FAS C2

Analysis Report

Punjab National Bank

Punjab National Bank is the 2nd largest Public Sector Bank, founded in 1894. The bank during the years 2006 to
2011 was facing a stiff competition from its private counterparts. The composition break-up between private
sector and public sector banks changed drastically in favor of the private sector bank owing to the
liberalization of the BFSI sector. Despite this shift, PNB focused on the peddlers, schemes for empowering
women, etc. Their core focus was retaining the existing customer base and improving the customer
experience at low cost. It leveraged on its technology by un-veiling technology driven initiatives like ‘PNB
Mobile Banking’, offering services like checking account balances, transfer of funds, stop-payment of cheques,
request for a cheque book and many more add-ons features for customer convenience. But due to the
predominant presence in the less developed areas, its operating costs jumped in 2011 by 33.64%. Also,
changing environment, adoption of technological advancement, marketing of products requires change in the
mind-set of employees. This can be attributed to the fact that the salary cost increased by 43.06% in 2011.

For the years 2012-2016,

TABLE 1: ADVANCES to TOTAL ASSETS RATIO (Rs. In Crore)

YEAR TOTAL ADVANCES TOTAL ASSETS ATAR

2011-12 293775 458192 64.12
2012-13 308796 478877 64.47
2013-14 349269 550420 63.45
2014-15 380534 636011 63.07
2015-16 412326 712792 61.78

In the above table, we can see a decreasing trend in the ratio, indicating that the bank was careful while
lending. This is due the drastic increase in NPAs (gross NPA by 99% and net NPA by 118%) from 2010-11 to
2011-12. With the decrease in the advances the NPAs, both gross and net, also started to increase in a
decreasing trend.

TABLE 2: CREDIT DEPOSIT RATIO (Rs. In Crore)

YEAR CREDIT TOTAL DEPOSIT CDR

2011-12 293775 379588 77.39
2012-13 308796 391560 78.86
2013-14 366073 461204 79.37
2014-15 404614 515245 78.53
2015-16 446083 570383 78.21
 FAS C2

Credit Deposit Ratio

2015-16 78.21

2014-15 78.53

2013-14 79.37

2012-13 78.86

2011-12 77.39

76 76.5 77 77.5 78 78.5 79 79.5 80

The credit Deposit Ratio plays an important role in determining the profitability of the bank. It tells how much
of the core funds are being utilized for lending. Banks have been advised to achieve a credit deposit ratio of
60% in respect of their rural and semi-urban branches separately on an all-India basis. The CDR ranging from
77.39% to 79.37% shows that PNB maintains a high CDR which is a good signal.

15.00%
10.00%
5.00%
0.00%
2015 2016 2017 2018 2019
-5.00%
-10.00%
-15.00%
-20.00%
-25.00%
-30.00%
-35.00%

ROE ROA

The return on assets and return on equity are experiencing a downward trend which becomes negative in the
year 2015-16. Negative ROA means that the bank is incurring net loss. Also, negative ROE indicates that the
bank is in financial distress and shareholders are losing value.

Also, according to the current guidelines of RBI, banks are required to maintain a minimum CRAR of 9 % under
Basel II and 8% under Basel III (2014 onwards) on an ongoing basis. Including the capital conservation buffer,
the requirement is 10.5%. PNB, over the past 10 years, has maintained a capital adequacy ratio well above the
RBI norms signaling its efficiency.
 FAS C2

CRAR
16.00% 14.03%
14.00%
11.52%
12.00%
9.73%
10.00% 9%
8%
8.00%
6.00%
4.00%
2.00%
0.00%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Capital adequacy ratio RBI requirement

The Nirav Modi scam in September,2018 has impacted a lot of the financial parameters. The bank started
incurring losses with a net loss of 12,113 crore in 2018. 1237% increase in the burden from 2017 to 2018
shows how heavily the institution was burdened by the net expenses. The gross NPA jumped by 56.44% & net
NPA by 48.87%.

Net Profit:

Net Profit
6,000

4,000

2,000

(2,000)

(4,000)

(6,000)

(8,000)

(10,000)

(12,000)

(14,000)

Though there was a 2.2% increase in the profit, because of the deteriorating asset quality, provisions
increased by 82.1% resulting in the net loss in the FY 2015-16.
 FAS C2

Asset Quality:

Asset Quality
100000 25.00%
90000
80000 20.00%
70000
(in Rs. crores)

60000 15.00%
50000
40000 10.00%
30000
20000 5.00%
10000
0 0.00%

Axis Title

Non Performing assets (gross) Non performing assets (net)

Non Performing assets (gross) (%) Non performing assets (net) (%)

In the FY 2015-16, there Is a drastic increase in the gross NPA. The asset quality review conducted by RBI in
that year, advised the bank to revise asset classifications and provisions which were implemented.

Provision Coverage Ratio:

Provision coverage ratio 74.50%

80.00%
70.00% 59.07%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

The provision coverage ratio of all scheduled commercial banks (SCBs) stands at 60.6% while the PCR of PNB
stands at 74.5% as on March’19. This shows the increasing resilience against

Power Finance Corporation Ltd

Power Finance Corporation Ltd. (PFC) is a leading Non-Banking Finance Company which was incorporated in
1986. It is a Schedule-A Navratna CPSE (Central Public Sector Enterprises). It is a specialized public financial
institution in power sector and is the largest infrastructure finance company in the country by net worth. PFC’s
product portfolio comprises of financial products and services mainly to power projects like project term
 FAS C2
loans, short term loans, equipment lease financing, discounting of bills and consultancy services. It has also
initiated financing of projects based on renewable energy sources. It acts as vehicle for development in
generation, transmission and distribution as well as for renovation and modernization of power projects. PFC
presently has ten subsidiary companies which are mainly regional power financing companies.

In FY 2010-11, PFC entered the top 10 profit making PSUs for the first time and also became the youngest PSU
to do so. In FY 2016-17, Company’s profit and other financial parameters were negatively impacted due to
transition from Ministry of Power approved norms to RBI approved restructuring norms retrospectively w.e.f.
1st April 2015. Due to this, loans worth 23,309 Crore got downgraded to NPAs and loans amounting to 35,995
Crore got downgraded to Restructured Assets. Although, loan assets affected due to RBI norms were likely to
turn standard over next few years and provisions would start reversing. Provisions turned negative in 2018-19
as a result of conservative practices of provisioning and contingencies during previous financial years.
During March 2019, PFC made one of its biggest acquisition with 52.63% equity stake in REC Limited (formerly
Rural Electrification Corporation limited), for a total consideration of 14,500 crores. With this landmark deal,
the acquisition became a significant move towards consolidation in power finance sector and gives a
significant inorganic growth opportunity for PFC, which resulted in creation of bigger entity with combined
annual revenues of more than 50,000 crores, loan assets of 6 lacs crores and estimated profit of more than
12,500 crores combined.
Income components:

60000

50000

40000

30000

20000

10000

0
Mar-19 Mar-18 Mar-17 Mar-16 Mar-15 Mar 14 Mar-13 Mar-12 Mar-11

Net Interest Income Total Income

 FAS C2
50000
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
Mar-19 Mar-18 Mar-17 Mar-16 Mar-15 Mar 14 Mar-13 Mar-12 Mar-11

Interest Expenditure Interest Income

PFC finances power sector projects and its main source of revenue is interest income on loans which can be
inferred from the above graphs. Growth in interest income has been consistent in line with growth in interest
expenditure as the company grew in size with organic growth and inorganic acquisitions. The difference
between net interest income and total income over the last few years indicate better and efficient
management of operating expenses after sizable growth of the company.
Advances and Borrowings:

600,000.00

500,000.00

400,000.00

300,000.00

200,000.00

100,000.00

0.00
Mar-19 Mar-18 Mar-17 Mar-16 Mar-15 Mar 14 Mar-13 Mar-12 Mar-11

Average borrowings Average advances

The graph of average borrowings and average advances is highly consistent indicating better funds
management ability of this NBFC especially as this is non deposit taking NBFC. Spike in advances and
borrowings is visible because of the issuance of bonds and increased foreign borrowings in FY 2017 after
expanding the business networks through the regional subsidiaries of the PFC.
NPAs
 FAS C2
35000
30000
25000
20000
15000
10000
5000
0
Mar-19 Mar-18 Mar-17 Mar-16 Mar-15 Mar 14 Mar-13 Mar-12 Mar-11

Non Performing assets (gross) Non performing assets (net)

The difference between gross and net NPA since March 16 is the result of increasing provisioning regularities
being brought in by the RBI. The rise in NPAs both Gross and Net is also attributed highly to the stressed assets
of the power sector enterprises.
Considering the significant increase in size and profitability, PFC became the largest financial player in power
sector. PFC is also the third-largest government-owned financial player in the country based on the current
market capital after State Bank of India (SBI) and Punjab National Bank (PNB). Company registered highest
Return on Equity in the decade with 21 %, as the net profits grew significantly on the account of negative
provisions and contingencies. Also, PFC is regularly maintaining CAR of more than what is described by the RBI
for non-deposit taking NBFCs. PFC is also now the third-highest profit-making financial player in India based on
profit data of 2018-19 after IOCL and ONGC.

HDFC BANK

HDFC Bank is an Indian banking and financial services company headquartered in Mumbai. HDFC Bank has the
highest market capitalisation of among private banks and it has 28.66% of sectoral distribution. It has a
banking network of 5435 branches and 14533 ATMs spread across 2787 cities and towns.

To analyse the bank’s financial performance over the years, we shall look at few key fundamentals such as
interest earned, interest expenditure, operating profits, total advances, deposits, investments etc., key ratios
such as net interest margin or interest spread, credit deposit ratio, Gross and Net NPA, asset utilisation factor,
return on assets, return on equity, burden, yield on investments, provision coverage ratios etc. We shall also
consider whether the company has been able to satisfy the regulatory requirements stated by RBI as well
adherence to guidelines issued by it as a major metric to adjudge its performance and position in the industry.

Interest Earned:
 FAS C2

2019 48,243.22
2018 40,094.86
2017 33,139.22
2016 27,591.51
2015 22,395.67
2014 18,482.63
2013 15,811.12
2012 12,884.61
2011 10,543.13
2010 8,386.42
0

0 10000 20000 30000 40000 50000 60000

HDFC Bank has seen a steady increase in the net interest income (amount in crores) as seen in the above
table. The interest earned over the years were predominantly on loans and advances, investments and on
balance kept with RBI and other banks. This increase is supported by the increase in total advances and
investments on year on year basis of 23.59% and 17.87% respectively on average.

All the while the bank has been able to maintain the net interest margin or interest spread in the range of
4.20% to 4.50%, with the margin in the last four years being stable at 4.30% as seen in the below chart.

Interest spread
4.55%
4.50%
4.45%
4.40%
4.35%
4.30%
4.25%
4.20%
4.15%
4.10%
4.05%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
 FAS C2
Return on Equity and Return on Assets:

19.50%

14.13%

13.70%

1.33% 1.72% 1.69%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Return on equity Return on assets

Net-Profit and EPS:

18.08%

14.63%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

The bank has been able to generate consistent returns for its shareholders over the years and has maintained
the return it has been able to generate using assets at over 1% throughout the years, which for a bank can be
classified as being efficient. The bank’s profitability has also been steadily increasing over the years with
reported net-profit of Rs 21078.17 crores i.e. 18.08% in the last financial year of 2018-19. This trend is also
reflected in growth of EPS %, as shown below:

Earnings per share

84.03 78.65

66.87

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
 FAS C2
Gross and net NPA %:

1.45%
1.37%
1.31%

1.06% 1.02% 1.06%

0.97% 0.99% 0.94% 0.95%

0.40% 0.39%
0.31% 0.33%
0.27% 0.28%
0.19% 0.18% 0.20% 0.25%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
% NPA (gross) NPA % (net)

The gross NPA ratio for the bank never rose above 1.5% of the total advances in past 10 years, with reported
gross NPA at 1.37% in the FY 2018-19 wherein the ratio for private sector banks was at 5.3%. The net NPA for
FY 2018-19 stood at 0.39% for HDFC and at 2% for the private sector banks. Therefore, the bank has been
efficient in recovery of their loans as well have effective due diligence in terms of credit rating and
identification of clients. HDFC has been able to maintain this despite the NPA provisioning norms by RBI
becoming more stringent over the years.

Credit deposit ratio:

88.76%

75.17%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

The credit deposit ratio shows how much of the bank’s core funds are being used for lending. If this ratio is
high, it may create pressures on the bank’s resources for adhering to the RBI norms and regulations in terms
capital adequacy, maintaining CRR and SLR at 4% and 19.5% respectively. The credit deposit ratio for the bank
stood at 88.76%, which is in line with the average of the private banks sector which stood at 88.26%. It
indicates that this is a sector wide trend but in long term it could result in certain regulatory and legal issues
not just for HDFC bank but for the entire sector. HDFC bank raised Rs 23,715.9 crores in FY 2018-19 through
 FAS C2
preferential allotment to Housing Development Finance Corporation limited, institutional placement and ADR
offering, resulting in increase in share capital and premium, securing capital adequacy requirements.

Provision Coverage Ratio:

78.42%

71.36%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Provision coverage ratio higher means that the unexposed part of the bad loans is lower as it is ratio of
provision against possible loan default. HDFC is maintaining a much higher ratio at 71.36% than sector average
of 60.5% as on March 2019.

Banks are also required to maintain LCR of 70%, 80%, 90%, 100% in FY 2016, 2017, 2018, 2019 respectively
as per Basel III disclosure norms, which HDFC has been able to achieve each year. Currently it is maintaining
118.40%.

118.4

79.67 100

70

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

LCR Minimum req

HDFC Bank has been consistently performing in most areas of the business and has been able to outperform
the industry in multiple factors, so much so that it can be considered a benchmark to measure other banks
and financial institutions by.