UNIT3

Financial Analysis
UNIT 3 FINANCIAL ANALYSIS OF BANKS of Banks
Objectives
The objectives of this unit are to:
l explain the role of financial analysis of Banks in managing finance
l illustrate different methods of analysing the financial statements
l understand how management can examine the performance of Banking
operations
l highlight some of the special features in financial analysis related to Banks
Structure
3.1 Introduction
3.2 Role of financial analysis in financial management
3.3 Techniques of Financial Analysis
3.4 DuPont Model of Financial Analysis
3.5 Special issues in Financial Analysis of Banking Industry
3.6 Summary
3.7 Self-Assessment Questions
3.8 Further Readings
Tables
3.1 INTRODUCTION
Every organisation has a purpose and it is generally stated in the form of mission or
vision statement. To achieve this purpose, organisations need finance, which is raised
from the capital market through debt or equity and such capital is raised either directly
from the investors or through intermediary institutions like Banks. Once capital is
raised, the capital is invested in assets, which can be broadly classified into fixed and
current assets. Several factors determine the choice of assets and proportion of
investments in different types of assets. For instance, banking industry will invest less
on real fixed assets whereas automobile manufacturer would invest substantial part of
the capital to buy fixed assets. After raising capital and acquiring assets, the business
unit runs the operations and generates revenue. Since most business units are started
with an objective of making profit, many of them might report profit. What is the role
of accounting in general when firm performs certain activities to achieve the goal?
Accounting statements typically reflect the above activities and allow the managers to
examine whether their plan or strategy has resulted in positive impact on the company
or not. Balance Sheet, Profit and Loss Account and Cash Flow Statements are three
principal financial statements and they reflect the above activities. Balance Sheet
explains where from the organisation has raised money and where they have invested
the money. Profit and Loss account explains how efficiently the assets of an
organisation have been used and what is the net outcome of the operations in monetary
terms. Cash Flow Statement provides operational outcome, capital raised and where
they are used but all in terms of cash. While the principal financial statements
provide wealth of information to investors and others, there is no ready answer to the
question whether the Organisation has achieved the goal/mission or not. Financial
Statements are analysed further to get such an insight on the performance of the
Organisation and its various parts or division.
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Conceptual Framework
3.2 ROLE OF FINANCIAL ANALYSIS IN FINANCIAL
MANAGEMENT
Financial analysis today is performed by various users of financial statements.
Investors and Management perform the financial analysis to understand how
profitably or productively the assets of the company are used. Lenders and Suppliers
of goods look for the ability of the firm to repay the dues on time. For instance, as a
deposit holder of a Bank, you would be interested in liquidity of the Bank and would
expect the Bank to pay you the amount when you need. Customers would like to know
the long-term solvency of the Bank to get continued support. For example, as a
borrower, you would like your bank to be healthy and profitable since you will be
depending on the Bank for your future needs. Of course, employees would be
interested in the profitability as well as liquidity of the bank. Financial managers not
only prepare financial statements but also analyse the same to get further insight on
the performance of the Organisation. They need to examine the organisation from the
perspective of several users so that they can follow the needs of them and satisfy
several stakeholders. Sometimes, profitability might be affected when the managers
try to satisfy the needs of various stakeholders but if you focus too much on
profitability, it might affect the organisation in other ways. For instance, we would
expect that our deposit holders need liquidity. If we plan for more liquidity, it might
affect profitability. On the other hand, if we continue to have low liquidity, we may
not get funds or we need to pay more interest to attract funds.
While financial analysis is often used for evaluating current or historical performance,
management uses the input of such analysis for future planning exercise. For instance,
in preparing budgets, the inputs of financial analysis are extensively used. Financial
analysis provides linkage between operating activities and funding activities.
Normally, top management sets the goal and operational managers then determine the
level of operations required to achieve the goal. It would be difficult to increase the
level of operations without any investments unless there is a huge idle capacity. Thus
increased activity demands more addition to assets and this in turn puts a demand for
capital. The first step in this process is to know how much of additional assets we
need and how much of capital we need to mobilise from various sources. Financial
analysis, which provides historical linkage between various financial components, is
useful. Suppose the top management fixes a goal to increase the net income by another
20% for the coming year. Using profit to sales linkage, we can estimate additional
turnover required to achieve the goal. Once we know additional turnover, it is possible
for us to assess how much of additional assets are required (fixed and current assets in
the case of manufacturing companies) and then additional funds that are required to
buy the assets. Thus financial analysis is a prerequisite for financial planning.
3.3 TECHNIQUES OF FINANCIAL ANALYSIS

Financial statements are analyzed to answer several questions. A few of them are
listed below along with the relevant techniques used for the same:
(a) How my company is different from other companies in the industry on
distribution of assets, liabilities and cost? Since size of the companies compared
will be different, we need to bring them on certain common scale. For instance,
SBI is several times more than Canara Bank. Comparison is possible if we are
able to reduce the financial statements into percentage basis. This is called
‘common size statement analysis’. Common size statement analysis performed
on yearly basis explains changes in assets/liability mix and cost structure.
(b) How my company has grown over the years? Since growth is important for long-
3 8 term survival, managers would be interested to assess the growth of the company
on various components. This is achieved by taking base year values as 100 and Financial Analysis
then subsequent years values are adjusted to show the growth rate. This type of of Banks
analysis is called ‘Trend Analysis or Time Series Analysis’.
(c) How my company has performed on profitability, productivity of assets and risk?
Performance of companies on these parameters is normally assessed through
computation of important ratios. This type of analysis if called ‘Ratio Analysis’
or ‘Du Pont Chart Analysis’.
To illustrate financial statement analysis, we are using financial statements of Banking
Industry, State Bank of India, HDFC Bank Ltd. and Corporation Bank. Balance Sheet
and Profit and Loss Account of these banks are given in Table-3.1 to 3.4. While State
Bank of India is the largest public sector bank, HDFC Bank is a leading hi-tech
private sector bank. Corporation Bank is one of the best performing PSU Bank and
comparable to HDFC Bank in terms of size. Industry figures are based on all the
banks including public sector, private sector, and foreign banks.
Activity 1
1) Go through Table-3.1 and highlight your important observations of banking
industry.
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2) Go through Table-3.2 to 3.4 (P&L account) of three banks and highlight your
important observations.
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3) Based on Balance Sheet of the three banks, highlight your important
observations.
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a) Common Size Financial Statements Analysis

As mentioned earlier, the common size financial statement expresses each items of the
balance sheet or profit and loss statement as a percentage of total assets and net sales
respectively. Table-3.5 (a) to (c) provide the common size financial statements of SBI,
HDFC Bank and Corporation Bank. An analysis of common size profit and loss
account over the years for each bank and between the banks provides certain
important insights. While interest is important source of income, its dominance has
come down over the years except for Corporation Bank. In Corporation Bank, interest
income contribution has gone up from 46% in 1999 to 80% in 2000. Investment and
dividend income has almost equal share in SBI and HDFC Bank whereas it was at
equal level in 1999 in the case of Corporation Bank but declined to less than 1% in
2002 & 2003. This sudden change could be purely an accounting issue than real
change in the nature of business model of Corporation Bank. For instance, while SBI
and HDFC Bank might recognise interest earned on government securities as income
from investments, whereas Corporation Bank may show the same under interest
3 9
Conceptual Framework income. Other income, which mainly consists of fee based income has increased over a
period of time and is in the range of 15% to 18%. The hi-tech HDFC Bank reports
highest other income compared to the two PSU banks.
It is natural that banks spend large amount towards interest expenditure and a
declining trend is witnessed on account of general reduction in interest rates in the
market. Next to interest expense, personnel expenditure share major component.
Thanks to VRS schemes and increase in business volume, the personnel expenditure
has come down from 19% to 5% in the last five years for SBI. While HDFC Bank
spends about 6% for employees, Corporation Bank spends more than 10% toward
employees’ cost. Other operation expenditure ranges from 5% to 15% and economies
of scale clearly show the importance of cost control. Provision for NPA is lower for
newer banks, whereas PSU banks spend almost two times of HDFC Bank. Being a hi-
tech bank, HDFC Bank spends more on capital equipment and hence larger
depreciation. Despite such higher spending, profit for the HDFC and Corporation
Bank are significantly higher than SBI.
Activity-2
1) Highlight strong and weak points of SBI based on common size P&L account.
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2) Repeat the above for HDFC Bank and Corporation Bank.
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3) Why the profitability of SBI is significantly lower despite enjoying economies of
scale?
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While deposit constitutes significant portion of sources of capital for all banks, you
can observe major differences in components of deposits. While Corporation Bank
enjoys largest percentage of term deposits (59%), HDFC could attract only 42%.
Is it good or bad? Though interest rate for term deposits is more, the liquidity
risk is low and banks can use the amount for longer period. The distribution of funds
among various assets is by and large same. In terms of importance, Investments
constitute major uses of funds followed by loans and advances. However, in
Corporation Bank, loans and advances is more than investments for the year 2003.
Investment in fixed assets is relatively small in banking industry. A detailed discussion
on the Disabilities and Assets of the banks is presented in Blocks 2 and 3 of this
course respectively.
b) Trend Analysis
Trend analysis shows the level of growth that banks have achieved over the years on
each component of financial statements. Suppose a bank shows a growth rate of 20%
in total income but its cost has increased by 26%, then its profitability is affected. One
can perform such analysis by observing the trends on each one of financial
parameters. Table-3.6 (a) to (c) show the trends in financial variables.
4 0
While SBI and Corporation Bank has reported around 68% income growth in the last Financial Analysis
five years, HDFC Bank has seen a growth rate of more than 500% during the same of Banks
period. It doesn’t mean that HDFC Bank will continue to grow at this rate in the
future since a substantial part of the growth arises from the smaller base. Similarly,
asset
base has gone up around 65%-70% for SBI and Corporation Bank, HDFC Bank
reported a growth rate of 700% during the same period. While SBI has started
concentrating on Treasury activities, Corporation Bank is focussing more on lending.
Again, Term Deposits has seen major growth in Corporation Bank compared to
other two banks.
Activity-3
1) Examine Table-3.6 and show how Corporation Bank is different from SBI?
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2) Growth ratio of HDFC Bank is significantly larger than other two banks? Why?
Is it sustainable?
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3) How the three banks performed on personnel cost and other operating expenses?
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c) Ratio Analysis
Ratios are aimed to assess profitability, productivity of assets/capital and risk
associated with operations. Though one can get some basic idea about the bank or a
company from the above ratios while evaluating percentage statement and trend
analysis, the level of comparison is restricted to few ratios. Ratio analysis integrates
financial statements to assess financial health of the firm. Some of the important ratios
in general are discussed below. (Refer to MS-4 course material for detailed
discussion). However, many of these ratios require modification or are not relevant for
banking industry and therefore, we will discuss the ratios relevant to banking industry
separately.
1) Liquidity Analysis Ratios
i) Current Ratio: A firm needs liquid assets to meet day to day payments. Therefore,
liquidity ratios highlight the ability of the firms to convert its assets into cash. If the
ratios are low then it means that money is tied up in stocks and debtors. Thus, money
is not available to make payments. This may cause considerable problems for firms in
the short run. It is often viewed that a value less than 1.5 implies that the company
may run out of money as its cash is tied up in unproductive assets. 4 1
Conceptual Framework The current ratio shows the relationship between the current assets and the current
liabilities
Current Assets
Current Ratio = ———————–
Current Liabilities
ii) Quick Ratio: The acid test ratio is similar to the current ratio as it highlights the
liquidity of the company. A ratio of 1:1 (i.e. a value of approximately 1) is
satisfactory. However, if the value is significantly less than 1 it implies that the
company has a large amount of its cash tied up in unproductive assets, so the
company may struggle to raise money in the short term.
Quick Assets
Quick Ratio = ———————
Current Liabilities
Quick Assets = Current Assets – Inventories
iii) Net Working Capital Ratio: The working capital ratio can give an indication of
the ability of your business to pay its bills. Generally a working capital ratio of 2:1 is
regarded as desirable. A stronger ratio indicates a better ability to meet ongoing and
unexpected bills therefore taking the pressure off your cash flow. Being in a liquid
position can also have advantages such as being able to negotiate cash discounts with
your suppliers. A weaker ratio may indicate that your business is having greater
difficulties meeting its short-term commitments and that additional working capital
support is required. Having to pay bills before payments are received may be the issue
in which case an overdraft could assist. Alternatively building up a reserve of cash
investments may create a sound working capital buffer. Ratios should be considered
over a period of time (say three years), in order to identify trends in the performance
of the business.
The calculation used to obtain the ratio is:
Net Working Capital
Net Working Capital Ratio = —————————
Total Assets
Net Working Capital = Current Assets – Current Liabilities
2. Profitability Analysis Ratios

Profitability ratios are the most significant of the financial ratios. Similar to income
ratios, profitability ratios provide a definitive evaluation of the overall effectiveness of
management based on the returns generated on sales and investment.
The adequacy of your company’s earnings can be measured in terms of (1) the rate
earned on average total assets; (2) the rate earned on sales; (3) the rate earned on
average common stockholders’ equity; and (4) the availability of earnings to common
stockholders. The most widely used profitability measurements are profit margin on
sales, return-on-investment ratios, and earnings per share.
i) Return on Assets (ROA)

Net Income
Return on Assets (ROA) = —————————
Average Total Assets
Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2
4 2
ii) Return on Equity (ROE) Financial Analysis
of Banks
Net Income
Return on Equity (ROE) = —————————————
Average Stockholders’ Equity
Average Stockholders’ Equity =
(Beginning Stockholders’ Equity + Ending Stockholders’ Equity) / 2
iii) Profit Margin

Net Income
Profit Margin = —————–
Sales
Net Income could either be calculated with net profit or Gross Profit.
iv) Gross Profit on Net Sales

Gross profit ratio helps to determine whether average markup on goods will
consistently cover expenses, therefore resulting in the desired profit. If gross profit
rate is continually lower than your average margin, something is wrong! Be on the
lookout for downward trends in gross profit rate. This is a sign of future problems for
bottom line.
Net Sales – Cost of Goods Sold
Gross Profit Rate = ——————————————
Net Sales
Note: This percentage rate can - and will - vary greatly from business to business,
even for those within the same industry. Sales, location, size of operations, and
intensity of competition are the factors that can affect the gross profit rate.
v) Net Profit on Net Sales

Earnings after Taxes
Net Profit Rate = —————————
Net Sales
This ratio provides a primary appraisal of net profits related to investment. Once the
basic expenses are covered, profits will rise disproportionately greater than sales
above the break-even point of operations.
Note: Sales expenses may be substituted out of profits for other costs to generate even
more sales and profits
The other types of profitability ratios that are in use include:
vi) Management Rate of Return

This profitability ratio compares operating income to operating assets, which are
defined as the sum of tangible fixed assets and net working capital.
Operating Income
Rate of Return = ———————————————
Fixed Assets + Net Working Capital
This rate determines whether assets are efficiently used. This ratio can be calculated
for the entire company or for each of its divisions or operations. The percentage
should be compared with a target rate of return that you have set for the business.
vii) Net Sales to Tangible Net Worth

Net Sales
Net Sales to Tangible Net Worth Ratio = —————————
Tangible Net Worth
Tangible Net Worth = owners’ equity – intangible assets
4 3
Conceptual Framework This ratio indicates whether investment in the business is adequately proportionate to
sales volume. It may also uncover potential credit or management problems, usually
called overtrading and under trading.
Overtrading, or excessive sales volume transacted on a thin margin of investment,
presents a potential problem with creditors. Overtrading can come from
considerable management skill, but outside creditors must furnish more
funds to carry on daily operations.
Under trading is usually caused by management’s poor use of investment money and
their general lack of ingenuity, skill or aggressiveness.
viii) Earnings Per Share (EPS)

The earnings per share ratio is mainly useful for companies with publicly traded
shares. Most companies will quote the earnings per share in their financial statements,
saving you from having to calculate it yourself. By itself, EPS doesn’t really tell you a
whole lot. But if you compare it to the EPS from a previous quarter or year, it
indicates the rate of growth that a company is earning.
Net Income
Earnings Per Share (EPS) = ——————————————————————
Weighted Average No. of Common Shares Outstanding
3. Activity Analysis Ratios
i) Assets Turnover Ratio

The asset turnover ratio simply compares the turnover with the assets that the business
has used to generate that turnover. In its simplest terms, we are just saying that for
every Re. 1 of assets, the turnover is Rs. x. The formula for total asset turnover is:
Sales
Assets Turnover Ratio = ——————————
Average Total Assets
Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2
ii) Accounts Receivable Turnover Ratio

The debtor turnover ratio indicates the average time to collect debts. A ratio that is
lengthening can be the result of some debtors slowing down in their payments.
Economic factors, such as a recession, can also influence the ratio. Tightening your
business’ credit control procedures may be required in these circumstances.
The debtor ageing ratio has a strong impact on business operations particularly
working capital. Maintaining a running total of your debtors by ageing (eg. current,
30 days, 60 days, 90 days) is a good idea, not just in terms of making sure you are
getting paid for the work or goods you are supplying but also in managing your
working capital.
Debtor Ageing Ratio (in days) = No. of days (365)/Accounts receivables
turnover ratio
Sales
Accounts Receivable Turnover Ratio = —————————————
Average Accounts Receivable
Average Accounts Receivable =
(Beginning Accounts Receivable + Ending Accounts Receivable) / 2
4 4
iii) Inventory Turnover Ratio Financial Analysis
of Banks
The inventory turnover ratio indicates how quickly your business is turning over stock.
A high ratio may indicate positive factors such as good stock demand and management.
A low ratio may indicate that either stock is naturally slow moving or problems such as
the presence of obsolete stock or good presentation. A low ratio can also be indicative of
potential stock valuation issues. The calculation used to obtain the ratio is:
Cost of Goods Sold

Inventory Turnover Ratio = —————————
Average Inventories
Average Inventories = (Beginning Inventories + Ending Inventories) /2
4. Capital Structure (Leverage) Analysis Ratios
(i) Debt to Equity Ratio

Also called as gearing ratio. Gearing is concerned with the relationship between the
long term liabilities that a business has and its capital employed. The idea is that this
relationship ought to be in balance, with the shareholders’ funds being significantly
larger than the long term liabilities.
Total Liabilities (Long term debt)
Debt to Equity Ratio = ——————————————
Total Stockholders’ Equity
(ii) Interest Coverage Ratio

The interest coverage ratio is a measurement of the number of times a company
could make its interest payments with its earnings before interest and taxes; the
lower the ratio, the higher the company’s debt burden. As a general rule of thumb,
interest coverage ratio above 2 is good. An interest coverage ratio below 1.0
indicates that the business is having difficulties generating the cash necessary to pay
its interest obligations. The history and consistency of earnings is tremendously
important. The more consistent a company’s earnings, the lower the interest coverage
ratio can be.
Income Before Interest and Income Tax Expenses
Interest Coverage Ratio = —————————————————————
Interest Expense
Income Before Interest and Income Tax Expenses = Income Before Income Taxes +
Interest Expense
Activity-4
1) Compare the Profitability of SBI, HDFC Bank and Corporation Bank with
industry average?
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2) Compare the Productivity of assets/capital of SBI, HDFC Bank and
Corporation Bank with industry average?
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4 5
Conceptual Framework 3) Compare the liquidity/solvency of SBI, HDFC Bank and Corporation Bank with
industry average?
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3.4 DUPONT MODEL OF FINANCIAL ANALYSIS

While ratio analysis helps to a great extent in performing the financial statement
analysis, most of the time, one would be left in confusion with umpteen ratio
calculation in hand. Hence one has to have a guided and structured form of ratio
analysis to get a complete picture of the overall performance and risk of the company
in a nut shell. The DuPont System of Analysis merges the income statement and
balance sheet into two summary measures of profitability: Return on Assets (ROA)
and Return on Equity (ROE). The system uses three financial ratios to express the
ROA and ROE: Operating Profit Margin Ratio (OPM), Asset Turnover Ratio (ATR),
and Equity Multiplier (EM).
The table given below shows the financial statements of SBI, in a condensed format,
which will be used to explain DuPont Analysis.
Profit and Loss Account and Balance Sheet of State Bank of India
P&L A/c 2002 2003 Balance sheet 2002 2003
Total Income 34422.89 37582.8 Net Worth 15555.23 16802.19

Personnel 5152.78 5688.72 Loan 333837.44 359846.50
Operating Exp. 4506.63 6214.84 Total Liabilities 349392.67 376648.70
PBIT 24763.48 25679.24
Interest 20728.84 21109.46 F.A. 2415.23 2388.54
PBT 4034.64 4569.78 Receivables 14857.92 17416.31
Tax 1603.02 1464.78 Investments 145993.55 173552.50
PAT 2431.62 3105.00 Other current assets 121195.81 138110.30
Cash 64930.16 45181.03
Total Assets 349392.67 376648.70
Current assets 346588.10 373908.30
Cost of debt 6.20% 5.87%
DuPont chart Financial Statement Analysis (Template)
Return on Networth
PBT/Networth
Impact of leverage Leverage or financial risk

(ROI-Kd)* Debt/NW Return on Investment Debt to Networth
PBIT/Total assets
Asset Turnover Ratio (ATO) Profit Margin

Sales/Total Assets PBIT/Sales
Fixed Asset TO Current Asset TO Employee Cost to Sales

Sales / Fixed Assets Sales / Current Assets Employee Cost/Sales
Current ratio Inventory TO Operating Expenses to sales

CA/CL Sales / Inventory Operating Expenses/Sales
Debtors TO Interest on Sales

4 6 Sales/Debtors Interest / Sales
Collection Period
365 or 12 / Debtors TO
DuPont chart Financial Statement Analysis of State Bank of India Financial Analysis
of Banks
2002 2003
Return on Networth
25.94 27.20
Impact of leverage Leverage or financial risk

18.85 20.78 Return on Investment 21.46 21.42
7.09 6.82
Asset Turnover Ratio (ATO) Profit Margin

0.10 0.10 71.94 68.33
Fixed Asset TO Current Asset TO Employee Cost to Sales

14.75 15.73 0.10 0.10 14.97 15.14
Current ratio Inventory TO Operating Expenses to sales

Not Applicable Not Applicable 13.09 16.54
Debtors TO Interest on Sales

2.32 2.18 60.22 56.17
Collection Period
157 days 169 days
The above DuPont chart shows an improvement in Return on Equity or Return on Net
Worth but profit margin has declined. The primary reason for improvement in ROE is
on account of lower interest rate. The average cost of debt was 6.21% in 2002 but it
has declined to 5.87% in 2003. Though Profit Margin has come down in 2003, the
profit margin net of interest liability (Income-Interest/Sales) has increased from
11.72% to 12.16% in 2003. This might be purely on account of existing loans
carrying higher interest rates. Both employee cost and operating expenses as a
percentage of sales have gone up. In other words, there is no major improvement in
SBI’s performance during 2002-03 but decline in interest cost helped SBI to improve
profitability. This inference is not apparent when we looked into financial statements
in its raw form. Actually, the growth in PAT gives us an impression that everything is
good at SBI. A simple DuPont analysis gives entirely different picture. The
management of SBI needs to concentrate on ways to reduce the cost to sustain such
higher profitability, which is the permanent source of improvement.
Activity-5
1) What is the basic benefit of using the DuPont form of financial statement analysis?
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2) Perform DuPont Analysis for HDFC Bank and Corporation Bank and
summarize your observations.
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3) Perform DuPont Analysis for Banking Industry and then compare SBI, HDFC
Bank and Corporation Bank ratios. Highlight the strong and weak areas for each
bank.
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Conceptual Framework
3.5 SPECIAL ISSUES IN FINANCIAL ANALYSIS OF
BANKING INDUSTRY
Banking industry is like trading company, where banks trade on capital or funds.
Unlike manufacturing industry, there is not much of processing. Hence some of the
ratios developed for manufacturing industry are not relevant. For example, though we
computed fixed asset ratio, the fixed assets are not used to process the material and
generate income. Similarly, there is no inventory turnover ratio. While some of the
ratios are not relevant, there are ratios which require some modification. For instance,
we computed profit margin without considering interest expenses. For SBI, the ratio
works out to 68% for 2003. Is it possible for a firm to report such a huge profit
margin? The ratio is high because the principal expense namely interest expense is
omitted for computing the ratio. Interest expenses are minor for a manufacturing
industry whereas for banking industry, it is a major expense item. There are some
items, which are difficult to measure. For instance, if you want to measure liquidity,
normally we compute current ratio, which requires current assets and current
liabilities. The definition of current asset and liabilities is assets and liabilities, which
matures or converts within a year. But this data is not apparently available in the
financial statements and one has to collect from the internal sources. To give an
example, we need to know the term structure of Term Deposit and similarly loans and
advances to classify whether they are current or not. Considering the special nature of
banking industry, we list the following ratios, which are relevant for the banking
industry.
a) Return on Equity
b) Return on Investments
c) Leverage or Debt to Equity or Debt to Capital
d) Interest Income to Average Assets
e) Interest Expenses to Average Assets
f) Net Interest Income to Average Assets [(d) ñ (e)]
g) Non-interest income to Average Assets
h) Non-interest income to Total income
i) Income from Treasury activities/Investments
j) Operating Expenses to Average Assets
k) Provision for Loans and losses to Average Assets
l) Growth Rate of Assets
m) Growth Rate of Net Worth
n) Cash dividends to PAT
o) Provision for NPA to Total Loan
Table-3.7 provides these ratios for the year 2003 for the three banks.
3.6 SUMMARY
The analysis of Bank’s financial statements consists of a mixture of steps and pieces
that interrelate and affect each other. It would lead to wrong conclusion and strategy if
the analysis is done on a piecemeal basis. For instance higher interest spread does not
mean that the bank is in good position. It could be simply due to aggressive lending
leading to higher NPA or simply on account of higher asset-liability mismatch. We
need to look for five important things when we analyse the financial positions of the
4 8 bank.
a) Whether the bank is growing or not? We use trend analysis to answer this Financial Analysis
question. of Banks
b) Whether the bank is able to get leverage that is equal to industry average? Since
profitability of bank is primarily on account of ability to use leverage, this ratio
assumes importance.
c) Whether the bank is able to increase non-fund based income (i.e. fee based
income)? This shows the capability of offering services and leveraging customer
base for such services.
d) Whether the bank is able to contain the cost of its operations?
e) Whether the risk of the bank is within limits? Though not discussed here,
measures like Value-at-Risk (VAR) are used.
3.7 SELF ASSESSMENT QUESTIONS

1. What do we achieve by analysing financial statements that we are not able to
achieve while reading financial statements?
2. Differentiate between common size analysis and trend analysis.
3. Explain three important profitability ratios with examples drawn from bank
statements.
4. How financial statement analysis of banks differs from similar analysis of
manufacturing companies?
5. Debt to equity ratio of banks is very high compared to other industries. Is it
good? Is it possible for banks to operate with low debt to equity ratio?
6. Suppose a bank raises deposits at 6% and lends at 8%. The debt to equity ratio
of the bank is 20:1. Find the impact of leverage on return on equity.
7. Suppose in the above example, the debt to equity ratio of the bank is 10:1. What
is the impact of such lower debt to equity ratio on return on equity?
8. Identify at least five ratios that are not relevant for banking industry but are
important for other industries.
9. What is DuPont Analysis? Perform DuPont Analysis based on the inputs given
below:
Income Statement 2002 2003 Balance sheet 2002 2003

Sales 8674.57 37582.48 Net Worth 3359.93 5443.91
Personnel 1298.50 5688.40 Loan 72108.89 116590.27
Op.Exp. 1135.67 6214.52 Total Liabilities 75468.82 122034.18
PBIT 6240.40 25679.56
Interest 5223.67 7240.26 F.A. 521.69 773.89
PBT 1016.73 18439.31 Receivables 3209.31 5642.88
Tax 403.96 1464.46 Investments 31534.61 56231.02
PAT 612.77 16974.85 Other current assets 26178.29 44747.74
Cash 14024.91 14638.65
Total Assets 75468.82 122034.18
Current assets 74947.13 121260.29
Cost of debt 7.24% 6.21%
10. Refer to the Financial statements of HDFC given in Table-3.3 (a) and (b). And
answer the following questions:
4 9
Conceptual Framework Suppose you are the Financial Manager of HDFC and you are being asked to report
to the Management on the performance of the company. You are being asked to
prepare a bank performing analysis for the 5 years ending 2003. Using balance sheet
and income statement data create a bank analysis and performance report for your
supervisor that addresses the following issues:
1. Using the balance sheet for each year:

a) Prepare the common size financial statement analysis. In other words, prepare
the balance sheet showing all assets as a percentage of total assets and liabilities
as a percentage of total liabilities. Report as to which of the assets on the bankís
balance sheet increased over the last 5 years? Which assets on the bank’s balance
sheet declined over the last 5 years?
b) Examine the liquidity position of the bank over the last 5 years. How has the
liquidity position of the bank changed over time? How does the liquidity position
of the bank compare to the other public sector banks in year 5? (You could use
the financial statements of SBI, Corporation Bank data from the tables provided
in this unit). Would your bank have sufficient reserves if deposits increased 40%
in year 6? (Assume that the desired reserve ratio is 8% on all deposits.)
2. Using the income statement for each year:
a) Create an income statement with operating income items expressed as a
percentage of total operating income. Which items improved over the 5
year period? Which trends need to be reversed? How does the bank
performed compare to the public sector banks?
b) Create an income statement with operating expenses expressed as a
percentage of total operating expenses. Which items improved over the 5
years? Which trends need to be reversed? How does the bank performed in
comparison to the PSU banks?
3. Analyze the performance of the bank for each year:
a) Calculate the return on assets (ROA) for each year. How has the ROA
trend changed over the 5 years? How Compare the Bank’s performance
with the public sector banks?
b) Calculate the return on equity (ROE) for each year. How has the ROE
trend changed over the 5 years? Compare the Bank’s performance with the
public sector banks?
c) Identify the strengths and weaknesses of the HDFC bank relative to the
trends over time and in year 5 for all regional banks. What is the
relationship between the HDFC bank trends and the year 5 comparison
with the PSUs?
3.8 FURTHER READINGS

Peter Atrill and Eddie McLaney, 1997, Accounting and Finance for Non-Specialists,
Prentice Hall.
Leopold Bernstein and John Wild, 2000, Analysis of Financial Statements,
McGraw-Hill.
Daniel L. Jensen, 1997, Advanced Accounting, McGraw-Hill College Publishing.
Fraser, L M and Ormiston, A, 2001, Understanding Financial Statements, Sixth
Edition, Prentice Hall of India Private Ltd, New Delhi.
Eric Press, 1999, Analyzing Financial Statements, Lebahar-Friedman.
Gerald I. White, 1997, The Analysis and Use of Financial Statements, John Wiley & Sons.
Martin Mellman et. al, 1994, Accounting for Effective Decision Making, Irwin
5 0 Professional Press.
TABLES Financial Analysis
Table 3.1 (a): Profit and Loss Account of Banking Industry as at end March ........ of Banks
(Rs. in cr.)
1998 1999 2000 2001 2002
Income 84940.68 98860.92 114255.64 130899.34 150693.04

Interest income 44197.41 51091.97 58400.06 68034.25 90849.64
Investment / dividend income 29608.12 36290.49 41804.69 47969.79 38160.97
Others 11135.15 11478.46 14050.89 14895.30 21682.43
Gain on security transactions 1863.30 1005.30 3063.29 3136.73 9558.17
Leasing & hire services 366.50 424.16 540.26 470.64 366.54
Bills discounting 16.71 12.41 6.05 2.91 0.00
Gain on forex transactions 2334.39 2587.48 2139.30 2321.03 2464.53
Commission & brokerage 6476.02 7395.74 7898.77 8923.86 9245.01
Others 78.23 53.37 403.22 40.13 48.18
Other income 1066.53 1395.72 1705.79 2138.15 2273.25
Non-recurring income 2712.70 904.38 1192.58 509.36 1345.15
Total 88719.91 101161.02 117154.01 133546.85 154311.44
Expenditure:
Interest expended 50265.32 60767.28 69564.58 78629.67 88752.85
Personnel cost 14098.85 16609.60 18536.45 21184.80 20721.68
Prov. for contingencies, NPA 6284.79 7247.85 7308.09 8158.51 11719.96
Insurance premium 380.27 440.92 479.21 540.78 630.63
Other expenses 5941.65 6798.43 8093.19 11937.13 12098.63
Non-recurring expenses 227.83 973.09 88.68 207.94 1270.99
PBDT 11521.20 8323.85 13083.81 12888.02 19116.70
Depreciation 1069.03 1427.72 1670.22 2007.14 2202.32
PBT 10452.17 6896.13 11413.59 10880.88 16914.38
Tax provision 3915.43 2654.19 4103.35 4400.05 6481.27
PAT 6536.74 4241.94 7310.24 6480.83 10433.11
Appropriation of profits
Dividends 950.24 1003.07 1288.22 1492.67 1569.58
Retained earnings 5586.50 3238.87 6022.02 4988.16 8863.53
Table 3.1 (b): Balance Sheet of Banking Industry as at end of March ........
(Rs. in cr.)
1998 1999 2000 2001 2002
Paid-up equity capital 19323.02 18015.96 18384.95 19234.58 20038.94

Reserves & surplus 24894.73 29323.19 36696.45 43707.63 56676.88
Deposits 642426.98 769093.05 901760.81 1059733.65 1211429.77
Demand deposits 94930.65 108616.64 129156.52 140313.85 153866.04
Saving deposits 133851.58 158683.91 189138.47 219653.07 256583.30
Term deposits 413644.75 501792.50 583465.82 699766.73 800980.43
Borrowings 28790.89 41168.63 55856.28 71513.71 132413.81
RBI 836.10 5990.85 9261.36 6625.07 3650.27
Banks 5450.87 10507.25 9740.72 16787.97 20552.09
Financial institutional 7446.60 10728.19 12047.20 13880.20 14383.30
Debentures & bonds 2586.25 2588.41 8477.67 15474.84 60984.38
Government 988.20 180.94 1197.99 529.16 1130.10
Foreign borrowings 10856.75 10752.31 8899.79 9729.92 15536.14
Other borrowings 626.12 420.68 6231.55 8486.55 16177.53
Current liabilities 69217.78 82697.01 91727.32 100808.10 115529.20
Provisions 246.24 254.48 1414.41 2363.99 3977.58
5 1
Total liabilities 784899.64 940552.32 1105840.22 1297361.66 1541976.83
Conceptual Framework Banking Services
Rs. Crore (Non-Annualised) 199803.00 199903.00 200003.00 200103.00 200203.00
Cash & bank balance 131206.82 169022.82 166800.37 191636.63 207130.56
Investments 270886.67 338064.10 414519.43 493633.00 591028.77
Government securities 185598.77 228968.02 269685.92 343005.32 431509.82
Approved securities 28701.52 26965.28 43901.97 32029.35 21913.80
Assisted companies 5.83 5.83 9.82 10.77 0.95
Subsidiaries / associates 2504.97 2873.23 5253.42 2968.13 3411.33
Other companies 4402.80 4988.17 8099.45 8027.23 10558.54
Mutual funds 1827.11 2993.80 5463.65 5088.98 1088.29
Debentures / PSU bonds 41575.99 62552.60 70290.87 81495.29 95548.23
Others 6269.68 8717.17 11814.33 21007.93 26997.81
Advances & loans 323931.47 368708.56 447991.51 529944.38 652204.90
Bills receivables 33812.96 36446.54 42804.78 49807.56 53704.27
Short term / demand advances 187981.61 202544.14 244619.72 288203.69 325593.93
Term advances 102136.90 129717.88 160567.01 191842.47 271959.15
Deferred tax assets 0.00 0.00 0.00 0.00 1910.47
Other assets / stocks 219.58 216.90 230.41 231.67 227.72
Receivables 45379.59 49681.64 60293.95 58060.71 64987.30
Future lease rent receivable 0.00 0.00 0.00 0.00 37.16
Gross fixed assets 18286.24 21730.80 24322.04 26697.40 32462.42
Less: cumulative depreciation 5329.31 7094.49 8570.51 10118.18 11925.09
Net fixed assets 12956.93 14636.31 15751.53 16579.22 20537.33
Intangible/ DRE not written off 10.62 25.78 34.89 6951.82 3949.78
Total assets 784899.64 940552.32 1105840.22 1297361.66 1541976.83
Table 3.2 (a): Profit and Loss Account for State Bank of India (Rs. in crores)
Mar-1999 Mar-2000 Mar-2001 Mar-2002 Mar-2003
Income 22311.16 25649.31 29755.66 33781.48 36621.87

Interest income 11522.23 12694.76 14957.45 15538.21 15829.39
Others 3141.18 3383.55 3540.03 3868.73 5397.63
Other income 82.25 111.33 270.89 233.61 252.17
Total 22406.51 26299.83 30166.77 34422.89 37582.8
Expenditure:
Personnel cost 4147.40 4477.87 5158.46 5152.78 5688.72
Prov. for contingencies, NPA. 1570.02 1319.53 1470.48 2204.73 2797.10
Other expenses 1086.85 1583.17 2691.40 1689.16 2028.14
PBDT 1861.12 3548.38 2982.47 4485.68 5104.89
Depreciation 310.57 356.85 406.86 451.04 535.11
PBT 1550.55 3191.53 2575.61 4034.64 4569.78
Tax provision 522.75 1139.98 971.36 1603.02 1464.78
PAT 1027.80 2051.55 1604.25 2431.62 3105.00
Dividends 233.68 306.57 289.99 315.78 504.68
5 2
Table 3.2 (b): Balance Sheet Summary of State Bank of India Financial Analysis
of Banks
(Rs. in crores)
Liabilities + Equity:
Free reserves 4714.14 4967.06 4588.26 4235.27 3613.94
Specific reserves 5161.87 6653.92 8346.98 10462.81 13063.14
Deposits 169041.93 196821.07 242828.37 270560.14 296123.28
Demand deposits 30692.03 36182.05 40328.08 42312.79 44772.38
Saving deposits 34321.25 41506.53 47893.42 56396.36 65782.71
Term deposits 104028.65 119132.49 154606.87 171850.99 185568.19
Borrowings 10063.13 11193.41 15133.62 12781.61 12765.95
Other liabilities & provisions 33001.66 41343.19 44220.66 50495.69 50957.29
Assets:
Investments 71286.52 91878.68 122876.48 145993.55 173552.52
Advances & loans 82359.84 98101.97 113590.27 120806.47 137758.46
Receivables 13386.74 21842.28 13529.53 14857.92 17416.31
Net fixed assets 2193.66 2477.61 2593.31 2415.23 2388.54
Total assets 222509.03 261504.95 315644.19 349392.67 377356.74
Table 3.3 (a): Profit and Loss Account for HDFC Bank Ltd.
(Rs. in cr.)
Income 444.08 805.24 1444.92 2035.41 2492.62

Interest income 193.88 313.09 623.87 839.02 910.02
Others 68.00 125.37 185.46 332.42 469.65
Other income 0.06 0.08 0.67 1.64 2.37
Total 444.15 805.32 1446.33 2051.43 2496.07
Expenditure:
Personnel cost 22.06 48.53 78.00 109.24 151.95
Other expenses 51.07 99.26 185.54 264.55 374.05
PBDT 131.89 221.34 369.25 508.96 677.46
Depreciation 15.02 26.46 53.94 69.02 106.14
PBT 116.87 194.88 315.31 439.94 571.32
Tax provision 34.47 74.84 105.19 142.90 183.72
PAT 82.40 120.04 210.12 297.04 387.60
Dividends 28.60 36.21 53.69 70.34 95.93
5 3
Conceptual Framework Table 3.3 (b): Balance Sheet Summary of HDFC Bank Ltd.
(Rs. in cr.)
Free reserves 88.19 391.16 511.61 1168.48 1383.19
Deposits 2915.11 8427.72 11658.11 17653.81 22376.07
Demand deposits 981.52 2779.91 2855.98 4220.18 4950.96
Saving deposits 346.51 1124.95 1903.00 2957.45 4663.14
Term deposits 1587.08 4522.86 6899.13 10476.18 12761.97
Borrowings 582.88 1578.74 1432.90 2023.02 2284.65
Assets:
Investments 1928.80 5753.28 7145.14 12005.02 13388.58
Advances & loans 1400.56 3462.34 4636.66 6813.72 11754.86
Receivables 349.12 660.60 485.70 702.75 1267.71
Net fixed assets 131.55 236.76 289.74 371.10 528.58
Total assets 4349.96 11731.03 15617.33 23819.11 30482.45
Table 3.4 (a): Profit and Loss Account for Corporation Bank Ltd.
(Rs. in cr.)

Income 1521.07 1835.86 2049.24 2275.69 2562.91
Interest income 721.88 915.34 1060.69 1945.69 2102.53
Others 164.77 222.66 234.19 311.93 422.98
Other income 31.45 39.24 47.37 27.14 37.61
Total 1554.81 1889.53 2096.62 2328.41 2634.28

Expenditure:
Personnel cost 164.95 177.26 200.00 213.90 255.91
Other expenses 98.10 122.40 148.07 163.67 207.44
PBDT 260.43 360.62 418.00 492.32 675.47
Depreciation 18.48 21.78 21.51 31.97 48.86
PBT 241.95 338.84 396.49 460.35 626.61
Tax provision 67.05 105.40 134.65 152.25 210.62
PAT 174.90 233.44 261.84 308.10 415.99
Dividends 46.20 56.34 52.90 52.11 72.82
5 4
Table 3.4 (b): Balance Sheet Summary of Corporation Bank Ltd. Financial Analysis
of Banks
(Rs. in cr.)
Free reserves 641.84 730.66 871.49 1386.75 1463.48
Deposits 12601.43 14279.62 16560.13 18924.27 21724.57
Demand deposits 1647.28 1910.09 2136.66 2314.03 2922.44
Saving deposits 1599.58 1957.72 2246.90 2609.06 3275.50
Term deposits 9354.57 10411.81 12176.57 14001.18 15526.63
Borrowings 197.63 296.28 594.95 1423.54 803.35

Assets
Investments 5510.69 5790.93 6860.34 8143.00 10765.44
Advances & loans 6286.20 7777.47 8666.11 10987.42 12029.17
Receivables 620.38 595.56 819.33 1013.42 909.47
Net fixed assets 116.69 143.47 171.97 199.34 232.95
Total assets 14983.09 16762.28 19703.20 23690.71 26367.52
Table 3.5 (a): Common Size Financial Statements of State Bank of India
1999 2000 2001 2002 2003
Income 99.57% 97.53% 98.64% 98.14% 97.44%

Interest income 51.42% 48.27% 49.58% 45.14% 42.12%
Investment / dividend income 34.13% 36.39% 37.32% 41.76% 40.96%
Others 14.02% 12.87% 11.73% 11.24% 14.36%
Other income 0.37% 0.42% 0.90% 0.68% 0.67%
Non-recurring income 0.06% 2.05% 0.46% 1.18% 1.89%
Total 100.00% 100.00% 100.00% 100.00% 100.00%

Expenditure:
Interest expended 58.22% 58.07% 58.86% 60.22% 56.17%
Personnel cost 18.51% 17.03% 17.10% 14.97% 15.14%
Prov. for contingencies, NPA. 7.01% 5.02% 4.87% 6.40% 7.44%
Insurance premium 0.33% 0.37% 0.36% 0.41% 0.40%
Other expenses 4.85% 6.02% 8.92% 4.91% 5.40%
Non-recurring expenses 2.78% 0.00% 0.00% 0.06% 1.87%
PBDT 8.31% 13.49% 9.89% 13.03% 13.58%
Depreciation 1.39% 1.36% 1.35% 1.31% 1.42%
PBT 6.92% 12.14% 8.54% 11.72% 12.16%
Tax provision 2.33% 4.33% 3.22% 4.66% 3.90%
PAT 4.59% 7.80% 5.32% 7.06% 8.26%
5 5
Conceptual Framework Liabilities + Equity:
Paid-up equity capital 0.24% 0.20% 0.17% 0.15% 0.14%
Reserves & surplus 4.44% 4.44% 4.10% 4.21% 4.42%
Free reserves 2.12% 1.90% 1.45% 1.21% 0.96%
Specific reserves 2.32% 2.54% 2.64% 2.99% 3.46%
Deposits 75.97% 75.26% 76.93% 77.44% 78.47%
Demand deposits 13.79% 13.84% 12.78% 12.11% 11.86%
Saving deposits 15.42% 15.87% 15.17% 16.14% 17.43%
Term deposits 46.75% 45.56% 48.98% 49.19% 49.18%
Borrowings 4.52% 4.28% 4.79% 3.66% 3.38%
Other liabilities & provisions 14.83% 15.81% 14.01% 14.45% 13.50%
Total liabilities 100.00% 100.00% 100.00% 100.00% 100.00%
Assets:
Cash & bank balance 23.91% 18.03% 19.23% 18.58% 11.97%
Investments 32.04% 35.13% 38.93% 41.78% 45.99%
Advances & loans 37.01% 37.51% 35.99% 34.58% 36.51%
Deferred tax assets 0.00% 0.00% 0.00% 0.09% 0.07%
Other assets / stocks 0.03% 0.03% 0.02% 0.02% 0.02%
Receivables 6.02% 8.35% 4.29% 4.25% 4.62%
Net fixed assets 0.99% 0.95% 0.82% 0.69% 0.63%
Intangible/ DRE not written off 0.00% 0.00% 0.72% 0.00% 0.19%
Total assets 100.00% 100.00% 100.00% 100.00% 100.00%
Table 3.5 (b): Common Size Financial Statements of HDFC Bank
1999 2000 2001 2002 2003
Income 99.98% 99.99% 99.90% 99.22% 99.86%

Interest income 43.65% 38.88% 43.13% 40.90% 36.46%
Others 15.31% 15.57% 12.82% 16.20% 18.82%
Other income 0.01% 0.01% 0.05% 0.08% 0.09%
Total 100.00% 100.00% 100.00% 100.00% 100.00%
Expenditure:
Personnel cost 4.97% 6.03% 5.39% 5.33% 6.09%
Other expenses 11.50% 12.33% 12.83% 12.90% 14.99%
PBDT 29.69% 27.48% 25.53% 24.81% 27.14%
Depreciation 3.38% 3.29% 3.73% 3.36% 4.25%
PBT 26.31% 24.20% 21.80% 21.45% 22.89%
Tax provision 7.76% 9.29% 7.27% 6.97% 7.36%
PAT 18.55% 14.91% 14.53% 14.48% 15.53%
5 6
Liabilities + Equity: Financial Analysis
of Banks
Free reserves 2.03% 3.33% 3.28% 4.91% 4.54%
Deposits 67.01% 71.84% 74.65% 74.12% 73.41%
Demand deposits 22.56% 23.70% 18.29% 17.72% 16.24%
Saving deposits 7.97% 9.59% 12.19% 12.42% 15.30%
Term deposits 36.48% 38.55% 44.18% 43.98% 41.87%
Borrowings 13.40% 13.46% 9.18% 8.49% 7.49%
Assets:
Investments 44.34% 49.04% 45.75% 50.40% 43.92%
Advances & loans 32.20% 29.51% 29.69% 28.61% 38.56%
Receivables 8.03% 5.63% 3.11% 2.95% 4.16%
Net fixed assets 3.02% 2.02% 1.86% 1.56% 1.73%
Total assets 100.00% 100.00% 100.00% 100.00% 100.00%
Table 3.5 (c): Common Size Financial Statements of Corporation Bank
1999 2000 2001 2002 2003
Income 97.83% 97.16% 97.74% 97.74% 97.29%

Interest income 46.43% 48.44% 50.59% 83.56% 79.81%
Others 10.60% 11.78% 11.17% 13.40% 16.06%
Other income 2.02% 2.08% 2.26% 1.17% 1.43%
Total 100.00% 100.00% 100.00% 100.00% 100.00%
Expenditure:
Personnel cost 10.61% 9.38% 9.54% 9.19% 9.71%
Other expenses 6.31% 6.48% 7.06% 7.03% 7.87%
PBDT 16.75% 19.09% 19.94% 21.14% 25.64%
Depreciation 1.19% 1.15% 1.03% 1.37% 1.85%
PBT 15.56% 17.93% 18.91% 19.77% 23.79%
Tax provision 4.31% 5.58% 6.42% 6.54% 8.00%
PAT 11.25% 12.35% 12.49% 13.23% 15.79%
5 7
Free reserves 4.28% 4.36% 4.42% 5.85% 5.55%
Deposits 84.10% 85.19% 84.05% 79.88% 82.39%
Demand deposits 10.99% 11.40% 10.84% 9.77% 11.08%
Saving deposits 10.68% 11.68% 11.40% 11.01% 12.42%
Term deposits 62.43% 62.11% 61.80% 59.10% 58.89%
Borrowings 1.32% 1.77% 3.02% 6.01% 3.05%

Assets:
Investments 36.78% 34.55% 34.82% 34.37% 40.83%
Advances & loans 41.96% 46.40% 43.98% 46.38% 45.62%
Receivables 4.14% 3.55% 4.16% 4.28% 3.45%
Net fixed assets 0.78% 0.86% 0.87% 0.84% 0.88%
Total assets 100.00% 100.00% 100.00% 100.00% 100.00%
Table 3.6 (a): Trend Analysis of Financial Statements of State Bank of India
1999 2000 2001 2002 2003
Income 100.00% 114.96% 133.37% 151.41% 164.14%

Interest income 100.00% 110.18% 129.81% 134.85% 137.38%
Investment/dividend income 100.00% 125.15% 147.21% 187.96% 201.30%
Others 100.00% 107.72% 112.70% 123.16% 171.83%
Other income 100.00% 135.36% 329.35% 284.02% 306.59%
Total 100.00% 117.38% 134.63% 153.63% 167.73%
Expenditure:
Personnel cost 100.00% 107.97% 124.38% 124.24% 137.16%
Other expenses 100.00% 145.67% 247.63% 155.42% 186.61%
PBDT 100.00% 190.66% 160.25% 241.02% 274.29%
Depreciation 100.00% 114.90% 131.00% 145.23% 172.30%
PBT 100.00% 205.83% 166.11% 260.21% 294.72%
Tax provision 100.00% 218.07% 185.82% 306.65% 280.21%
PAT 100.00% 199.61% 156.09% 236.58% 302.10%
5 8
of Banks
Free reserves 100.00% 105.37% 97.33% 89.84% 76.66%
Deposits 100.00% 116.43% 143.65% 160.06% 175.18%
Demand deposits 100.00% 117.89% 131.40% 137.86% 145.88%
Saving deposits 100.00% 120.94% 139.54% 164.32% 191.67%
Term deposits 100.00% 114.52% 148.62% 165.20% 178.38%
Borrowings 100.00% 111.23% 150.39% 127.01% 126.86%
Assets:
Investments 100.00% 128.89% 172.37% 204.80% 243.46%
Advances & loans 100.00% 119.11% 137.92% 146.68% 167.26%
Deferred tax assets
Receivables 100.00% 163.16% 101.07% 110.99% 130.10%
Net fixed assets 100.00% 112.94% 118.22% 110.10% 108.88%
Intangible/ DRE not w/o
Total assets 100.00% 117.53% 141.86% 157.02% 169.59%
Table 3.6 (b): Trend Analysis of Financial Statements of HDFC Bank
1999 2000 2001 2002 2003
Income 100.00% 181.33% 325.37% 458.34% 561.30%

Interest income 100.00% 161.49% 321.78% 432.75% 469.37%
Investment/dividend Income 100.00% 201.31% 348.84% 474.19% 610.84%
Others 100.00% 184.37% 272.74% 488.85% 690.66%
Other income 100.00% 133.33% 1116.67% 2733.33% 3950.00%
Total 100.00% 181.32% 325.64% 461.88% 561.99%
Expenditure:
Personnel cost 100.00% 219.99% 353.58% 495.19% 688.80%
Other expenses 100.00% 194.36% 363.31% 518.01% 732.43%
Non-recurring expenses
PBDT 100.00% 167.82% 279.97% 385.90% 513.66%
Depreciation 100.00% 176.17% 359.12% 459.52% 706.66%
PBT 100.00% 166.75% 269.80% 376.44% 488.85%
Tax provision 100.00% 217.12% 305.16% 414.56% 532.99%
PAT 100.00% 145.68% 255.00% 360.49% 470.39% 5 9
Free reserves 100.00% 443.54% 580.12% 1324.96% 1568.42%
Deposits 100.00% 289.10% 399.92% 605.60% 767.59%
Demand deposits 100.00% 283.22% 290.98% 429.96% 504.42%
Saving deposits 100.00% 324.65% 549.19% 853.50% 1345.74%
Term deposits 100.00% 284.98% 434.71% 660.09% 804.12%
Borrowings 100.00% 270.85% 245.83% 347.07% 391.96%
Assets:
Investments 100.00% 298.28% 370.44% 622.41% 694.14%
Advances & loans 100.00% 247.21% 331.06% 486.50% 839.30%
Deferred tax assets
Receivables 100.00% 189.22% 139.12% 201.29% 363.12%
Net fixed assets 100.00% 179.98% 220.25% 282.10% 401.81%
Intangible/DRE not w/o
Total assets 100.00% 269.68% 359.02% 547.57% 700.75%
Table 3.6 (c): Trend Analysis of Financial Statements of Corporation Bank
1999 2000 2001 2002 2003
Income 100.00% 120.70% 134.72% 149.61% 168.49%

Interest income 100.00% 126.80% 146.93% 269.53% 291.26%
Others 100.00% 135.13% 142.13% 189.31% 256.71%
Other income 100.00% 124.77% 150.62% 86.30% 119.59%
Total 100.00% 121.53% 134.85% 149.76% 169.43%
Expenditure:
Personnel cost 100.00% 107.46% 121.25% 129.68% 155.14%
Other expenses 100.00% 124.77% 150.94% 166.84% 211.46%
Non-recurring expenses
PBDT 100.00% 138.47% 160.50% 189.04% 259.37%
Depreciation 100.00% 117.86% 116.40% 173.00% 264.39%
PBT 100.00% 140.05% 163.87% 190.27% 258.98%
Tax provision 100.00% 157.20% 200.82% 227.07% 314.12%
PAT 100.00% 133.47% 149.71% 176.16% 237.84%
6 0
of Banks
Free reserves 100.00% 113.84% 135.78% 216.06% 228.01%
Deposits 100.00% 113.32% 131.41% 150.18% 172.40%
Demand deposits 100.00% 115.95% 129.71% 140.48% 177.41%
Saving deposits 100.00% 122.39% 140.47% 163.11% 204.77%
Term deposits 100.00% 111.30% 130.17% 149.67% 165.98%
Borrowings 100.00% 149.92% 301.04% 720.31% 406.49%
Assets:
Investments 100.00% 105.09% 124.49% 147.77% 195.36%
Advances & loans 100.00% 123.72% 137.86% 174.79% 191.36%
Deferred tax assets
Receivables 100.00% 96.00% 132.07% 163.35% 146.60%
Net fixed assets 100.00% 122.95% 147.37% 170.83% 199.63%
Intangible/ DRE not written off
Total assets 100.00% 111.87% 131.50% 158.12% 175.98%
Table 3.7: Important Financial Ratios relevant for Banking Industry for the year 2003
Ratios SBI HDFC Corporation Bank

(a) Return on Equity 26.56% 25.37% 26.44%
(b) Return on Investments 6.81% 5.78% 7.35%
(c) Leverage or Debt to Equity 20.94 12.54 10.12
(d) Interest Income to Average Assets 4.19% 2.99% 7.97%
(e) Interest Expenses to Average Assets 5.59% 3.91% 4.97%
(f) Net Interest Income to Average Assets [(d) – (e)] -1.40% -0.92% 3.00%
(g) Non-interest income to Average Assets 5.58% 5.20% 1.89%
(h) Non-interest income to Total income 56.00% 63.50% 18.90%
(i) Income from Treasury activities/Investments 8.87% 8.31% 0.35% *
(j) Operating Expenses to Average Assets 3.01% 2.06% 2.46%
(k) Provision for Loans and losses to Average Assets 0.74% 0.29% 0.66%
(l) Growth Rate of Assets 8.00% 27.97% 11.30%
(m) Growth Rate of Net Worth 13.46% 17.95% 17.03%
(n) Cash dividends to PAT 16.25% 24.75% 17.51%
(o) Provision for NPA to Total Loan 0.94% 0.02% 0.66%
* This ratio may be low due to accounting treatment on interest received on investments.
6 1

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Financial Analysis

UNIT 3 FINANCIAL ANALYSIS OF BANKS of Banks

3.3 TECHNIQUES OF FINANCIAL ANALYSIS

a) Common Size Financial Statements Analysis

1) Liquidity Analysis Ratios

2. Profitability Analysis Ratios

i) Return on Assets (ROA)

iii) Profit Margin

iv) Gross Profit on Net Sales

v) Net Profit on Net Sales

vi) Management Rate of Return

vii) Net Sales to Tangible Net Worth

viii) Earnings Per Share (EPS)

3. Activity Analysis Ratios

i) Assets Turnover Ratio

ii) Accounts Receivable Turnover Ratio

Cost of Goods Sold

4. Capital Structure (Leverage) Analysis Ratios

(i) Debt to Equity Ratio

(ii) Interest Coverage Ratio

3.4 DUPONT MODEL OF FINANCIAL ANALYSIS

P&L A/c 2002 2003 Balance sheet 2002 2003

Total Income 34422.89 37582.8 Net Worth 15555.23 16802.19

DuPont chart Financial Statement Analysis (Template)

Impact of leverage Leverage or financial risk

Asset Turnover Ratio (ATO) Profit Margin

Fixed Asset TO Current Asset TO Employee Cost to Sales

Current ratio Inventory TO Operating Expenses to sales

Debtors TO Interest on Sales

Impact of leverage Leverage or financial risk

Asset Turnover Ratio (ATO) Profit Margin

Fixed Asset TO Current Asset TO Employee Cost to Sales

Current ratio Inventory TO Operating Expenses to sales

Debtors TO Interest on Sales

3.7 SELF ASSESSMENT QUESTIONS

Income Statement 2002 2003 Balance sheet 2002 2003

1. Using the balance sheet for each year:

3.8 FURTHER READINGS

1998 1999 2000 2001 2002

Income 84940.68 98860.92 114255.64 130899.34 150693.04

1998 1999 2000 2001 2002

Paid-up equity capital 19323.02 18015.96 18384.95 19234.58 20038.94

Total assets 784899.64 940552.32 1105840.22 1297361.66 1541976.83

Mar-1999 Mar-2000 Mar-2001 Mar-2002 Mar-2003

Income 22311.16 25649.31 29755.66 33781.48 36621.87

Mar-1999 Mar-2000 Mar-2001 Mar-2002 Mar-2003

Mar-1999 Mar-2000 Mar-2001 Mar-2002 Mar-2003

Income 444.08 805.24 1444.92 2035.41 2492.62

Mar-1999 Mar-2000 Mar-2001 Mar-2002 Mar-2003

Mar-1999 Mar-2000 Mar-2001 Mar-2002 Mar-2003

Total 1554.81 1889.53 2096.62 2328.41 2634.28

Total liabilities 14983.09 16762.28 19703.20 23690.71 26367.52

Total assets 14983.09 16762.28 19703.20 23690.71 26367.52

1999 2000 2001 2002 2003

Income 99.57% 97.53% 98.64% 98.14% 97.44%

Total 100.00% 100.00% 100.00% 100.00% 100.00%

Table 3.5 (b): Common Size Financial Statements of HDFC Bank

1999 2000 2001 2002 2003

Income 99.98% 99.99% 99.90% 99.22% 99.86%

Table 3.5 (c): Common Size Financial Statements of Corporation Bank

1999 2000 2001 2002 2003

Income 97.83% 97.16% 97.74% 97.74% 97.29%

Total liabilities 100.00% 100.00% 100.00% 100.00% 100.00%