Commercial Banking Project

Ratio Analysis

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Submitted By:

Kanav Karol

Roll No 17

PGDM - FS

Vision: - IDBI

Profile: IDBI Bank Ltd. is today one of India's largest commercial Banks. For over 40 years, IDBI Bank has essayed a key nation-building role, first as the apex Development Financial Institution (DFI) (July 1, 1964 to September 30, 2004) in the realm of industry and thereafter as a full-service commercial Bank (October 1, 2004 onwards). As a DFI, the erstwhile IDBI stretched its canvas beyond mere project financing to cover an array of services that contributed towards balanced geographical spread of industries, development of identified backward areas, emergence of a new spirit of enterprise and evolution of a deep and vibrant capital market. On October 1, 2004, the erstwhile IDBI converted into a Banking company (as Industrial Development Bank of India Limited) to undertake the entire gamut of Banking activities while continuing to play its secular DFI role. Post the mergers of the erstwhile IDBI Bank with its parent company (IDBI Ltd.) on

April 2, 2005 (appointed date: October 1, 2004) and the subsequent merger of the erstwhile United Western Bank Ltd. with IDBI Bank on October 3, 2006, the tech-savvy, new generation Bank with majority Government shareholding today touches the lives of millions of Indians through an array of corporate, retail, SME and Agri products and services. Headquartered in Mumbai, IDBI Bank today rides on the back of a robust business strategy, a highly competent and dedicated workforce and a state-of-the-art information technology platform, to structure and deliver personalized and innovative Banking services and customized financial solutions to its clients across various delivery channels. As on March 31, 2011, IDBI Bank has a balance sheet of Rs.2.53 lakh crore and business size (deposits plus advances) of Rs.3.38 lakh crore. As an Universal Bank, IDBI Bank, besides its core banking and project finance domain, has an established presence in associated financial sector businesses like Capital Market, Investment Banking and more recently, the Mutual Fund Business. Going forward, IDBI Bank is strongly committed to work towards emerging as the 'Bank of choice' and 'the most valued financial conglomerate', besides generating wealth and value to all its stakeholders.

VISION:- Central Bank of India

To emerge as a strong, vibrant and pro-active Bank/Financial Super Market and to positively contribute to the emerging needs of the economy through consistent harmonization of human, financial and technological resources and effective risk control systems.

Profile:

Established in 1911, Central Bank of India was the first Indian commercial bank which was wholly owned and managed by Indians. The establishment of the Bank was the ultimate realization of the dream of Sir Sorabji Pochkhanawala, founder of the Bank. Sir Pherozesha Mehta was the first Chairman of a truly 'Swadeshi Bank'. In fact, such was the extent of pride felt by Sir Sorabji Pochkhanawala that he proclaimed Central Bank of India as the 'property of the nation and the country's asset'. He also added that 'Central Bank of India lives on people's faith and regards itself as the people's own bank'. During the past 99 years of history the Bank has weathered many storms and faced many challenges. The Bank could successfully transform every threat into business opportunity and excelled over its peers in the Banking industry.

Further in line with the guidelines from Reserve Bank of India as also the Government of India, Central Bank has been playing an increasingly active role in promoting the key thrust areas of agriculture, small scale industries as also medium and large industries. The Bank also introduced a number of Self Employment Schemes to promote employment among the educated youth.

Ratios in context of banks: 1. Liquidity Ratios a) Demand deposit to Time deposits b) Short term investments to total assets c) Cash to demand deposit d) SLR investment to total investment

2. Efficiency and income expenditure ratios a) Operating efficiency ratio b) Cost of funds ratio c) Non-interest income to total income ratio

3. Profitability Ratios a) Net interest margin b) Return on total assets c) Profit margin ratio d) Return on equity e) Earnings per share (Basic and diluted) f) P/E ratio (Future growth Prospects)

Liquidity Ratios

IDBI 1) Demand deposit to time deposit ratio = Total Demand Deposits / Total Time Deposits = 237335000/ 1427750200 = .17

Central Bank of India = Demand deposit to time deposit ratio = Total Demand Deposits / Total Time Deposits = 154313550/1162797214 = .13

The demand deposit to time ratio of Central Bank is comparatively lower compared to IDBI because the difference between the demand deposits and time deposits is not big and is manageable therefore the liquidity requirements of Central Bank are comparatively lower. The demand deposit to time deposit ratio of .17 indicates that the liquidity requirements of IDBI are reasonably high because the amount of demand deposits is relatively higher as compared to time deposits. Thus, the bank needs to maintain adequate liquidity to meet the requirements of demand deposits withdrawal in the near future.

2) Short term investments to total assets ratio: IDBI = Short Term Investments/Total Assets = 540199982/ 2535576031 = .213

Central Bank of India =Short Term Investments/Total Assets = 478417979/ 78192445 = .23 On comparing the ratio between the two banks we can say that since the Central bank of India is having a slightly higher ratio compared to IDBI. Thus, the short term assets in Central bank is more liquid compared to IDBIs short term investments.

3) Cash to Demand Deposit ratio: IDBI = cash balance &balance with other banks/demand deposits = 207660732/237421590 = .87

Central Bank of India = cash balance &balance with other banks/demand deposits = 152828013/154313550

= 0.99 On calculating the above mentioned ratio it can be gauged that since Central Bank of India has a ratio of .99 implying that Central bank has greater degree of liquidity compared to IDBIs ratio of .87

4) SLR Investment to Total Investment: IDBI = SLR/ Total Investment = 19559 04 67/253376 79 28 =.47

Central Bank of India: = SLR/ Total Investment = 13056, 23, 27/ 54504, 48, 83 =.23 Statutory liquidity ratio is the percentage of net demand and time liabilities that the bank is required to keep with the Reserve Bank of India. Therefore higher the ratio means a bank is required to park greater funds with the RBI and these reserves cannot be used by the bank to lend thus, a higher ratio indicates less liquidity with the bank and vice-versa.

Efficiency and Income Expenditure Ratios

1) Operating Efficiency Ratio: IDBI:

= Total Operating Expenses/Total Revenue = 2254 69 34/ 20838 18 96 = .10 Central Bank of India: = Total Operating Expenses/Total Revenue = 3998, 98, 83/16485, 60, 75 = .24

This ratio signifies that a bank with the lower ratio is able to operate with a greater efficiency compared to the bank having a higher operating efficiency ratio. Thus, we can interpret that Central Bank cost of operation is high compared to IDBI bank.

2) Cost of Funds: IDBI =Total Interest Expenses (paid)/Total Deposits &Non Deposit Borrowing = 14,271.90/348152.9 = .04

Central Bank = Total Interest Expenses (paid)/Total Deposits &Non Deposit Borrowing = 9895, 22, 87/1922439947 = .05

This ratio indicates that higher the interest expenses paid by the bank higher would be the ratio and meaning the cost of borrowing is high, this would translate into lower efficiency for

the bank having higher interest expense. Therefore we can see that Central Bank is having a slightly higher Cost of funds ratio compared to IDBI.

3) Non Interest income to total income: IDBI = Non Interest Income (Fee based)/Total Income = 2221 66 83/ 20838 18 96 = .11

Central Bank = Non Interest Income (Fee based)/Total Income = 1265, 04, 14/ 16485, 60, 75 = .08

Non Interest / Total Income ratio measures the proportion of bank's total incomes that have been generated by non-interest related activities (e.g. fees and commission, trading gains, forex activities etc). The interpretation of this ratio is subject to ambiguity since a higher ratio may be interpreted as dependency of bank on unstable revenues that are not predictable for its profitability and on the other hand some may interpret it as non dependency of bank on the income generated from its lending activities.

Ratios relating to Profitability

1. Net Interest Margin IDBI = Total Interest income-total Interest expenses/Total assets = 18616 52 13 - 14270 23 21/ 30373414 = 1.43

Central Bank = Total Interest income-total Interest expenses/Total assets = 15220, 56, 61 - 9895, 22,87/ 209973,31,45 = .025 A performance metric that examines how successful a firm's investment decisions are compared to its debt situations. From the above calculated ratio we can interpret that the investment decisions of IDBI are better than the investment decisions of Central bank simply because IDBI commands a higher Net Interest Margin Ratio.

2) Return on Total Assets: IDBI = Net Profit/Total Assets = 208255013/253376 79 28 = .08

Central Bank = Net Profit/Total Assets = 111476388/2097573269 = .05

The ratio measures a company's earnings before interest and taxes (EBIT) against its total net assets. The ratio is considered an indicator of how effectively a company is using its assets to generate earnings before contractual obligations must be paid. The greater a company's earnings in proportion to its assets (and the greater the coefficient from this calculation), the more effectively that company is said to be using its assets. 3) Profit Margin Ratio: IDBI = Net Profit/ Total Income = 1650 31 94/20684 46 97 = .08

Central Bank = Net Profit/ Total Income = 16,40,63,00,000/1,65,13,65,16,000 = .10

Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Increased earnings are good, but an increase does not mean that the profit margin of a company is improving. For instance, if a company has costs that have increased at a greater rate than sales, it leads to a lower profit margin. This is an indication that costs need to be under better control. Thus, here central bank is having greater profitability than IDBI bank.

4) Return on Equity IDBI = Net Profit/Equity Share capital & Reserves and Surplus

= 1563 50 98/984 56 81 +1541 08 20 = .13

Central Bank = Net Profit/Equity Share capital & Reserves and Surplus = 11189000000/89791670000 = .12

The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

5) Earnings per Share IDBI = Net profit/ No of Equity shares outstanding = 1563 50 98000/ 89,84,29,626 = 17.4

Central Bank = Net profit/ No of Equity shares outstanding = 11756400000/404141460

= 29.00 Earnings per share are generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-toearnings valuation ratio. An important aspect of EPS that's often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal, would be a "better" company.

Price-to-Earnings-Ratio: IDBI = Market Price/EPS = 146.20/17.4 = 8.40

Central Bank = Market Price/EPS = 142/29 = 4.9 In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects.