Pa

Capital Adequacy Asset Quality Management Soundness Earnings & Profitability Liquidity Sensitivity To Market Risk
A Capital Adequacy Ratio is a measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted credit exposures. Also known as ""Capital to Risk Weighted Assets Ratio (CRAR). Capital adequacy is measured by the ratio of capital to risk-weighted assets (CRAR). A sound capital base strengthens confidence of depositors. This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world. Asset quality determines the robustness of financial institutions against loss of value in the assets. The deteriorating value of assets, being prime source of banking problems, directly pour into other areas, as losses are eventually writtenoff against capital, which ultimately jeopardizes the earning capacity of the institution. With this backdrop, the asset quality is gauged in relation to the level and severity of non-performing assets, adequacy of provisions, recoveries, distribution of assets etc. Popular indicators include non-performing loans to advances, loan default to total advances, and recoveries to loan default ratios.

Capital Adequacy Asset

The solvency of financial institutions typically is at risk when their assets become impaired, so it is important to monitor indicators of the quality of their assets in terms of overexposure to specific risks, trends in nonperforming loans, and the health and profitability of bank borrowers especially the corporate sector. Share of bank assets in the aggregate financial sector assets: In most emerging markets, banking sector assets comprise well over 80 per cent of total financial sector assets, whereas these figures are much lower in the developed economies. Furthermore, deposits as a share of total bank liabilities have declined since 1990 in many developed countries, while in developing countries public deposits continue to be dominant in banks. In India, the share of banking assets in total financial sector assets is around 75 per cent, as of end-March 2008. There is, no doubt, merit in recognizing the importance of diversification in the institutional and instrument-specific aspects of financial intermediation in the

interests of wider choice, competition and stability. However, the dominant role of banks in financial intermediation in emerging economies and particularly in India will continue in the medium-term; and the banks will continue to be special for a long time. In this regard, it is useful to emphasise the dominance of banks in the developing countries in promoting non-bank financial intermediaries and services including in development of debt-markets. Even where role of banks is apparently diminishing in emerging markets, substantively, they continue to play a leading role in non-banking financing activities, including the development of financial markets. One of the indicators for asset quality is the ratio of non-performing loans to total loans (GNPA). The gross non-performing loans to gross advances ratio is more indicative of the quality of credit decisions made by bankers. Higher GNPA is indicative of poor credit decision-making.

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 31 | P a g e

NPA: Non-Performing Assets

Advances are classified into performing and non-performing advances (NPAs) as per RBI guidelines. NPAs are further classified into sub-standard, doubtful and loss assets based on the criteria stipulated by RBI. An asset, including a leased asset, becomes non-performing when it ceases to generate income for the Bank. An NPA is a loan or an advance where: 1. Interest and/or instalment of principal remains overdue for a period of more than 90 days in respect of a term loan; 2. The account remains "out-of-order'' in respect of an Overdraft or Cash Credit (OD/CC); 3. The bill remains overdue for a period of more than 90 days in case of bills purchased and discounted; 4. A loan granted for short duration crops will be treated as an NPA if the installments of principal or interest thereon remain overdue for two crop seasons; and 5. A loan granted for long duration crops will be treated as an NPA if the installments of principal or interest thereon remain overdue for one crop season . The Bank classifies an account as an NPA only if the interest imposed during any quarter is not fully repaid within 90 days from the end of the relevant quarter. This is a key to the stability of the banking sector. There should be no hesitation in stating that Indian banks have done a remarkable job in containment of non-performing loans (NPL) considering the overhang issues and overall difficult environment. For 2008, the net NPL ratio for the Indian scheduled

commercial banks at 2.9 per cent is ample testimony to the impressive efforts being made by our banking system. In fact, recovery management is also linked to the banks interest margins. The cost and recovery management supported by enabling legal framework hold the key to future health and competitiveness of the Indian banks. No doubt, improving recovery-management in India is an area requiring expeditious and effective actions in legal, institutional and judicial processes. Management of financial institution is generally evaluated in terms of capital adequacy, asset quality, earnings and profitability, liquidity and risk sensitivity ratings. In addition, performance evaluation includes compliance with set norms, ability to plan and react to changing circumstances, technical competence, leadership and administrative ability. In effect, management rating is just an amalgam of performance in the above-mentioned areas. Sound management is one of the most important factors behind financial institutions performance. Indicators of quality of management, however, are primarily applicable to individual institutions, and cannot be easily aggregated across the sector. Furthermore, given the qualitative nature of management, it is difficult to judge its soundness just by looking at financial accounts of the banks. Nevertheless, total expenditure to total income and operating expense to total expense helps in gauging the management quality of the banking institutions.

Management Soundness
Sound management is key to bank performance but is difficult to measure. It is primarily a qualitative factor applicable to individual institutions. Several indicators, however, can jointly serveas, for instance, efficiency measures doas an indicator of management soundness. The ratio of non-interest expenditures to total assets (MGNT) can be one of the measures to assess the working of the management. . This variable, which includes a variety of expenses, such as payroll, workers compensation and training investment, reflects the management policy stance. Efficiency Ratios demonstrate how efficiently the company uses its assets and how efficiently the company manages its operations.

Asset Turnover Ratio = Total Revenue/Total Assets

Indicates the relationship between assets and revenue. Companies with low profit margins tend to have high asset turnover, those with high profit margins have low asset turnover - it indicates pricing strategy This ratio is more useful for growth companies to check if in fact they are growing revenue in proportion to sales Asset Turnover Analysis: This ratio is useful to determine the amount of sales that are generated from each

dollar of assets. As noted above, companies with low profit margins tend to have high asset turnover, those with high profit margins have low asset turnover. Earnings and profitability, the prime source of increase in capital base, is examined with regards to interest rate policies and adequacy of provisioning. In addition, it also helps to support present and future operations of the institutions. The single best indicator used to gauge earning is the Return on Assets (ROA), which is net income after taxes to total asset ratio. Strong earnings and profitability profile of banks reflects the ability to support present and future operations. More specifically, this determines the capacity to absorb losses, finance its expansion, pay dividends to its shareholders, and build up an adequate level of capital. Being front line of defense against erosion of capital base from losses, the need for high earnings and profitability can hardly be overemphasized. Although different indicators are used to serve the purpose, the best and most widely used indicator is Return on Assets (ROA). However, for in-depth analysis, another indicator Net Interest Margins (NIM) is also used. Chronically unprofitable financial institutions risk insolvency. Compared with most other indicators, trends in profitability can be more difficult to interpret for instance, unusually high profitability can reflect excessive risk taking. ROA-Return On Assets An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate

Earnings and Profitability

earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment". The formula for return on assets is: ROA tells what earnings were generated from invested capital (assets). ROA for public companies can vary substantially and will be highly dependent on the industry. This is why when using ROA as a comparative measure, it is best to compare it against a company's previous ROA numbers or the ROA of a similar company. The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment. For example, if one company has a net income of $1 million and total assets of $5 million, its ROA is 20%; however, if another company earns the same amount but has total assets of $10 million, it has an ROA of 10%. Based on this example, the first company is better at converting its investment into profit. When you really think

about it, management's most important job is to make wise choices in allocating its resources. Anybody can make a profit by throwing a ton of money at a problem, but very few managers excel at making large profits with little investment An adequate liquidity position refers to a situation, where institution can obtain sufficient funds, either by increasing liabilities or by converting its assets quickly at a reasonable cost. It is, therefore, generally assessed in terms of overall assets and liability management, as mismatching gives rise to liquidity risk. Efficient fund management refers to a situation where a spread between rate sensitive assets (RSA) and rate sensitive liabilities (RSL) is maintained. The most commonly used tool to evaluate interest rate exposure is the Gap between RSA and RSL, while liquidity is gauged by liquid to total asset ratio. Initially solvent financial institutions may be driven toward closure by poor management of short-term liquidity. Indicators should cover funding sources and capture large maturity mismatches. The term liquidity is used in various ways, all relating to availability of, access to, or convertibility into cash. An institution is said to have liquidity if it can easily meet its needs for cash either because it has cash on hand or can otherwise raise or borrow cash. A market is said to be liquid if the instruments it trades can easily be bought or sold in quantity with little impact on market prices. An asset is said to be liquid if the market for that asset is liquid.

Liquidity
The common theme in all three contexts is cash. A corporation is liquid if it has ready access to cash. A market is liquid if participants can easily convert positions into cashor conversely. An asset is liquid if it can easily be converted to cash. The liquidity of an institution depends on: the institution's short-term need for cash; cash on hand; available lines of credit; the liquidity of the institution's assets; The institution's reputation in the marketplacehow willing will counterparty is to transact trades with or lend to the institution? The liquidity of a market is often measured as the size of its bid-ask spread, but this is an imperfect metric at best. More generally, Kyle (1985) identifies three components of market liquidity: Tightness is the bid-ask spread; Depth is the volume of transactions necessary to move prices; Resiliency is the speed with which prices return to equilibrium following a large trade.

Examples of assets that tend to be liquid include foreign exchange; stocks traded in the Stock Exchange or recently issued Treasury bonds. Assets that are often illiquid include limited partnerships, thinly traded bonds or real estate. Cash maintained by the banks and balances with central bank, to total asset ratio (LQD) is an indicator of bank's liquidity. In general, banks with a larger volume of liquid assets are perceived safe, since these assets would allow banks to meet unexpected withdrawals. Credit deposit ratio is a tool used to study the liquidity position of the bank. It is calculated by dividing the cash held in different forms by total deposit. A high ratio shows that there is more amounts of liquid cash with the bank to met its clients cash withdrawals. It refers to the risk that changes in market conditions could adversely impact earnings and/or capital. Market Risk encompasses exposures associated with changes in interest rates, foreign exchange rates, commodity prices, equity prices, etc. While all of these items are important, the primary risk in most banks is interest rate risk (IRR), which will be the focus of this module. The diversified nature of bank operations makes them vulnerable to various kinds of financial risks. Sensitivity analysis reflects institutions exposure to interest rate risk, foreign exchange volatility and equity price risks (these risks are summed in market risk). Risk sensitivity is mostly evaluated in terms of managements ability to monitor and control market risk. Banks are increasingly involved in diversified operations, all of which are subject to market risk, particularly in the setting of interest rates and the carrying out of foreign exchange transactions. In countries that allow banks to make trades in stock markets or commodity exchanges, there is also a need to monitor indicators of equity and commodity price risk. Interest Rate Risk Basics In the most simplistic terms, interest rate risk is a balancing act. Banks are trying to balance the quantity of re-pricing assets with the quantity of re-pricing liabilities. For example, when a bank has more liabilities re-pricing in a rising rate environment than assets re-pricing, the net interest margin (NIM) shrinks. Conversely, if your bank is asset sensitive in a rising interest rate environment, your NIM will improve because you have more assets re-pricing at higher rates. An extreme example of a re-pricing imbalance would be funding 30-year fixedrate mortgages with 6-month CDs. You can see that in a rising rate environment the impact on the NIM could be devastating as the liabilities re-price at higher rates but the assets do not. Because of this exposure, banks are required to monitor and control IRR and to maintain a reasonably well-balanced position.

Liquidity risk is financial risk due to uncertain liquidity. An institution might lose liquidity if its credit rating falls, it experiences sudden unexpected cash outflows, or some other event causes counterparties to avoid trading with or lending to the institution. A firm is also exposed to liquidity risk if markets on which it depends are subject to loss of liquidity. Liquidity risk tends to compound other risks. If a trading organization has a position in an illiquid asset, its limited ability to liquidate that position at short notice will compound its market risk. Suppose a firm has offsetting cash flows with two different counterparties on a given day. If the counterparty that owes it a payment defaults, the firm will have to raise cash from other sources to make

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 40 | P a g e

its payment. Should it be unable to do so, it too we default. Here, liquidity risk is compounding credit risk. Accordingly, liquidity risk has to be managed in addition to market, credit and other risks. Because of its tendency to compound other risks, it is difficult or impossible to isolate liquidity risk. In all but the most simple of circumstances, comprehensive metrics of liquidity risk don't exist. Certain techniques of assetliability management can be applied to assessing liquidity risk. If an organization's cash flows are largely contingent, liquidity risk may be assessed using some form of scenario analysis. Construct multiple scenarios for market movements and defaults over a given period of time. Assess day-to-day cash flows under each scenario. Because balance sheets differed so significantly from one organization to the next, there is little standardization in how such analyses are implemented. Regulators are primarily concerned about systemic implications of liquidity risk. Business activities entail a variety of risks. For convenience, we distinguish between different categories of risk: market risk, credit risk, liquidity risk, etc. Although such categorization is convenient, it is only informal. Usage and definitions vary. Boundaries between categories are blurred. A loss due to widening credit spreads may reasonably be called a market loss or a credit loss, so market risk and credit risk overlap. Liquidity risk compounds other risks, such as market risk and credit risk. It cannot be divorced from the risks it compounds. An important but somewhat ambiguous distinguish is that between market risk and business risk. Market risk is exposure to the uncertain market value of a portfolio. Business risk is exposure to uncertainty in economic value that cannot

be marked-to-market. The distinction between market risk and business risk parallels the distinction between market-value accounting and book-value accounting. The distinction between market risk and business risk is ambiguous because there is a vast "gray zone" between the two. There are many instruments for which markets exist, but the markets are illiquid. Mark-to-market values are not usually available, but mark-to-model values provide a more-or-less accurate reflection of fair value. Do these instruments pose business risk or market risk? The decision is important because firms employ fundamentally different techniques for managing the two risks. Business risk is managed with a long-term focus. Techniques include the careful development of business plans and appropriate management oversight. bookvalue accounting is generally used, so the issue of day-to-day performance is not material. The focus is on achieving a good return on investment over an extended horizon. Market risk is managed with a short-term focus. Long-term losses are avoided by avoiding losses from one day to the next. On a tactical level, traders and portfolio managers employ a variety of risk metrics duration and convexity, the Greeks, beta, etc.to assess their exposures. These allow them to identify and reduce any exposures they might consider excessive. On a more strategic level, organizations manage market risk by applying risk limits to traders' or portfolio managers' activities. Increasingly, value-at-risk is being used to define and monitor these limits. Some organizations also apply stress testing to their portfolios.

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 42 | P a g e

BANK PROFILE
Chapter-03

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 43 | P a g e

HDFC BANK State Bank of India AXIS BANK IDBI

ICICI

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 44 | P a g e

HDFC Bank Ltd. is a major Indian financial services company based in Mumbai, incorporated in August 1994, after the Reserve Bank of India allowed establishing private sector banks. The Bank was promoted by the Housing Development Finance Corporation, a premier housing finance company (set up in 1977) of India. HDFC Bank has 1,412 branches and over 3,295 ATMs, in 528 cities in India, and all branches of the bank are linked on an online real-time basis. As of September 30, 2008 the bank had total assets of INR 1006.82 billion. For the fiscal year 2008-09, the bank has reported net profit of Rs.2,244.9 crore, up 41% from the previous fiscal. Total annual earnings of the bank increased by 58% reaching at Rs.19,622.8 crore in 2008-09. HDFC Bank is one of the Big Four Banks of India, along with State Bank of India, ICICI Bank and Axis Bank its main competitors. History HDFC Bank was incorporated in the year of 1994 by Housing Development Finance Corporation Limited (HDFC), India's premier housing finance company. It was among the first companies to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector.The Bank commenced its operations as a Scheduled Commercial Bank in January 1995 with the help of RBI's liberalization policies. In a milestone transaction in the Indian banking industry, Times Bank Limited (promoted by Bennett, Coleman & Co. / Times Group) was merged with HDFC Bank Ltd., in 2000. This was the first merger of two private banks in India. As

HDFC BANK

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 45 | P a g e

per the scheme of amalgamation approved by the shareholders of both banks and the Reserve Bank of India, shareholders of Times Bank received 1 share of HDFC Bank for every 5.75 shares of Times Bank. In 2008 HDFC Bank acquired Centurion Bank of Punjab taking its total branches to more than 1,000. The amalgamated bank emerged with a strong deposit base of around Rs. 1,22,000 crore and net advances of around Rs. 89,000 crore. The balance sheet size of the combined entity is over Rs. 1,63,000 crore. The amalgamation added significant value to HDFC Bank in terms of increased

branch network, geographic reach, and customer base, and a bigger pool of skilled manpower.
Figure 3.1 HDFC BANK

State Bank of India is the largest banking and financial services company in India, by almost every parameter - revenues, profits, assets, market capitalization, etc. The bank traces its ancestry to British India, through the Imperial Bank of India, to the founding in 1806 of the Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent. The Government of India nationalized the Imperial Bank of India in 1955, with the Reserve Bank of India taking a 60% stake, and renamed it the State Bank of India. In 2008, the Government took over the stake held by the Reserve Bank of India. SBI provides a range of banking products through its vast network of branches in India and overseas, including products aimed at NRIs. The State Bank Group, with over 16,000 branches, has the largest banking branch network in India. With an asset base of $260 billion and $195 billion in deposits, it is a regional banking behemoth. It has a market share among Indian commercial banks of about 20% in deposits and advances, and SBI accounts for almost one-fifth of the nation's loans. SBI has tried to reduce over-staffing by computerizing operations and "golden handshake" schemes that led to a flight of its best and brightest managers. These managers took the retirement allowances and then went on to become senior managers in new private sector banks. The State bank of India is the 29th most reputed company in the world according to Forbes. Axis Bank, formally UTI Bank, is a financial services firm that had begun operations in 1994, after the Government of India allowed new private banks to be established. The Bank was promoted jointly by the Administrator of the Specified Undertaking of the Unit Trust of India (UTI-I), Life Insurance Corporation of India (LIC), General Insurance Corporation Ltd., National Insurance Company Ltd., The New India Assurance Company, The Oriental Insurance Corporation and United India Insurance Company UTI-I holds a special position in the Indian capital markets and has promoted many leading financial institutions in the country. The bank changed its name to Axis Bank in April 2007 to avoid confusion with other unrelated entities with similar name. After the Retirement of Mr. P. J. Nayak, Shikha Sharma was named as the bank's managing director and CEO on 20 April 2009. As on the year ended March 31, 2009 the Bank had a total income of Rs 13,745.04 crore (US$ 2.93 billion) and a net profit of Rs. 1,812.93 crore (US$ 386.15 million). On February 24, 2010, Axis Bank announced the launch of

'AXIS CALL & PAY on atom', a unique mobile payments solution using Axis Bank debit cards. Axis Bank is the first bank in the country to provide a secure debit card-based payment service over IVR. Axis Bank is one of the Big Four Banks of India, along with ICICI Bank, State Bank of India and HDFC Bank

AXIS BANK

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 49 | P a g e

Branch Network At the end of March 2009, the Bank has a very wide network of more than 835 branch offices and Extension Counters. Total number of ATMs went up to 3595. The Bank has loans now (as of June 2007) account for as much as 70 per cent of the banks total loan book of Rs 2,00,000 crore. In the case of Axis Bank, retail loans have declined from 30 per cent of the total loan book of Rs 25,800 crore in June 2006 to around 23 per cent of loan book of Rs.41,280 crore (as of June 2007). Even over a longer period, while the overall asset growth for Axis Bank has been quite high and has matched that of the other banks, retail exposures grew at a slower pace. The bank, though, appears to have insulated such pressures. Interest margins, while they have declined from the 3.15 per cent seen in 2003-04, are still hovering close to the 3 per cent mark.
Figure 3.3 AXIS BANK

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 50 | P a g e

The Industrial Development Bank of India Limited commonly known by its acronym IDBI is one of India's leading public sector banks and 4th largest Bank in overall ratings. RBI categorized IDBI as an "other public sector bank". It was established in 1964 by an Act of Parliament to provide credit and other facilities for the development of the fledgling Indian industry. It is currently 10th largest development bank in the world in terms of reach with 1210 ATMs, 720 branches and 486 centers. Some of the institutions built by IDBI are the National Stock Exchange of India (NSE), the National Securities Depository Services Ltd (NSDL), the Stock Holding Corporation of India (SHCIL), the Credit Analysis & Research Ltd, the Export-Import Bank of India (Exim Bank), the Small Industries Development bank of India(SIDBI), the Entrepreneurship Development Institute of India, and IDBI BANK, which today is owned by the Indian Government, though for a brief period it was a private scheduled bank.

The Industrial Development Bank of India (IDBI) was established on July 1, 1964 under an Act of Parliament as a wholly owned subsidiary of the Reserve Bank of India. In 16 February 1976, the ownership of IDBI was transferred to the Government of India and it was made the principal financial institution for coordinating the activities of institutions engaged in financing, promoting and developing industry in the country. Although Government shareholding in the Bank came down below 100% following IDBIs public issue in July 1995, the former continues to be the major shareholder (current shareholding: 52.3%).

IDBI

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 51 | P a g e

During the four decades of its existence, IDBI has been instrumental not only in establishing a well-developed, diversified and efficient industrial and institutional structure but also adding a qualitative dimension to the process of industrial development in the country. IDBI has played a pioneering role in fulfilling its mission of promoting industrial growth through financing of medium and long-term projects, in consonance with national plans and priorities. Over the years, IDBI has enlarged its basket of products and services, covering almost the entire spectrum of industrial activities, including manufacturing and services. IDBI provides financial assistance, both in rupee and foreign currencies, for green-field projects as also for expansion, modernization and diversification purposes. In the wake of financial sector reforms unveiled by the government since 1992, IDBI evolved an array of fund and fee-based services with a view to providing an integrated solution to meet the entire demand of financial and corporate advisory requirements of its clients.
Figure 3.4 IDBI

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 52 | P a g e

ICICI Bank (formerly Industrial Credit and Investment Corporation of India) is a major banking and financial services organization in India. It is the 4th largest bank in India and the largest private sector bank in India by market capitalization. The bank also has a network of 1,700+ branches (as on 31 March 2010) and about 4,721 ATMs in India and presence in 19 countries, as well as some 24 million customers (at the end of July 2007). ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and specialization subsidiaries

and affiliates in the areas of investment banking, life and non-life insurance, venture capital and asset management. (These data are dynamic.) ICICI Bank is also the largest issuer of credit cards in India. ICICI Bank's shares are listed on the stock exchanges at Kolkata and Vadodara, Mumbai and the National Stock Exchange of India Limited; its ADRs trade on the New York Stock Exchange (NYSE). The Bank is expanding in overseas markets and has the largest international balance sheet among Indian banks. ICICI Bank now has wholly-owned subsidiaries, branches and representatives offices in 19 countries, including an offshore unit in Mumbai. This includes wholly owned subsidiaries in Canada, Russia and the UK (the subsidiary through which the Hi SAVE savings brand is operated), offshore banking units in Bahrain and Singapore, an advisory branch in Dubai, branches in Belgium, Hong Kong and Sri Lanka, and representative offices in Bangladesh, China, Malaysia, Indonesia, South Africa, Thailand, the

ICICI

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 53 | P a g e

United Arab Emirates and USA. Overseas, the Bank is targeting the NRI (NonResident Indian) population in particular. ICICI reported a 1.15% rise in net profit to Rs. 1,014.21 crore on a 1.29% increase in total income to Rs. 9,712.31 crore in Q2 September 2008 over Q2 September 2007. The bank's CASA ratio increased to 30% in 2008 from 25% in 2007.
Figure 3.5 ICICI BANK

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 54 | P a g e

Data Analysis

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 55 | P a g e Particular 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 HDFC 11.40% 13.10% 13.60% 15.10% 17.40% SBI 11.88% 12.34% 13.47% 14.25% 13.39% AXIS 11.08% 11.57% 13.73% 13.69% 15.80% IDBI 14.80% 13.73% 11.95% 11.57% 11.31% ICICI 13.35% 11.69% 13.97% 15.53% 19.41%

Table 3.1 CAR Figure 3.6 CAR

Capital Adequacy Ratio

0.00% 5.00% 10.00% 15.00% 20.00% 25.00% HDFC SBI AXIS IDBI ICICI 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 56 | P a g e

Reserve Bank of India prescribes Banks to maintain a minimum Capital to riskweighted Assets Ratio (CRAR) of 9 percent with regard to credit risk, market risk and operational risk on an ongoing basis, as against 8 percent prescribed in Basel Documents. Capital adequacy ratio of the ICICI Bank was well above the industry average of 13.97% t. CAR of HDFC bank is below the ratio of ICICI bank. HDFC Banks total Capital Adequacy stood at 15.26% as of March 31, 2010. The Bank adopted the Basel 2 framework as of March 31, 2009 and the CAR computed as per Basel 2 guidelines stands higher against the regulatory minimum of 9.0%. HDFC CAR is gradually increased over the last 5 year and the capital adequacy ratio of Axis bank is the increasing by every 2 year. SBI has maintained its CAR around in the range of 11 % to 14 %. But IDBI should reconsider their business as its CAR is falling YOY. Higher the ratio the banks are in a comfortable position to absorb losses. So ICICI and HDFC are the strong one to absorb their loses.

Interpretation

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 57 | P a g e Particular 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 HDFC 27.90% 36.30% 46.20% 52.90% 67.60% SBI 83.73% 86.29% 126.62% 143.77% 144.37%

AXIS 17.45% 23.50% 32.15% 50.61% 65.78% IDBI 7.76% 8.70% 10.06% 11.85% 14.23% ICICI 32.49% 34.84% 39.39% 33.76% 36.14%

Table 3.2 EPS Figure 3.7 EPS

Earning Per Share

0.00% 20.00% 40.00% 60.00% 80.00% 100.00% 120.00% 140.00% 160.00% HDFC SBI AXIS IDBI ICICI 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 58 | P a g e

Calculating EPS To calculate this ratio, simply divide the companys net income by the number of shares outstanding during the same period. If the number of shares out in the market has changed during that period (ex. a share buyback), a weighted average of the quantity of shares is used. Importance of EPS The significance of EPS is obvious, as the viability of any business depends on the income it can generate. A money losing business will eventually go bankrupt, so the only way for long term survival is to make money. Earnings per share allow us to compare different companies power to make money. The higher the earnings per share with all else equal, the higher each share should be worth. EPS is often considered the single most important metric to determine a companys profitability. It is also a major component of another important metric, price per earnings ratio (P/E). When we do our analysis, we should look for a positive trend of EPS in order to make sure that the company is finding more ways to make more money. Otherwise, the company is not growing and thus should be considered only if you are confident that it can at least sustain its income. When we do our analysis, we should look for a positive trend of EPS in order to

make sure that the company is finding more ways to make more money. It is clear from the figure 3.7 that SBI tops the group so that investors would select SBI to invest. HDFC is also showing the positive trend over last 5 year. AXIS bank must be attracted by investors as positive growth in EPS is highest among peers who show its ability to generate profit for shareholders. ICICI has not any remarkable performances in EPS. There were so many ups and down in ICICI business performance during economic crises which is

Interpretation

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 59 | P a g e

reflected in its EPS. IDBIs performance is just okay. Its neither high nor low. IDBI maintained its EPS but its slightly growing.
Net Profit Margin
Particular 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 HDFC 19.46 16.57 15.72 13.75 18.23 SBI 12.31 11.5 13.75 14.3 12.91 AXIS 16.79 14.45 15.29 16.75 21.61 IDBI 10.42 9.93 9.09 7.38 6.75 ICICI 18.43 13.53 13.5 12.09 15.66

Table 3.3 NPM

Net Profit Margin

0 5 10 15 20 25 HDFC SBI AXIS IDBI ICICI 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 60 | P a g e

Figure 3.8 NPM

Net Profit margin is a key method of measuring profitability. It can be interpreted as the amount of money the company gets to keep for every dollar of revenue. That is, Net Profit Margin = Net Income Net Sales.

Profit margins can be useful metrics, but typically require some specific circumstances to really have significance. Suppose we have Company A from above (15% profit margins) and Company B (with 20% profit margins). If A and B are in the same industry and, indeed, are competitors, then B may be a more intelligent investment. If, however, companies A and B are not in the same space, then the differences in profit margins may not be so insightful. Suppose A is in an industry where profit margins are typically less than 10%, and B is in an industry where margins are typically greater than 25%, then A is probably a higher quality candidate. AXIS bank shown its performance in Net Profit Margin as its highest among group. HDFCs NPM is better but it decreased in first 4 year (2005-09) and then in 2009-10 its rises. SBI is slightly low as compared to HDFC but its performance is constant. IDBIs NPM is gradually decreasing; reason is the rise in expenditures and poor performance in economic crisis. ICICI in 2005-06 has second highest NPM (18.43%) but it decreased to the only 12 % in 2008-09. ICICI has incurred huge losses in financial crisis but in 200910 it again shows its ability to perform and achieve 15.66%

Interpretation

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 61 | P a g e Particular 2005-06 2006-07 2007 - 08 2008 - 09 2009 - 10 HDFC 1.39% 1.39% 1.42% 1.42% 1.45% SBI 0.92% 0.98% 1.01% 1.04% 0.88% AXIS 1.11% 1.07% 1.24% 1.44% 1.67% IDBI 0.66% 0.66% 0.67% 0.62% 0.53% ICICI 1.21% 1.04% 1.12% 0.98% 1.13%

Table 3.4 ROA Figure 3.9 ROA

Return on Assets
0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 1.20% 1.40% 1.60% 1.80% HDFC SBI AXIS IDBI ICICI 2005-06 2006-07

2007 - 08 2008 - 09 2009 - 10

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 62 | P a g e

Return on Assets Where asset turnover tells an investor the total sales for each $1 of assets, return on assets, or ROA for short, tells an investor how much profit a company generated for each $1 in assets. The return on assets figure is also a sure-fire way to gauge the asset intensity of a business. ROA measures a companys earnings in relation to all of the resources it had at its disposal (the shareholders capital plus short and long-term borrowed funds). Thus, it is the most stringent and excessive test of return to shareholders. If a company has no debt, the return on assets and return on equity figures will be the same. HDFC has shown remarkable ROA over 5 years but AXIS bank will attract more eyes as its ROA increases for last 5 year. SBIs ROA is slightly low as compared to HDFC; reason is the SBI has highest assets in Indian bank industry thats why its ROA is low as compared to AXIS bank and HDFC bank. IDBI is out performed in ROA but ICICIs ROA is quite enough to attract investors. Its rise and fall alternatively YOY.

Interpretation

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 63 | P a g e Particular 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 HDFC 65.79 66.08 65.28 66.64 72.44 SBI 62.11 73.44 77.51 74.97 75.96 AXIS 52.79 59.85 65.94 68.89 71.87 IDBI 238.79 166.12 124.35 100.13 86.28 ICICI 87.59 83.83 84.99 91.44 90.04

Table 3.5 Credit Deposit Ratio Figure 3.10 Credit Deposit Ratio

Credit Deposit Ratio

0 50 100 150 200 250 300 HDFC SBI AXIS IDBI ICICI

2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 64 | P a g e

It is the proportion of loan-assets created by banks from the deposits received. The higher the ratio, the higher the loan-assets created from deposits. Consider Bank X which has deposits worth Rs. 100 crores and a credit-deposit ratio of 60 per cent. That means Bank X has used deposits worth Rs. 60 crores to create loan-assets. Only Rs. 40 crores is available for other investments. Now, the Indian government is the largest borrower in the domestic credit market. The government borrows by issuing securities (G-secs) through auctions held by the RBI. Banks, thus, lend to the government by investing in these Gsecs. And Bank X has only Rs. 40 crores to invest in G-secs. If more banks like X have lesser money to invest in G-Secs, what will the government do? After all, it needs to raise money to meet its expenditure. If the money so released is large, ``too much money will chase too few goods'' in the economy resulting in higher inflation levels. This would prompt investors to demand higher returns on debt instruments. In other words, higher interest rates HDFC, SBI and AXIS bank has CDR in equal range from last 5 year. IDBI has highest CDR all 5 year but good thing is that is gradually fall YOY. ICICI banks CDR is slightly higher than SBI , AXIS and HDFC but it also maintained its CDR YOY.

Interpretation

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 65 | P a g e Column1 2007 - 08 2008 - 09 2009 - 10 HDFC 1.30% 1.98% 1.43% SBI 3.04% 2.84% 3.05% AXIS 0.72% 0.96% 1.13% IDBI 1.87% 1.38% 1.53% ICICI 3.30% 4.32% 5.06%

Table 3.6 GNPA

Gross Non Performing Assets

0.00% 1.00% 2.00% 3.00%

4.00% 5.00% 6.00% HDFC SBI AXIS IDBI ICICI 2007 - 08 2008 - 09 2009 - 10

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 66 | P a g e

Figure 3.11 Gross NPA

Gross NPA: Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all the non standard assets like as substandard, doubtful, and loss assets. It can be calculated with the help of following ratio: Gross NPAs Ratio Gross Advances SBI maintained its GNPA to 3% which is very good sign of performances as SBI is the largest lender in INDIA. HDFCs GNPA is quite good as it is low with compared to ICICI and SBI but in 2008-09 GNPA rises. The reason may be economic crises. AXIS bank has lowest GNPA which shown its management ability. ICICI has the highest GNPA in banking industry and rising YOY.

Interpretation

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 67 | P a g e Particular 2007 - 08 2008 - 09 2009 - 10 HDFC 0.50% 0.60% 0.50% SBI 1.78% 1.76% 1.72% AXIS 0.36% 0.35% 0.36% IDBI 1.30% 0.92% 1.02% ICICI 1.12% 2.09% 2.12%

Table 3.7 Figure 3.12 Net NPA

Net Non Performing Assets

0.00% 0.50% 1.00% 1.50%

2.00% 2.50% HDFC SBI AXIS IDBI ICICI 2007 - 08 2008 - 09 2009 - 10

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 68 | P a g e

Net NPA:
Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPAs according to the central bank guidelines, are quite significant. That is why the difference between gross and net NPA is quite high. It can be calculated by following_

Net NPAs = Gross NPAs Provisions

Gross Advances - Provisions

AXIS Bank has least Net NPA and ICICI has highest NNPA among group. HDFC shown its management quality as it maintained its NNPA YOY. SBI has to keep NNPA below. IDBI has successful to control NNPA YOY.

Interpretation

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 69 | P a g e

Findings & conclusion

Chapter-04

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 70 | P a g e

Capital adequacy: HDFC BANK has shown best performance in CAR as its gradually rising YOY and IDBIs decreasing YOY. IDBI should reconsider their business tactics. Return on Assets: HDFC tops the group and IDBI again at last but this tie IDBI shown consistent performance as compared to ICICI having higher ROA. Earnings Per Share: SBIs EPS is highest among group. IDBI has least EPS. Investors will choice SBI over all banks and IDBI at last.

Net Profit Margin: AXIS Bank has highest NPM in 2009-10 and rising YOY. IDBIs NPM is decreasing YOY. Credit Deposit Ratio: HDFC maintains its CDR and tops the group. IDBI again on worst side but good thing is that its decreasing YOY. Gross NPA: AXIS bank has least GNPA and ICICI has highest among peers. Net NPA: AXIS Bank again performed better than others and ICICI has maintained its position. SBI has rise in NNPA over the GNPA.

Findings

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 71 | P a g e

1) The banks should adapt themselves quickly to the changing norms. 2) The system is getting internationally standardized with the coming of BASELL II accords so the Indian banks should strengthen internal processes so as to cope with the standards. 3) The banks should maintain a 0% NPA by always lending and investing or creating quality assets which earn returns by way of interest and profits. 4) The banks should find more avenues to hedge risks as the market is very sensitive to risk of any type. 5) Have good appraisal skills, system, and proper follow up to ensure that banks are above the risk.

SUGGESTIONS FOR FURTHER RESEARCH

Research on which industries are best suited for the use of the CAMELS Framework. Research on how other variables can be added or how variables can be selected to suit the industry needs. Research on why the CAMELS Framework can not be used as a tool of performance evaluation.

Recommandations

KinG Of uNfoRtunAteS
Email: - satishpgoyal@gmail.com PUNE 2010 72 | P a g e

1. Websites: www.investmentz.com www.sify.business.com www.investopedia.com

www.bseindia.com http://www.icicibank.com http://www.hdfcbank.com

http://www.axisbank.com www.moneycontrol.com http://www.allbankingsolutions.com/camels.htm

Bibliography