fra project banking industry

Table of Contents

Capital Adequacy Ratio (CAR)2Quality of Assets4Return on Equity6Return on Assets7Net Interest Margin8Net Interest Spread9Net Profit Margin10Burden11Other Income/Total Income13

Capital Adequacy Ratio (CAR)It is the measure of a bank's capital and expressed in percentage term. In simple terms, this capital is set aside by banks to protect depositors. A lower CAR means a bank is prone to the risk of going burst in case of any crisis. However, a very high CAR means, the bank is not doing enough business. It is calculated according to the Basel Accords. CAR is made up of Tier 1 capital (Going-concern capital) and Tier 2 capital (Gone-concern capital) divided by risk weighted assets. Tier 2 is supplementary capital which consists of undisclosed reserves, general loss reserves, hybrid debt capital instruments and subordinated debts. Tier 2 capital is considered less reliable than Tier 1.

20112012201320142015

SBI11.9813.8612.9212.9612.79

ICICI19.5418.5218.7417.717.02

HDFC16.2216.5216.816.0716.79

Analysis: At March 31, 2015, Basel III guidelines require the Bank to maintain a minimum CAR of 9.0%. CAR between 10 and 20 is considered good. Indian Banks have a CAR well above the prescribed minimum of 9%. This shows that banks are capital healthy and investor protection is more. Compared to HDFC and ICICI, SBI has more sub-standard assets because more loans are given to low-income people resulting in lower CAR. Private Banks have low NPAs compared to public sector banks and due to higher CAR, they have been able to recover fast in times of recession. Over the years, with a rise in non-performing assets exerting pressure on their profitability, Indian bankscapital adequacy ratio has fallen. This shows that banks are eyeing growth and have become slightly more aggressive increasing their high risk capital. We have observed from the data that the decrease in CAR is mainly because of decrease in Tier 2 capital ratio. For example, in last 2 years in case of SBI, Tier 2 ratio decreased from 2.98 to 2.69 while tier 1 ratio increased from 9.98 to 10.10 resulting in overall decrease from 12.96 to 12.79. Similarly, in ICICI, Tier 2 ratio decreased from 4.92 to 4.24 while Tier 1 ratio remained the same at 12.78 resulting in overall decrease from 17.7 to 17.02. In HDFC, Tier 2 ratio decreased from 4.3 to 3.13 while Tier 1 ratio increased from 11.77 to 13.66 resulting in an overall increase from 16.07 to 16.79. In March 2015, RBI issued amendments on capital adequacy which can increase the risk weight of banks further reducing their CAR. For example, in case of ICICI, the risk weight of 1111% applicable earlier for certain exposures was revised to 1250%.

Quality of AssetsA Non-performing asset (NPA) is defined as a credit facility in respect of which the interest and/or installment of Bond finance principal has remained past due for a specified period of time. NPA is used by financial institutions that refer to loans that are in jeopardy of default. Once the borrower has failed to make interest or principle payments for 90 days the loan is considered to be a non-performing assetGross NPA is the total number of assets which are in jeopardy of default.Net NPA = Gross NPA (Provisions for Bad Debt)SBI:% of Total assets20112012201320142015

Gross NPA 3.284.444.754.954.25

Net NPA 1.631.822.102.572.12

Provisions 1.652.622.712.382.13

HDFC:% of Total assets20112012201320142015

Gross NPA 1.051.020.971.000.90

Net NPA 0.200.200.200.300.20

Provisions 0.850.820.770.700.70

ICICI:% of Total assets20112012201320142015

Gross NPA 3.053.123.403.783.68

Net NPA 0.991.091.271.611.58

Provisions 2.062.032.132.172.10

Analysis: Low NPA of private sector banks such as HDFC and ICICI show that they are better in performance and management of funds than public sector banks Compared to HDFC and ICICI, SBI have more sub-standard asset and doubtful assets because more loans are given to low-income people like farmers who default SBI is less cautious while granting loans while HDFC and ICICI adopted necessary measures to avoid any account becoming doubtful or sub-standard account HDFC has lowest NPA because it sells large share of NPAs to Asset Reconstruction Companies while ICICI does not. Thus HDFC has best quality of assets. Increment in NPA of ICICI and SBI was due to the slowdown in the economy for the past few years.

Return on EquityThe amount ofnet incomereturned as a percentage ofshareholdersequity. Return onequitymeasures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.Return on Equity = Net Income/Shareholder's EquityYear/BankHDFCSBIICICI

201115.479.3511.34

201217.2610.713.94

201318.5712.4814.26

201419.513.49.2

201516.4713.8910.2

Analysis: Excluding ICICI, both HDFC and SBI experienced a downfall in the ROE in the 2014-15 and 2013-15 fiscal years respectively. As the profits of HDFC have been increasing steadily, so have their net worth. In case of SBI, net profits fell from Rs. 14105.32 Cr to Rs. 10891.51 Cr in 2013-14. This reduction in profit margin explains the drastic fall of ROE for the year. Furthermore the profits have soared only up-to Rs.13101.89 Cr for the year 2014-15. Hence a small rise in that year.

Return on AssetsROA gives an idea as to how efficient management is at using itsassets to generate earnings. It is calculated by dividing a company's annualearningsby its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment".ROA = Net Income/Total AssetsYear/BankHDFCSBIICICI

20111.570.731.34

20121.680.911.44

20131.820.971.62

20141.90.651.73

20151.890.681.8

Analysis: SBI has the lowest ROA amongst the target group, its reason being the reach of SBI in order to provide financial inclusion being a public bank. This leads to issues arising out of inefficient use of resources. The total assets of SBI are in the order of 20, 48,079.80 Cr, while that of HDFC is 5, 90,503.07 Cr and 6,46,129.29 Cr for ICICI, nearly a quarter in comparison to SBI. Hence the ROA of SBI is also lower due to a higher base.

Net Interest MarginA performance metric that examines how successful a firm'sinvestmentdecisions are compared to its debt situations.Net Interest Margin = (Investment returns Investment Expenses)/Total earning assets Year/BankHDFCSBIICICI

20114.222.862.34

201243.382.44

20134.283.062.74

20144.142.932.91

20154.142.873.07

Analysis: Some of the factors affecting net interest margin can be capital adequacy, credit risk, cost of holding reserves and operating costs. Comparing these three banks on the amount of taxes paid, ICICI pays the least, yet margin of HDFC is higher than that of ICICI. This could be due to the inflated rate spread of HDFC in order to cover operating costs. ICICI commands the highest net interest margin signifying its healthy returns from investments.

Net Interest SpreadNetinterest spreadrefers to the difference in borrowing and lending rates of financial institutions (such as banks) in nominal terms. It is considered analogous to the gross margin of non-financial companies. Year/BankHDFCSBIICICI

20118.256.126.95

20128.246.877.45

20138.785.957.82

20148.015.767.35

20158.016.267.04

Analysis: We can observe that HDFC has the largest average net interest spread. This refers that it is effectively yielding the most interest rate on its earning assets. However the interest earnings of SBI is far greater than HDFC or ICICI (3 times nearly), given the amount of investments it make. Comparing similar sized banks ICICI and HDFC, the operating expenses of HDFC is more than that of ICICI while the interest earned is less than ICICI in year 2014-15. This could explain the inflated net rate spreads on HDFC in order to cover costs.

Net Profit MarginProfit margin is part of a category ofprofitability ratioscalculated asnet incomedivided byrevenue.Net Profit Margin = Net Income/Total revenueYear/BankHDFCSBIICICI

201116.189.0519.83

201215.8810.9919.27

201316.0411.7820.77

201417.287.9822.2

201521.078.5922.76

Analysis: We can see the profit margins for ICICI are consistently higher than HDFC and that of the SBI is the lowest. For SBI again, the issue of efficient handling of resources is a big factor due to its size of operations which drives down the profit margin. Comparing ICICI and HDFC, the operating expenses of HDFC are throughout more than that of the ICICI for almost comparable income generated. This explains slightly lower margins for HDFC. Also, cash flow of ICICI is more from investing activities and that of HDFC is more from operational activities in the recent years.

BurdenBank Efficiency Ratio/Burden = Non-Interest Expenses /RevenueCosts include salaries, rent and other general and administrative expenses. Interest expenses are usually excluded because they areinvestingdecisions, not operational decisions. Revenue includes interestincomeand fee income.Thebank efficiency ratiois a measure of a bank's ability to turn resources into revenue. The lower the ratio, the better. An increase in theefficiency ratioindicates either increasing costs or decreasingrevenues.Burden20152014201320122011

SBI0.740.740.680.760.83

ICICI0.650.630.570.570.64

HDFC0.740.730.760.760.90

Analysis:2013: SBI saw a rise in total income owing to deposit growth that came from a surge in advances to large corporates and mid corporate segment. Major drivers in this segment have been Home Loans and Auto loans, owing to various strategic and market oriented initiatives.2014: Prolonged slowdown in general macroeconomic conditions impacted business and profit of the industry. Due to higher provisioning requirement, the growth in income did not translate into higher profits. SBI made additional provision to cover expenses towards wage revision, one time provision for pension due to change in mortality table and payment for pension and gratuity. The three heads combined under the additional provisioning accounted for 13.29% or `4,751 crores of the total operating expenses for FY 2014.2015: While the economy entered a new phase in 2015 with several policy initiatives & positive trends in macroeconomic indicators, the corporate & SME sectors continued to experience challenges given the prolonged slowdown and gradual pace of recovery, resulting in continued additions to non-performing and restructured loans for the banking sector.

Other Income/Total IncomeNon-interest income primarily includes fee and commission, income from treasury-related activities, dividend from subsidiaries and other income including lease income.Other income/total income20152014201320122011

SBI12.911.9811.8211.8716.28

ICICI19.8719.117.2418.2820.38

HDFC15.6616.1416.3516.1217.87

Analysis: SBI saw an increase in other income by way of dividends from Associate Banks/subsidiaries and joint ventures in India and abroad, and through strategic sale of investments. The non-interest income of ICICI Bank increased in 2014 and 2015.Fee income increased primarily due to an increase in income from transaction banking fees, third party referral fees and commercial banking fees, offset, in part by a decrease in merchant foreign exchange income and income on customer derivative transactions and lending linked fees. Profit from treasury-related activities increased due to higher gains on government securities and other fixed income positions and realized gains on equity and preference share investments, offset, in part, by lower gains on security receipts. HDFC recorded high revenues from foreign exchange and derivative transactions distributed across large corporate, emerging corporate, business banking and retail customer segments for both plain vanilla foreign exchange products and derivatives.