Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Table of content
Chapter No.
Content
Page No
List of Tables
List of Figures
Executive summary
1.
Introduction
Overview of Banking
Objective of study
Research methodology
Limitation of study
2.
Review of literature
CAMELS Framework
3.
Company profile
HDFC BANK
SBI
AXIS BANK
IDBI
ICICI BANK
4.
5.
Bibliography
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List of Tables
Table
No.
3.1
3.2
3.3
3.4
3.5
3.6
3.7
Table Content
Page
No.
List of Figures
Figure
No.
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
3.12
Title
Page
No.
HDFC BANK
STATE BANK OF INDIA
AXIS BANK
IDBI BANK
ICICI BANK
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Executive Summery
The banking sector has been undergoing a complex, but comprehensive phase of
restructuring since 1991, with a view to make it sound, efficient, and at the same
time it is forging its links firmly with the real sector for promotion of savings,
investment and growth. Although a complete turnaround in banking sector
performance is not expected till the completion of reforms, signs of improvement
are visible in some indicators under the CAMELS framework. Under this bank is
required to enhance capital adequacy, strengthen asset quality, improve
management, increase earnings and reduce sensitivity to various financial risks.
The almost simultaneous nature of these developments makes it difficult to
disentangle the positive impact of reform measures.
CAMELS Framework
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CAPITAL ADEQUACY
ASSET QUALITY
MANAGEMENT SOUNDNESS
EARNINGS & PROFITABILITY
LIQUIDITY
SENSITIVITY TO MARKET RISK
The whole banking scenario has changed in the very recent past on the
recommendations of Narasimham Committee. Further BASELL II Norms were
introduced to internationally standardize processes and make the banking
industry more adaptive to the sensitive market risks. Amongst these reforms and
restructuring the CAMELS Framework has its own contribution to the way
modern banking is looked up on now. The attempt here is to see how various
ratios have been used and interpreted to reveal a banks performance and how
this particular model encompasses a wide range of parameters making it a widely
used and accepted model in todays scenario. The project attempts to analyse the
performance of Axis bank on the basis of CAMELS model and
gives suggestions on the basis of the finding of the analysis. The overall strategy
of Axis bank is also studied to gain a better understanding of the working of the
bank and to identify its strength and weakness.
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Chapter-01
Introduction
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Without a sound and effective banking system in India it cannot have a healthy
economy. The banking system of India should not only be hassle free but it
should be able to meet new challenges posed by the technology and any other
external and internal factors.
For the past three decades India's banking system
has several outstanding achievements to its credit. The most striking is its
extensive reach. It is no longer confined to only metropolitans or cosmopolitans
in India. In fact, Indian banking system has reached even to the remote corners
of the country. This is one of the main reasons of India's growth process. The
government's regular policy for Indian bank since 1969 has paid rich dividends
with the nationalization of 14 major private banks of India.
Not long ago, an account holder had to wait for hours at the bank
counters for getting a draft or for withdrawing his own money. Today, he has a
choice. Gone are days when the most efficient bank transferred money from one
branch to other in two days. Now it is simple as instant messaging or dials a
pizza. Money has become the order of the day. The first bank in India, though
conservative, was established in 1786. From 1786 till today, the journey of
Indian Banking System can be segregated into three distinct phases.
They are as mentioned below:
Early phase from 1786 to 1969 of Indian Banks
Nationalization of Indian Banks and up to 1991 prior to Indian
banking sector Reforms.
New phase of Indian Banking System with the advent of Indian
Financial & Banking Sector Reforms after 1991.
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PHASE-01
The General Bank of India was set up in the year 1786. Next came Bank of
Hindustan and Bengal Bank. The East India Company established Bank of
Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as
independent units and called it Presidency Banks. These three banks were
amalgamated in 1920 and Imperial Bank of India was established which started
as private shareholders banks, mostly Europeans shareholders.
In 1865 Allahabad Bank was established and first time
exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with
headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank
of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore
were set up. Reserve Bank of India came in 1935. During the first phase the
growth was very slow and banks also experienced periodic failures between
1913 and 1948. There were approximately 1100 banks, mostly small. To
streamline the functioning and activities of commercial banks, the Government
of India came up with The Banking Companies Act, 1949 which was later
changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No.
23 of 1965). Reserve Bank of India was vested with extensive powers for the
supervision of banking in India as the Central Banking Authority. During those
days public has lesser confidence in the banks. As an aftermath deposit
mobilization was slow. Abreast of it the savings bank facility provided by the
Postal department was comparatively safer. Moreover, funds were largely given
to traders.
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PHASE-02
Government took major steps in this Indian Banking Sector Reform after
independence. In 1955, it nationalized Imperial Bank of India with extensive
banking facilities on a large scale especially in rural and semi-urban areas. It
formed State Bank of India to act as the principal agent of RBI and to handle
banking transactions of the Union and State Governments all over the country.
Seven banks forming subsidiary of State Bank of India was nationalized in 1960
on 19th July, 1969, major process of nationalization was carried out. It was the
effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major
commercial banks in the country were nationalized. Second phase of
nationalization Indian Banking Sector Reform was carried out in 1980 with
seven more banks. This step brought 80% of the banking segment in India under
Government ownership. The following are the steps taken by the Government of
India to Regulate Banking Institutions in the Country:
1949: Enactment of Banking Regulation Act.
1955: Nationalization of State Bank of India.
1959: Nationalization of SBI subsidiaries.
1961: Insurance cover extended to deposits.
1969: Nationalization of 14 major banks.
1971: Creation of credit guarantee corporation.
1975: Creation of regional rural banks.
1980: Nationalization of seven banks with deposits over 200 crore.
After the nationalization of banks, the branches of the public sector bank India
rose to approximately 800% in deposits and advances took a huge jump by
11,000%. Banking in the sunshine of Government ownership gave the public
implicit faith and immense confidence about the sustainability of these
institutions.
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PHASE-03
This phase has introduced many more products and facilities in the banking
sector in its reforms measure. In 1991, under the chairmanship of M
Narasimham, a committee was set up by his name which worked for the
liberalization of banking practices. The country is flooded with foreign banks
and their ATM stations. Efforts are being put to give a satisfactory service to
customers. Phone banking and net banking is introduced. The entire system
became more convenient and swift. Time is given more importance than money.
The financial system of India has shown a great deal of resilience. It is sheltered
from any crisis triggered by any external macroeconomics shock as other East
Asian Countries suffered. This is all due to a flexible exchange rate regime,
the foreign reserves are high, the capital account is not yet fully convertible, and
banks and their customers have limited foreign exchange exposure.
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RESERVE BANK OF INDIA (RBI)
------------------------------
The central bank of the country is the Reserve Bank of India (RBI). It was
established in April 1935 with a share capital of Rs. 5 crores on the basis of the
recommendations of the Hilton Young Commission. The share capital was
divided into shares of Rs. 100 each fully paid which was entirely owned by
private shareholders in the beginning. The Government held shares of nominal
value of Rs. 2, 20,000. Reserve Bank of India was nationalized in the year 1949.
The general superintendence and direction of the Bank is entrusted to Central
Board of Directors of 20 members, the Governor and four Deputy Governors,
one Government official from the Ministry of Finance, ten nominated Directors
by the Government to give representation to important elements in the economic
life of the country, and four nominated Directors by the Central Government to
represent the four local Boards with the headquarters at Mumbai, Kolkata,
Chennai and New Delhi. Local Boards consist of five members each Central
Government appointed for a term of four years to represent territorial and
economic interests and the interests of co-operative and indigenous banks. The
Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act,
1934 (II of 1934) provides the statutory basis of the functioning of the Bank. The
Bank was constituted for the need of following:
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Functions of Reserve Bank of India
The Reserve Bank of India Act of 1934 entrust all the important functions of a
central bank the Reserve Bank of India.
Issue Of Notes
Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right
to issue bank notes of all denominations. The distribution of one rupee notes and
coins and small coins all over the country is undertaken by the Reserve Bank as
agent of the Government. The Reserve Bank has a separate Issue Department
which is entrusted with the issue of currency notes. The assets and liabilities of
the Issue Department are kept separate from those of the Banking Department.
Originally, the assets of the Issue Department were to consist of not less than
two-fifths of gold coin, gold bullion or sterling securities provided the amount of
gold was not less than Rs. 40 crores in value. The remaining three-fifths of the
assets might be held in rupee coins, Government of India rupee securities,
eligible bills of exchange and promissory notes payable in India. Due to the
exigencies of the Second World War and the post-was period, these provisions
were considerably modified. Since 1957, the Reserve Bank of India is required
to maintain gold and foreign exchange reserves of Ra. 200 crores, of which at
least Rs. 115 crores should be in gold. The system as it exists today is known as
the minimum reserve system.
Banker to Government
The second important function of the Reserve Bank of India is to act as
Government banker, agent and adviser. The Reserve Bank is agent of Central
Government and of all State Governments in India excepting that of Jammu and
Kashmir. The Reserve Bank has the obligation to transact Government business,
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via. to keep the cash balances as deposits free of interest, to receive and to make
payments on behalf of the Government and to carry out their exchange
remittances and other banking operations. The Reserve Bank of India helps the
Government - both the Union and the States to float new loans and to manage
public debt. The Bank makes ways and means advances to the Governments for
90 days. It makes loans and advances to the States and local authorities. It acts as
adviser to the Government on all monetary and banking matters.
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Controller of Credit
The Reserve Bank of India is the controller of credit i.e. it has the power to
influence the volume of credit created by banks in India. It can do so through
changing the Bank rate or through open market operations. According to the
Banking Regulation Act of 1949, the Reserve Bank of India can ask any
particular bank or the whole banking system not to lend to particular groups or
persons on the basis of certain types of securities. Since 1956, selective controls
of credit are increasingly being used by the Reserve Bank.
The Reserve Bank of India is armed with many more powers to control the
Indian money market. Every bank has to get a license from the Reserve Bank of
India to do banking business within India, the license can be cancelled by the
Reserve Bank of certain stipulated conditions are not fulfilled. Every bank will
have to get the permission of the Reserve Bank before it can open a new branch.
Each scheduled bank must send a weekly return to the Reserve Bank showing, in
detail, its assets and liabilities. This power of the Bank to call for information is
also intended to give it effective control of the credit system. The Reserve Bank
has also the power to inspect the accounts of any commercial bank. As supreme
banking authority in the country, the Reserve Bank of India, therefore, has the
following powers:
a) It holds the cash reserves of all the scheduled banks.
(b) It controls the credit operations of banks through quantitative and
qualitative controls.
(c) It controls the banking system through the system of licensing, inspection
and calling for information.
(d) It acts as the lender of the last resort by providing rediscount facilities to
scheduled banks.
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Custodian of Foreign Reserves
The Reserve Bank of India has the responsibility to maintain the official rate of
exchange. According to the Reserve Bank of India Act of 1934, the Bank was
required to buy and sell at fixed rates any amount of sterling in lots of not less
than Rs. 10,000. The rate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the
Bank was able to maintain the exchange rate fixed at lsh.6d. Though there were
periods of extreme pressure in favor of or against the rupee. After India became a
member of the International Monetary Fund in 1946, the Reserve Bank has the
responsibility of maintaining fixed exchange rates with all other member
countries of the I.M.F. Besides maintaining the rate of exchange of the rupee, the
Reserve Bank has to act as the custodian of India's reserve of international
currencies. The vast sterling balances were acquired and managed by the Bank.
Further, the RBI has the responsibility of administering the exchange controls of
the country.
Supervisory functions
In addition to its traditional central banking functions, the Reserve bank has
certain non-monetary functions of the nature of supervision of banks and
promotion of sound banking in India. The Reserve Bank Act, 1934, and the
Banking Regulation Act, 1949 have given the RBI wide powers of supervision
and control over commercial and co-operative banks, relating to licensing and
establishments, branch expansion, liquidity of their assets, management and
methods of working, amalgamation, reconstruction, and liquidation. The RBI is
authorized to carry out periodical inspections of the banks and to call for returns
and necessary information from them. The nationalization of 14 major
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Indian scheduled banks in July 1969 has imposed new responsibilities on the
RBI for directing the growth of banking and credit policies towards more rapid
development of the economy and realization of certain desired social objectives.
The supervisory functions of the RBI have helped a great deal in improving the
standard of banking in India to develop on sound lines and to improve the
methods of their operation.
Promotional functions
The Bank now performs variety of developmental and promotional functions,
which, at one time, were regarded as outside the normal scope of central
banking. The Reserve Bank was asked to promote banking habit, extend banking
facilities to rural and semi-urban areas, and establish and promote new
specialized financing agencies. Accordingly, the Reserve Bank has helped in the
setting up of the IFCI and the SFC; it set up the Deposit Insurance Corporation
in 1962, the Unit Trust of India in 1964, the Industrial Development Bank of
India also in 1964, the Agricultural Refinance Corporation of India in 1963 and
the Industrial Reconstruction Corporation of India in 1972. These institutions
were set up directly or indirectly by the Reserve Bank to promote saving habit
and to mobilize savings, and to provide industrial finance as well as agricultural
finance. The Bank has developed the co-operative credit movement to encourage
saving, to eliminate moneylenders from the villages and to route its short term
credit to agriculture. The RBI has set up the Agricultural Refinance and
Development Corporation to provide long-term finance to farmers.
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SCOPE OF THE RESEARCH
To study the strength of using CAMELS framework as a tool of performance
evaluation for banking institutions.
RESEARCH METHODOLOGY
Research methodology is a very organized and systematic way through which a
particular case or problem can be solved efficiently.
It is a step-by-step logical process, which involves:
Defining a problem
Laying the objectives of the research
Sources of data
Methods of data collection
Tabulation of data
Data analysis & processing
Conclusions & Recommendations
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STATEMENT OF THE PROBLEM
In the recent years the financial system especially the banks have undergone
numerous changes in the form of reforms, regulations & norms. CAMELS
framework for the performance evaluation of banks is an addition to this. The
study is conducted to analyze the pros & cons of this model.
OBJECTIVES OF STUDY
To do an in-depth analysis of the model.
AREA OF SURVEY:
The survey was done for three banks. The study environment
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iii)
SAMPLING TECHNIQUE :
Convenience sampling: Convenience sampling was done for the
selection of the banks.
The different parameters that were selected for the comparison is: CAR
Net Profit Margin
EPS
Credit Deposit Ratio
GNPA
NPA
ROA.
4. Sampling plane:-
Sample- ICICI, HDFC, IDBI, AXIS Bank and State Bank of India.
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LIMITATIONS OF THE STUDY
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Chapter-02
Review of literature
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Number of studies has been conducted about the use of CAMEL model. And
number of reviews on the previous researches is present but due to paucity of
time, a few snapshots of literature are given here.
Swindle, C, (1995) This study uses the capital adequacy component of the
CAMEL rating system to assess whether regulators in the 1980s influenced
inadequately capitalized banks to improve their capital. Using a measure of
regulatory pressure that is based on publicly available information, I find that
inadequately capitalized banks responded to regulators' demands for greater
capital. This conclusion is consistent with that reached by Keeley (1988). Yet, a
measure of regulatory pressure based on confidential capital adequacy ratings
reveals that capital regulation at national banks was less effective than at statechartered banks.
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Gilbert R., Meyer A., & Vaughan M. (2000) This article examines the
potential contribution to bank supervision of a model designed to predict which
banks will have their supervisory ratings downgraded in future periods. Bank
supervisors rely on various tools of off-site surveillance to track the condition of
banks under their jurisdiction between on-site examinations, including
econometric models. One of the models that the Federal Reserve System uses for
surveillance was estimated to predict bank failures. The number of banks
downgraded to problem status in recent years has been substantially larger than
the number of bank failures. During a period of few bank failures, the relevance
of this bank failure model for surveillance depends to some extent on the
accuracy of the model in predicting which banks will have their supervisory
ratings downgraded to problem status in future periods. This paper compares the
ability of two models to predict downgrades of supervisory ratings to problem
status: the Board staff model, which was estimated to predict bank failures,
and a model estimated to predict downgrades of supervisory ratings. We find that
both models do about as well in predicting downgrades of supervisory ratings for
the early 1990s. Over time, however, the ability of the downgrade model to
predict downgrades improves relative to that of the model estimated to predict
failures. This pattern reflects the value of using a model for surveillance that can
be re-estimated frequently. We conclude that the downgrade model may prove to
be a useful supplement to the Board's model for estimating failures during
periods when most banks are healthy, but that the downgrade model should not
be considered a replacement for the current surveillance framework.
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Lacewell, Stephen Kent (2001). Stage one in the estimation of cost and
alternative profit efficiency scores using a national model and a size-specific
model. Previous research referred in the paper asserts that an efficiency
component should be added to the current CAMEL regulatory rating system to
account for the ever-increasing diverse components of modern financial
institutions. Stage two is the selection and computation of financial ratios
deemed to be highly correlated with each component of the CAMEL rating. The
research shows that there is definitely a relationship between bank efficiency
scores and financial ratios used to proxy a bank's CAMEL rating. It is also
evident that certain types of efficiency models are better suited to large banks
than to small banks and vice versa.
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Godlewski (2003) has tested the validity of the CAMEL rating typology for
bank's default modification in emerging markets. He focused explicitly on using
a logical model applied to a database of defaulted banks in emerging markets. He
found that the principle results of the early warning signals models follow the
CAMEL typology. The proxy variables of bank solvability, assets' quality and
liquidity, particularly loan losses provisions, management quality, profitability,
and intermediation rate have a negative impact on the one year probability of
bank's default.
Said and Saucier (2003) examined the liquidity, solvency and efficiency of
Japanese Banks. Using CAMEL rating methodology, for a representative sample
of Japanese banks for the period 1993-1999, they evaluated capital adequacy,
assets and management quality, earnings ability and liquidity position. They
quantified banks managerial quality by calculating X-inefficiency using data
envelopment analysis (DEA). Results support the view that the major problem of
failed banks was not inefficiency of management, but below standard capital
adequacy and considerable problems in their assets quality. Significantly above
average efficiency of ailing banks could be explained by a survival strategy that
pushed them to drastically improve management.
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regulators were examined for both ratings in order to select significant predictors
among them. They employed an ordered response logit model to analyze the
monthly long-run S&P rating and a panel data framework for the analysis of the
quarterly CAMEL rating.
Baral (2005) analysed the performance of joint ventures banks in Nepal on the
basis of CAMEL Model. For the purpose of the study data set published by joint
venture banks in their annual reports was used. This paper examined the
financial health of joint venture banks in the CAMEL framework. The health
check up was conducted on the basis of publicly available financial data. It
concluded that the health of joint venture banks is better than that of the other
commercial banks. In addition, the perusal of indicators of different components
of CAMEL indicated that the financial health of joint venture banks was not so
strong to manage the possible large scale shocks to their balance sheet and their
health was fair.
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Kapil (2005) examined the relationship between the CAMEL ratings and the
bank stock performance. The viability of the banks was analyzed on the basis of
the Offsite Supervisory Exam ModelCAMEL Model. The M for Management
was not considered in this paper because all Public Sector Banks, (PSBs) were
government regulated, and also because all other four componentsC, A, E and
Lreflect management quality. The remaining four components were analyzed
and rated to judge the composite rating. Part A of the study analyzed the
interbank performance by determining their CAEL composite score. Part B of
the study assessed the relation between the banks composite CAMEL ratings
with the banks stock performance. The paper revealed that the Off-site
Supervisory Exam Model, CAMEL, is related to the banks stock performance in
the capital market.
Hirtle and Lopez, (2005),This research paper was carried out; to find the
adequacy of CAMEL in capturing the overall performance of a bank; to find the
relative weights of importance in all the factors in CAMEL; and lastly to inform
on the best ratios to always adopt by banks regulators in evaluating banks'
efficiency. In addition, the best ratios in each of the factors in CAMEL were
identified. For example, the best ratio for Capital Adequacy was found to be the
ratio of total shareholders' fund to total risk weighted assets. The paper
concluded that no one factor in CAMEL suffices to depict the overall
performance of a bank. Among other recommendations, banks' regulators are
called upon to revert to the best identified ratios in CAMEL when evaluating
banks performance.
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Sarker (2005) examined the CAMEL model for regulation and supervision of
Islamic banks by the central bank in Bangladesh. With the experience of more
than two decades the Islamic banking now covers more than one third of the
private banking system of the country and no concerted effort has been made to
add a Shariah component both in on-site and off-site banking supervision system
of the central bank. Rather it is being done on the basis of the secular supervisory
and regulatory system as chosen for the traditional banks and financial
institutions. To fill the gap, an attempt had been made in this paper to review the
CAMEL standard set by the BASEL Committee for off-site supervision of the
banking institutions. This study enabled the regulators and supervisors to get a
Shariah benchmark to supervise and inspect Islamic banks and Islamic financial
institutions from an Islamic perspective.
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"Nuts and Bolts"
Concept of CAMELS Framework?
Capital Adequacy
Asset Quality
Management Soundness
Earnings & Profitability
Liquidity
Sensitivity To Market Risk
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Capital Adequacy
Asset Quality
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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.
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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.
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
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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 Soundness
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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.
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Earnings and Profitability
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
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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".
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
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Liquidity
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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
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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.
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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.
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its payment. Should it be unable to do so, it too we default. Here, liquidity risk is
compounding credit risk.
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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.
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Chapter-03
BANK PROFILE
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HDFC BANK
State Bank of India
AXIS BANK
IDBI
ICICI
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HDFC BANK
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
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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.
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SBI
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 $195 billion in
deposits, it is a regional banking behemoth. It has a market share among Indian
commercial banks of about 20% in deposits and advances, and SBI accounts for
almost one-fifth of the nation's loans.
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The State bank of India is the 29th most reputed company in the world according
to Forbes.
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AXIS BANK
Axis Bank, formally UTI Bank, is a financial services firm that had begun
operations in 1994, after the Government of India allowed new private banks to
be established. The Bank was promoted jointly by the Administrator of the
Specified Undertaking of the Unit Trust of India (UTI-I), Life Insurance
Corporation of India (LIC), General Insurance Corporation Ltd., National
Insurance Company Ltd., The New India Assurance Company, The Oriental
Insurance Corporation and United India Insurance Company UTI-I holds a
special position in the Indian capital markets and has promoted many leading
financial institutions in the country. The bank changed its name to Axis Bank in
April 2007 to avoid confusion with other unrelated entities with similar name.
After the Retirement of Mr. P. J. Nayak, Shikha Sharma was named as the bank's
managing director and CEO on 20 April 2009.
As on the year ended March 31, 2009 the Bank had a total income of Rs
13,745.04 crore (US$ 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
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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.
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IDBI
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%).
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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.
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ICICI
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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.
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Data Analysis
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Capital Adequacy Ratio
Particular
HDFC
SBI
AXIS
IDBI
ICICI
2005 - 06
2006 - 07
2007 - 08
2008 - 09
2009 - 10
11.40%
13.10%
13.60%
15.10%
17.40%
11.88%
12.34%
13.47%
14.25%
13.39%
11.08%
11.57%
13.73%
13.69%
15.80%
14.80%
13.73%
11.95%
11.57%
11.31%
13.35%
11.69%
13.97%
15.53%
19.41%
25.00%
20.00%
2005 - 06
2006 - 07
2007 - 08
2008 - 09
2009 - 10
15.00%
10.00%
5.00%
0.00%
HDFC
SBI
AXIS
IDBI
ICICI
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Interpretation
.
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.
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Earning Per Share
Particular
HDFC
SBI
AXIS
IDBI
ICICI
2005 - 06
2006 - 07
2007 - 08
2008 - 09
2009 - 10
27.90%
36.30%
46.20%
52.90%
67.60%
83.73%
86.29%
126.62%
143.77%
144.37%
17.45%
23.50%
32.15%
50.61%
65.78%
7.76%
8.70%
10.06%
11.85%
14.23%
32.49%
34.84%
39.39%
33.76%
36.14%
100.00%
2006 - 07
80.00%
2007 - 08
60.00%
2008 - 09
40.00%
2009 - 10
20.00%
0.00%
HDFC
SBI
AXIS
IDBI
ICICI
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Interpretation
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
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reflected in its EPS. IDBIs performance is just okay. Its neither high nor low.
IDBI maintained its EPS but its slightly growing.
25
20
2005 - 06
15
2006 - 07
2007 - 08
10
2008 - 09
2009 - 10
0
HDFC
SBI
AXIS
IDBI
ICICI
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Figure 3.8 NPM
Interpretation
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%
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Return on Assets
Particular
HDFC
SBI
AXIS
IDBI
ICICI
2005-06
2006-07
2007 - 08 2008 - 09 2009 - 10
1.39%
1.39%
1.42%
1.42%
1.45%
0.92%
0.98%
1.01%
1.04%
0.88%
1.11%
1.07%
1.24%
1.44%
1.67%
0.66%
0.66%
0.67%
0.62%
0.53%
1.21%
1.04%
1.12%
0.98%
1.13%
1.80%
1.60%
1.40%
1.20%
2005-06
1.00%
2006-07
0.80%
2007 - 08
0.60%
2008 - 09
0.40%
2009 - 10
0.20%
0.00%
HDFC
SBI
AXIS
IDBI
ICICI
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Interpretation
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.
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Credit Deposit Ratio
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
300
250
200
2005 - 06
2006 - 07
150
2007 - 08
2008 - 09
100
2009 - 10
50
0
HDFC
SBI
AXIS
IDBI
ICICI
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Interpretation
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Gross Non Performing Assets
Column1
HDFC
SBI
AXIS
IDBI
ICICI
2007 - 08
2008 - 09
2009 - 10
1.30%
1.98%
1.43%
3.04%
2.84%
3.05%
0.72%
0.96%
1.13%
1.87%
1.38%
1.53%
3.30%
4.32%
5.06%
6.00%
5.00%
4.00%
2007 - 08
3.00%
2008 - 09
2009 - 10
2.00%
1.00%
0.00%
HDFC
SBI
AXIS
IDBI
ICICI
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Figure 3.11 Gross NPA
Interpretation
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.
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.
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Net Non Performing Assets
Particular
HDFC
SBI
AXIS
IDBI
ICICI
2007 - 08
2008 - 09
0.50%
1.78%
0.36%
1.30%
1.12%
2009 - 10
0.60%
1.76%
0.35%
0.92%
2.09%
0.50%
1.72%
0.36%
1.02%
2.12%
Table 3.7
2.50%
2.00%
1.50%
2007 - 08
2008 - 09
1.00%
2009 - 10
0.50%
0.00%
HDFC
SBI
AXIS
IDBI
ICICI
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Interpretation
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 =
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.
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Chapter-04
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Findings
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.
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Recommandations
1) The banks should adapt themselves quickly to the changing norms.
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.
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Bibliography
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
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