CHAPTER 4

RESEARCH METHODOLOGY
The researcher adopted the analysis of data in a manner that to combine relevance to purpose
with economy in procedure. Research design is the based define of a research problem. The
preparation of the design of the project is standard analytical of researcher favourite. It was
used in secondary data that was published already as annual reports of the bank in bank's
website, journals, magazines and newspapers and other secondary data sources. This
Secondary data may be already collected and analysed by someone else but gap is period of
the study and variables which we want to know. The study mainly connected annual financial
reports that are last three years 2016-2019 company final accounts (balance sheet and profit
and loss).
4.1 DATA COLLECTION
Main data of this study is based to the annual financial reports of HDFC bank from in 2016 to
2019. Also researcher used four main financial statements for ratio analysis of bank such as;
Balance Sheets, Profit and Loss account, Cash Flow Statement; Statement of Shareholder's
Equity although study strongly emphasis the first main reports.
4.2 DATA ANALYSIS
The study used all important tools of ratio analysis for profitability evaluation of bank. It
indicates the different steps such Selection of financial report, Identification of balance sheet,
Profit and Loss account and cash flow statement, ratio analysis, mathematical calculation,
statistical analysis of bank financial report year by year comparison and among industry First
step of model, we do a selection of financial report that means a choose of annual financial
report. The annual financial report present financial data of a company's position, operating
performance, and funds flow for an accounting period .We use the annual reporting of bank
in 2016 to 2019. Second step of model, researcher identify the balance sheet, Profit and Loss
account, cash flow statement from the annual financial report. Study used some data from
balance sheets for different kind of ratio such as liquidity ratios, asset management ratios,
debt management ratios. In contrast, we used some sources from Profit and Loss account.
When analysis the ratio of profitability and debt management ratio employment of bank
Profit and loss account and balance sheet is must. However the use of some data from the
cash flow statement for ratio analysis such as market value ratio is also possible. The third
step of model, study identify the suitable ratio for profitability analysis and evaluation the
ratio such as current ratio, liquidity ratio, asset management ratio, profitability ratio, debt
coverage ratio, market value etc. All types of ratio are most important for how well a bank to
generate its assets, liquidity, revenue, expense, shareholder equity profit or loss are also here .
The Forth step of model, study used the Mathematical calculation of bank. Some figures from
the Profit and loss account and balance sheet. Financial calculators was used to determine the
results a financial ratio calculations a graphical analysis for evaluation of bank using
Microsoft excel is employed and finally study compares the results to manipulate objectives.
4.3 SECONDARY DATA
The major source of data for this project was collected through Balance sheet and Profit and
loss of HDFC bank, account of 3 year period from 2016-2019. Descriptive research is used in
this study because it will ensure the minimization of bias and maximization of reliability of
data collected. The researcher had to use fact and information already available through
financial statements of earlier years and analyse these to make critical evaluation of the
available material. Hence by making the type of the research conducted to be both Descriptive
and Analytical in nature.
4.4 RESEARCH INSTRUMENTS
Study used secondary data collected from publishers of the bank final accounts; it is limited
to last three years 2016-2019 annual financial reports.
4.5 HYPOTHESIS OF THE STUDY

The bank profitability is improving with constant growth rate.

4.6 RATIO ANALYSIS FORMULAS
For most of us, accounting is not the easiest thing in the world to understand, and often the
terminology used by accountants is part of the problem. “Financial ratio analysis” sounds
pretty complicated. The analysis of the financial statements and interpretations of financial
results of a particular period of operations with the help of 'ratio' is termed as "ratio analysis."
Ratio analysis used to determine the financial soundness of a business concern. The term
'ratio' refers to the mathematical relationship between any two inter-related variables. In other
words, it establishes relationship between two items expressed in quantitative form.
According J. Batty, Ratio can be defined as "the term accounting ratio is used to describe
significant relationships which exist between figures shown in a balance sheet and profit and
loss account in a budgetary control system or any other part of the accounting management.
4.6.1 CLASSIFICATION OF RATIOS
Accounting Ratios are classified on the basis of the different parties interested in making use
of the ratios. A very large number of accounting ratios are used for the purpose of
determining the financial position of a concern for different purposes. Ratios may be broadly
classified in to:

 Classification of Ratios on the basis of Balance Sheet.

 Classification of Ratios on the basis of Profit and Loss Account.
 Classification of Ratios on the basis of Mixed Statement (or) Balance Sheet and Profit
and Loss account.
To meet the objective of the study groups ratios and divides three main parts which are
Liquidity ratios, profitability ratios, and asset management ratios.
4.6.2 COMMON SIZE RATIOS
One of the most useful ways for the owner of a business to look at the company’s financial
statements is by using “common size” ratios. Common size ratios can be developed from
both balance sheet and Profit and Loss items. The phrase “common size ratio” may be
unfamiliar to you, but it is simple in concept and just as simple to create. You just calculate
each line item on the statement as a percentage of the total.
4.6.3 LIQUIDITY RATIOS
Liquidity ratio refers to the ability of a company to interact its assets that is most readily
converted into cash. Assets are converted into cash in a short period of time that are concerns
to liquidity position. However, the ratio made the relationship between cash and current
liability
 CURRENT RATIO:
Current Ratio = CURRENT ASSETS
CURRENT LIABILITIES

 QUICK RATIO:
Quick Ratio= (QUICK ASSETS-INVENTORIES)
QUICK LIABILITIES

Quick Asset= current asset-(stock + prepaid expense)

Quick Liabilities = current liabilities -Bank Overdraft
 CASH RATIO:
Cash Ratio = CASH
CURRENT LIABILITIES
4.6.4 PROFITABILITY RATIO
Profitability ratios designate a bank's overall efficiency and performance. It measures how to
use assets and how to control its expenses to generate an acceptable rate of return. It also used
to examine how well the bank is operating or how well current performance compares to past
records of bank
 PROFIT MARGIN RATIO
Profit Margin Ratio = NET INCOME
TOTAL OPERATING INCOME

 RETURN ON EQUITY RATIO

Return on equity ratio = NET INCOME
TOTAL EQUITY CAPITAL

4.6.5 ASSET MANAGEMENT RATIO

Asset management ratios are most notable ratios of financial ratios analysis. It measure how
effectively any organization uses and controls its assets. It is analysis how a company quickly
converted to cash or sale on their resources. It is also called Turnover ratios because it
indicates the asset converted or turnover in to sales.

 DEPOSIT TO TOTAL ASSET RATIO

Deposit to Total Asset Ratio= DEPOSIT
TOTAL ASSETS

 NET INTEREST MARGIN RATIO

Net Interest Margin Ratio= (INTEREST EARNED – INTEREST EXPENDED )
TOTAL ASSET

4.6.6 OTHER BANK RATIO

 CREDIT DEPOSIT RATIO

Credit Deposit Ratio is a commonly used statistic for assessing a bank ‘s liquidity by dividing the
banks total loans by its total deposits.

Credit Deposit Ratio= CREDITS

DEPOSITS

 EQUITY MULTIPLIER RATIO

 This ratio measures the extent to which assets of the financial institutions are funded with
equity relative to debt. Equity Multiplier measures the value of assets funded per equity
capital. the higher this ratio the more leverage or debt the bank is using to fund its assets.

Equity Multiplier Ratio= TOTAL ASSETS

TOTAL EQUITY CAPITAL

 INTEREST EXPENSES TO OPERATING INCOME RATIO

Interest expenses constitute the major part of Total expenses incurred by bank. Interest is
paid on the amount deposited by customers on various schemes like Fixed Deposit
Schemes and Savings bank account.

Interest Expenses To Operating Income Ratio= INTEREST EXPENSES

TOTAL OPERATING INCOME

 CAPITAL ADEQUACY RATIO

A bank’s capital ratio is the qualifying capital to risk adjusted (or weighted) assets.
Tier I capital funds include paid-up equity capital, statutory and capital reserves, and
perpetual debt instruments eligible for inclusion in Tier I capital. Tier II capital is the
secondary bank capital which includes items such as undisclosed reserves, general
loss reserves, subordinated term debt, amongst others.

Capital Adequacy Ratio= (TIER I CAPITAL+ TIER II CAPITAL

RISK WEIGHTED ASSETS

 NPA (NON PERFORMING ASSETS ) TO ADVANCE RATIO

The net NPA to loans (Advances) ratio is used as a measure of the overall quality of the
bank‘s loan book. An NPA are those assets for which interest is overdue for more than 90
days (or 3 months). Net NPAs are calculated by reducing cumulative balance of provisions
outstanding at a period end from gross NPAs.

NPA To Advance Ratio= NET NPA

ADVANCE