Analysis of Branch profitability

Submitted by K. Laxminarayana University Reg No:112542246 BOB Reg No: BOB0024815

The goal of this project is to analyze the Balance Sheet and Profit & Loss account of Tilaknagar Branch (Hyderabad, AP-1)--Analysis of the Profitability of the Branch.
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Certificate from the Mentor

This is to certify that this project titled Analysis of branch profitability is a bonafied work carried out and developed by K.LAXMINARAYANA in partial fulfillment for the 1 year training program of PGDBF at Baroda Manipal School of Banking. This is also to certify that this project is the result of candidates own work and is of sufficiently high standard to warrant its submission to the university for the award of the said degree. The

assistance and help rendered to him during the course of his project work in the form of basic source material and information have been duly acknowledged.

Mentor

P S N Murthy Chief Manager Tilaknagar Branch Bank of Baroda

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Acknowledgement

I present this project on Analysis of Branch Profitability that has a significant impact on business of the branch in Bank of Baroda, with a sense of great pleasure and satisfaction. I take this opportunity to express my gratitude to the people who have been instrumental in the successful completion of this project. I would like to show my greatest appreciation to Mr. P.S.N.Murthy (Chief Manager) and the Staff members of Tilaknagar branch, Bank of Baroda. I cant say thank you enough for his tremendous support and help. I feel motivated and encouraged every time I attend his meeting. Without his encouragement and guidance this project would not have materialized. The guidance and support received from all the members who contributed to this project, was vital for the successful completion of the project. I am grateful for their constant support and help.

Date: 15-11-2012

K Laxminarayana
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Table of content

CERTIFICATE FROM THE MENTOR .................................................................................................................... 2 ACKNOWLEDGEMENT ..................................................................................................................................... 3 TABLE OF CONTENT ......................................................................................................................................... 4 EXECUTIVE SUMMARY ..................................................................................................................................... 5 INTRODUCTION / BACKGROUND ..................................................................................................................... 7 RELATED THEORY / LITERATURE....................................................................................................................... 8 STUDY / ANALYSIS OF TILAKNAGAR BRANCH.................................................................................................. 10 RECOMMENDATIONS .................................................................................................................................... 26 CONCLUSION ................................................................................................................................................ 28

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Executive summary

The term 'profit' is an accounting concept which shows the excess of income over expenditure viewed during a specified period of time. Profit is the main reason for the continued existence of every commercial organization. On the other hand, the term profitability is a relative measure where profit is expressed as a ratio, generally expressed as a percentage. Profitability depicts the relationship of the absolute amount of profit with various other factors. Profitability is the most important and reliable indicator as it gives a broad indicator of the ability of a bank to raise its income level. Profitability of banks is affected by a number of factors. Some of these are endogenous, some are exogenous. Changes in policies made by RBI are exogenous to the system. These include changes in monetary policy, changes in quantitative credit control like changes in cash reserve ratio(CRR), statutory liquidity ratio(SLR), changes in bank rates, qualitative credit controls like selective credit control measures, credit deposit ratio, region-wise guidelines on lending to priority sector, changes in interest rates on deposits and advances, levy of tax on interest income etc. Various other factors like careful control of expenditure, timely recovery of loans are endogenous. In practice executives define profits in banks as the difference between total earnings from all earning assets and total expenditure on managing the entire asset & liabilities portfolio. In case of banks, the main source of income is interest earned and discount on bills discounted. Since banks accept various types of deposits from people so interest paid to customer is an important expenditure of the banks. The difference between interest earned and interest paid is known as spread
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and is a good indicator of bank's efficiency. Establishment expenses covering salaries, provident fund, allowances, and bonus and so on, form another important component of expenditure. Profit is the very reason for the continued existence of any commercial organization. The rate of profitability and volume of profits are therefore rightfully considered as indicators of efficiency in the deployment of resources of banks. This Project aims at Analysis of Tilaknagar Branch Profitability by reading the Balance sheet and Profit & Loss Account for the financial year 2011-12(FY12) and comparing the same with the previous Fiscal year 2010-11(FY11) to interpret the trend.

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Introduction / Background
Concept of profitability Profitability means ability to make profit from all the business activities of an Organization, Company, Firm, or an Enterprise. It shows how efficiently the management can make profit by using all the resources available in the market. Profitability is the the ability of a given investment to earn a return from its use. Profitability is an important yardstick for measuring the efficiency, the extent of profitability cannot be taken as a final proof of efficiency. Sometimes satisfactory profits can mark inefficiency and conversely, a proper degree of efficiency can be accompanied by an absence of profit. The net profit figure simply reveals a satisfactory balance between the values receive and value given. The change in operational efficiency is merely one of the factors on which profitability of an enterprise largely depends. Moreover, there are many other factors besides efficiency, which affect the profitability.

Profit & Profitability Sometimes, the terms Profit and Profitability are used interchangeably. But in real sense, there is a difference between the two. Profit is an absolute term, whereas, the profitability is a relative concept. However, they are closely related and mutually interdependent, having distinct roles in business. Profit refers to the total income earned by the enterprise during the specified period of time, while profitability refers to the operating efficiency of the enterprise. It is the ability of the enterprise to make profit on sales. It is the ability of enterprise to get sufficient return on the capital and employees used in the business operation.

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Related theory / literature

Profitability analysis is a component of enterprise resource planning (ERP) that allows administrators to forecast the profitability of a proposal or optimize the profitability of an existing project. Profitability analysis can anticipate sales and profit potential specific to aspects of the market such as customer age groups, geographic regions, or product types. Profitability analysis can help key personnel in an enterprise to:

Identify the most and least profitable products or services. Discover which sources of information offer the most reliable facts. Optimize responses to changing customer needs. Evolve the product mix to maximize profits in the medium and long term. Isolate and remedy the causes of decreasing profit margins.

Profitability Ratio which helps in Statistical Analysis of Profitability 1. Credit Deposit Ratio 2. Return on Asset Ratio 3. Operating Profit to Total Asset Ratio 4. Spread to Total Asset Ratio 5. Interest Income to Total Income Ratio 6. Interest Expenditure to Total Expenditure Ratio 1. Credit Deposit Ratio: It is the ratio of how much a bank lends out of the deposits it has mobilized. It indicates how much of a bank's core funds are being used for lending, the main banking activity. A higher ratio indicates more reliance on deposits for lending and vice-versa. Credit Deposit Ratio = Net Loans / Total Deposits

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2. Return on Asset Ratio: This ratio indicates how profitable a company is relative to its total assets. The return on assets (ROA) ratio illustrates how well management is employing the company's total assets to make a profit. The higher the return, the more efficient management is in utilizing its asset base. The ROA ratio is calculated by comparing net income to average total assets, and is expressed as a percentage. Formula: Return on Assets = Net Income / Average Total Assets 3. Operating profit to Total Asset Ratio: It is a measure of income that tells investor how much of revenue will eventually become profit for a branch. The higher the operating profit, the more profitable a branch business is. Operating profit = Revenue Total expenditure 4. Spread to total asset Ratio: The difference between interest earned and interest
paid is known as spread and is a good indicator of bank's efficiency. Spread on Total Assets is defined as the Net Interest Income Divided by Total Assets.

5. Interest income: Interest income is earned on Advances 6. Interest Expenditure: Interest paid on Deposits

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Study / Analysis of Tilaknagar Branch

Tilaknagar Branch, Hyderabad Date of Opening: 25-12-1991
SOL ID: (Service Outlet ID)

2420. This normally indicates the serial number of branches opened. Region: Zone: Andhra Pradesh Region-I KARAP

Tilaknagar branch is situated in Metro City surrounded by well developed Residential colonies. Good old branch having good loyal and high net worth customer base. This branch is strengthened by the presence of Regional office, RLF and SME-LF in the city which facilitated quick decision making in sanction of Advances. This branch ranked 4th place in the region in terms of volume of total business. Branch is under CBS with good infrastructure and having onsite ATM. Tilaknagar branch has the large customer base of deposits and advances. The number of deposit accounts is 15800 and advance accounts are 776. This branch is offering all most all the major products of our bank and also the third party products like BOB Gold Coins, Baroda Pioneer Mutual Funds, India First Life Insurance products which helps in increasing the non-interest and fee-based income of the branch.

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Business Performance

The table below represents financial status and Business Performance of the branch from FYs 2010 to 2012. (Rs. in lacs) MAR 10 MAR11 ACTUALS ACTUALS 1. Total Deposits 12344.92 623.59 3906.80 4530.39 7814.53 10566.12 22911.04 17811.38 1100.62 4981.17 6081.79 11729.59 12860.22 30671.6 14.95 1158.22 716.19 721.76 5.47% 11.99% 1909.25 1645.65 885.69 989.94 5.36% 12.42% 2555.97 MAR 12 ACTUALS 20427.36 848.48 4525.89 5374.34 15053.02 14553.09 34980.45 1966.02 2004.52 1364.83 1042.19 6.99% 13.74% 2915.04 SEPT12 ACTUALS 21488.48 622.59 5102.24 5724.83 15763.65 14369.50 35857.98 1447.34 777.43 836.66 236.05 7.83% 10.05% 3259.82

A Current B SB Low cost Deposits(CASA) C Time 2. Total Advances Total Business (Deposits + Advances) NPA Income Expenses Net Profit Cost of Deposits Yield on Advances Business per employee

3. 4 5 6 7 8. 9

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Profitability Analysis
Deposits
MAR'10 Current SB Low cost Time 623.59 3906.8 4530.3 7814.53 MAR'11 1100.62 4981.17 6081.79 11729.59 MAR'12 848.48 4525.89 5374.34 15053.02

16000 14000 12000 10000 8000 6000 4000 2000 0 Current SB Low cost Time MAR'10 MAR'11 MAR'12

From the above graph we can infer that there is a continuous growth in time deposits, whereas current and SB deposits recorded growth in 2011 and a fall in 2012. However CASA i.e low cost deposits are more or less at the average level for the years 2010, 2011 and 2012. The percentages of low cost deposits to total deposits are 36.7%, 34.2 % and 26.37% for the fiscal years 2010, 2011 and 2012 respectively.

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Total Advances: (Amount in Lacs) Retail Credit Priority sec Advances MSE Advances Other Priority sec Advances Total Advances 2010 5516 3009 747 1525 10566.12 2011 6200 2532 590 1735 12860.22 2012 5874 2653 492 1885 14553.09

16000 14000 12000 10000 8000 6000 4000 2000 0 Retail Credit Priority sec Advances MSE Advances Other Priority sec Advances Total Advances 2010 2011 2012

A consistent growth can be observed in Total advances from 2010 to 2011 and 2011 to 2012, which is achieved by creating awareness in the customers about the various types of offers/schemes and quickly disposing off the loan applications. The branch has to concentrate more on SME advances and Priority sector advances which appear to be on a lower side.
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Total NPA: (Amounts in lacs) Sub Standered Asset Doubtful Loss TOTAL NPA
2500 2000 1500 1000 500 0 Sub Standered Asset Doubtful Loss TOTAL NPA

2010 2.73 8.58 3.86 15.17

2011 4.12 7.42 3.41 14.95

2012 448.53 1501.9 15.52 1966.02

Sep-12 281.45 1146.36 19.53 1447.34

2010 2011 2012 Sep-12

Branch profitability depends upon the level of NPA also. From the above graph there is abnormal increase in branch NPA level from the year 2010 to 2011. A major cause for high NPA is failure in projects of big customers. With timely recovery steps situation is improving and NPA level is coming down as shown in the graph. Therefore, as soon as an account is classified as substandard, the banker must keep strict vigil over the security during the next one year because in the event of the account being classified as doubtful, the lack of security proves too costly for the bank.

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Total Income & Total Expenses Expenses: (Amount in Lacs) 2010 2011 2012 Total income 1158 1645 2004 Total Expenses 716 885 1364

2500

2000

1500 Total income 1000 Total Expences

500

0 2010 2011 2012

If we compare expenditure of the branch with the income for the last three years income is higher than the expenditure. Expenditure can show direct impact on net profits of branch. Total income including interest earned on advances is commission exchange, Recovery in bad debts and other income. Total expenses are sum of interest paid on Deposits; interest paid on Borrowings, staff expenses, Bad Borrowings, debt expenses account and other expenses

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Total income

other income Total income (Amount Interest earned Commission & Exchange in Lacs) on Advances 2010 962.98 179.12 16.12 1158.22 2011 1441.02 188.08 16.55 1645.65 2012 1876.2 112.34 15.98 2004.52

2500

2000 Interest earned on Advances 1500 Commision & Exchange other income Total income 500

1000

0 2010 2011 2012

Most of the customers used Demand drafts and Bankers Cheque to transfer money heque in pre RTGS &NEFT period. It fetches good exchange commission to the bank. NEFT Now the customers are using NEFT and RTGS for money transfers instead of DDs transfers and BCs. This is one of the reasons for reduction in commission based income. Total advances are also increased from the year 2010 to 2012 so the interest earned on advances also increased.
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Avg. Return on advances Formula: Interest received on advances Total advances Mar2011 Interest received on 1441.02 advances Total advances Avg.Return on advances 12860.22 11.20

Mar2012 1876.20 14553.09 12.89

The Return on advances are increased from FY 2011 to FY 2012

13 12.5 12 11.5 11 10.5 10 Avg.Return on advances 2011 20112

Average return on advances increased due to following reasons Total advances increased for the FY 2012 Increase in Rate of interest( Changes in Base Rate)

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Total Expenses:

(Amount In Lacs ) Int paid on Deposits Staff expenses other Expenses Bad debt written off Total expenses

2010 636.04 45.43 33.55 1.17 716.19

2011 772.6 73.2 39.55 0.34 885.69

2012 1267.4 64.33 33.1 0 1364.83

1600 1400 1200 1000 800 600 400 200 0 Int paid on Deposits Staff expences other Expences Bad debt written off Total expences 2010 2011 2012

Deposits increased from the year Mar 2010 to Mar 2012. This can be attributed to increased interest rates which reflected in increase in interest paid on deposits. Staff expenses also increased from Mar 2011 to Mar 2012 because of arrears paid to the staff.
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Avg .Cost of Deposits Formula: Total interest: paid on deposits Total deposits Mar2011 Total interest paid on 772.60 deposits Total Deposits 17811.38 Avg Cost of Deposits 4.33 Mar2012 1267.40 20427.36 6.20

The cost of deposits are increased from FY 2011 to FY 2012

7 6 5 4 3 2 1 0 Total interest paid on deposits 2011 2012

Cost of deposits increased from Mar 11 to Mar 12 because of fluctuations in the rate of interest. Changes in Rate of interest showed impact on cost of deposits. . Also the composition of deposits with the branch has changed. Increasing time with deposits lead to pay more interest on time deposits. So, branch has to concentrate more on CASA deposits

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Growth percentage in CASA to total Deposits (Amounts in lacs) Total Deposits Low cost Deposits(CASA) Growth % 2010 12344.92 4530.39 36.69 2011 17811.38 6081.79 34.14 2012 20427.36 5374.34 26.30 Sep-12 21488.48 5724.83 26.63

40 35 30 25 2010 20 15 10 5 0 Growth % 2011 2012 Sep-12

From the above graph we can observe that there is slight decrease in growth % in CASA to total deposits during the year 2010 to 2012. But from the last six months the branch CASA is going up because of the staff referrals to customers. As CASA deposit level is relatively low (26.63%) more focused efforts needed to be put in to strengthen the CASA portfolio.

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Business per employee:

year 2010 2011 2012

Business per employee 1909 2555 2915

3500 3000 2500 2000 1500 1000 500 0 Business per employee 2010 2011 2012

Every year the business per employee is increasing. Because of following reasons 1. Customer Delight 2. Social Banking 3. Targeting HNI Customers 4. Target High Business Shops 5. Identifying our good borrowers

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Percentage of staff expense to the total expenses Formula: staff expense Total expenses Mar2011 73.20 Mar2012 64.33 1364.83 4.71

staff expense

Total expenses 885.69 % of staff expense to the 8.26 total expenses

9 8 7 6 5 4 3 2 1 0

2011 2012

% of staff expense to the total expenses

The Percentage of staff expense to the total expenses Decreased from FY 2011 to FY 2012, because the arrears paid to the staff during the year 10 10-11 .It has been taken into P & L account for the year 10-11 hence there is increase in staff 10 11 expenses during Mar 11.Staff expenses came to normal in the FY 2012.

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Percentage of staff expense to the total Business

Formula: staff expense Total Business (Deposits+Advances)

staff expense

Mar2011 73.20

Mar2012 64.33 34980 0.18

Total business 30671 % of staff expense to the 0.23 total business

The % Percentage of staff expense to the total income decreased from FY 2011 to ecreased FY 2012
0.25

0.2

0.15 2011 0.1 2012

0.05

0 % of staff expense to the total business

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Findings Cost of deposits increased from Mar 11 to Mar 12 because of increase in ROI over the time deposits. Average return on advances increased, Because High yielding advances increased in the FY 12 The branch has to concentrate on non interesting income by promoting third party products and non fund based products. Operating expenses reduced from the FY 2011 to FY 2012 therefore branch has good control over on operating expenses Staff expenses Decreased from FY 2011 to FY 2012, because the arrears paid to the staff during the year 10-11 .it has been taken into P & L account for the year 10-11 hence there is increase in staff expenses .Staff expenses normalized in the FY 2012. Suggestions: Since the branch is located in prime residential area there is scope for getting more CASA deposits .Branch needs to concentrate more on CASA, Current Deposits in particular. Branch can canvass for new savings, Current and Salary Accounts, thereby increasing customer base which may turn into huge CASA deposit in future. Increase yield on advances by increasing qualitative credit portfolio and reduction in NPA, arresting fresh slippage. Maximize fee based income

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Concentrate on recovery in NPA accounts. Control slippage of loan accounts by regular monitoring. Periodical reviews should be done. Prevent the revenue expenses by reducing other expenses Increase the sales of Third party products by cross selling Motivate the customers towards usage of alternate delivery channels which results in reduction in cost of transaction, thereby we can reduce back office staff and deploy them in front office. Minimizing the capital expenses and revenue In connection with compromise settlement, sacrifice amount should be least possible.

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Recommendations
Targeting HNI Customers The HNI customers / Top 50 Customers of the branch should be identified & we can give advisory services to their financial management. We can sell our Baroda Life Insurance plans, Baroda Pioneer Mutual Funds, Gold coin sales, Acquiring more Fixed Deposits, Recurring Deposits from them. Wealthier customers should be invited to the branch and high quality Financial Advisory Services should be provided. Target High Business Shops In Tilaknagar, there is good scope for Retail lending as well as lending to small Business Units like Branded Textile Showroom, Restaurants, Shopping malls etc. are popping up gradually. If we can attract those high business shops to have account (current) with us, then the business of the branch will be increased which in turn increases the profitability. Prudent Banker Most important Strategy to improve the business of the branch. Each and Every employee has to monitor the transactions very carefully as we deal with our customers money. They should monitor each and every account carefully & if they feel the account may slip to NPA category, from the initial stage itself necessary preventive & recovery measures have to be taken. Customer Delight This can be achieved by providing excellent customer service & creating innovative products for the benefit of the customers. Through customer cooperation only we can achieve any target in our bank.

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Recognizing our good borrowers Recognizing our good borrowers and rewarding their loyalty by offering concessional rates of interest, better operational flexibility in the operation of their accounts. Development Areas As CASA deposit level is relatively low (32%) more focused efforts needed to be put in to strengthen the CASA portfolio. There is a need to inculcate competitive spirit in staff members to promote business as a bank situated in most banked area where competition to canvass business relatively on the higher side. Customer referrals Referral marketing should be done in the branch because it takes word of mouth from the spontaneous situation to one where maximum referrals are generated Segment Customers We have to segment our customers into the mass market and more affluent or wealthy individuals. Focus on providing efficient, streamlined services for the mass market. Focus individual time on building relationships with affluent customers. All the services of the bank should be clearly communicated to the customers. Good Location & Clean Environment The Branch should give a pleasant and comfortable ambience to the customers and they should feel the comfortable to visit and get their business done at our branch again and again. This paves the way to build the Customer Relationship with our bank and therefore whatever we want to achieve in terms of profit, we can achieve.

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Conclusion

The economic outlook for FY13 is quite mixed. The risks from weak global outlook, volatile inflation and investment slowdown remain on the downside. However, our Banks capital strength, adequate liquidity reserves and well diversified balance sheet & sources of earnings has made it more stable and stronger. During FY13, our Bank will continue to expand its market share in both deposits and advances by exploiting its geographic & strategic advantages and capital strength. As in the past, our Bank will focus on maintaining a high growth in domestic CASA deposits. Our Bank will leave no stone unturned in maintaining its asset quality in terms of low NPA ratios. With reference to Tilaknagar branch, we can infer that the banks policies and plans to increase business and profit are implemented at the branch level. Today, the major differentiator amongst the banking service providers is the quality of customer service which the branch is maintaining at high standards at all times. Tilaknagar branchs well sustained good performance has enabled it to face the future with confidence and commitment. The varied interests and expectations of customers have to be taken care of by further improving upon the delivery of services which if most essential to retain and increase profits and thereby profitability. I would specially like to thank my mentor and all staff members of Tilaknagar branch, as they provided me full support, encouragement and acted as a backbone for this project.

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