average Total Assets Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2 4 2 . Alternatively building up a reserve of cash investments may create a sound working capital buffer.e. in order to identify trends in the performance of the business. Ratios should be considered over a period of time (say three years). The calculation used to obtain the ratio is: Net Working Capital Net Working Capital Ratio = ————————— Total Assets Net Working Capital = Current Assets – Current Liabilities 2.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. Having to pay bills before payments are received may be the issue in which case an overdraft could assist. profitability ratios provide a definitive evaluation of the overall effectiveness of management based on the returns generated on sales and investment. and (4) the availability of earnings to common stockholders. so the company may struggle to raise money in the short term. The most widely used profitability measurements are profit margin on sales. The adequacy of your company’s earnings can be measured in terms of (1) the rate earned on average total assets. Being in a liquid position can also have advantages such as being able to negotiate cash discounts with your suppliers. A ratio of 1:1 (i. 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. 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. Similar to income ratios. Profitability Analysis Ratios Profitability ratios are the most significant of the financial ratios. if the value is significantly less than 1 it implies that the company has a large amount of its cash tied up in unproductive assets.

Once the basic expenses are covered.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) / 2 iii) Profit Margin Net Income Profit Margin = —————– Sales Net Income could either be calculated with net profit or Gross Profit. If gross profit rate is continually lower than your average margin. Sales. 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. iv) Gross Profit on Net Sales Gross profit ratio helps to determine whether average markup on goods will consistently cover expenses. which are defined as the sum of tangible fixed assets and net working capital.vary greatly from business to business. Net Sales – Cost of Goods Sold Gross Profit Rate = —————————————— Net Sales Note: This percentage rate can . This is a sign of future problems for bottom line. location. The percentage should be compared with a target rate of return that you have set for the business. profits will rise disproportionately greater than sales above the break-even point of operations. therefore resulting in the desired profit. and intensity of competition are the factors that can affect the gross profit rate. This ratio can be calculated for the entire company or for each of its divisions or operations. something is wrong! Be on the lookout for downward trends in 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. Operating Income Rate of Return = ——————————————— Fixed Assets + Net Working Capital This rate determines whether assets are efficiently used. size of operations.and will . 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 4 3 . even for those within the same industry.

of days (365)/Accounts receivables turnover ratio Sales Accounts Receivable Turnover Ratio = ————————————— Average Accounts Receivable Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2 4 4 . But if you compare it to the EPS from a previous quarter or year. 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. Maintaining a running total of your debtors by ageing (eg. A ratio that is lengthening can be the result of some debtors slowing down in their payments. current. Tightening your business’ credit control procedures may be required in these circumstances. 60 days. saving you from having to calculate it yourself. Economic factors. 30 days. The formula for total asset turnover is: Sales Assets 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. By itself. but outside creditors must furnish more funds to carry on daily operations. we are just saying that for every Re. 1 of assets. Under trading is usually caused by management’s poor use of investment money and their general lack of ingenuity. the turnover is Rs. EPS doesn’t really tell you a whole lot. It may also uncover potential credit or management problems.Conceptual Framework This ratio indicates whether investment in the business is adequately proportionate to sales volume. The debtor ageing ratio has a strong impact on business operations particularly working capital. Net Income Earnings Per Share (EPS) = —————————————————————— Weighted Average No. 90 days) is a good idea. Debtor Ageing Ratio (in days) = No. In its simplest terms. it indicates the rate of growth that a company is earning. Most companies will quote the earnings per share in their financial statements. of Common Shares Outstanding 3. viii) Earnings Per Share (EPS) The earnings per share ratio is mainly useful for companies with publicly traded shares. 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. skill or aggressiveness. Overtrading. presents a potential problem with creditors. Overtrading can come from considerable management skill. or excessive sales volume transacted on a thin margin of investment. x. usually called overtrading and under trading. can also influence the ratio. such as a recession.

............................................................... interest coverage ratio above 2 is good.................................................................................................................. ................................. HDFC Bank and Corporation Bank with industry average? ................................... As a general rule of thumb.................................................................iii) Inventory Turnover Ratio Financial Analysis of Banks The inventory turnover ratio indicates how quickly your business is turning over stock................ the lower the interest coverage ratio can be....... the higher the company’s debt burden........... The history and consistency of earnings is tremendously important............................... The calculation used to obtain the ratio is: Cost of Goods Sold Inventory Turnover Ratio = ————————— Average Inventories Average Inventories = (Beginning Inventories + Ending Inventories) /2 4......... with the shareholders’ funds being significantly larger than the long term liabilities....................... 2) Compare the Productivity of assets/capital of SBI............................ The idea is that this relationship ought to be in balance............................... Capital Structure (Leverage) Analysis Ratios (i) Debt to Equity Ratio Also called as gearing ratio........... 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................................. 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 high ratio may indicate positive factors such as good stock demand and management................................ the lower the ratio........................................................... ........ HDFC Bank and Corporation Bank with industry average? ........................... A low ratio can also be indicative of potential stock valuation issues..... An interest coverage ratio below 1....................... Gearing is concerned with the relationship between the long term liabilities that a business has and its capital employed............... 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.......................0 indicates that the business is having difficulties generating the cash necessary to pay its interest obligations........... ............. 4 5 . The more consistent a company’s earnings......

......... and Equity Multiplier (EM)........... 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..78 1464..................... Asset Turnover Ratio (ATR)...16 349392..... HDFC Bank and Corporation Bank with industry average? ....4 DUPONT MODEL OF FINANCIAL ANALYSIS While ratio analysis helps to a great extent in performing the financial statement analysis......84 25679....67 16802... which will be used to explain DuPont Analysis......23 333837.......... most of the time....92 145993..............78 4506...... Profit and Loss Account and Balance Sheet of State Bank of India P&L A/c Total Income Personnel Operating Exp....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 4 6 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 ....54 17416.........64 1603....81 64930. 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 table given below shows the financial statements of SBI......A..................55 121195...20% 5..70 F.............67 346588. ..............70 373908.........44 349392.....48 20728.......62 37582.....31 173552..........00 Balance sheet 2002 2003 Net Worth Loan Total Liabilities 15555.......19 359846......84 4034............30 6.50 376648....23 14857.. 3...72 6214......30 45181......10 2388. PBIT Interest PBT Tax PAT 2002 2003 34422..24 21109. in a condensed format.. Receivables Investments Other current assets Cash Total Assets Current assets 2415...... one would be left in confusion with umpteen ratio calculation in hand.......................50 138110.....Conceptual Framework 3) Compare the liquidity/solvency of SBI...................... .............................89 5152... The system uses three financial ratios to express the ROA and ROE: Operating Profit Margin Ratio (OPM).63 24763......03 376648...........8 5688.46 4569......78 3105............02 2431.....

........................................................................32 2........... the growth in PAT gives us an impression that everything is good at SBI............. ...14 Current ratio Not Applicable Inventory TO Not Applicable Operating Expenses to sales 13.........94 27.............. The management of SBI needs to concentrate on ways to reduce the cost to sustain such higher profitability......10 0...........42 Profit Margin 71............ ...85 20.....09 16.........46 21..... HDFC Bank and Corporation Bank ratios.... the profit margin net of interest liability (Income-Interest/Sales) has increased from 11...22 56.................... 3) Perform DuPont Analysis for Banking Industry and then compare SBI.. ..................... Though Profit Margin has come down in 2003.... there is no major improvement in SBI’s performance during 2002-03 but decline in interest cost helped SBI to improve profitability...10 Employee Cost to Sales 14.............................................................. This might be purely on account of existing loans carrying higher interest rates........................18 Collection Period 157 days 169 days Interest on Sales 60. In other words......16% in 2003. Highlight the strong and weak areas for each bank......................54 Debtors TO 2... This inference is not apparent when we looked into financial statements in its raw form......... A simple DuPont analysis gives entirely different picture................................94 68.......................72% to 12. .. 2) Perform DuPont Analysis for HDFC Bank and Corporation Bank and summarize your observations...............20 Impact of leverage 18.................... The primary reason for improvement in ROE is on account of lower interest rate..... 4 7 .........................10 Leverage or financial risk 21.................. Both employee cost and operating expenses as a percentage of sales have gone up. The average cost of debt was 6.....................78 Return on Investment 7............73 Current Asset TO 0........................ Actually..........33 Fixed Asset TO 14......87% in 2003.... which is the permanent source of improvement................... Activity-5 1) What is the basic benefit of using the DuPont form of financial statement analysis? ........................75 15....................... ..........17 The above DuPont chart shows an improvement in Return on Equity or Return on Net Worth but profit margin has declined..........................................21% in 2002 but it has declined to 5............97 15.....................................10 0............09 6.......82 Asset Turnover Ratio (ATO) 0....DuPont chart Financial Statement Analysis of State Bank of India 2002 Financial Analysis of Banks 2003 Return on Networth 25.......

we computed profit margin without considering interest expenses. There are some items. For instance higher interest spread does not mean that the bank is in good position. 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. which requires current assets and current liabilities. Similarly. we need to know the term structure of Term Deposit and similarly loans and advances to classify whether they are current or not. 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. Unlike manufacturing industry. The definition of current asset and liabilities is assets and liabilities. But this data is not apparently available in the financial statements and one has to collect from the internal sources.Conceptual Framework 3. the ratio works out to 68% for 2003. While some of the ratios are not relevant. the fixed assets are not used to process the material and generate income. We need to look for five important things when we analyse the financial positions of the bank. which are relevant for the banking industry. Interest expenses are minor for a manufacturing industry whereas for banking industry. we list the following ratios. To give an example. It would lead to wrong conclusion and strategy if the analysis is done on a piecemeal basis. there are ratios which require some modification. there is not much of processing. Considering the special nature of banking industry.7 provides these ratios for the year 2003 for the three banks. It could be simply due to aggressive lending leading to higher NPA or simply on account of higher asset-liability mismatch. For instance. For example. . For SBI.6 4 8 SUMMARY The analysis of Bank’s financial statements consists of a mixture of steps and pieces that interrelate and affect each other. Hence some of the ratios developed for manufacturing industry are not relevant. there is no inventory turnover ratio. though we computed fixed asset ratio. which are difficult to measure. which matures or converts within a year. For instance. 3. where banks trade on capital or funds. normally we compute current ratio.5 SPECIAL ISSUES IN FINANCIAL ANALYSIS OF BANKING INDUSTRY Banking industry is like trading company. if you want to measure liquidity. it is a major expense item.

18 PBIT 6240.96 1464.Financial Analysis of Banks a) Whether the bank is growing or not? We use trend analysis to answer this question. fee based income)? This shows the capability of offering services and leveraging customer base for such services.91 Other current assets 26178. this ratio assumes importance.13 121260.67 6214. 9. 1135. the debt to equity ratio of the bank is 10:1. 3.18 Current assets 74947. 2002 2003 3359.82 122034. Suppose in the above example. Find the impact of leverage on return on equity. What is the impact of such lower debt to equity ratio on return on equity? 8. Explain three important profitability ratios with examples drawn from bank statements. Suppose a bank raises deposits at 6% and lends at 8%.69 773. c) Whether the bank is able to increase non-fund based income (i. What is DuPont Analysis? Perform DuPont Analysis based on the inputs given below: 2002 2003 Sales Income Statement 8674.65 Total Assets 75468.A. 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.31 Receivables 3209.61 56231. Differentiate between common size analysis and trend analysis.56 Interest 5223.89 116590. measures like Value-at-Risk (VAR) are used.e.24% 6. 7.52 Total Liabilities 75468.29 44747.46 Investments 31534.27 Op. Identify at least five ratios that are not relevant for banking industry but are important for other industries. Refer to the Financial statements of HDFC given in Table-3.3 (a) and (b).73 18439.88 Tax 403.67 7240. What do we achieve by analysing financial statements that we are not able to achieve while reading financial statements? 2. 4.21% Cost of debt 10.26 521.29 7.02 PAT 612.40 Loan 72108. How financial statement analysis of banks differs from similar analysis of manufacturing companies? 5.89 PBT 1016.57 37582.91 14638.93 5443.77 16974.31 5642.74 Cash 14024.48 Balance sheet Personnel 1298.82 122034.85 Net Worth F. And answer the following questions: 4 9 .50 5688. 3. 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. Is it good? Is it possible for banks to operate with low debt to equity ratio? 6.Exp. Debt to equity ratio of banks is very high compared to other industries.7 SELF ASSESSMENT QUESTIONS 1.40 25679. The debt to equity ratio of the bank is 20:1.

Which items improved over the 5 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. Lebahar-Friedman. John Wiley & Sons. 1999. 1997. . How has the ROE trend changed over the 5 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 5 for all regional banks. McGraw-Hill. Report as to which of the assets on the bankís balance sheet increased over the last 5 years? Which assets on the bank’s balance sheet declined over the last 5 years? b) Examine the liquidity position of the bank over the last 5 years. Leopold Bernstein and John Wild. 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. 1994. 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. Using the income statement for each year: a) Create an income statement with operating income items expressed as a percentage of total operating income. Jensen. 1997. Accounting for Effective Decision Making. How has the ROA trend changed over the 5 years? How Compare the Bank’s performance with the public sector banks? b) Calculate the return on equity (ROE) for each year.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. In other words.8 5 0 Analyze the performance of the bank for each year: a) Calculate the return on assets (ROA) for each year. Sixth Edition. Advanced Accounting. Daniel L. You are being asked to prepare a bank performing analysis for the 5 years ending 2003. Prentice Hall. Analysis of Financial Statements. Which items improved over the 5 years? Which trends need to be reversed? How does the bank performed in comparison to the PSU banks? 3. Martin Mellman et. Accounting and Finance for Non-Specialists. White. Gerald I. Eric Press. 1997.) 2. Understanding Financial Statements. 2001. McGraw-Hill College Publishing. What is the relationship between the HDFC bank trends and the year 5 comparison with the PSUs? FURTHER READINGS Peter Atrill and Eddie McLaney. A. The Analysis and Use of Financial Statements. 3. 2000. Using balance sheet and income statement data create a bank analysis and performance report for your supervisor that addresses the following issues: 1. al. prepare the balance sheet showing all assets as a percentage of total assets and liabilities as a percentage of total liabilities. Analyzing Financial Statements. L M and Ormiston. Fraser. Prentice Hall of India Private Ltd. a) Using the balance sheet for each year: Prepare the common size financial statement analysis. New Delhi. Irwin Professional Press.

55 8486.30 Term deposits 413644.47 219653..89 41168.04 Saving deposits 133851.60 7247.99 529.02 Others 78.85 9261.22 1705.85 1427.59 4103.38 114255.43 Borrowings 28790.18 2273.07 256583.78 11937.74 53.29 540.50 Bills discounting 16.78 82697.63 56676.15 509.32 16914.07 3238.24 78629.83 11521.63 12098.41 2363.86 40.28 71513.87 10507.30 Leasing & hire services 366.87 1288.20 246.19 88.96 18384.79 1192.30 7898.64 940552.72 6896.05 901760.14 10880.67 4988.20 13880.30 3136.68 6231..84 60984.02 117154.51 540.43 973.25 1345.68 13083.70 98860.81 1670.74 60767.15 Gain on security transactions 1863.92 51091.07 3650.63 55856.11 950.10 5990. NPA Insurance premium Other expenses Non-recurring expenses PBDT Depreciation PBT Tax provision PAT Appropriation of profits Dividends Retained earnings Table 3.89 3063.73 29323.13 2654.1 (b): Balance Sheet of Banking Industry as at end of March .58 8863.28 16609.22 1297361.03 10452.16 1569.71 132413.48 7395.58 130899.25 9740.98 769093.69 14050.67 21184.45 7308..94 Reserves & surplus 24894.01 48.TABLES Financial Analysis of Banks Table 3.97 36290.01 91727.58 158683.20 1069.53 9245. in cr.43 6536..13 2138.39 Commission & brokerage 6476.35 7310..64 2.32 100808.27 10433.09 Financial institutional 7446.25 47969.17 3915.32 1105840..79 9729.72 904.99 3977.30 Debentures & bonds 2586.17 366.88 4400.91 101161.22 6022.94 69564.97 21682.72 16787.04 90849.85 6284..27 Banks 5450.16 1130.58 18536.26 6. in cr.88 642426.41 Investment / dividend income 29608.97 20552.09 479.24 254.34 68034.75 10752.79 380.05 6480.45 43707.73 470..85 440.03 8923.52 140313.53 Current liabilities 69217.23 Other income 1066.50 583465.53 Total Expenditure: Interest expended Personnel cost Prov.19 4241.27 5941.) 1998 1999 2000 2001 2002 Paid-up equity capital 19323.58 20038.12 420.75 501792.32 14098.77 403.63 1270..64 129156.81 RBI 836.54 0..85 153866.30 424.13 207.91 2321.58 784899.82 699766.91 189138..70 2202.31 8899.66 1541976.38 6481.10 10856.02 1492.81 1059733.65 108616.) 1998 1999 2000 2001 2002 Income 84940.85 154311.80 8158..02 2007.53 Non-recurring income 2712.21 8093.20 180.36 150693.99 19116.02 18015.71 Gain on forex transactions 2334.65 227.64 58400.68 11719.85 20721.43 9558.92 6798.92 15536.36 6625.20 14383.50 1003.22 11413.19 36696.06 41804.38 988.94 1197.46 1005.01 133546.19 12047.64 38160. (Rs.00 2464.65 1211429.48 1414.96 630.44 50265.15 88719.55 16177.24 5586.41 8477.05 2139.95 19234.37 1395.10 115529.09 8323.83 88752.25 2588.94 12888.77 94930.83 Deposits Demand deposits Government Foreign borrowings Provisions Total liabilities 5 1 . (Rs.73 800980.1 (a): Profit and Loss Account of Banking Industry as at end March . for contingencies.67 15474.12 Others 11135.60 10728.49 11478.68 Interest income 44197..16 12.79 14895..14 Other borrowings 626.41 2587.

68 794.46 1470.8 13044.00 233.21 14374.57 1744.11 4569. NPA.55 522.78 2204.01 191842.35 21913.77 34422.94 2691.00 200103.90 129717.00 37.47 271959. in crores) Mar-1999 Mar-2000 Mar-2001 Mar-2002 Mar-2003 Income Interest income Investment / dividend income Others Other income Non-recurring income 22311.64 940552.56 447991.2 (a): Profit and Loss Account for State Bank of India 5 2 (Rs.36 1861.22 11925.54 Mutual funds 1827.68 2600.11 2993.67 338064.82 Approved securities 28701.00 1910.78 34.98 1088.38 356.57 1550.51 529944.62 21109.14 244619.00 Cash & bank balance 131206.84 504.89 535.72 2797.90 230.52 26965.89 37582.41 231.16 Gross fixed assets 18286.05 5104.Conceptual Framework Banking Services Rs.66 14957.93 Term advances 102136.20 4485.73 142.84 5152.30 1583.12 306.42 2968.48 107.64 60293.17 8099.72 45379.04 4034.76 Total 22406.99 62552.68 8717.02 5158.10 414519.61 202544.51 15751.46 5688.51 26299.77 Government securities 185598.56 53704.97 2873.80 Assisted companies 5.67 227.82 10.23 7647.29 95548.80 36621.60 70290.32 1086.13 3411.53 10118.56 Investments 270886.14 703.16 11522.17 11814.97 32029.86 2575.71 64987.73 233.10 151.87 81495. Insurance premium Other expenses Non-recurring expenses PBDT Depreciation PBT Tax provision PAT Appropriation of profits Dividends Retained earnings .62 25.61 407.26 315.80 15272.42 Less: cumulative depreciation Net fixed assets 5329.77 0.39 15394.78 2115.90 Bills receivables 33812.82 169022.17 708.75 3141.22 33781.85 5397.00 0. for contingencies.23 6269.54 3868.02 269685.09 20537.00 0.82 3949. Crore (Non-Annualised) 199803.47 406.50 1689.53 98.32 431509.30 0.85 622.98 2051.69 325593.19 29755.95 58060.92 343005.23 5253.00 0.78 49807.95 Subsidiaries / associates 2504.44 2028.89 6951.31 12694.00 3548.82 166800.63 207130.55 111.02 2431.87 15829.88 160567.00 3383.78 3105.32 Expenditure: Interest expended Personnel cost Prov.00 200203.04 26697.58 4477.53 1139.00 0.45 11258.43 493633.75 1027.96 36446.83 5.17 0.63 252.33 10.78 784899.47 219.44 4147.78 1464.25 13.48 15538.98 289.15 0.87 1319.76 9571.61 971.66 1541976.37 191636.72 288203.02 74.45 8027.33 539.24 21730.80 4988.85 3191.68 451.00 0.93 7094.22 1297361.00 591028.65 5088.38 652204.29 41575.81 Advances & loans 323931.00 0.55 17756.83 Debentures / PSU bonds Others Deferred tax assets Other assets / stocks Receivables Future lease rent receivable Intangible/ DRE not written off Total assets Table 3.83 9.80 5463.10 25649.32 1105840.18 82.49 14636.64 1603.03 270.80 24322.23 10558.31 8570.00 2982.58 216.83 30166.47 368708.99 1314.59 49681.33 21007.18 16579.27 Short term / demand advances 187981.40 1570.12 310.40 0.36 1604.31 12956.89 140.00 200003.77 228968.00 199903.33 Other companies 4402.40 32462.18 3540.25 20728.16 19.93 26997.54 42804.28 43901.

03 261504.70 95.28 48.00 1444.18 22.00 0.08 16677.05 40328.07 0.42 1.25 41506.18 76.14 296123.95 99.87 34.36 264.28 13529.30 526.95 88.96 151.84 98101. Insurance premium Other expenses Non-recurring expenses PBDT Depreciation PBT Tax provision PAT Appropriation of profits Dividends Retained earnings 5 3 .08 Free reserves 4714.58 51.) Mar-1999 Mar-2000 Mar-2001 Mar-2002 Mar-2003 Income Interest income Investment / dividend income Others Other income Non-recurring income 444.61 12765.09 366.24 14698.37 270560.07 242828.53 58.94 142.18 64930.79 44772.24 0.30 526.37 1.28 30692.62 910.74 2035.31 2415.08 Total 444.61 2593.07 229.34 226.26 4235.32 1446.43 70.3 (a): Profit and Loss Account for HDFC Bank Ltd.08 193.37 0. (Rs.60 28.55 0.19 349392.31 2193.08 42312.21 83.00 0.13 11193.44 75.92 8346.24 313.23 185.92 17416.48 145993.52 Advances & loans 82359.30 526.80 36.39 12.90 275.14 169041.88 74.66 2477.00 677.Table 3.95 Other liabilities & provisions 33001.86 2.15 805.93 196821.78 125.27 120806.68 122876.49 154606.87 171850.53 47893.00 0.00 2271.19 Borrowings 10063.97 113590.00 0.03 36182.60 53.25 53. for contingencies.77 8.98 12935.02 863.46 106.33 2051.75 78.64 14.26 0.96 6.05 0.66 41343.38 2492.31 105.83 53. in crores) Mar-1999 Mar-2000 Mar-2001 Mar-2002 Mar-2003 526.97 332.67 377356. in cr. NPA.10 221.44 60709.19 210.06 4588.46 194.38 Financial Analysis of Banks Liabilities + Equity: Paid-up equity capital Deposits Demand deposits Saving deposits 34321.00 709.60 369.60 47136.55 173552.00 312.53 14857.84 120.03 222509.36 65782.43 2496.81 13063.04 753.24 85.87 6653.71 104028.34 26.94 315.47 137758.81 508.90 297.54 0.62 12781.01 805.02 1112.95 315644.63 Term deposits Total liabilities Assets: Deferred tax assets Other assets / stocks 69.29 222509.67 67.54 0.94 Specific reserves 5161.2 (b): Balance Sheet Summary of State Bank of India (Rs.37 1.23 2388.96 69.14 4967.04 1191.67 377356.41 15133.65 2.30 526.01 11620.19 44220.72 387.27 3613.46 0.93 291.46 0.26 374.99 185568.02 116.20 68.52 91878.74 21842.30 Reserves & surplus 9876.12 1073.41 839.06 0.03 261504.97 74.00 52.65 119132.87 635.69 156.98 10462.88 182.00 131.89 15.06 8.40 374.08 0.42 56396.67 Expenditure: Interest expended Personnel cost Prov.22 13386.74 109.14 571.74 Cash & bank balance 53212.03 Investments 71286.67 0.47 82.95 469.74 Receivables Net fixed assets Intangible/ DRE not written off Total assets Table 3.95 315644.19 349392.59 185.69 50957.66 50495.02 439.16 45181.92 623.32 183.

37 1669.19 311.98 31.00 3863.07 4950.11 30482.90 52.51 1587.Conceptual Framework Table 3.40 134.05 1969.07 37.65 8.13 1432.3 (b): Balance Sheet Summary of HDFC Bank Ltd.14 4636. for contingencies.37 27.62 Total liabilities 4349.95 338.00 0.00 98.70 177. Insurance premium Other expenses Non-recurring expenses PBDT Depreciation PBT Tax provision PAT 6.34 1060.10 0.95 177.16 511.32 675.99 343.38 Personnel cost 164.35 626.66 0.86 241.61 67.28 3462.04 243.00 6899.91 1124.10 208.72 2779.51 1928.62 174.) 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. in cr.17 .84 396.00 Total assets 4349.43 0.02 6813.46 0.00 0.55 0.00 1617.91 46.20 56.56 0.25 210.33 23819.90 255.41 2634.00 3059.74 2915.99 Appropriation of profits Dividends 5 4 Retained earnings 46.97 2284.77 222.00 0.45 39.48 501.72 12005.11 72.97 48.34 52.55 11658.56 281.26 200.45 Cash & bank balance Investments Advances & loans Deferred tax assets Other assets / stocks Receivables Net fixed assets Intangible/ DRE not written off 539.10 415.47 18.34 0.76 0.28 Interest expended 978.58 0.48 1310.93 88.10 122.03 15617.96 4663.57 9.14 12761.44 0. (Rs.88 513.64 5753.05 105.78 21.95 4522.19 Other income Non-recurring income Total Expenditure: Prov.94 1267.96 11731.00 5.51 31.07 163.81 4220.16 117.82 128.89 98.44 261.93 422.66 234.96 11731.94 255.56 485.19 50.01 25.71 528.45 Assets: Table 3.34 702.28 508.53 2096.62 418.86 2049.00 260.00 3463.48 17653.58 33.05 243. (Rs.67 174.18 2957.86 754.03 15617.00 492.12 131.74 973.76 1554.91 Interest income 721.21 1320.29 14.61 168.19 586.65 152.88 70.67 13388.14 37.42 697. NPA.88 915.69 1945.72 62.86 78.40 148.11 0.11 30482.09 1223.53 7145.90 233.43 360.24 391.16 1146.4 (a): Profit and Loss Account for Corporation Bank Ltd.00 0.50 22376.69 1383.37 10.52 346.69 2562.02 2159.07 1835.00 0.67 207.51 0.74 0.49 460.58 11754.90 1602.69 2102.75 371.40 Others 164.00 213.45 10476.24 47.33 23819.29 7.96 1168.11 981.08 582.00 138.36 18.) Income Mar-1999 Mar-2000 Mar-2001 Mar-2002 Mar-2003 1521.77 128.42 349.86 1578.41 660.61 2.53 Investment / dividend income 634.81 1889.18 2023.60 236.24 2275.80 1400.62 2328.70 289.60 680.98 1903.22 282.08 8427.11 2855. in cr.65 3511.84 308.48 21.

36% 1.44 Reserves & surplus 854.20 7777.76 Free reserves 641.44% Interest income 51.03% 17.51% 17.13% 36.66 871.93 6860.14% Prov.Table 3.00 143.52 14983.28 19703.91% 5.42 12029.90% 4.38 595.43 14279. (Rs.02% 8.26% Income Total Expenditure: PBDT Depreciation PBT Tax provision PAT 5 5 .62 594.60 1440.42 909.40% 7.86% 60.00 0.66 2314.12 2429.40% Non-recurring expenses 2.33% 4.39% 1.71 26367.69 143.28 12601.27 21724.00% 100.90% 0.37% 0.34 8143. in cr.58 1957.89% 13.97% 15.62 16560.39% 37.17 Deferred tax assets 0.01% 5.47 8666.00 0.66% 3.33 1013.21 516.00 120.09 2136.) Financial Analysis of Banks Liabilities + Equity: Paid-up equity capital 119.61 1024.14% 97.46% 1.08 1.87% 8.49% 9.00 0.44% Insurance premium 0.48 Specific reserves 212. for contingencies.33% 3.00 0.00 14983.22% 4.00% 100.78% 0.57 Demand deposits 1647.00 Other assets / stocks 1.36% Other income 0.00 0.70 1902.64% 98.05 Investments 5510.57% 97.18 15526.33% 0.31% 13.09 16762.34 232.80 2226.12% Investment / dividend income 34.44 143.76% 40.42% 0.92% 12.40% Other expenses 4.49 1386.09 16762.24% 14.44 Assets Receivables 620.02% 4.53% 98.76 1227.22 26367.37% 0.81 12176.87% 6.41 1.5 (a): Common Size Financial Statements of State Bank of India 1999 2000 2001 2002 2003 99.03% 13.92% 4.80% 5.00% 100.06% 2.34 1.59% 7.18% 1.52 1.75 1463.06% 8.14% 42.16% 2.47 Net fixed assets 116.42% 6.35% 1.05 763.79 2453.10% 14.95 1423.54% 11.05% 0.33 3184.85% 6.57 10411.35 1200.44 Advances & loans 6286. 7.50 Term deposits 9354.00% 100.06 3275.47 171.52 Intangible/ DRE not written off Total assets Table 3.67% Non-recurring income 0.28 Deposits Borrowings Other liabilities & provisions Total liabilities 1209.44 Saving deposits 1599.96% Others 14.97 199.07% 58.27% 49.69 5790.54 803.99 120.90 2609.87% 11.72 2246.11 10987.06% 1.17% Personnel cost 18.00 0.72% 12.14% 8.63 296.95 0.22% 56.13 18924.20 23690.00 0.73% 11.02% 12.36% 0.28 19703.57 14001.84 730.42 1281.43 1041.03 2922.00% Interest expended 58.63 197.00% 0.28 1910.32% 41.00 10765.56 819.10 356.31% 1.58% 45.41% 0.42% 48.00% 0.37 3346.71 Cash & bank balance 2447.00 0.22% 58.32% 7.4 (b): Balance Sheet Summary of Corporation Bank Ltd.20 23690.58% 1.77 294. NPA.68% 0.89% 100.

54% 2.21% 4.98% 49. NPA.44% 78.64% 2.5 (b): Common Size Financial Statements of HDFC Bank 1999 2000 2001 2002 2003 99.86% Saving deposits 15.11% 52.79% 13.01% 0.00% 0.15% 0.54% 43.65% 38.00% 0.90% 1. 1.95% 0.59% Others 15.97% 75.22% 99.83% 12.48% 15.27% 6.48% 25.41% 0.20% 0.69% 27.66% 4.42% 15.29% 7.02% 0.81% 27.25% 26.78% 45.78% 12.24% 0.52% 4.93% 41.01% 14.76% 9.43% Term deposits 46.60% 46.31% 15.02% 45.88% 7.49% 11.99% 34.18% 3.00% Cash & bank balance 23.97% Investments 32.45% 1.98% 99.17% 16.09% Non-recurring income 0.99% Advances & loans 37.99% 3.00% 0.02% 8.00% 100.04% 0.55% 14.72% 0.34% 47.43% 0.04% 0.90% 36.93% 77.53% 24.00% 100.87% 15.73% 3.39% 5.90% 14.99% 0.09% Prov.36% 4.42% Free reserves 2.00% 100.56% 48.82% Other income 0.29% 3.03% 0.51% Deferred tax assets 0.14% 17.84% 12.00% 100.23% 18.25% 4.99% 0.33% 6.04% 35.14% Reserves & surplus 4.09% 0.20% 18.07% Other assets / stocks 0.19% 100.90% 99.54% Insurance premium 0.50% 100.00% 0.32% 2.00% 0.13% 38.29% 4.44% 4.00% 0.08% 0.01% 0.01% 0.70% 0.91% 18.47% Demand deposits 13.00% 51.80% 21.00% 100.Conceptual Framework Liabilities + Equity: Paid-up equity capital 0.81% 14.00% 100.97% 6.03% 19.00% 100.86% Interest income 43.00% 0.17% 0.12% 1.97% 7.48% 52.13% 40.26% 76.69% 0.14% 3.38% 14. for contingencies.37% 0.38% 3.83% 15.33% 12.58% 11.05% 0.79% 3.05% 0.02% 0.53% 14.00% Deposits Borrowings Other liabilities & provisions Total liabilities Assets: Total assets Table 3.82% 0.57% 12.99% 99.31% 3.91% 14.63% Intangible/ DRE not written off 0.89% 7.00% 0.62% Net fixed assets 0.00% 29.03% 0.82% 16.36% 0.45% 22.01% 37.04% 100.46% Investment / dividend income 41.00% 100.28% 4.19% 49.31% 24.75% Personnel cost 4.20% 21.45% 13.36% 18.11% 11.12% 44.18% 4.66% 3.00% 100.02% Receivables 6.96% Specific reserves 2.21% 0.03% 5.44% 4.88% 43.00% 0.53% Income Total Expenditure: Interest expended Other expenses Non-recurring expenses PBDT Depreciation PBT Tax provision PAT 5 6 .00% 100.00% 100.75% 45.35% 4.58% 36.46% 75.95% 42.51% 35.00% 100.50% 12.10% 4.

00% 0.40% 43.00% Cash & bank balance 12.26% 9.74% Personnel cost 10.75% 19.98% 41.25% 12.79% 19.40% 0.00% Interest expended 62.83% 97.29% 10.14% 25.93% 18.52% 100.61% 38.29% 0.08% 2.00% 100.15% 1.74% 97.01% 71.34% 49.31% 6.54% 9.74% 97.00% 11.04% 45.46% 9.42% 10.09% 19.03% 5.95% 4.61% 9.28% 4.00% 100.44% 50.23% 15.00% 100.33% 4.91% 4.87% Non-recurring expenses 0.76% 0.70% 4.97% 9.01% 0.58% 6.00% 0.02% 2.79% 4.71% 49.43% 48.51% 29.02% 1.02% 3.63% 3.03% 3.00% 100.46% Free reserves 2.56% Deferred tax assets 0.00% 1. for contingencies.00% 100.28% 100.41% 22.79% 8.34% 56.00% 0.93% 35.56% 1.54% 8.02% 2.00% 100.48% 7.40% 13.24% 7.78% 1.00% 100.77% 23.00% 0.64% 1.29% 17.00% 0.00% 0.17% 13.20% 29.00% 0.16% Net fixed assets 3.65% 74.81% Investment / dividend income 40.30% 36.56% 1.00% 100.07% 1.60% 2.00% 100.56% 23.01% 6.10% 1.56% 79.91% 19.72% 16.94% 21.59% 16. 3.19% 1.00% 100.00% 100.87% Borrowings 13.86% 1.92% Advances & loans 32.00% 0.79% Income Others Total Expenditure: PBDT Depreciation PBT Tax provision PAT 5 7 .00% 100.26% 1.11% 1.54% Specific reserves 1.60% 11.40% 0.61% Insurance premium 0.18% 43. NPA.38% 9.00% 0.5 (c): Common Size Financial Statements of Corporation Bank 1999 2000 2001 2002 2003 97.33% 3.71% Prov.26% 0.59% 83.17% 1.15% 0.00% 100.71% 5.18% 8.16% 97.41% 0.36% Investments 44.55% 44.06% 7.40% 13.73% Intangible/ DRE not written off 0.00% 8.29% Interest income 46.40% 0.22% 11.49% 13.41% Other expenses 6.31% 5.18% 0.65% 58.36% 7.11% 2.56% 17.80% 36.07% 11.19% 12.00% 0.49% 7.43% Non-recurring income 0.92% 67.70% 18.48% 38.00% Deposits Demand deposits Saving deposits Term deposits Total liabilities Financial Analysis of Banks Assets: Receivables Total assets Table 3.00% 0.00% 16.19% 9.93% Reserves & surplus 3.75% 50.37% 1.98% 0.00% 0.78% 11.19% 4.12% 73.26% Other assets / stocks 0.49% Other liabilities & provisions 11.Liabilities + Equity: Paid-up equity capital 4.40% 16.42% 6.00% 1.17% 1.03% 1.85% 15.08% 2.91% 60.35% 12.53% 6.69% 28.03% 7.84% 74.42% 15.00% 0.59% 12.06% Other income 2.

07% 185.14% 3.01% 0.07% 6.97% 124.00% 125.00% 135.00% 100.00% 145.01% Receivables 4.36% 4. 100.72% 100.38% Total 100.00% 100.61% 156.43% 178.81% 134.82% 306.6 (a): Trend Analysis of Financial Statements of State Bank of India 1999 2000 2001 2002 2003 100.00% 100.21% Investments 36.24% 137.01% 0.96% 46.85% 137.36% 329.00% 3.00% 0.29% 100.00% 114.77% 11.19% 84.00% 0.00% 0.09% 236.00% 100.30% Others 100.16% 14.23% 8.78% 34.00% 145.00% Cash & bank balance 16.61% 0.77% Other expenses 100.38% 3112.86% 0.01% 3.83% Personnel cost 100.01% 12.42% 186.42% Term deposits 62.40% 10.54% Reserves & surplus 5.21% 187.40% 43.00% 100.41% 5.10% 58.14% Interest income 100.00% 0.83% Advances & loans 41.16% Insurance premium 100.30% 100.00% 0.11% 6.83% 166.58% 302.55% 4.28% 3.00% 0.01% 0.02% 274.09% 112.15% 147.89% Borrowings 1.08% 136.63% 167.84% 0.66% 140.98% 5410.05% Other liabilities & provisions 8.00% 190.00% 117.00% 100.75% 1.91% 161.70% 123.61% Non-recurring expenses 100.45% Free reserves 4.59% Non-recurring income 100.28% 4.40% 11.23% 172.80% 0.43% 62.18% 129.00% 114.68% 11.65% 280.77% 3.25% 241.00% 110.00% 100.11% 61.08% Saving deposits 10.12% 9.00% Other assets / stocks 0.61% 0.84% 9.87% 0.21% 6.09% 5.05% 79.88% Intangible/ DRE not written off 0.24% 191.00% 0. for contingencies.42% 1.10% 85.00% 132.41% 164.35% 284.16% 4.27% 145.45% Net fixed assets 0.72% 0.83% Other income 100.82% 34.00% 84.Conceptual Framework Liabilities + Equity: Paid-up equity capital 0.67% 247.16% 171.38% 45.02% 306.03% 8.10% Income Expenditure: PBDT Depreciation PBT Tax provision 5 8 PAT .88% 82.66% 160.42% 5.00% 205. NPA.11% 260.73% Interest expended 100.81% 2.34% 14.00% 107.64% 16.80% 59.70% 6.02% 6.18% 2.00% 0.62% Deferred tax assets 0.55% Specific reserves 1.00% 0.99% 11.72% 112.16% Prov.78% 0.32% 1.95% 1070.05% 93.55% 34.89% 84.38% 124.98% 46.96% 201.00% Deposits Total liabilities Assets: Total assets Table 3.63% 155.37% 151.90% 131.85% 5.68% 11.00% 100.00% 199.00% 107.39% Demand deposits 10.46% 100.00% 218.00% 117.37% 40.38% 134.00% 100.21% 100.00% 4115.74% 203.96% 133.01% 0.00% 0.63% 153.38% Investment/dividend income 100.12% 158.97% 100.21% 294.

00% 360.30% Interest income 100.65% 160.00% 0.91% 161.38% Borrowings 100.33% 325.39% Income 7400.07% 100.09% 122.69% 253.51% 520.64% 461.54% 164.98% 148.67% 2733.68% 167.12% 305.66% Other income 100.11% 137.85% 690.52% 706.00% 100.95% Other expenses 100.00% 125.01% 126.00% 117.00% 176.36% 363.84% 474.83% 168.00% 163.86% Other liabilities & provisions 100.00% 194.84% Others 100.10% 108.97% 385.89% 172.19% 610.03% Insurance premium 100.30% 529.00% 120.91% Investments 100.90% 513.56% 532.31% 328.94% 118.49% 470.72% 107.10% Net fixed assets 100.37% 458.00% 167.32% 191.94% 139.66% 100.00% Total 100.00% 201.00% 112.00% 116.01% 732.28% 134.62% 165.00% 117.00% 161.00% Reserves & surplus 100.20% 178.53% 141.00% 100.40% 137.43% 143.80% 243.33% 1116.88% Saving deposits 100.00% 143800.71% 394.53% 141.00% 117.46% Advances & loans 100.17% 359.47% 109.00% 181.00% 111.92% 146.02% 169.31% 518.85% 100.86% 145.70% 202.00% 117.12% 459.00% 217.02% 169.84% 76.00% 145.00% 100. NPA.00% 128.75% 269.00% Expenditure: Non-recurring expenses PBDT Depreciation PBT Tax provision PAT 5 9 .82% 279.56% 106.37% Investment/dividend Income 100.74% 488.18% Demand deposits 100.74% 1024.89% 131.00% 10800.Liabilities + Equity: Paid-up equity capital 100.34% 561.89% 468.00% 219.16% 101.00% 88.80% 376.33% 89.00% 163.88% 561.00% 97.58% 495.67% 130.59% Cash & bank balance 100.10% Personnel cost 100.00% 128.75% 469.66% 100.86% 157.31% 348. for contingencies.73% 1056.07% 110.66% Specific reserves 100.52% 148.68% 255.99% 100.00% 181.00% 166.59% Deposits Financial Analysis of Banks Assets: Deferred tax assets Intangible/ DRE not w/o Total assets Table 3.99% 353.67% Term deposits 100.06% 175.39% 127.37% 204.97% Receivables 100.6 (b): Trend Analysis of Financial Statements of HDFC Bank 1999 2000 2001 2002 2003 100.00% 105.00% 114.33% 3950.00% 153.01% 154.80% Prov.58% 114. 100.00% 100.11% 775.88% 100.00% 119.00% Non-recurring income 100.32% 325.26% Other assets / stocks 100.86% 157.37% 272.00% 186.22% 110.00% 133.41% Total liabilities 100.23% 150.23% 632.00% 184.37% 97.99% 130.86% Free reserves 100.00% 703.44% 488.19% 688.99% Interest expended 100.02% 84.49% 321.16% 414.78% 432.43% 100.

30% 119.24% Total 100.02% 547.00% 138.25% 282.95% 223.53% 134.83% 347.13% Other expenses 100.96% 504.71% 660.77% 150.39% 100.61% 168.47% 149.03% 1474.18% 988.43% Interest expended 100.00% 121.80% 146.00% Investments 100.50% 189.10% 399.33% 80.12% 100.25% 148.00% 269.44% 622.00% 324.87% 190.54% 580.33% 1155.90% Others 100.14% Advances & loans 100.47% 371.09% 804.Conceptual Framework Liabilities + Equity: Paid-up equity capital 100.00% 135.17% 125.02% 547.68% 155.29% 363.62% 86.00% 289.32% 210.22% 290.93% 269.81% Receivables 100. for contingencies.00% 283.41% 694.96% Other liabilities & provisions 100.47% Total liabilities 100.07% 391.14% Prov.85% 245.37% 100.87% 684.12% 201.31% 256.98% 434.82% 227.60% 767.00% 133.05% 135.00% 179.70% 134.98% 100.00% 630.12% 1324.44% 1117.00% 189.42% Saving deposits 100. 100.57% 700.00% 269.53% 291.00% 149.13% 142.00% 120.96% Personnel cost 100.80% 140.28% 370.64% 121.00% 117.00% 121.77% 150.27% 258.57% Income Expenditure: Insurance premium 100.89% 100.59% Demand deposits 100.84% 567.00% 299.21% 331.00% 284.06% 486.50% 1345.09% 716.75% Cash & bank balance 100.00% 443.00% 118.98% 429.94% 166.00% 124.00% 298.37% 420.46% 121.84% 211.91% 2.57% 1202.00% 121.12% Net fixed assets 100.86% 116.00% 133.12% Borrowings 100.02% 1417.57% 700.84% Non-recurring expenses PBDT Depreciation PBT Tax provision 6 0 PAT .92% 605.00% 264.71% Other income 100.71% 176.74% Term deposits 100.04% 259.00% 270.68% 359.10% 401.25% 129.76% 169.00% 157.68% 359.65% 549.85% 149.07% 314.62% 136.16% 237.59% Non-recurring income 100.6 (c): Trend Analysis of Financial Statements of Corporation Bank 1999 2000 2001 2002 2003 100.00% 365.00% 117.00% 97.96% 1568.00% 124.42% Specific reserves 100.26% Investment / dividend income 100.72% 149.62% 133.00% 189.00% 230.13% 189.49% Interest income 100.98% 220.75% Deposits Assets: Deferred tax assets Intangible/DRE not w/o Total assets Table 3.00% 110.46% 100.13% 0.40% 173.66% 312.03% Reserves & surplus 100.69% 141.19% 853.00% 107.82% 489.50% 839.97% 173.22% 139.81% 100.00% 140.05% 163.20% 200.15% 642.00% 126.74% 332.85% 5.47% 160.00% 247. NPA.76% Free reserves 100.69% 274.30% Other assets / stocks 100.

54% 358.41% 150.66% 222.19% 2.50% 158.78% 216.08% Total liabilities 100.35% * (j) Operating Expenses to Average Assets 3.84% 135.30% 130.31% 406.01% 119.66% 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.66% (l) 8.11% 204.20% 1.06% 2.00% 122.12% 99.51% 0.87% 131.54 10.65% 260.49% Other liabilities & provisions 100.22% 167.81% 5.29% 0.75% 17.35% (c) Leverage or Debt to Equity 20.00% 138.91% 4.00% 113.97% 11.40% -0.00% 100.78% 7.43% 80.37% 170.50% 158.36% Advances & loans 100.31% 0.00% 115.86% 174.92% 3.00% 119.63% 100.47% 163.95% 129.99% 7.09% 136.00% 27.12 (d) Interest Income to Average Assets 4.32% 131.7: Important Financial Ratios relevant for Banking Industry for the year 2003 Ratios SBI HDFC Corporation Bank 26.58% 5.46% Receivables 100.60% 105.00% 113.49% 147.30% (m) Growth Rate of Net Worth 13.06% 228.44% (b) Return on Investments 6.09% 124. 6 1 .00% 123.37% 26.00% 149.95% 17.25% 24.77% 195.26% 105.72% 137.74% 0.89% 56.00% 96.18% 172.73% 100.01% 2.70% 99.12% 175.54% 119.56% 25.00% 122.01% Specific reserves 100.87% 8.23% 130.71% 140.92% 301.98% Deposits Financial Analysis of Banks Assets: Deferred tax assets Intangible/ DRE not written off Total assets Table 3.95% 147.50% 18.00% 111.98% Cash & bank balance 100.23% Investments 100.79% 191.00% 111.77% Term deposits 100.83% 199.67% 165.90% (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 8.17% 149.41% Saving deposits 100.04% 720.01% 100.46% (k) Provision for Loans and losses to Average Assets 0.60% Net fixed assets 100.97% 119.97% -1.35% 146.59% 3.36% Other assets / stocks 100.91% 143.00% 113.94% 0.02% 0.87% 131.54% Reserves & surplus 100.22% 107.00% 111.98% Borrowings 100.56% Free reserves 100.39% 140.48% 177.00% 86.94 12.00% 63.00% 105.12% 175.00% 132.07% 163.40% Demand deposits 100.00% 5.03% (n) Cash dividends to PAT 16.42% 242.Liabilities + Equity: Paid-up equity capital 100.46% 17.97% (e) Interest Expenses to Average Assets 5.00% 100.

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