FINANCIAL APPRAISAL OF BANKING INDUSTRY A Comparative Insight of ICICI Bank and State Bank of India Introduction The banking

sector is the most dominant sector of the financial system in India, and with good valuations and increasing profits, the sector has been among the top performers in the markets. The public sector banks maintained its dominance in the banking system. As on March 31, 2009, PSBs accounted for 69.9 per cent of the aggregate assets and 72.7 per cent of the aggregate advances of the Scheduled Commercial Banking (SCB) system. Private banks are also pacing up in good number with these public sector banks and provide a good competition to them. Deregulation has opened new doors for banks to increase revenues by entering into investment banking, insurance, credit cards, depository services, mortgage, securitization, etc. The limit for foreign direct investment in private banks has been increased from 49% to 74%. In addition, the limit for foreign institutional investment in private banks is 49%. Liberalization and globalization have created a more challenging environment in the banking sector as well as in the other segments of the financial sector such as mutual funds, Non Banking Finance Companies, post offices, capital markets, venture capitalists, etc. Now the challenges faced by the sector would be gaining profitability, reinforcing technology, maintaining global standards, corporate governance, sharpening skills, risk management and, the most important of all, to establish Customer Intimacy.According to a report by McKinsey and NASSCOM, India has the potential to process 30 per cent of the banking transactions in the US by the year 2010.

Purpose of the Study The purpose of the present article is to analyze the financial strength of the banking sector on a comparative basis of ICICI and SBI .The study specifically aims at the following: To appraise the profitability of the units in detail To analyze the liquidity trend. To appraise the operating efficiency To have an in-depth view of the financial soundness To find out the value creation To find out the shortcomings, if any and suggest required remedial measures thereof.

RATIO ANALYSIS It refers to the systematic use of ratios to interpret the financial statements in terms of the operating performance and financial position of a firm. It involves comparison for a meaningful interpretation of the financial statements. Financial ratios: Financial ratios illustrate relationships between different aspects of a small business's operations. They involve the comparison of elements from a balance sheet or income statement, and are crafted with particular points of focus in mind. Financial ratios can provide small business owners and managers with a valuable tool to measure their progress against predetermined internal goals, a certain competitor, or the overall industry. In addition, tracking various ratios over time is a powerful way to identify trends as they develop. Ratios are also used by bankers, investors, and business analysts to assess various attributes of a company's financial strength or operating results. Ratios are determined by dividing one number by another, and are usually expressed as a percentage. They enable business owners to examine the relationships between seemingly unrelated items and thus gain useful information for decision-making. "They are simple to calculate, easy to use, and provide a wealth of information that cannot be gotten anywhere else," James O. Gill noted in his book Financial Basics of Small Business Success. But, he added, "Ratios are aids to judgment and cannot take the place of experience. They will not replace good management, but

they will make a good manager better. They help to pinpoint areas that need investigation and assist in developing an operating strategy for the future." Virtually any financial statistics can be compared using a ratio. In reality, however, small business owners and managers only need to be concerned with a small set of ratios in order to identify where improvements are needed. "As you run your business you juggle dozens of different variables," David H. Bangs, Jr. wrote in his book managing by the Numbers. "Ratio analysis is designed to help you identify those variables which are out of balance." It is important to keep in mind that financial ratios are time sensitive; they can only present a picture of the business at the time that the underlying figures were prepared. For example, a retailer calculating ratios before and after the Christmas season would get very different results. In addition, ratios can be misleading when taken singly, though they can be quite valuable when a small business tracks them over time or uses them as a basis for comparison against company goals or industry standards. As a result, business owners should compute a variety of applicable ratios and attempt to discern a pattern, rather than relying on the information provided by only one or two ratios. Gill also noted that small business owners should be certain to view ratios objectively, rather than using them to confirm a particular strategy or point of view. Perhaps the best way for small business owners to use financial ratios is to conduct a formal ratio analysis on a regular basis. The raw data used to compute the ratios should be recorded on a special form monthly. Then the relevant ratios should be computed, reviewed, and saved for future comparisons. Determining which ratios to compute depends on the type of business, the age of the business, the point in the business cycle, and any specific information sought. For example, if a small

business depends on a large number of fixed assets, ratios that measure how efficiently these assets are being used may be the most significant. In general, financial ratios can be broken down into four main categories 1. Profitability or return on investment 2. Liquidity 3. Leverage 4. Operating or efficiency With several specific ratio calculations prescribed within each. 1.Profitability or Return on Investment Ratios Profitability ratios provide information about management's performance in using the resources of the small business. As Gill noted, most entrepreneurs decide to start their own businesses in order to earn a better return on their money than would be available through a bank or other low-risk investments. If profitability ratios demonstrate that this is not occurringparticularly once a small business has moved beyond the start-up phasethen the entrepreneur should consider selling the business and reinvesting his or her money elsewhere. However, it is important to note that many factors can influence profitability ratios, including changes in price, volume, or expenses, as well the purchase of assets or the borrowing of money. Some specific profitability ratios follow, along with the means of calculating them and their meaning to a small business owner or manager. Gross profitability:

Gross Profits / Net Salesmeasures the margin on sales the company is achieving. It can be an indication of manufacturing efficiency or marketing effectiveness. Net profitability: Net Income / Net Salesmeasures the overall profitability of the company, or how much is being brought to the bottom line. Strong gross profitability combined with weak net profitability may indicate a problem with indirect operating expenses or non-operating items, such as interest expense. In general terms, net profitability shows the effectiveness of management. Though the optimal level depends on the type of business, the ratios can be compared for firms in the same industry. Return on assets: Net Income / Total Assetsindicates how effectively the company is deploying its assets. A very low ROA usually indicates inefficient management, whereas a high ROA means efficient management. However, this ratio can be distorted by depreciation or any unusual expenses. Return on investment 1: Net Income / Owners' Equityindicates how well the company is utilizing its equity investment. Due to leverage, this measure will generally be higher than return on assets. ROI is considered to be one of the best indicators of profitability. It is also a good figure to compare against competitors or an industry average. Experts suggest that companies usually need at least 10-14 percent ROI in order to fund future growth. If this ratio is too low, it can indicate poor management performance or a highly conservative business approach. On the other hand, a high

ROI can mean that management is doing a good job, or that the firm is undercapitalized. Return on investment 2: Dividends / Stock Price Change / Stock Price Paidfrom the investor's point of view, this calculation of ROI measures the gain (or loss) achieved by placing an investment over a period of time. Earnings per share: Net Income / Number of Shares Outstandingstates a corporation's profits on a per share basis. It can be helpful in further comparison to the market price of the stock. Investment turnover: Net Sales / Total Assetsmeasures a company's ability to use assets to generate sales. Although the ideal level for this ratio varies greatly, a very low figure may mean that the company maintains too many assets or has not deployed its assets well, whereas a high figure means that the assets have been used to produce good sales numbers. Sales per employee: Total Sales / Number of Employeescan provide a measure of productivity, though a high figure can indicate either good personnel management or good equipment. 2. Liquidity Ratios Liquidity ratios demonstrate a company's ability to pay its current obligations. In other words, they relate to the availability of cash and other assets to cover accounts payable, short-term debt, and other liabilities. All small businesses require a certain degree of liquidity in order to pay their bills on time, though startup and very young companies are often not very liquid. In mature companies, low

levels of liquidity can indicate poor management or a need for additional capital. Any company's liquidity may vary due to seasonality, the timing of sales, and the state of the economy. But liquidity ratios can provide small business owners with useful limits to help them regulate borrowing and spending. Some of the best-known measures of a company's liquidity include: Current ratio: Current Assets / Current Liabilitiesmeasures the ability of an entity to pay its near-term obligations. "Current" usually is defined as within one year. Though the ideal current ratio depends to some extent on the type of business, a general rule of thumb is that it should be at least 2:1. A lower current ratio means that the company may not be able to pay its bills on time, while a higher ratio means that the company has money in cash or safe investments that could be put to better use in the business. Quick ratio (or "acid test"): Quick Assets (cash, marketable securities, and receivables) / Current Liabilitiesprovides a stricter definition of the company's ability to make payments on current obligations. Ideally, this ratio should be 1:1. If it is higher, the company may keep too much cash on hand or have a poor collection program for accounts receivable. If it is lower, it may indicate that the company relies too heavily on inventory to meet its obligations. Cash to total assets: Cash / Total Assetsmeasures the portion of a company's assets held in cash or marketable securities. Although a high ratio may indicate some degree of safety from a creditor's viewpoint, excess amounts of cash may be viewed as inefficient.

Sales to receivables (or turnover ratio): Net Sales / Accounts Receivable measures the annual turnover of accounts receivable. A high number reflects a short lapse of time between sales and the collection of cash, while a low number means collections take longer. It is best to use average accounts receivable to avoid seasonality effects. Days' receivables ratio: 365 / Sales to receivables ratiomeasures the average number of days that accounts receivable are outstanding. This number should be the same or lower than the company's expressed credit terms. Other ratios can also be converted to days, such as the cost of sales to payables ratio. Cost of sales to payables: Cost of Sales / Trade Payablesmeasures the annual turnover of accounts payable. Lower numbers tend to indicate good performance, though the ratio should be close to the industry standard. Cash turnover: Net Sales / Net Working Capital (current assets less current liabilities)reflects the company's ability to finance current operations, the efficiency of its working capital employment, and the margin of protection for its creditors. A high cash turnover ratio may leave the company vulnerable to creditors, while a low ratio may indicate an inefficient use of working capital. In general, sales five to six times greater than working capital are needed to maintain a positive cash flow and finance sales. 3.Leverage Ratios Leverage ratios look at the extent that a company has depended upon borrowing to finance its operations. As a result, these ratios are reviewed closely by bankers and investors. Most leverage ratios compare assets or net worth with liabilities. A high leverage ratio may increase a company's exposure to risk and business downturns,

but along with this higher risk also comes the potential for higher returns. Some of the major measurements of leverage include: Debt to equity ratio: Debt / Owners' Equityindicates the relative mix of the company's investor-supplied capital. A company is generally considered safer if it has a low debt to equity ratiothat is, a higher proportion of owner-supplied capitalthough a very low ratio can indicate excessive caution. In general, debt should be between 50 and 80 percent of equity. Debt ratio: Debt / Total Assetsmeasures the portion of a company's capital that is provided by borrowing. A debt ratio greater than 1.0 means the company has negative net worth, and is technically bankrupt. This ratio is similar, and can easily be converted to, the debt to equity ratio. Fixed to worth ratio: Net Fixed Assets / Tangible Net Worthindicates how much of the owner's equity has been invested in fixed assets, i.e., plant and equipment. It is important to note that only tangible assets are included in the calculation, and that they are valued less depreciation. Creditors usually like to see this ratio very low, but the large-scale leasing of assets can artificially lower it. Interest coverage: Earnings before Interest and Taxes / Interest Expenseindicates how comfortably the company can handle its interest payments. In general, a higher interest coverage ratio means that the small business is able to take on additional debt. This ratio is closely examined by bankers and other creditors. Efficiency Ratios By assessing a company's use of credit, inventory, and assets, efficiency ratios can help small business owners and managers conduct business better. These ratios can

show how quickly the company is collecting money for its credit sales or how many times inventory turns over in a given time period. This information can help management decide whether the company's credit terms are appropriate and whether its purchasing efforts are handled in an efficient manner. The following are some of the main indicators of efficiency: Annual inventory turnover: Cost of Goods Sold for the Year / Average Inventory shows how efficiently the company is managing its production, ware-housing, and distribution of product, considering its volume of sales. Higher ratiosover six or seven times per yearare generally thought to be better, although extremely high inventory turnover may indicate a narrow selection and possibly lost sales. A low inventory turnover rate, on the other hand, means that the company is paying to keep a large inventory, and may be overstocking or carrying obsolete items. Inventory holding period: 365 / Annual Inventory Turnovercalculate the number of days, on average, that elapse between finished goods production and sale of product. Inventory to assets ratio: Inventory / Total Assetsshows the portion of assets tied up in inventory. Generally, a lower ratio is considered better. Accounts receivable turnover: Net (credit) Sales / Average Accounts Receivable gives a measure of how quickly credit sales are turned into cash. Alternatively, the reciprocal of this ratio indicates the portion of a year's credit sales that are outstanding at a particular point in time.

Collection period: 365 / Accounts Receivable Turnovermeasures the average number of days the company's receivables are outstanding, between the date of credit sale and collection of cash.

Learning Objective Explain to the participants on the limitation of ratio analysis. Important Terms Creative accounting. Accounting Policies. Limitations of Ratios Accounting Information Different Accounting Policies The choices of accounting policies may distort inter company comparisons. Example IAS 16 allows valuation of assets to be based on either revalued amount or at depreciated historical cost. The business may opt not to revalue its asset because by doing so the depreciation charge is going to be high and will result in lower profit. Creative accounting The businesses apply creative accounting in trying to show the better financial

performance or position which can be misleading to the users of financial accounting. Like the IAS 16 mentioned above, requires that if an asset is revalued and there is a revaluation deficit, it has to be charged as an expense in income statement, but if it results in revaluation surplus the surplus should be credited to revaluation reserve. So in order to improve on its profitability level the company may select in its revaluation programme to revalue only those assets which will result in revaluation surplus leaving those with revaluation deficits still at depreciated historical cost. Information problems Ratios are not definitive measures Ratios need to be interpreted carefully. They can provide clues to the companys performance or financial situation. But on their own, they cannot show whether performance is good or bad. Ratios require some quantitative information for an informed analysis to be made. Outdated information in financial statement The figures in a set of accounts are likely to be at least several months out of date, and so might not give a proper indication of the companys current financial position. Historical costs not suitable for decision making IASB Conceptual framework recommends businesses to use historical cost of accounting. Where historical cost convention is used, asset valuations in the balance sheet could be misleading. Ratios based on this information will not be very useful for decision making. Financial statements certain summarised information Ratios are based on financial statements which are summaries of the accounting records. Through the summarisation some important information may be left out which could have been of relevance to the users of accounts. The ratios are based

on the summarised year end information which may not be a true reflection of the overall years results. Interpretation of the ratio It is difficult to generalise about whether a particular ratio is good or bad. For example a high current ratio may indicate a strong liquidity position, which is good or excessive cash which is bad. Similarly Non current assets turnover ratio may denote either a firm that uses its assets efficiently or one that is under capitalised and cannot afford to buy enough assets. Comparison of performance over time Price changes Inflation renders comparisons of results over time misleading as financial figures will not be within the same levels of purchasing power. Changes in results over time may show as if the enterprise has improved its performance and position when in fact after adjusting for inflationary changes it will show the different picture. Technology changes When comparing performance over time, there is need to consider the changes in technology. The movement in performance should be in line with the changes in technology. For ratios to be more meaningful the enterprise should compare its results with another of the same level of technology as this will be a good basis measurement of efficiency. Changes in Accounting policy Changes in accounting policy may affect the comparison of results between different accounting years as misleading. The problem with this situation is that the directors may be able to manipulate the results through the changes in accounting policy. This would be done to avoid the effects of an old accounting policy or gain

the effects of a new one. It is likely to be done in a sensitive period, perhaps when the businesss profits are low. Changes in Accounting standard Accounting standards offers standard ways of recognising, measuring and presenting financial transactions. Any change in standards will affect the reporting of an enterprise and its comparison of results over a number of years. Impact of seasons on trading As stated above, the financial statements are based on year end results which may not be true reflection of results year round. Businesses which are affected by seasons can choose the best time to produce financial statements so as to show better results. For example, a tobacco growing company will be able to show good results if accounts are produced in the selling season. This time the business will have good inventory levels, receivables and bank balances will be at its highest. While as in planting seasons the company will have a lot of liabilities through the purchase of farm inputs, low cash balances and even nil receivables.

Inter-firm comparison Different financial and business risk profile No two companies are the same, even when they are competitors in the same industry or market. Using ratios to compare one company with another could provide misleading information. Businesses may be within the same industry but having different financial and business risk. One company may be able to obtain bank loans at reduced rates and may show high gearing levels while as another may not be successful in obtaining cheap rates and it may show that it is operating at low gearing level. To un informed analyst he may feel like company two is

better when in fact its low gearing level is because it can not be able to secure further funding. Different capital structures and size Companies may have different capital structures and to make comparison of performance when one is all equity financed and another is a geared company it may not be a good analysis. Impact of Government influence Selective application of government incentives to various companies may also distort intercompany comparison. One company may be given a tax holiday while the other within the same line of business not, comparing the performance of these two enterprises may be misleading. Window dressing These are techniques applied by an entity in order to show a strong financial position. For example, MZ Trucking can borrow on a two year basis, K10 Million on 28th December 2003, holding the proceeds as cash, then pay off the loan ahead of time on 3rd January 2004. This can improve the current and quick ratios and make the 2003 balance sheet look good. However the improvement was strictly window dressing as a week later the balance sheet is at its old position. Ratio analysis is useful, but analysts should be aware of these problems and make adjustments as necessary. Ratios analysis conducted in a me chanical, unthinking manner is dangerous, but if used intelligently and with good judgement, it can provide useful insights into the firms operations.

PROFILES
ICICI Bank ICICI Bank, a private sector bank under the house of ICICI was incorporated in the year of 1994. It is a multi specialist financial service provider with leadership position across the spectrum of financial services in India. ICICI Bank is the 2nd largest bank in India. ICICI runs its business with six principal groups, such as 1.Retail Banking, 2.Wholesale Banking, 3.International Banking, 4.Rural, Micro Banking and Agro-Business, 5.Government Banking 6. Corporate Centre.

The Bank offers a wide spectrum of domestic and international banking services to facilitate trade, investment banking, Insurance, Venture Capital, asset management, cross border business & treasury and foreign exchange services besides providing a full range of deposit and ancillary services for both individuals and corporate through various delivery Channels and specialized subsidiaries. ICICI Bank has 14 subsidiaries,out of that 10 in domestic and

rest of 4 in international level such as UK, Canada and Russia. To efficiently distribute its products and services, the bank has developed multiple access channels comprising lean brick and mortar branches, ATMs, call centers and Internet banking. The Bank has introduced the concept of mobile ATMs in the remote/rural areas. It has also extended its mobile banking services to all cellular service providers across India and NRI customers in USA, UK, Middle- East and Singapore.

FINANCIALS STATEMENT OF ICICI BANK

Profit & Loss account of ICICI Bank Income / Year Interest Earned Other Income Total Income Expenditure Interest expended Employee Cost Selling and Admin Expenses Depreciation Miscellaneous 2004-05 9,409.89 3,416.23 (Value in Crores ) 2006 -07 2007 -08 2008 -09

2005 -06 13,784.50 5,036.62

22,994.29 30,788.34 31,092.55 6,962.95 8,878.85 8,117.76 29,957.24 39,667.19 39,210.31

12,826.12 18,821.12

6,570.89 737.41 1,040.49 590.36 1,881.77

9,597.45 1,082.29 2,360.72 623.79 2,616.78

16,358.50 23,484.24 22,725.93 1,616.75 2,078.90 1,971.70 4,900.67 544.78 3,426.32 5,834.95 578.35 3,533.03 5,977.72 678.60 4,098.22

Expenses Preoperative Exp Capitalized Operating Expenses Provisions & Contingencies Total Expenses Net Profit for the Year Extraordinary Items Profit brought forward Total

0.00 3,177.78 1,072.25

0.00 5,274.23 1,409.35

0.00 8,849.86 1,638.66

0.00

0.00

10,855.18 10,795.14 1,170.05 1,931.10

10,820.92 16,281.03

26,847.02 35,509.47 35,452.17

2,005.20 0.00 53.09

2,540.07 0.00 188.22

3,110.22 0.00 293.44

4,157.73 0.00 998.27

3,758.13 -0.58 2,436.32

2,058.29

2,728.29

3,403.66

5,156.00

6,193.87

Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualized) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs) Appropriations

0.00 632.96 90.10

0.00 759.33 106.50

0.00 901.17 153.10

0.00 1,227.70 149.67

0.00 1,224.58 151.21

27.22 85.00 170.35

28.55 85.00 249.55

34.59 100.00 270.37

37.37 110.00 417.64

33.78 110.00 445.17

Transfer to Statutory Reserves Transfer to Other Reserves Proposed Dividend/Transfer to Govt Balance c/f to Balance Sheet Total

547.00 600.01

248.69 1,320.34

1,351.12 0.00

1,342.31 0.01

2,008.42 0.01

723.06

865.83

1,054.27

1,377.37

1,375.79

188.22 2,058.29

293.44 2,728.30

998.27 3,403.66

2,436.32 5,156.01

2,809.65 6,193.8

Balance Sheet of ICICI Bank

Year Capital and Liabilities: Total Share Capital Equity Share

2004-05

2005 -06

2006 -07

2007 -08

2008 -09

1,086.75 736.75

1,239.83 889.83

1,249.34 899.34

1,462.68 1,112.68

1,463.29 1,113.29

Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Net Worth Deposits Borrowings Total Debt Other Liabilities & Provisions Total Liabilities 0.02 0.00 0.00 0.00 0.00

350.00 11,813.20 0.00 12,899.97 99,818.78 33,544.50 133,363.2 8 21,396.17 167,659.4 2

350.00 21,316.16 0.00 22,555.99 165,083.17 38,521.91 203,605.08 25,227.88

350.00 23,413.92 0.00 24,663.26 230,510.1 9 51,256.03 281,766.2 2 38,228.64 344,658.1 2

350.00 45,357.53 0.00 46,820.21 244,431.0 5 65,648.43 310,079.4 8 42,895.39 399,795.0 8

350.00 48,419.73 0.00 49,883.02 218,347.82 67,323.69 285,671.51 43,746.43

251,388.95

379,300.96

Year Assets Cash & Balances with RBI Balance with Call Advances

2004-05

2005 -06

2006 -07

2007 -08

2008 -09

6,344.90

8,934.37

18,706.88

29,377.53

17,536.33

Banks, Money at 6,585.07 91,405.15

8,105.85

18,414.45

8,663.60 225,616.0

12,430.23 218,310.85

146,163.11 195,865.6

0 Investments Gross Block Accumulated Depreciation Net Block Capital Work In Progress Other Assets Total Assets Contingent Liabilities Bills for 50,487.35 5,525.65 1,487.61 4,038.04 96.30 8,702.59 167,659.4 0 97,507.79 71,547.39 5,968.57 1,987.85 3,980.72 147.94 12,509.57 251,388.95 91,257.84 6,298.56 2,375.14 3,923.42 189.66 16,300.26 344,658.1 1 177,054.1 8 22,717.23 270.37

8 111,454.3 4 7,036.00 2,927.11 4,108.89 0.00 20,574.63 399,795.0 7 371,737.3 6 29,377.55 417.64

103,058.31 7,443.71 3,642.09 3,801.62 0.00 24,163.62 379,300.96

119,895.78 15,025.21 249.55

803,991.92 36,678.71 445.17

9,803.67 collection Book Value (Rs) 170.35

Source : Religare Technova

Key Financial Ratios of ICICI Bank

Year Investment Valuation

2004-05 2005 -06

2006 -07

2007 -08

2008 -09

Face Value Dividend Per Share Operating Profit Per Share (Rs) Net Operating Profit Per Share (Rs) Free Reserves Per Share (Rs) Profitability Ratios Interest Spread Adjusted Cash Margin(%) Net Profit Margin

10.00 8.50 36.37 160.69 110.70

10.00 8.50 36.75 196.87 193.24

10.00 10.00 42.19 316.45 199.52

10.00 11.00 51.29 354.71 346.21

10.00 11.00 48.60 343.77 351.22

3.56 21.14 16.32

2.67 17.55 14.12

3.43 12.30 10.81

3.51 11.81 10.51

3.66 11.45 9.74

Year Return on Long Term Fund(%) Return on Net Worth(%) Adjusted Return on Net Worth(%) Return on Assets Excluding Revaluations Return on Assets Including Revaluations Management Efficiency

2004-05

2005 -06 2006 -07 2007 -08

2008 -09

70.54 18.86 15.99 1.20 1.20

56.24 14.33 11.40 1.01 1.01

82.46 13.17 12.31 0.90 0.90

62.34 8.94 8.80 1.04 1.04

56.72 7.58 7.55 0.99 0.99

Ratios

Interest Income / Total Funds Net Interest Income / Total Funds Non Interest Income / Total Funds Interest Expended / Total Funds Operating Expense / Total Funds Profit Before Provisions / Total Funds Net Profit / Total Funds Loans Turnover Total Income / Capital Employed(%) Interest Expended / Capital

8.08

8.36

9.55

10.60

9.82

3.60 0.31 4.49 1.77 1.73 1.37 0.16 8.39

3.78 0.22 4.58 2.22 1.49 1.21 0.15 8.58 4.58 0.08 2.94

4.06 0.10 5.49 2.79 1.19 1.04 0.17 9.65 5.49 0.10 4.52

4.29 0.02 6.31 2.76 1.40 1.12 0.20 10.62 6.31 0.11 5.61

3.99 0.08 5.83 2.60 1.30 0.96 0.18 9.90 5.83 0.10 5.14

4.49 Employed(%) Total Assets Turnover Ratios 0.08 Asset Turnover Ratio 2.14

Profit And Loss Account Ratios

Year Interest Expended / Interest

2004-05

2005 -06 2006 -07 2007 -08

2008 -09

69.83 Earned Other Income / Total Income 3.65 Operating Expense / Total 21.06 Income Selling Distribution Cost 5.08 Composition Balance Sheet Ratios

69.62 2.59 25.86 4.80

71.14 1.07 28.87 6.12

76.28 0.17 26.00 4.43

73.09 0.86 26.22 1.74

Year Capital Adequacy Ratio Advances / Loans Funds(%)

2004-05 11.78 76.65

2005 -06 2006 -07 2007 -08 13.35 84.89 11.69 77.72 13.97 72.67

2008 -09 15.53 69.86

Debt Coverage Ratios Year 2004-05 2005 -06 2006 -07 2007 -08 2008 -09

Credit Deposit Ratio Investment Deposit Ratio Cash Deposit Ratio Total Debt to Owners Fund Financial Charges Coverage Ratio Financial Charges Coverage

89.17 55.52 7.00 7.98 1.48 1.40

87.59 46.07 5.77 7.45 1.39 1.33

83.83 41.15 6.99 9.50 1.25 1.22

84.99 42.68 10.12 5.27 1.25 1.20

91.44 46.35 10.14 4.42 1.25 1.20

Ratio Post Tax

Leverage Ratios Year 2004-05 2005 -06 2006 -07 2007 -08 2008 -09

Current Ratio Quick Ratio Cash Flow Indicator Ratios Year

0.09 4.98

0.08 6.64

0.09 6.04

0.11 6.42

0.13 5.94

2004-05

2005 -06 2006 -07 2007 -08

2008 -09

Dividend Payout Ratio Net Profit Dividend Payout Ratio Cash Profit Earning Retention Ratio Cash Earning Retention Ratio Adjusted Cash Flow Times Earnings Per Share Book Value

36.05

34.08

33.89

33.12

36.60

27.85 63.98 72.17 38.43 27.22 170.35

27.36 65.82 72.58 52.30 28.55 249.55

28.84 64.80 70.22 65.12 34.59 270.37

29.08 66.35 70.51 52.34 37.37 417.64

31.00 63.23 68.87 49.41 33.78 445.17

Year

2004-05

2005 -06 2006 -07 2007 -08

2008 -09

PROFILE OF STATE BANK OF INDIA

State Bank of India SBI, started as Imperial Bank then named State Bank of India commenced its operations from the year 1955, is the largest commercial bank in India in terms of profits, assets, deposits, branches and employees. As of March 2008, the bank has had 21 subsidiaries and 10,000 branches. SBI offers the services of banking and as well as nonbanking services to their customers. The bank also concentrates in agriculture, for which it took initiative spotlight kharif and spotlight rabi campaigns for higher disbursement. It introduced Automated Teller Machine with Kishan Credit Cards in all circles to assist agriculture peoples. The strategic initiatives that SBI have launched business groups in 2007 namely rural and agri business; treasury and marketing; corporate strategy and new business; and fourth mid corporate group is on the anvil. SBI opened its 10,000th branch in March 2008, it becomes only the second bank in the world to have more than 10,000 branches after Chinas ICBC.

Profit & Loss account of SBI (Rs. in Crores ) Income / Year Income Interest Earned Other Income Total Income Expenditure Interest expended Employee Cost Selling and Admin Expenses Depreciation Miscellaneous Expenses Preoperative Exp Capitalised Operating Expenses Provisions & Contingencies Total Expenses 18,483.3 8 6,907.35 2,634.64 752.21 6,465.82 0.00 11,278.1 8 5,481.84 35,243.4 0 20,159.29 8,123.04 1,853.32 729.13 7,912.15 0.00 11,872.89 6,744.75 38,776.93 23,436.8 2 7,932.58 3,251.14 602.39 7,173.55 0.00 13,251.7 8 5,707.88 42,396.4 8 31,929.0 8 7,785.87 4,165.94 679.98 7,058.75 0.00 14,609.5 5 5,080.99 51,619.6 2 42,915.29 9,747.31 5,122.06 763.14 8,810.75 0.00 18,123.66 6,319.60 67,358.55 32,428.0 0 7,119.90 39,547.9 0 35,794.93 7,388.69 43,183.62 39,491.0 3 7,446.76 46,937.7 9 48,950.3 1 9,398.43 58,348.7 4 63,788.43 12,691.35 76,479.78 2004-05 2005 -06 2006 -07 2007 -08 2008 -09

Net Profit for the Year Extraordionary Items Profit brought forward Total Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs) Appropriations Transfer to Statutory Reserves Transfer to Other Reserves Proposed Dividend/Transfer to Govt Balance c/f to Balance Sheet Total

4,304.52 0.00 0.34 4,304.86 0.00 657.87 93.75

4,406.67 0.00 0.34 4,407.01 0.00 736.82 103.34

4,541.31 0.00 0.34 4,541.65 0.00 736.82 125.22

6,729.12 0.00 0.34 6,729.46 0.00 1,357.66 165.87

9,121.23 0.00 0.34 9,121.57 0.00 1,841.15 248.03

81.79 125.00 457.39 3,552.89 0.01

83.73 140.00 525.25 3,566.51 0.00

86.29 140.00 594.69 3,682.15 -2.88

106.56 215.00 776.48 5,205.69 -0.10

143.67 290.00 912.73 7,032.04 0.01

751.62

840.16

862.04

1,523.53

2,089.18

0.34 4,304.86

0.34 4,407.01

0.34 4,541.65

0.34 6,729.46

0.34 9,121.57

Balance Sheet of SBI

Year Capital and Liabilities:

2004-05

2005 -06

2006 -07

2007 -08

2008 -09

Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Net Worth Deposits Borrowings Total Debt Other Liabilities & Provisions Total Liabilities

526.30 526.30

526.30 526.30

526.30 526.30

631.47 631.47

634.88 634.88

0.00

0.00

0.00

0.00

0.00

0.00 23,545.84 0.00 24,072.14 367,047.5 3 19,184.31 386,231.8 4 49,578.89 459,882.8 7

0.00 27,117.79 0.00 27,644.09 380,046.0 6 30,641.24 410,687.3 0 55,538.17 493,869.5 6

0.00 30,772.26 0.00 31,298.56 435,521.0 9 39,703.34 475,224.4 3 60,042.26 566,565.2 5

0.00 48,401.19 0.00 49,032.66 537,403.9 4 51,727.41 589,131.3 5 83,362.30 721,526.3 1

0.00 57,312.82 0.00 57,947.70 742,073.13 53,713.68 795,786.81 110,697.57 964,432.08

Year Assets Cash & Balances with RBI Balance with Banks, Money at Call Advances Investments Gross Block Accumulated Depreciation Net Block Capital Work In Progress Other Assets Total Assets Contingent Liabilities Bills for collection Book Value (Rs)

2004-05

2005 -06

2006 -07

2007 -08

2008 -09

16,810.33

21,652.70

29,076.43

51,534.62

55,546.17

22,511.77 202,374.4 5 197,097.9 1 6,691.09 4,114.67 2,576.42 121.27 18,390.71 459,882.8 6 131,325.4 0 44,794.10 457.39

22,907.30 261,641.5 3 162,534.2 4 7,424.84 4,751.73 2,673.11 79.82 22,380.84 493,869.5 4 191,819.3 4 57,618.44 525.25

22,892.27 337,336.4 9 149,148.8 8 8,061.92 5,385.01 2,676.91 141.95 25,292.31 566,565.2 4 259,536.5 7 70,418.15 594.69

15,931.72 416,768.2 0 189,501.2 7 8,988.35 5,849.13 3,139.22 234.26 44,417.03 721,526.3 2 736,087.5 9 93,652.89 776.48

48,857.63

542,503.20 275,953.96 10,403.06 6,828.65 3,574.41 263.44 37,733.27 964,432.08 614,603.47 152,964.06 912.73

Source : Religare Technova Key Financial Ratios of SBI Investment Valuation Year Face Value Dividend Per Share Operating Profit Per Share (Rs) Net Operating Profit Per Share (Rs) Free Reserves Per Share (Rs) Bonus in Equity Capital Profitability Ratios Interest Spread Adjusted Cash Margin(%) Net Profit Margin Return on Long Term Fund(%) Return on Net Worth(%) Adjusted Return on Net Worth (%) Return on Assets Excluding Revaluations Return on Assets Including Revaluations 4.28 14.54 11.56 105.35 19.43 19.35 0.94 0.94 4.31 13.06 11.21 97.89 17.04 15.93 0.89 0.89 4.20 11.43 10.12 99.20 15.41 14.47 0.80 0.80 4.32 12.81 11.65 86.83 13.72 13.70 0.93 0.93 4.34 13.04 12.03 100.35 15.74 15.74 0.95 0.95 2004-05 2005 10.00 12.50 148.50 692.96 68.67 --06 10.00 14.00 124.77 719.54 178.33 -2006 -07 10.00 14.00 147.72 833.38 184.43 -2007 -08 10.00 21.50 173.61 899.83 356.61 -2008 -09 10.00 29.00 230.04 1,179.45 373.99 --

Management Efficiency Ratios Year Interest Income / Total Funds Net Interest Income / Total Funds Non Interest Income / Total Funds Interest Expended / Total Funds Operating Expense / Total Funds Profit Before Provisions / Total Funds Net Profit / Total Funds Loans Turnover Total Income / Capital Employed(%) Interest Expended / Capital 2004-05 2005 -06 2006 -07 2007 -08 2008 -09

8.41 4.15 0.17 4.26 2.34 1.80 0.99 0.20 8.58

7.94 3.71 0.30 4.23 2.34 1.52 0.92 0.16 8.24 4.23 0.08 5.10

8.27 3.85 0.19 4.42 2.39 1.54 0.86 0.15 8.46 4.42 0.08 5.44

8.82 3.87 0.14 4.96 2.16 1.74 1.04 0.15 8.96 4.96 0.09 6.32

8.88 3.79 0.11 5.09 2.06 1.75 1.08 0.16 8.99 5.09 0.09 7.20

4.26 Employed (%) Total Assets Turnover Ratios 0.08 Asset Turnover Ratio 5.45

Profit and Loss Account Ratios

Year Interest Expended / Interest

2004-05

2005 -06 2006 -07 2007 -08

2008 -09

57.00 Earned Other Income / Total Income 1.99 Operating Expense / Total 27.34 Income Selling Distribution Cost 0.18 Composition Balance Sheet Ratios

56.32 3.60 28.37 0.28

59.35 2.25 28.19 0.20

65.23 1.56 24.13 0.30

67.28 1.18 22.91 0.33

Year Capital Adequacy Ratio Advances / Loans Funds(%)

2004-05 12.45 56.35

2005 -06 2006 -07 2007 -08 11.88 65.66 12.34 76.16 13.47 78.31

2008 -09 14.25 78.34

Debt Coverage Ratios Year Credit Deposit Ratio Investment Deposit Ratio Cash Deposit Ratio Total Debt to Owners Fund 2004-05 52.55 55.83 5.23 15.25 2005 -06 2006 -07 2007 -08 62.11 48.14 5.15 13.75 73.44 38.22 6.22 13.92 77.51 34.81 8.29 10.96 2008 -09 74.97 36.38 8.37 12.81

Financial Charges Coverage Ratio Financial Charges Coverage Ratio Post Tax Leverage Ratios Year Current Ratio Quick Ratio

1.46 1.27

1.40 1.25

1.37 1.22

1.37 1.23

1.36 1.23

2004-05 0.04 4.79

2005 -06 2006 -07 2007 -08 0.05 5.50 0.05 6.52 0.07 6.15

2008 -09 0.04 5.74

Cash Flow Indicator Ratios Year Dividend Payout Ratio Net Profit Dividend Payout Ratio Cash Profit Earning Retention Ratio Cash Earning Retention Ratio AdjustedCash Flow Times Earnings Per Share Book Value 2004-05 2005 -06 2006 -07 2007 -08 2008 -09

17.46 14.86 83.88 86.12 67.82 81.79 457.39

19.06 16.35 80.93 83.64 74.03 83.73 525.25

18.98 16.75 80.97 83.21 84.87 86.29 594.69

22.64 20.56 77.33 79.41 72.64 106.56 776.48

22.90 21.13 77.11 78.88 75.05 143.67 912.73

COMPARATIVE STUDY
ICICI Following is the comparative trend in the financial position of ICICI with industry aggregates to give an idea of how the balance sheet is structured in this industry regarding the (i) financial risk, and (ii) operating risk pattern. Also, there is a discussion on how does the balance sheet of ICICI and SBI bank differs from their peers. Table 1 Comparative Trend in Financial position (31st March 2007 -31st March 2008) ( Rs. cr)

I. Funding pattern 1. Capital Major components of Capital are: Equity Share Capital Preference Share Capital

The major reason for an increase in capital has been the simultaneous public issue in India and issue of American Depository Shares (ADS) in the United States. The public issue in India was subscribed 11.5 times and the ADS issue was subscribed over 5 times. There was an increase in the equity capital also because of the merger of The Sangli Bank Ltd with ICICI Bank Ltd. The shareholders of Sangli Bank were allotted 3,455,008 equity shares of Rs 10.00 each on May 28, 2007. The merger has been accounted for as per the purchase method of accounting in accordance with the scheme of amalgamation. As a result of the issue, the merger and the exercising of employee stock option plan the Capital has increased. Comparison with the industry The dependence of the bank on capital is relatively less than that of the industry however if you see the dependence of the total shareholder funds it is almost the same. Another interesting point is that till last year even this total shareholder funds as a proportion of the capital employed was less and this may be the prime reason for the bank to go for a FPO to improve the Debt- Equity ratio and it may have found difficult to raise funds as borrowings 2. Reserves The important sub-heads under Reserves are Statutory Reserves compulsorily to be maintained as per company Law and the Banking Law Revenue Reserves Share Premium Exchange Fluctuation Reserves ICICI Bank has a lot of assets and liabilities which are denominated in foreign currency. These assets are investments which

may have to be marked to market on the balance sheet date. While doing so the bank may face a loss in the foreign exchange as on the date of preparing the balance sheet and thus this loss is not written off in the P&L account but is reduced from reserves directly. The total reserves have increased by Rs. 21,943.61crore and a major portion of this i.e. Rs. 19,231.61crore is because of increase in the Share Premium account and the remaining being due to increase in Profit and Loss account Balance. 3. Deposits The components of Deposits are Term Deposits Savings Deposit Demand Deposits If we notice there has been a tremendous growth in the total sources of funds however the amount of deposits has not increased so much one major reason for this is that higher cost of the deposits to attract depositors. Deposits grew by almost 12%. However what improved was the CASA ((Current Accounts + Saving Accounts) / Total Deposits) margin of the bank. This ratio determines the banks ability to raised cheap deposits as current accounts give nominal or zero interest. 4. Borrowings Borrowings are different from deposits as deposits are collected in the course of business and borrowings are like loans taken by the bank. Borrowings include Debentures Borrowings from various agencies The external borrowings of the bank increased by almost 28% and as we will notice further in the common size Balance Sheet of the bank compared to common

size Balance Sheet of the Industry (Pvt. Sector Banks) in aggregate ICICI Bank have a higher reliance on external borrowings and specifically borrowings from outside India. This is attributed mainly to the factors that availability of cheap credit in UK and Canada and the ability of ICICI Bank to raise money from these markets due to the presence of its subsidiaries. The borrowings from UK and Canada increased by 90%. II. Utilization trend 1. Cash and Cash Balances These include cash in hand majorly with RBI for the purpose of maintaining the CRR. 2. Balances with Banks and money at call 3. Investments These mainly include investments in subsidiaries, investment in government securities to meet SLR requirements, holding of equity shares of other companies. 4. Advances A major portion of this i.e. 78% is towards loans given out, then 15% towards cash credit and overdraft facilities and the remaining in bills purchased and other advances Fixed Assets include computers, premises, ATMs, fixtures etc.The Application of funds side has mainly remained constant with the last year as a proportion of the total asset except the Cash and Cash Balances this is also only mainly because of the CRR. Compared to the industry also the proportion remains the same. Contingent Liabilities One important point to make here about ICICI Bank and the other Pvt. Sector Banks is the amount of Contingent Liabilities forming a part of their notes to

accounts below the Balance Sheet. For ICICI Bank it is almost 3 times the amount of total assets it has and it goes up to 9 times for the industry aggregate. Most of these contingent liabilities are due to the outstanding amount on forward exchange, futures, interest swaps and option contracts. The other few reasons for the contingent liabilities include acceptances, guarantees, obligations and Letter of Credits issued for foreign trade. Takeover of Sangli Bank Ltd The net assets worth Rs.2,500 crore has been taken over and merged in to the balance sheet of ICICI Bank as a reason of the merger with Sangli Bank. Table 2 Comparative Trend in Profitability (31st March 2007 - 31st March 2008) ( Rs. Cr.) III. Income trend The income of the bank has increased by 36% (y o y) despite higher interest rates and slows down in the credit market. However the effect of the higher interest rate can be seen on the interest expended growth which grew by 46%. A major reason for the banks net profit margin to yet be intact and an increase in the net profit as compared to last year by 33% is because of its improving operating efficiency and manpower and employee efficiency which shall be shown in the ratio analysis. Table 3 Industry Benchmarking Year ICICI Bank Banks-Pvt Sector

Industry performance As we have mentioned earlier and would also be showing in the ratio analysis in detail one aspect where ICICI Bank has lagged in its performance as compared to its peers in the industry is the ability to raise funds at a lower cost and this is evident when we see the common size Profit and Loss account and even though the interest income earned as a percentage of the total income is the same as the industry however the interest expended is 12% points higher and thus as we see the net profit as a percentage of total income its a little less than its industry peers.

(B.) SBI
Table 4 Comparative Financial Performance and Benchmarking ( 31st March 2007 - 31st March 2008) Analysing the balance sheet for SBI with the industry, it can be found that the composition almost very similar with slight variations in each head. I. Funding pattern Capital & Reserves and Surplus

There has been a rise of almost 60% i.e. almost Rs.18,000cr in the total of the capital and reserves account of which almost Rs.16,000cr. increase is because of the Rights issue to the existing shareholders. The remaining heads under the liabilities side have an almost proportionate increase as compared to the increase in total liabilities. Deposits increased by almost 24% Borrowings increased by 30% Liabilities and Provisions increased by 38% II. Utilization trend Cash and Balances with RBI as explained earlier with ICICI Bank have an increase due to the hike in CRR.Investments include mainly investments in govt. and govt. approved securities. Table 5 Comparative Profitability (31st March 2007 - 31st March 2008)

III. Income trend There has been an increase in the total income of the bank by approximately by 31% this has been due to an equal increase both in interest income and other income. This has been because SBI is now looking to foray into models of business. Expenses Interest expense has increased drastically mainly because of the cost of funds available in the market and hike in interest rates by RBI. This has impacted the profitability a lot because the increase is almost 1.5 times that in that of income.

Even though the interest expense has risen so much the main reason SBI has been able to control its total expenditure is because of a very minor increase in the employee expense and a decrease in the operating and administrative expense. The above will be explained with the help of ratios later in the presentation. The total profitability has increased by 48% because the increase in total expenses has been much lesser than those in total income. Table 6

Comparative Financial Performance ICICI Bank vs. State Bank of India

Borrowings The borrowings of ICICI Bank represent approx 16% of the liabilities as compared to the 7% of SBI. As explained earlier this is because of its ability to raise funds abroad at lesser cost. Investments Though the size of Investments as a proportion of the total assets is the same however the composition is slightly different where major component in both their investments is in government or government approved securities, for SBI the next major portion is the investments in subsidiaries, whereas for ICICI, it is in other investments which include future contracts and other riskier assets.

Fixed Assets - The proportion of fixed assets for ICICI is almost double that of SBI is an important point here as even though SBI has 10 times the branches than ICICI has, its investment in premises is lesser not only in % terms but also in Rupee terms. Major reason for this is that many of its premises are on lease and thus do not appear on the balance sheets.

Contingent Liabilities the major reason for such a difference in the contingent liabilities of the banks is because SBI has major contingent liabilities in forward exchange contracts and guarantees and acceptances only. However for ICICI Bank not only are these heads high but also because the have a large exposure to the futures market and other instruments where only initial margins are high these are recorded as contingent liabilities. Profitability Appraisal 1. Net Profit Margin (%) - Net profit margin aims to find the net amount that is available after all expenses,as a percentage of revenue earned. In simple terms, it can be said that this ratio calculates the amount of revenue that is converted into net profit. Net Profit Turnover Table 7 Net profit margin 2007-08 2006-07 ICICI 13.5% 14.1% SBI 13.74% 12.19% Explanation: Net Profit Margin has taken a dip for ICICI bank because of higher cost of funds along with higher growth in interest earned than that in net profit. SBI, on the other hand, has shown a 48.17% growth in its net profit compared to 31.4% growth in interest earned.

2. Operating Ratio (%) - A ratio that shows the efficiency of companys management by comparing operating expense to net sales. The smaller the ratio,the greater the organizations ability to generate profit if revenues decrease. When using this ratio, however, investors should be aware that it doesnt take debt repayment or expansion into account. Operating Expense Net Sales

Table 8 Operating margin Explanation: This ratio is the Operating Expenses by Total Sales of the bank and this mainly includes administrative expenses and salaries. This ratio has drastically improved for SBI and this has led to an improvement in the net profit margin for SBI. 3. Interest Expended/ Interest Earned (%) - This ratio is similar to the COGS in a manufacturing concern to find that for the interest it is earning how much is it paying out. Interest Expended Interest Earned

Table 9 Interest margin Explanation: This has increased for both the banks because of the increasing CRR (as CRR earn zero or very less interest) and rising interest rates. This again supports our argument above of the high interest cost that ICICI bears due to its inability to raise cheaper funds. 4. Net Interest Margin (%) - This is the ratio which determines the difference between the interest margins earned and the cost of borrowed capital. To calculate the margins generally weighted average of the interest margin and the cost of funds are taken. It examines how efficiently the interest is generated on the average earning assets. A bank at first wants to increase this net interest margin. Investment Returns Interest Expense Average Earning Assets Table 10 Net interest margin

Explanation: Net interest margin for ICICI is expected to continue to be lower than other banks in India until they increase the proportion of low-cost deposits and retail deposits in their total funding. 5. CASA Ratio This ratio tells us that percentage of the total deposits which comes in the form of current account and saving account. It is important to know this ratio as these funds which come in the form of current and saving account deposits are available at a very cheap cost to the bank and thus reduce the interest cost of the bank. For eg. current account has an interest earning rate of any where between 0-1% and savings from 3-5%. Table 11 CASA margin

There been an increase in the CASA ratio of ICICI Bank because during the past year there was an increased focus on the Retail Banking model. SBI Retail Banking has been its core focus and thus it has always maintained such a high CASA Ratio 6. Net NPAs to Net Advances (%) - Non Performing Assets (NPAs) are the advances which have become bad and these are not expected to pay back the loans and advances taken by them. The ratio shows what percentage of Net advances have become NPAs. This ratio helps to find the quality of assets. Net NPA Net Advances Table 12

NPA margin Explanation: Banks try to keep this ratio to a minimum possible because NPAs cut the profits as well as reduce the customer base of the bank. The increase in non-performing assets was due to higher level of non-performing assets in the retail portfolio mainly due to increase in non-performing loans in rural segment. ICICI has a better NPA rate than SBI which shows that they are maintaining their assets better than SBI Solvency 1. Debt to Equity Ratio* Debt to Equity in banking industry is quite high unlike other industries due to high debts that these companies owe. Unlike other industries where high D/E ratio indicates bad longterm liquidity, the business of the banks is carried out due to debts. * As such we do not concentrate on this ratio, instead there is another solvency ratio which is of much importance to the banks called the capital adequacy ratio, which is discussed below. In the year 2006-07, SBI had a D/E ratio of around 15 whereas ICICI had the same around 11. This shows that SBI had more deposit strength than ICICI. 2. Capital Adequacy Ratio - CAR is a measure the ability of a banks to meet its credit risk, operational risk etc.

It is measured by dividing capital by risk weighted assets. Table 13 Capital adequacy margin

Tier-I Capital (%) - Equity of Capital adequacy is divided into two parts Tier I capital and Tier II capital. Tier I capital includes equity issued and reserve and surplus. Tier 2 capital included preference shares and 50% of subordinate debt. Table 14 Tier I Capital margin Interpretation: As per the capital adequacy guidelines under Basel I, a bank is required to maintain a minimum ratio of total capital to risk weighted assets (CRAR) of 9.0%, at least half of which is required to be Tier-1 capital. In April 2007, RBI issued the final guidelines on Basel II. As per Basel II guidelines, applicable from March 31, 2008, banks are required to maintain a minimum CRAR of 9.0%, with minimum Tier I capital ratio of 6%. Both SBI and ICICI are well above the statutory requirements. Higher the capital adequacy ratio, the better it is for lenders as the losses

are well covered for them. SBI board has decided to maintain capital adequacy ratio of more than 11% so that there is enough space to cover any addition of riskier assets to the companys balance sheet. There is a marked increase in the CAR of ICICI due to increase in Tier-I Capital of the bank as explained above. Operating Efficiency 1. Interest income to working funds (%) Interest income as a percent of working funds explains the efficiency with which working funds are used to generate interest. Interest Income Working Funds Table 15 Interest income margin Explanation: Working fund is the part of the total assets that is put to earn income for the bank. SBI has shown a slight dip in this ratio whereas ICICI has shown an increase. This shows a better utilization of resources in generating interest on the part of ICICI. 2. Non - Interest income to working funds NonInterest income as a percent of working funds explains the efficiency with which working funds are used to generate income from sources other than interest. Non-Interest Income Working Funds Table 16

Non-interest income margin

Explanation: SBI, though, is lagging behind ICICI in terms of efficiency in generating non-interest income from its working funds, but it has shown a rise on this front whereas ICICI has witnessed a slight fall. 3. Business and Income per Employee (Rs. Cr.) Banking being a service industry there is very less usage of fixed assets and current assets to generate business. The main business and income generators are the people or the service providers. Thus it is very important to identify the efficiency of these people as we do in a manufacturing firm by identifying how much income is generated per rupee of investment. Table 17 Employee efficiency Explanation: Similar to all other PSUs, SBI lags behind in its manpower efficiency. The prime reason why in spite of having higher cost of funds ICICI Bank manages a somewhat similar net profit margin is because of the manpower efficiency that it has. 4. Fixed Asset Turnover Ratio (times)* - This ratio shows the efficiency of the fixed assets in generating

sales. Sales Fixed Assets Table 18 Fixed assets efficcincy Explanation: This is very high for SBI because even though the Net Revenue of SBI is almost 40% higher than ICICI the Fixed Asset base is almost the same. This is not because the efficiency of SBI is low but because much of the premises has been taken on lease by SBI. *Again, this ratio is not very significant in a banking industry. Return Generation 1. Return on Assets (%): An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Net Profit Average Assets Table 19 ROAExplanation: Return on assets depicts the profit that the Bank is generating on its assets. SBI has shown remarkable improvement in its ROA.

2. Operating profit to working funds It shows the operational efficiency of the working funds. Operating Profit Working Funds Table 20 Operating profit margin Explanation: ICICI has shown an increase of 9 basis points whereas SBI witnessed an increase of 10 basis points. This year has been a turnaround year for SBI as it had shown a decrease of nearly 30 basis points in the last fiscal. The major reason for this increase is the staggering growth of 31.08% that SBI has witnessed in its Operating Profits. 3. Return on Net Worth (%) - Ratio of net income after taxes to total end of the year Net Worth. This ratio indicates the return on stockholders total equity. Net Profit after Tax Net Worth Table 21 RONW Explanation: There has been a declining trend in the RONW for the past 3 years for both the banks one of the reasons in 2006 07 was a reduction in the

profitability margin and another reason has been the fresh issuance of capital in the past year by both the banks. An effect of the increase of this capital on the net profit would take time however the net worth increases that moment itself thus it reduces the RONW. 4. EPS, DPS, DPR Table 22 Earning and Dividend trend As we see that RONW has reduced quite a lot however there has been an increase in the EPS this is because there has been an increase in the NPAT but not to such an extent that it can impact the RONW. And in EPS the number of shares are increasing but not the extent by how much Net Worth is increasing. 5. PE Ratio ( as on 31st March 2008) ICICI Bank - 19.66 State Bank of India - 15.5 6. Book Value/Share (Rs., as on 31st March 2008) ICICI Bank - 417.64 State Bank of India - 776.40 Explanation: Book value alone does not really say much otherwise, but in the case of banking business where most of the liabilities and assets are more liquid than in any other industry the book value tells the value of the share if the company were to be

liquidated. 7. Price : BV (as on 31st March 2008) ICICI Bank - 1.85 State Bank of India - 2.06 Explanation: Book Value of the share when compared to the market price helps the investor determine the value of the share and whether the price for the stock is expensive or cheap. Investment Perspective The long-term investment horizon of the bank is analyzed as under: 1. Credit : Deposit Ratio (%) - This ratio helps determine how much of the funds that the bank is getting are used for giving out credit. Table 23 Credit margin Explanation: This helps us understand what percentage of the funds is being used by the bank in its core activities. If a bank is using lesser and lesser of the funds in giving out credit that means it is focusing on all other activities and not its core activity. ICICI is far ahead of SBI on this front which reflects its emphasis on core banking activities. The hike in the ratio in case of ICICI can be explained due to the loss in the I-Banking business faced by the same. 2. Cash Flow Analysis

Table 24 Cash flow ICICI Table 25 Cash flow SBI Explanation: An interesting point to be noted in the banking industry is that though most of the banks have high profits and even higher cash profits from operations, many banks have a negative cash inflow due to operating activities. The major reason being that when advances are more than the deposits in the year the banks would generally have a negative cash flow from operating activities. Thus a positive cash flow from operating activities generally indicates declining credit/deposit ratio. Conclusion Though both ICICI and SBI have been performing well, but one aspect where ICICI Bank has lagged in its performance as compared to its peers in the industry is the ability to raise funds at a lower cost and even though the interest income earned as a percentage of the total income is the same as the industry however the interest expended is 12% points higher and thus as we see the netprofit as a percentage of total income its a little less than its industry peers . Net Profit Margin has taken a dip for ICICI bank during the said period because of higher cost

of funds along with higher growth in interest earned than that in net profit. SBI, on the other hand, has shown a 48.17% growth in its net profit compared to 31.4% growth in interest earned. Regarding CASA, there has been an increase in the CASA ratio of ICICI Bank because during the past year there was an increased focus on the Retail Banking model. SBI Retail Banking has been its core focus and thus it has always maintained such a high CASA Ratio. On cash front, an interesting point to be noted in the banking industry is that though most of the banks have high profits many banks have a negative cash inflow due to operating activities. This is true of IACAI and SBI both for 2008. The major reason being that when advances are more than the deposits in the year the banks would generally have a negative cash flow from operating activities. Thus a positive cash flow from operating activities generally indicates declining credit/deposit ratio. Policy Suggestions Financial strength is the key to any sector, in particular to banking sector being the backbone of an economy. As we have seen above that though both ICICI and SBI have been performing well, still to improve the situation further, it is suggested that: According to a FICCI survey, the chief strong point of the Indian banking industry is the regulatory system, which has enabled India to carve a place for itself in the global banking scene. Therefore, the

regulatory systems of Indian banks should be more strengthened to ensure stability, soundness, and efficiency of the financial sector. There should be a Lessening Quality of the Loan Portfolio. Although there was a general deterioration in the quality of the loan portfolio of the banks, the extent of the deterioration varied substantially among individual banks. Overall, these indicators call for an eye to watch. There should be an adequate level of short-term and long-term financing. There is always a need for the development of financial structure and policies to encourage the financial sector to provide both type of financing. A major issue is the apparent mismatch between the type of funds required by the private sector and those provided by the financial system. Thus the issue is more one of the types of funds rather than the lack of funds. As for the commercial banking sector, the major objective is to promote the viability of the banking system while preserving competitiveness and sound financial environment. The mobilisation of financial savings should be in a way which is consistent with the stability of the financial system. Stability in this context refers to the ability of the financial system to withstand disturbances, including those that may arise internally.

Reporting and accounting standards and practices should be more streamlined, particularly in private sector banks. An improvement of accounting and disclosure practice would enhance transparency in financial markets. References: Ali Ataullah,etal. (2006),Economic reforms and bank efficiency in developing countries: the case of the Indian banking industry ,Applied Financial Economics, Volume 16, Number 9, 1 June. Annual Report08 - SBI Annual Report08 - ICIC