A STUDY ON CAPITAL STRUCTURE OF

FEDERAL BANK ALUVA

PROJECT REPORT

Submitted by

PAUL JOSE

REG. NO.098001155027

In partial fulfilment for the award of the degree

Of

Master of Business Administration

In

Department of Management

SRI VENKATESWARA COLLEGE OF COMPUTER

APPLICATIONS AND MANAGEMENT

(AFFILIATED TO ANNA UNIVERSITY OF TECHNOLOGY-

COIMBATORE)

JUNE 2011

BONAFIDE

BONAFIDE CERTIFICATE

SRI VENKATESWARA COLLEGE OF COMPUTER APPLICATIONS AND

MANAGEMENT

DEPARTMENT OF MANAGEMENT

PROJECT WORK

JUNE 2011

This is to certify that the project entitled

A STUDY ON CAPITAL STRUCTURE OF FEDERAL BANK, ALUVA

is the bonafide record of project work done by

PAUL JOSE

Register No: 098001155027

of MBA during the year 2009-2011.

___________________ ___________________

Project Guide Head of the Department

Submitted for the Viva-Voce examination held on____________________

________________ ________________

(Internal Examiner) (External Examiner

DECLARATION

DECLARATION

I affirm that the internship training report titled “A STUDY ON CAPITAL

STRUCTURE OF FEDERAL BANK -ALUVA” being submitted in partial

fulfillment for the award of MASTER OF BUSINESS ADMINISTRATION

is the original work carried out by me. It has not formed the part of any other

project work submitted for award of any degree or diploma, either in this or any

other university.

(Signature of the candidate)

PAUL JOSE

REG.NO: 098001155027

I certify that the declaration made above by the candidate is true.

(Signature of the guide)

Prof. A Paramasivan

ACKNOLEDGEMENT

ACKNOWLEDGMENT

I would like to express my gratitude to CHAIRMAN COMMANDER K.VELU

and MRS. MEGALA VELU of SRI VENKATESWARA group of institutions for giving me

an opportunity and facility to complete this internship training.

I wish to place my deep sense of gratitude to Dr.R. GANESAN MBA, M.Com,

M.Phil, and PhD, PGDCA Principal of Sri Venkateswara College of Computer Applications

and Management, Ettimadai, Coimbatore.

4I owe my boundless thanks and gratitude towards my faculty guide

Prof.PARAMASIVAN, BE, MBA (Assistant Professor) Department of Management Of SRI

VENKATESWARA COLLEGE OF COMPUTER APPLICATIONS AND

MANAGEMENT, ETTIMADAI, COIMBATORE, for his guidance and help to undergo my

internship training successfully. I also express my gratitude to all the other faculty members

of the department.

I express my sincere thanks to Mr. SURESH R (senior manager Accounts

Department) guide in the organization and the staff member for that support and co-

operation in completing my internship training in timely.

I express my sincere thanks to my parents and all mighty for the fulfillment of this

work.

PAUL JOSE

ABSTRACT

ABSTRACT

The project was done at “FEDERAL BANK LIMITED”.It is a leading private sector bank in

India. Provide financial service to the public at conveniently .

The project „A STUDY ON NCAPITAL STRUCTURE OF FEDERAL BANK. The main

purpose of doing this project is to find out the strength of capital structure of federal bank. I have

done the project in Federal Bank Limited Aluva

The research done through the 5 years of annual report of the company and using the internet

and books.

The recommendations were purely based on what was derived from the study . The study

will help the company to know about the financial position as well as myself. The recommendations

are noted by the company

CONTENTS

CONTENTS

CHAPTER

NO

DESCRIPTION PAGE NO

ABSTRACT I

LIST OF TABLES II

LIST OF CHARTS III

1

INTRODUCTION

1.1. INTRODUCTON 1

1.2. OBJECTIVE OF FINANCIAL ANALYSIS 2

1.3. STATEMENT OF PROBLEM 2

1.4 NEED FOR THE STUDY 2

1.5. SCOPE OF THE STUDY 3

1.6 OBJECTIVE OF STUDY 3

1.7 LIMITATION OF STUDY 3

1.8 RESEARCH METHODOLOGY 3

2 INDUSTRY PROFILE 5

3 COMPANY PROFILE 25

4 REVIEW LITERATURE 33

5 FINDINGS AND SUGGESTION 76

6 CONCLUSION AND BIBLIOGRAPHY 78

LIST OF TABLES

LIST OF TABLES

TABLE NO PARTICULERS PAGE NO

3.1 GROWTH OF FEDERAL BANK 31

4.1 BALANCE SHEET TREND ANALYSIS 40

4.2 PROFITABILITY RATIOS 54

4.3 OPERATING PERFORMANCE RATIOS 55

4.4 RATIOS SPECIFIC TO BANKING SECTOR 55

4.5 OTHER RATIOS 56

4.6 NET PROFIT RATIO 57

4.7 RETURN ON TOTAL ASSET 58

4.8 RETURN ON EQUITY 59

4.9 EARNINGS POWER RATIO 60

4.10 OPERATING RATIO 61

4.11 EARNING POWER RATIO 62

4.12 OPERATING PROFIT MARGIN 63

4.13 COST TO INCOME 64

4.14 CREDIT TODEPOSIT RATIO 65

4.15 CAPITAL ADEQUACY RATIO 66

4.16 CAPITALIZATION RATIO 67

4.17 DEBT EQUITY RATIO 68

4.18 PAT TO EBT RATIO 69

4.19 FINANCIAL LEVERAGE RATIO 70

4.20 PAYOUT RATIO 71

4.21 BOOK VALUE 72

4.22 PROPRIETORY RATIO 73

4.23 PRICE EARNING RATIO 74

LIST OF CHARTS

LIST OF CHARTS

CHART NO PARTICULERS PAGE NO

4.1 TREND ANALYSIS BALANCE SHEET 42

4.2 NET PROFIT RATIO 57

4.3 RETURN ON TOTAL ASSET 58

4.4 RETURN ON EQUITY 59

4.5 EARNINGS POWER RATIO 60

4.6 OPERATING RATIO 61

4.7 EARNING POWER RATIO 62

4.8 OPERATING PROFIT MARGIN 63

4.9 COST TO INCOME 64

4.10 CREDIT TODEPOSIT RATIO 66

4.11 CAPITAL ADEQUACY RATIO 66

4.12 CAPITALIZATION RATIO 68

4.13 DEBT EQUITY RATIO 69

4.14 PAT TO EBT RATIO 70

4.15 FINANCIAL LEVERAGE RATIO 71

4.16 PAYOUT RATIO 72

4.17 BOOK VALUE 73

4.18 PROPRIETORY RATIO 74

4.19 PRICE EARNING RATIO 75

CHAPTER 1

INTRODUCTION

CHAPTER 1

1.1 INTRODUCTION

A firm communicates financial information to the users through

financial statement and reports. The financial statements contain summarized information

of the firm‟s financial affairs .The amount of information contained in a co-operative

financial statement is voluminous spanning the co-operatives internal operations, its

relationship with the outside world and its relationship with its members. To be useful,

this information must be organized into an understandable, coherent and sufficiently

limited set of data.³Analysis and Interpretation of Financial Statements´ can be beneficial

in this respect because it highlights a firm‟s strengths and weakness. Financial statements

provide certain basic information that focus on the entity as a whole and meet the

common needs of external users. Three main financial statements are required from

businesses:

Financial statement analysis is a common technique that allows small

business owners to review their company‟s operational performance. Small business

owners will need to create financial statements from their company‟s business

transactions before conducting a financial statement analysis. Financial statements

represent an aggregate total of the company's business information during a certain time

period. It is a process of evaluating the relationship between component parts of a

financial statement, to obtain a better understanding of a firm‟s position and performance

1.2 OBJECTIVES OF FINANCIAL ANALYSIS

Analysis of financial statements is an attempt to assess the efficiency and

performance of an enterprise. Thus, the analysis and interpretation of financial statements

is very essential to measure the efficiency, profitability, financial soundness and future

prospects of the business units. Financial analysis serves the following purposes:

Measuring the profitability

Indicating the trend of Achievements

Assessing the growth potential of the business

Comparative position in relation to other firms

Assess overall financial strength

Assess solvency of the firm

1.3. STATEMENT OF PROBLEM

Ratio analysis is one of the important tools of analyzing the Capital Structure

Ratio analysis may be defined as the process of computing and interpreting the

relationship between items of financial statement for arriving at conclusion about

financial position and performance of an enterprise Therefore I have selected the title of

the project as „capital structure of federal bank”

1.4. NEED FOR THE STUDY

Ratio analysis is a tool for financial statement analysis which helps the management to

measure the financial position and capital structure of the company

1.5. SCOPE OF THE STUDY

The study provides a reliable indication of a company's financial

position, operating results, and changes in financial position. The study helps in measuring

the financial performance of the company. The study helps in analyzing the trend of various

ratios.

1.6. OBJECTIVE OF THE STUDY

To analyze the capital structure of THE FEDERAL BANK LTD.

To calculate ratios and to perform trend analysis.

To measure the efficiency of the operation.

1.7. LIMITATION OF THE STUDY

The study is based on secondary data that is published annual report

1.8. RESEARCH METHODOLOGY

Research is defined as the “process which comprises

of defining and redefining problems, formulating hypothesis, or suggested solutions,

collecting, organizing, and evaluating data, making deductions and reaching conclusions

and at last carefully testing the conclusions to determine they fit the formulating

hypothesis”. The project which is being implemented in the name of “CAPITAL

STRUCTURE OF FEDERAL BANK “is a study conducted to analyze various ratios of

FEDERAL BANK.

1.9 DATA COLLECTION

Secondary data sources:

Company records,

Annual report (2003-08)

Profit & loss account (2003-08)

Internet

1.10 LIMITATION OF THE STUDY

The data collected only for a period of 5years and this is not enough for making a

detailed analysis.

The study is based on secondary data that is published annual report.

CHAPTER 2

INDUSTRY PROFILE

2.1. BANKING IN INDIA

Banking in India originated in the last decades of the 18th century.

The first banks were The General Bank of India, which started in 1786, and Bank of

Hindustan, which started in 1790; both are now defunct. The oldest bank in existence in

India is the State Bank of India, which originated in the Bank of Calcutta in June 1806,

which almost immediately became the Bank of Bengal. This was one of the three

presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all

three of which were established under charters from the British East India Company. For

many years the Presidency banks acted as quasi-central banks, as did their successors.

The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's

independence, became the State Bank of India.

History

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in

1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank,

established in 1865 and still functioning today, is the oldest Joint Stock bank in India; it

was not the first though, that honor belongs to the Bank of Upper India, which was

established in 1863, and which survived until 1913, when it failed, with some of its assets

and liabilities being transferred to the Alliance Bank of Simla.

When the American Civil War stopped the supply of cotton to Lancashire from

the Confederate States, promoters opened banks to finance trading in Indian cotton. With

large exposure to speculative ventures, most of the banks opened in India during that

period failed. The depositors lost money and lost interest in keeping deposits with banks.

Subsequently, banking in India remained the exclusive domain of Europeans for next

several decades until the beginning of the 20th century.

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The

Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and another in

Bombay in 1862; branches in Madras and Puducherry, then a French colony, followed.

HSBC Established itself in Bengal in 1869. Calcutta was the most active trading port in

India, mainly due to the trade of the British Empire, and so became a banking centre.

The first entirely Indian joint stock bank was the Oudh Commercial Bank,

established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National

Bank, established in Lahore in 1895, which has survived to the present and is now one of

the largest banks in India.

Around the turn of the 20th Century, the Indian economy was passing through a

relative period of stability. Around five decades had elapsed since the Indian Mutiny, and

the social, industrial and other infrastructure had improved. Indians had established small

banks, most of which served particular ethnic and religious communities.

The presidency banks dominated banking in India but there were also some

exchange banks and a number of Indian joint stock banks. All these banks operated in

different segments of the economy. The exchange banks, mostly owned by Europeans,

concentrated on financing foreign trade. Indian joint stock banks were generally

undercapitalized and lacked the experience and maturity to compete with the presidency

and exchange banks. This segmentation let Lord Curzon to observe, "In respect of

banking it seems we are behind the times. We are like some old fashioned sailing ship,

The period between 1906 and 1911, saw the establishment of banks inspired by

the Swadeshi movement. The Swadeshi movement inspired local businessmen and

political figures to found banks of and for the Indian community. A number of banks

established then have survived to the present such as Bank of India, Corporation Bank,

Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.

The fervour of Swadeshi movement lead to establishing of many private banks

in Dakshina Kannada and Udupi district which were unified earlier and known by the

name South Canara ( South Kanara ) district. Four nationalized banks started in this

district and also a leading private sector bank. Hence undivided Dakshina Kannada

district is known as "Cradle of Indian Banking".

During the First World War (1914-1918) through the end of the Second World

War (1939-1945), and two years thereafter until the independence of India were

challenging for Indian banking. The years of the First World War were turbulent, and it

took its toll with banks simply collapsing despite the Indian economy gaining indirect

boost due to war-related economic activities. At least 94 banks in India failed between

1913 and 1918 as indicated in the following table:

Post-Independence

The partition of India in 1947 adversely impacted the economies of Punjab

and West Bengal, paralyzing banking activities for months. India's independence marked

the end of a regime of the Laissez-faire for the Indian banking. The Government of India

initiated measures to play an active role in the economic life of the nation, and the

Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed

economy. This resulted into greater involvement of the state in different segments of the

economy including banking and finance. The major steps to regulate banking included:

The Reserve Bank of India, India's central banking authority, was nationalized on

January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public

Ownership) Act, 1948 (RBI, 2005b).[Reference www.rbi.org.in]

In 1949, the Banking Regulation Act was enacted which empowered the Reserve

Bank of India (RBI) "to regulate, control, and inspect the banks in India."

The Banking Regulation Act also provided that no new bank or branch of an

existing bank could be opened without a license from the RBI, and no two banks

could have common directors.

Nationalization

Despite the provisions, control and regulations of Reserve Bank of India,

banks in India except the State Bank of India or SBI, continued to be owned and operated

by private persons. By the 1960s, the Indian banking industry had become an important

tool to facilitate the development of the Indian economy. At the same time, it had

emerged as a large employer, and a debate had ensued about the nationalization of the

banking industry. India Gandhi, then Prime Minister of India, expressed the intention of

the Government of India in the annual conference of the All India Congress Meeting in a

paper entitled "Stray thoughts on Bank Nationalization." The meeting received the paper

with enthusiasm.

Thereafter, her move was swift and sudden. The Government of India issued

an ordinance and nationalized the 14 largest commercial banks with effect from the

midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the

step as a "masterstroke of political sagacity." Within two weeks of the issue of the

ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of

Undertaking) Bill, and it received the presidential approval on 9 August 1969.

A second dose of nationalization of 6 more commercial banks followed in

1980. The stated reason for the nationalization was to give the government more control

of credit delivery. With the second dose of nationalization, the Government of India

controlled around 91% of the banking business of India. Later on, in the year 1993, the

government merged New Bank of India with Punjab National Bank. It was the only

merger between nationalized banks and resulted in the reduction of the number of

nationalized banks from 20 to 19. After this, until the 1990s, the nationalized banks grew

at a pace of around 4%, closer to the average growth rate of the Indian economy.

Liberalization

In the early 1990s, the then Narasimha Rao government embarked on a

policy of liberalization, licensing a small number of private banks. These came to be

known as New Generation tech-savvy banks, and included Global Trust Bank (the first of

such new generation banks to be set up), which later amalgamated with Oriental Bank of

Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move,

along with the rapid growth in the economy of India, revitalized the banking sector in

India, which has seen rapid growth with strong contribution from all the three sectors of

banks, namely, government banks, private banks and foreign banks.

The next stage for the Indian banking has been set up with the proposed

relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in

banks may be given voting rights which could exceed the present cap of 10%,at present it

has gone up to 74% with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till

this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of

functioning. The new wave ushered in a modern outlook and tech-savvy methods of

working for traditional banks. All this led to the retail boom in India. People not just

demanded more from their banks but also received more.

Currently (2007), banking in India is generally fairly mature in terms of

supply, product range and reach-even though reach in rural India still remains a challenge

for the private sector and foreign banks. In terms of quality of assets and capital

adequacy, Indian banks are considered to have clean, strong and transparent balance

sheets relative to other banks in comparable economies in its region. The Reserve Bank of

India is an autonomous body, with minimal pressure from the government. The stated

policy of the Bank on the Indian Rupee is to manage volatility but without any fixed

exchange rate-and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some

time-especially in its services sector-the demand for banking services, especially retail

banking, mortgages and investment services are expected to be strong. One may also

expect M&As, takeovers, and asset sales.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to

increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first

time an investor has been allowed to hold more than 5% in a private sector bank since the

RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks

would need to be vetted by them.

In recent years critics have charged that the non-government owned banks

are too aggressive in their loan recovery efforts in connection with housing, vehicle and

personal loans. There are press reports that the banks' loan recovery efforts have driven

defaulting borrowers to suicide.

2.2. FUNCTIONS OF COMMERCIAL BANKS

1. PRIMARY FUNCTIONS OF COMMERCIAL BANKS

Primary or principal functions of a commercial bank Are three types

A) Acceptance of Deposit:

An important function of commercial banks is to attract deposit from the

public. Those people who have cash account and want their safety; they deposit that

amount of banks. Commercial banks accept deposits every class and source and take

responsibility to repay the deposit in the same currency whenever they are demanded by

depositors

B) Lending:

Another function of commercial banks is to make loans and advance out of the deposit

receive in various forms. Bank Apply the accumulated public deposits to productive uses

by way of loans and advances, overdraft and cash credits against approved securities.

C) Investment:

Now a day‟s commercial banks are also involved in Investment. Generally investment

means long term and medium term investments.

2. Secondary or Ancillary function:

Secondary or Ancillary functions of Commercial Banks Are two types:

A. Agency Services

1) Collection and Payment of Cheques

2) Standing Instruction

3) Acting as correspondence

4) Collecting of bills- electricity, gas, WASA, telephone etc.

5) Purchase and Sales of stocks/ share-act as a banker to issue

B. Miscellaneous or General Services:

1) Safe Custody

2) Lockers-trustee

3) Remittance facilities –DD, TT, MT and PO

4) Advisory services

5) Providing Credit reports

6) Opening L/C

7) Demand in ForEx/ Travers Cheque only Authorized Dealer branches

8) Complete service in Foreign Trade

9) Other Services: Debit Card, Credit Card, On-line banking SMS banking

10) Creation of Credit: a multiplier effect, Deposit creates credit and credit creates

deposits – derivative deposit.

2.3. FEATURES OF COMMERCIAL BANK

The following are the characteristics of the banks.

It is a commercial institution

It deals with money and credit

It accepts and advance loan

It has the ability to create credit. Its aim is to make profit.

It is a unique financial institution]

2.4. CHANNELS OF BANKING

Branches

ATMs

Easy Deposits

Call Centers.

Internet Banking

Mobile Banking

2.5. QUALITATIVE GROWTH

The growth of banking in the coming years is likely to be more qualitative than

quantitative, according to the report. Based on the projections made in the "India Vision

2020" prepared by the Planning Commission and the Draft 10th Plan, the report forecasts

that the pace of expansion in the balance-sheets of banks is likely to decelerate.

The total assets of all scheduled commercial banks by end-March 2010 is estimated at Rs

40, 90,000 crore. That will form about 65 per cent of GDP at current market prices as

compared to 67 per cent in 2002-03.

Banks assets are expected to grow at an annual composite rate of growth of 13.4 per cent

during the rest of the decade against 16.7 per cent between 1994-95 and 2002-03.

On the liability side, there is likely to be large additions to capital base and reserves. As

the reliance on borrowed funds increases, the pace of deposit growth may slow down.

On the asset side, the pace of growth in both advances and investments is forecast to

weaken.

Consolidation

On the growing influence of globalisation on the Indian banking industry, the

report is of the opinion that the financial sector would be opened up for greater

international competition under WTO. Opening up of the financial sector from 2005,

under WTO, would see a number of global banks taking large stakes and control over

banking entities in the country.

They are expected to bring with them capital, technology, and management skills

which would increase the competitive spirit in the system leading to greater efficiency.

Government policy to allow greater FDI in banking and the move to amend Banking

regulations Act to remove the existing 10 per cent cap on voting rights of shareholders are

pointer to these developments, says the report.

The pressure on banks to gear up to meet stringent prudential capital adequacy

norms under Basel II and the various Free Trade Agreements that India is entering into

with other countries, such as Singapore, will also impact on globalization of Indian

banking.

However, according to the report, the flow need not be one way. Some of the

Indian banks may also emerge global players. As globalisation opens up opportunities for

Indian corporate entities to expand their business overseas, banks in India wanting to

increase their international presence could naturally be expected to follow these corporate

entities and other trade flows out of India.

Alongside, the growing pressure on capital structure of banks is expected to trigger

a phase of consolidation in the banking industry. In the past mergers were initiated by

regulators to protect the interest of depositors of weak banks. In recent years, there have

been a number of market-led mergers between private banks.

This process is expected to gain momentum in the coming years, says the report.

Mergers between public sector banks or public sector banks and private banks could be

the next logical development, the report adds. Consolidation could also take place through

strategic alliances or partnerships covering specific areas of business such as credit cards,

insurance etc.

Risk and reward

The ability to gauge the risks and take appropriate position will be the key to

successful banking in the emerging scenario. Risk-takers will survive, effective

risk managers will prosper and risk-averse are likely to perish, the report asserts.

In this context, the report makes a very pertinent recommendation that risk

management has to trickle down from the corporate office to branches.

As audit and supervision shifts to a risk-based approach rather than transaction

oriented, the risk awareness levels of line functionaries also will have to increase.

The report also talks of the need for banks to deal with issues relating to

`reputational risk' to maintain a high degree of public confidence for raising

capital and other resources.

Technology

Technological developments would render flow of information and data faster

leading to faster appraisal and decision-making. This would enable banks to make credit

management more effective, besides leading to an appreciable reduction in transaction

cost.

To reduce investment costs in technology, banks are likely to resort more and

more to sharing facilities such as ATM networks, the report says. Banks and financial

institutions will join together to share facilities in the areas of payment and settlement,

back-office processing, date warehousing, and so on.

The advent of new technologies could see the emergence of new players doing

financial intermediation. For example, according to the report, we could see utility service

providers offering, say, bill payment services or supermarkets or retailers doing basic

lending operations. The conventional definition of banking might undergo changes.

Social banking

All these developments need not mean banks will give the go-by to social banking. Rather

than being seen as directed lending such lending would be business driven, the report

predicts. Rural market comprises 74 per cent of the population, 41 per cent of the middle-

class, and 58 per cent of disposable income.

Consumer growth is taking place at a fast pace in 17,000-odd villages with a population

of more than 5,000. Of these, more than 50 per cent are concentrated in just seven states.

Small-scale industries would remain important for banks.

However, instead of the narrow definition of SSI based on the investment in fixed assets,

the focus may shift to small and medium enterprises (SMEs) as a group. Changes could

be expected in the delivery channel for small borrowers, agriculturists and unorganized

sectors also.

2.6. CHALLENGES WITH IN BANKING INDUSTRY

Regulation

The expected integration of various intermediaries in the financial system would

require a strong regulatory framework, the report states. It would also require a number of

legislative changes to enable the banking system to remain contemporary and

competitive. Underscoring that there would be an increased need for self-regulation, the

report states that development of best practices could evolve better through self -

regulation rather than based on regulatory prescriptions.

For instance, to enlist the confidence of the global investors and international

market players, the banks will have to adopt the best global practices of financial

accounting and reporting. It is expected that banks would migrate to global accounting

standards smoothly, although it would mean greater disclosure and tighter norms, the

report adds.

Notwithstanding the limited time ahead, the expectations, suggestions and

recommendations of the Banking Industry Vision report are well within the realm of

realisation in part or whole. The first phase of banking reforms was born out of panic.

The second phase can be implemented from a position of strength and confidence in a

compressed time-frame.

Deregulation: This continuous deregulation has made the Banking market extremely

competitive with greater autonomy, operational flexibility and decontrolled interest rate

and liberalized norms for foreign exchange. The deregulation of the industry coupled with

decontrol in interest rates has led to entry of a number of players in the banking industry.

At the same time reduced corporate credit off take thanks to sluggish economy has

resulted in large number of competitors batting for the same pie.

New rules: As a result, the market place has been redefined with new rules of the game.

Banks are transforming to universal banking, adding new channels with lucrative pricing

and freebees to offer. Natural fall out of this has led to a series of innovative product

offerings catering to various customer segments, specifically retail credit

.

Efficiency: This in turn has made it necessary to look for efficiencies in the business.

Banks need to access low cost funds and simultaneously improve the efficiency. Thebans

are facing pricing pressure, squeeze on spread and have to give thrust on retail assets.

Diffused Customer loyalty: This will definitely impact Customer preferences, as they

are bound to react to the value added offerings. Customers have become demanding and

the loyalties are diffused. There are multiple choices, the wallet share is reduced per bank

with demand on flexibility and customization. Given the relatively low switching

delivery.

Misaligned mindset: These changes are creating challenges, as employees are made to

adapt to changing conditions. There is resistance to change from employees and the Seller

market mindset is yet to be changed coupled with Fear of uncertainty and Control

orientation. Acceptance of technology is slowly creeping in but the utilization is not

maximized.

Competency Gap: Placing the right skill at the right place will determine success. The

competency gap needs to be addressed simultaneously otherwise there will be missed

opportunities. The focus of people will be on doing work but not providing solutions, on

escalating problems rather than solving them and on disposing customers instead of using

the opportunity to cross sell.

2.7. BANKING SYSTEM IN INDIA

Without a sound and effective banking system in India it cannot

have a healthy economy. The banking system of India should not only be hassle free but

it should be able to meet new challenges posed by the technology and any other external

and internal factors.

For the past three decades India's banking system has several outstanding

achievements to its credit. The most striking is its extensive reach. It is no longer

confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system

has reached even to the remote corners of the country. This is one of the main reasons of

India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich

dividends with the nationalisation of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank

counters for getting a draft or for withdrawing his own money. Today, he has a choice.

Gone are days when the most efficient bank transferred money from one branch to other

in two days. Now it is simple as instant messaging or dial a pizza. Money have become

the order of the day.

The first bank in India, though conservative, was established in 1786. From

1786 till today, the journey of Indian Banking System can be segregated into three

distinct phases. They are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks

Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector

Reforms.

New phase of Indian Banking System with the advent of Indian Financial &

Banking Sector Reforms after 1991.

To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and

PhaseIII.

Phase1

The General Bank of India was set up in the year 1786. Next came Bank of

Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809),

Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it

Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of

India was established which started as private shareholders banks, mostly Europeans

shareholders.

In 1865 Allahabad Bank was established and first time exclusively by

Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore.

Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canada

Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in

1935.

During the first phase the growth was very slow and banks also

experienced periodic failures between 1913 and 1948. There were approximately 1100

banks, mostly small. To streamline the functioning and activities of commercial banks,

the Government of India came up with The Banking Companies Act, 1949 which was

later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23

of 1965). Reserve Bank of India was vested with extensive powers for the supervision of

banking in india as the Central Banking Authority

.During those days public has lesser confidence in the banks. As an

aftermath deposit mobilization was slow. Abreast of it the savings bank facili ty provided

by the Postal department was comparatively safer. Moreover, funds were largely given to

traders

PhaseII

Government took major steps in this Indian Banking Sector Reform after

independence. In 1955, it nationalised Imperial Bank of India with extensive banking

facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of

India to act as the principal agent of RBI and to handle banking transactions of the Union

and State Governments all over the country.

Seven banks forming subsidiary of State Bank of India was nationalised in 1960

on 19th July, 1969, major process of nationalisation was carried out. It was the effort of

the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the

country was nationalised.

Second phase of nationalisation

Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step

brought 80% of the banking segment in India under Governmen ownership.

The following are the steps taken by the Government of India to Regulate

Banking Institutions in the Country:

1949: Enactment of Banking Regulation Act.

1955: Nationalization of State Bank of India.

1959: Nationalization of SBI subsidiaries.

1961: Insurance cover extended to deposits.

1969: Nationalization of 14 major banks.

1971: Creation of credit guarantee corporation.

1975: Creation of regional rural banks.

1980: Nationalization of seven banks with deposits over 200 core.

After the nationalization of banks, the branches of the public

sector bank India rose to approximately 800% in deposits and advances took a huge jump

by 11,000%.Banking in the sunshine of Government ownership gave the public implicit

faith and immense confidence about the sustainability of these institutions.

PhaseIII

This phase has introduced many more products and facilities in the

banking sector in its reforms measure. In 1991, under the chairmanship of M

Narasimham, a committee was set up by his name which worked for the liberalization of

banking practices.

The country is flooded with foreign banks and their ATM

stations. Efforts are being put to give a satisfactory service to customers. Phone banking

and net banking is introduced. The entire system became more convenient and swift.

Time is given more importance than money

.The financial system of India has shown a great deal of

resilience. It is sheltered from any crisis triggered by any external macroeconomics shock

as other East Asian Countries suffered. This is all due to a flexible exchange rate regime,

the foreign reserves are high, the capital account is not yet fully convertible, and banks

and their customers have limited foreign exchange exposure.

2.8. BANKING IN KERALA

Process of development and growth of the country is finance. The

economy of a country becomes crippled without the flow of finance and the economic

growth is stunted. Monitory resources can be channelised only with the help of a proper

financial infrastructure. An effective financial system in the form of banks and financial

institutions offer economical lending and borrowing.

Kerala boasts of a well-developed banking infrastructure. With progressing time

Kerala banking system has attained a high benchmark. Commercial, Nationalized a large

number of Grameen banks have sprung up within the state. In fact there was a surge of

Banks in the state following the nationalisation of the banks in 1969.

The State Bank of India (S.B.I.), Canara Bank and Syndicate Bank are the principal

nationalized banks. The State Bank of India offers around 228 branches and the Syndicate

Bank has 115 branches in the fourteen districts of Kerala.

Apart from these commercial banks like Vijaya Bank, Dhanlakshmi Bank and the Federal

Bank also offer commendable finance and banking facilities. Dhanalakshmi Bank offers

112 branches in the state. The Grameen Banks like SMGB and NMGB provide loans at

low interest rates, special, subsidized lands and relief facilities to the local farmers and

plays a great role in enhancing the agrarian productivity of the state.

According to a survey conducted in the year 2001, there were-

44 PCARDBs

2 Regional Rural banks (RRBs)

49 Commercial Banks

14 District Co-operative Banks

1StateCooperativeBank

All these banks altogether had 3813 branches in the rural as well as the urban

areas and among them 2956 branches belonged to the Commercial Banks. Besides, there

are also 1593 Primary Agriculture Credits Co-operatives in Kerala. The commercial

banks of Kerala have also witnessed an increased flow of non-resident deposits toward

the end of 2005. Kerala is done experiencing better growth of economy in the banking

sector. Besides the banks, the other financial institutions which give a boost to the

economy of Kerala are

Government Institutions

Kerala Financial Corporation (KFC)

Kerala State Financial Enterprises (KSFE)

Kerala Transport Development Finance Corporation (KTDFC)

Reserve Bank of India

HDFC(Housing Development Finance Corporation Limited)

CHAPTER 3

COMPANY PROFILE

CHAPTER-3

3.1. COMPANY PROFILE

History:

The history of Federal Bank dates back to the pre-independence era. Though initially it

was known as the Travancore Federal Bank, it gradually transformed into a full -fledged

bank under the able leadership of its Founder, Mr. K P Hormis. The name Federal Bank

Limited was officially announced in the year 1947 with its headquarters nestled on the

banks on the river Periyar. Since then there has been no looking back and the bank has

become one of the strongest and most stable banks in the country

The Federal Bank Limited (FBL) (the erstwhile

Travancore Federal Bank Limited) was incorporated with an authorised capital of rupees

five thousand at Nedumpuram, a place near Tiruvalla in Central Travancore in 28th April

of the year 1931 under the Travancore Company's Act. Shri K.P.Hormis founded the

Bank. It started business of auction -chitty and other banking transactions connected with

agriculture and industry. The bank though successful in the earlier periods, suffered

setbacks and was on the verge of liquidation. As a largest traditional private sector bank

in the country, FBL nurtured for more than seven decades, gaining the reputation of being

an agile, technology savvy and customer friendly bank and mostly built wide network of

branches, reaching out to cover all the major cities of the country.

In 18th May of the year 1945, the registered office of the Bank was shifted to

Aluva and the Bank commenced business by opening of its first branch at Aluva. The

Bank opened its second branch at Angamally during the year 1946. As of 24th March of

the year 1947, it was resolved to change the name of the Bank as 'The Federal Bank

Limited' and in the same year the third branch of the Bank was opened at Perumbavoor in

the moth of April. The Bank was licensed under Sec.22 of the Banking Companies Act,

1949 in 11th of July of the year 1959. FBL had floated several kuries one after another.

It also introduced several new deposit schemes

during the same period. The Bank embarked for a massive takeover bids during the year

1964, which accelerated its growth horizontally and vertically. In that process it took over

the assets and liabilities of the Chalakudy Public Bank Ltd, The Cochin Union Bank Ltd

and The Alleppey Bank Ltd. The St.George Union Bank Ltd was merged with the Bank in

the year 1965 and in the year 1968, The Marthandom Commercial Bank Ltd was

amalgamated with the FBL. During the year 1970, The Bank became a Scheduled

Commercial Bank, which also coincided with the Silver Jubilee Year, since the Bank

commenced its operation in Aluva. Witnessed expansion beyond the home state during

the year 1972. The Bank became an Authorised Dealer in Foreign Exchange and the

International Banking Department of the bank was started functioning from Mumbai in

the year 1973. The sustainable growth of the bank was survived during the year 1975 and

1976. In 1975, the Bank opened 53 branches and in 1976 it opened 42 branches.

The International Banking Department of the bank was

shifted to Cochin in the year 1982 as part of consolidation and centralisation of activities.

As part of the organisation redesigning recommended by National Institute of Bank

Management (NIBM) in November of the year 1984, the Agricultural Finance

Department was set up in Head Office. After a year, in 1985, in tune with the NIBM

recommendation, Personnel and Industrial Relations Department was set up in July and in

the same year the first Advanced Ledger Posting Machine (ALPM-a Wipro banker) was

installed at Br.Aluva-Bank Junction branch. The administrative building complex of the

bank was inaugurated in the year 1987. During the year 1989, Federal Bank entered into

the Merchant Banking Operations. Tapped the Capital Market with a public issue in

March of the year 1994. The Bank's first ATM was inaugurated at Eranakulam North in

27th February of the year 1997.

During the year 2000, FBL had started its Any Where Banking (ABB) at

Bangalore connecting all branches located in the Bangalore metro, launched Depository

Services in association with NSDL and also the Bank commenced Internet Banking under

the name of 'Fed Net' during April of the same year 2000 with software support from

Infosys Technologies Ltd. Also E-commerce business, The Bank had entered into

marketing pacts with some commercial agencies for its E-commerce business in the same

year. In the year 2001, the bank made a tie up with Escotel Communications to launch

mobile banking services using SMS technology and in the identical year FBL had

launched a new deposit scheme christened as Suraksha' for senior citizens. The bank

became a member of INFINET, the financial network supported by RBI. Full-fledged

systems for the RBI's Negotiated Dealing Systems (NDS) were set up at the Funds &

Investment Branch in Mumbai, enabling online trading in securities from February of the

year 2002. FBL had unveiled the Anywhere Banking in the year 2003 provides the

convenience of doing transactions from 300-plus interconnected branches. The Bank had

obtained the level of 100% interconnectivity among all its branches during the year 2004

and also in the same year FBL had launched an Equity Subscription Scheme, a new retail

product for financing the IPOs and public issue applications of its own customers.

In the identical year of 2004, Federal Bank joined

hands with ICICI Prudential Life Insurance Company Ltd for premium collection through

its branches and introduced new Fed e-Pay services. JRG Securities Ltd had forged

alliance with the Bank in the year 2005 for providing loans for subscribing to initial

public offers (IPOs). The bank has emerged as the first bank in India to offer Real Time

Gross Settlement (RTGS) across all of its branches. The 32 branches of erstwhile Ganesh

Bank of Kurundwad Ltd were successfully integrated to bank's network. Ganesh Bank

was amalgamated with effect from 2nd September of the year 2006. During the period of

2006-07, the bank entered into a joint venture agreement with IDBI Ltd & Fortis

Insurance International N V for incorporating a Life Insurance Company under the name

of IDBI Fortis Life Insurance Company Ltd. During the year 2007-08, FBL had opened

its Representative office at Abu Dhabi, Capital of U.A.E. for the gateway of the bank to

the whole of Middle East and also as an interface between its existing customers of GCC

countries and its Branches /Offices in India. FBL won the Best Core Banking Project

Award 2007' at the Asian Banker IT Implementation Awards 2008. The bank's Joint

Venture life insurance company, in association with IDBI Bank Limited and Fortis

Insurance International N.V. namely IDBI Fortis Life Insurance Company Limited

commenced its operation in March of the years 2008. As of May 2008, the bank has 606

branches, 544 ATMs, 10 extension counters and one satellite office.

3.2 VISION

Become the dominant “numero uno” bank in Kerala and a leading player in target

markets.

Be the „trusted‟ partner of choice for target (SME, Retail, NRI) customers.

Be a customer-centric organisation setting the benchmarks for service.

Offer innovative yet simple products supported by the state-of-the art technology.

Have a dynamic and energised workforce with a strong sense of belonging.

Deliver top tier financial performance and superior value to stakeholders.

Be a role model for corporate governance and social responsibility.

3.3. MISSION:

Shareholders: Achieve a consistent annual post-tax return of at least 20% on net

worth.

Employees: Develop in every employee a high degree of pride and loyalty in

serving the Bank.

Customers: Meet and even exceed expectations of target customers by delivering

appropriate products and services, employing, as far as feasible, the single-

window and 24-hour-seven-day-week concepts, leveraging strengthened branch

infrastructure, ATMs, and other alternative distribution channels, cross-selling a

range of products and services to meet customer needs varying over time, and

ensuring the highest standards of services at all times

The Bank has also the distinction of being one of the first banks in the country

to deploy most of these technology enabled services at the smaller branches including rural

and semi-urban areas.

3.4. ABOUT OUR FOUNDER

Kulangara Paulo Hormis, educated as a lawyer, began his

career as an Advocate in the Courts of Perumbavoor. But the path breaker soon gravitated

to commercial banking and soon took up the reins of Federal Bank in 1945 as its Chief

Executive. Fired by a passion for institution building Shri Hormis built out of a One-

Branch-Small-Time Bank, a nationwide institution of 285 branches in the 34 years that he

remained at the helm. The quintessential banker that he was, a structure for extending

finance to agriculture and the weaker sections of society was laid by him much before

these areas came into national focus.

3.5. DEPARTMEBTS OF HEAD OFFICE

Accounts departments

ALM department

Asset Recovery department

Credit control department

Corporate finance department

Federal staff colleagues

SME agricultural department

Retail banking department

Integrated risk management department

Inter banking department

Inter branch reconciliation department

Inspection department

Legal department

Personnel and industrial relation department

Premises and other asset relation department

Printing and stationery department

Planning department

NRI division

MIS division

Staff administration department

Treasury department

Vigilance department

3.6. GROWTH OF FEDERAL BANK

Rs in Crores

3.7. FINANCIAL SUPER MARKETS

The Bank has now emerged into a financial supermarket giving the customers a range of

products and services. Apart from the entire slew of Banking products and delivery

channels the bank also provide the following facilities:

Depository Services

Credit Cards

Life Insurance Products in association with IDBI Fortis

General Insurance Products in association with United India Insurance

Export Credit Insurance Products in association with ECGC

Express Remittance Facility from Abroad - FEDFAST

Cash -On- Line Express Cash Remittance

Year No. Of Branches Deposits Advances Capital

1945 1 0.01 0.10 0.01

1955 5 0.20 0.15 0.01

1965 16 1.33 0.84 0.05

1975 188 38.12 24.12 0.25

1985 324 356.51 186.16 1.40

1995 355 2790.96 1631.51 14.81

2004 440 13124.34 7700.53 21.76

2005 456 15192.88 8822.59 65.60

2006 506 17878.74 11736.47 85.60

2007 536 21584.44 14899.10 85.60

2008 612 25913.35 18904.66 171.03

2009 669 32192.31 22391.87 171.03

2010 729 36057.95 26950.11 171.03

Lock Box Service for NRI's in the US

Cash Management Services

Merchant Banking Services

E-shopping Payment gateway

BSNL Bill Payment

Online LIC Insurance Payment

Easy Pay- On-line fee payment system

Online Railway Reservation System

Online Kiosks for customers

3.8. TAG LINE OF FEDERAL BANK

“Your Perfect Banking Partner”

3. 9. LOCATIONS

The Corporate head office of the bank is at Aluva. The Bank has more than 600 branches all

over India

3.10. SOME OTHER INFORMATIONS

The Bank had the distinction of introducing Anywhere Banking in all its branches,

including rural locations. Federal bank was the first among the traditional banks to launch

Internet banking an e-commerce

The Fed Soft software developed in-house for branch

automation is based on state-of-the-art technology and is based on workflow automation

concepts. This unique software runs on Sybase RDBMS and has a graphical user interface

(GUI), making it elegant and user-friendly.

The Bank has entered into agreements with National Securities Depository Ltd. (NSDL) -

from 1998 onwards, and Central Depository Services Ltd. (CDSL) - from 1999 onwards, for

having the Bank's shares traded in electronic (demat) form.

3.11. SHARE HOLDER INFORMATION

Listing on Stock Exchanges

The shares of the Bank are listed in, National Stock Exchange Ltd (NSE), Bombay Stock

Exchange Ltd (BSE) and the Cochin Stock Exchange Ltd.

CHAPTER 4

REVIEW LITERATURE

REVIEW LITERATURE

4.1. MEANING – CAPITAL STRUCTURE

A mix of a company's long-term debt, specific short-term

debt, common equity and preferred equity. The capital structure is how a firm finances its

overall operations and growth by using different sources of funds.

CLARIFYING CAPITAL STRUCTURE AND RELATED TERMINOLOGY

The equity part of the debt-equity relationship is the easiest to

define. In a company's capital structure, equity consists of a company's common and

preferred stock plus retained earnings, which are summed up in the shareholders' equity

account on a balance sheet. This invested capital and debt, generally of the long-term

variety, comprises a company's capitalization, i.e. a permanent type of funding to support

a company's growth and related assets

A discussion of debt is less straightforward. Investment literature

often equates a company's debt with its liabilities. Investors should understand that there

is a difference between operational and debt liabilities - it is the latter that forms the debt

component of a company's capitalization - but that's not the end of the debt story.

Among financial analysts and investment research services, there

is no universal agreement as to what constitutes a debt liability. For many analysts, the

debt component in a company's capitalization is simply a balance sheet's long-term debt.

This definition is too simplistic. Investors should stick to a stricter interpretation of debt

where the debt component of a company's capitalization should consist of the following:

short-term borrowings (notes payable), the current portion of long-term debt, long-term

debt, two-thirds (rule of thumb) of the principal amount of operating leases and

redeemable preferred stock. Using a comprehensive total debt figure is a prudent

analytical tool for stock investors

It's worth noting here that both international and U.S. financial

accounting standards boards are proposing rule changes that would treat operating leases

and pension "projected-benefits" as balance sheet liabilities. The new proposed rules

certainly alert investors to the true nature of these off-balance sheet obligations that have

all the earmarks of debt.,

Financial terms, debt is a good example of the proverbial two-edged

sword. Astute use of leverage (debt) increases the amount of financial resources available

to a company for growth and expansion. The assumption is that management can earn

more on borrowed funds than it pays in interest expense and fees on these funds.

However, as successful as this formula may seem, it does require that a company

maintain a solid record complying with its borrowing committee

4.2. OBJECTIVES OF CAPITAL STRUCTUE ANALYSIS

To determine if the proportion of debt to equity enables an entity to create wealth

without unduly jeopardizing the firm

Evaluate the key structural features of a company‟s existing and new financial

obligations and their potential effect on the company‟s financial flexibility, cash -

flows and credit quality/rating

Understand how to assess various types of debt instruments in terms of advantages

and disadvantages to the issuer and the investor, when the instrument should be

used and when it may be inappropriate, focusing on bank debt, hybrids,

bonds/notes and asset securitization

Identify the key drivers of company and sector performance and the potential

impact on profitability, cash-flow, access to capital, etc. in order to assess a

company‟s ability to meet its existing obligations and determine the appropriate

funding structure

Consider the degree to which the level of indebtedness might affect liquidity and

the potential impact on business strategy and ability to finance future growth.

Describe the advantages and disadvantages of financial leverage

Compute the financial leverage index, debt to capital ratio, debt to equity ratio, and

other techniques for analyzing capital structure. Relate capital structure

composition to owner and creditor investment objectives.

Capital structure composition Consists of long-term liabilities, preferred stock,

common stock, and retained earnings. Sufficient equity must exist to provide

financial stability

Debt can be used as leverage to increase returns to shareholders,

but it can also reduce returns on shareholders‟ investments

4.3. Theories of Capital Structure

Trade-off Theory

Trade-off theory allows the bankruptcy cost to exist. It states that

there is an advantage to financing with debt and that there is a cost of financing with

debt (the bankruptcy costs and the financial distress costs of debt). The marginal benefit

of further increases in debt declines as debt increases, while the marginal cost increases,

so that a firm that is optimizing its overall value will focus on this trade-off when

choosing how much debt and equity to use for financing. Empirically, this theory may

explain differences in D/E ratios between industries, but it doesn't explain differences

within the same industry.

Pecking order theory

Pecking Order theory tries to capture the costs of asymmetric information. It states

that companies prioritize their sources of financing (from internal financing to equity)

according to the law of least effort, or of least resistance, preferring to raise equity as a

financing means “of last resort”. Hence: internal financing is used first; when that is

depleted, then debt is issued; and when it is no longer sensible to issue any more debt,

equity is issued. This theory maintains that businesses adhere to a hierarchy of financing

sources and prefer internal financing when available, and debt is preferred over equity if

external financing is required (equity would mean issuing shares which meant 'bringing

external ownership' into the company. Thus, the form of debt a firm chooses can act as a

signal of its need for external finance. The pecking order theory is popularized by Myers

(1984) when he argues that equity is a less preferred means to raise capital because when

managers (who are assumed to know better about true condition of the firm than

investors) issue new equity, investors believe that managers think that the firm is

overvalued and managers are taking advantage of this over-valuation. As a result,

investors will place a lower value to the new equity issuance

4.4. METHODS OF ANALYSING CAPITAL STRUCTURE

1. Trend Percentage Analysis

2. Ratio Analysis

3. Cash Flow statement

4. Income statement

4.5. TREND PERCENTAGE ANALYSIS

An aspect of technical analysis that tries to predict

the future movement of a stock based on past data. Trend analysis is based on the idea

that what has happened in the past gives traders an idea of what will happen in the

future. Trend ratios show the nature and rate of movements in various financial

factors. They provide a horizontal analysis of comparative statements and reflect the

behavior of various items with the passage of time. Trend ratios can be graphically

presented for a better understanding by the management. They are very useful in

predicting the behavior of the various financial factors in future. However, it should be

noted that conclusions should not be drawn on the basis of a single trend. Trends of

related items should be carefully studied, before any meaningful conclusion is arrived

at. Since trends are sometimes significantly affected by externalities, i.e. reasons

extraneous to the organizations, the analyst must give due weightage to such extraneous

factors like government policies, economic conditions, changes in income and its

distribution, etc.

4.6.1. COMPUTATION OF TREND PERCENTAGES:

For calculation of the trend of data shown in the financial

statements, it is necessary to have statements for a number of years, and then proceed

as under:

1) The accounting principles and practices must be followed constantly over the

period for which the analysis is made. This is necessary to maintain consistency

and comparability.

2) Take one of the statements as the base with reference to which all other

statements are to be studied. In selection of the best statement, it should be noted

that it belongs to a normal' year of business activities. Statement relating to an

'abnormal' year should not be selected as base, otherwise the trend calculated will

be meaningless.

3) Every item in the base statement is stated as 100.

4) Trend percentage of each item in other statement is calculated with reference to

same

item

in

the

base

statement by using the following formula:

4.6.2. LIMITATIONS OF TREND RATIOS

It should be noted that trend ratios are not calculated

for all items. They are calculated only for logically connected items enabling meaningful

analysis. For example, trend ratios of sales become more revealing when compared with the

trend ratios of fixed assets, cost of goods sold and operating expenses. Trend ratios have the

following limitations:

(a) If the accounting practices have not been consistently followed year after year, these

ratios become incomparable and thus misleading.

(b) Trend ratios do not take into consideration the price level charges. An increasing

trend in sales might not be the result of larger sales volume, but may be because of

increased sales price due to inflation. In order to avoid this limitation, figures of the

current year should be first adjusted for price level changes from the base year and

then the trend ratios be calculated.

(c) Trend ratios must be always read with absolute data on which they are based,

otherwise the conclusions drawn may be misleading. It may be that a 100% change in

trend ratio may represent an absolute change of Rs.1,000 only in one item, while a

20% change in another item may mean an absolute change of Rs. 1,00,000.

(d) The trend ratios have to be interpreted in the light of certain non-financial factors like

economic conditions, government policies, management policies etc

Absolute Value of item (say cash) in other statements

------------------------------------------------------------------- x 100

Absolute Value of item (cash) in the base statement

4.6.3 FEATURES AND LIMITATIONS OF TREND ANALYSIS

Input Data

TREND requires a continuous time series as input data.

Various time series data formats are supported within the TIME environment.

After downloading TREND to the default directory, sample data file can be found

in c:\Program Files\Toolkit\TREND\Data.

TREND performs the statistical tests on annual time series data. TREND will

convert daily and monthly time series data into an annual time series before

carrying out the statistical testing on the annual time series (see the TREND User

Guide on how you can modify the data file to use TREND for non-annual time

series data). Input data files must be continuous and complete (daily and monthly

data files must have complete years of records)

Output Data

TREND displays as an output (for all the statistical tests selected by the user):

Value of the test statistic

Critical values of the test statistic for a = 0.01, a = 0.05 and a = 0.1 significance

levels (from statistical table)

Critical values of the test statistic for a = 0.01, a = 0.05 and a = 0.1 significance

levels (from resampling analysis)

Simple statement of test result

TREND also provides a graphical display of the time series data.

TREND also allows easy retrieval of the test results.

BALANCE SHEET TREND ANALYSIS TAKING 2005 AS BASE YEAR

Table 4.1 (Base as 100)

As at

31st Mar

2005

As at

31st Mar

2006

As at

31st Mar

2007

As at

31st Mar

2008

As at

31st Mar

2009

As at

31st Mar

2010

CAPITAL &

LIABILITIES

Capital

100

130.49

130.49

260.71

260.71 260.71

Reserves

&Surplus

100

177.03

215.37

570.84

631.68 687.11

Deposits

100

117.68

142.07

170.56

211.93 238.34

Borrowings

100

328.40

414.31

426.00

402.87 832.04

Other &

provisions

100

125.76

171.54

260.90

219.50 192.04

TOTAL 100 122.64 149.16 193.25 230.97 259.65

ASSETS

Cash & balance

Reserve Bank

Of India

100

176.20

178.67

341.77

321.27 336.42

Balances with

banks & money

at cal and short

notice

100

75.92

124.81

44.98

141.09 46.68

Investments

100

108.15

121.27

172.90

208.98 225.11

Advances

100

133.03

168.87

214.28

242.87 305.47

Fixed assets

100

93.75

100.36

125.56

151.41 156.26

Other assets

100

128.35

143.91

130.35

135.88 143.64

TOTAL

100

122.72

149.16

193.25

230.97 259.64

Contingent

liabilities

100

135.56

106.19

109.10

62.17 78.95

Bills for

collection

100

135.70

163.27

254.07

245.43 264.27

INTERPRETATION:

There is a continuous increase in the capitals and liabilities of the bank and also some

assets are increased but some assets are decreased. Trend analysis of the balance sheet is

also helpful to know the increase or decrease of the balance sheet items in the year 2005 to

2010

Graph 4.1

0

100

200

300

400

500

600

700

800

900

2005

2006

2007

2008

2009

2010

4.7.1. RATIO ANALYSIS

Ratio analysis is one of the techniques of financial analysis to evaluate

the financial condition and performance of a business concern. Simply, ratio means the

comparison of one figure to other relevant figure or figures. Accounting ratios are very

useful as they briefly summarize the result of detailed and complicated computations.

Absolute figures are useful but they do not convey much meaning. In terms of accounting

ratios, comparison of these related figures makes them meaningful. For example, profit

shown by two-business concern is Rs. 50,000 and Rs. 1, 00,000. It is difficult to say

which business concern is more efficient unless figures of capital investment or sales are

also available.

Advantages of Ratios Analysis:

Ratio analysis is an important and age-old technique of financial analysis. The following

are some of the advantages / Benefits of ratio analysis:

1. Simplifies financial statements: It simplifies the comprehension of financial

statements. Ratios tell the whole story of changes in the financial condition of the

business

2. Facilitates inter-firm comparison: It provides data for inter-firm comparison.

Ratios highlight the factors associated with with successful and unsuccessful firm.

They also reveal strong firms and weak firms, overvalued and undervalued firms.

3. Helps in planning: It helps in planning and forecasting. Ratios can assist

management, in its basic functions of forecasting. Planning, co-ordination, control

and communications.

4. Makes inter-firm comparison possible: Ratios analysis also makes possible

comparison of the performance of different divisions of the firm. The ratios are

helpful in deciding about their efficiency or otherwise in the past and likely

performance in the future.

5. Help in investment decisions: It helps in investment decisions in the case of

investors and lending decisions in the case of bankers etc. Bottom of Form

LIMITATIONS OF RATIO ANALYSIS

1. Limitations of financial statements: Ratios are based only on the information

which has been recorded in the financial statements. Financial statements

themselves are subject to several limitations. Thus ratios derived, there from, are

also subject to those limitations. For example, non-financial changes though

important for the business are not relevant by the financial statements. Financial

statements are affected to a very great extent by accounting conventions and

concepts. Personal judgment plays a great part in determining the figures for

financial statements.

2. Comparative study required: Ratios are useful in judging the efficiency of the

business only when they are compared with past results of the business. However,

such a comparison only provide glimpse of the past performance and forecasts for

future may not prove correct since several other factors like market conditions,

management policies, etc. may affect the future operations.

3. Ratios alone are not adequate: Ratios are only indicators, they cannot be taken as

final regarding good or bad financial position of the business. Other things have

also to be seen.

4. Problems of price level changes: A change in price level can affect the validity

of ratios calculated for different time periods. In such a case the ratio analysis may

not clearly indicate the trend in solvency and profitability of the company.

CATEGORIES OF RATIOS

Profitability ratios

Operating ratios

Ratios specific to banking sector

1 PROFITABILITY RATIOS

The purpose of study and analysis of profitability ratio are to assess the adequacy

of profiles earned by the company and also to discover whether profitability is increasing or

decreasing. The profitability of the firm is the net result of a large number o f policies and

decisions. The major profitability are as follows:

♦ Earnings per share

The objective of financial management is wealth or value maximization of

a corporate entity. The value is maximized when market price of equity shares is

maximized. The use of objectives of wealth maximization or net present value

maximization has been advocated as an appropriate and operationally feasible criterion

to choose among the alternative financial actions. In practice, the performance of a

corporation is better judged in terms of its earnings per share.

The EPS is one of the important measures of economic performance of a

corporate entity. The flow of capital to the companies under the present imperfect capital

market conditions would be made on the evaluation of EPS.

A higher EPS means better capital productivity. EPS is one of the most

important ratios which measure the net profit earned per share. EPS is one of the major

factors affecting the dividend policy of the firm and the market prices of the company. A

steady growth in EPS year after year indicates a good track of profitability. EPS is

computed by dividing the net profit after tax and dividend to preference share holders. This

avoids confusion and indicates the profit available to the ordinary shareholders on a "per

share basis". This is computed as follows:

♦ Net profit ratio

This ratio reflects the net profit margin on the total sales after deducting all expenses

but before deducting interest and taxation. This ratio measures the efficiency of

operation of the company. The net profit is arrived from gross profit aftr deducting

administration, selling and distribution expenses. The non operating incomes and

expenses are ignored in computation of net profit before tax, depreciation and

interest.

The following formula is used for calculating net profit ratio:

Net profit ratio =

♦ Return on Shareholders‟ Funds or Return on Net Worth or Return on Equity

(ROE)

This ratio expresses the net profit in terms of the equity shareholders funds. This ratio is an

important yardstick of performance for equity shareholders since it indicates the return on

Net Profit

--------------------------

No. of equity shares

Net profit

-------------------------- *100

Sales

the funds employed by them. However, this measure is based on the historical net worth

and will be high for old plants and low for new plants.

Net Profit

---------------- x 100

Net worth

Net worth = Equity capital + Reserves and Surplus

The ratio indicates: measure of profitability, the efficiency in use of assets in achieving

sales, measure of leverage.

Earnings Power Ratio

Earnings before tax (EBT)

-------------------------------- x 100

Total assets

♦ Operating Ratio or Operating Cost Ratio

Operating ratio expresses the relationship of operating expenses to net income. It may be

expressed as follows:

The ratio of all operating expenses administration and selling expenses to sales is the

operating ratio. A comparison f the operating ratio would indicate whether the cost content

Operating cost

-------------------- x 100

Net Income

is high or low in the figures of sales. It is therefore the management as to concentrate to

know as to which element of cost has been gone up.

♦ Return on total asset ratio

This ratio is calculated to measure the profit after tax against the amount invested in total

asset to ascertain whether assets are being utilized properly or not . it Is calculated as under:

Return on total asset=

2. OPERATING RATIOS

Includes the following ratios:

1. Operating Profit Margin

2. Cost To Income Ratio

Operating Profit Margin

Banks operating profit is calculated after deducting administrative expenses, which mainly

include salary cost and network expansion cost. Operating margins are profits earned by

the bank on its total interest income. For some private sector banks the ratio is negative on

account of their large IT and network expansion spending.

Net interest income – Operating expenses

----------------------------------------------------------- x100

Total interest income

Net profit after tax

-------------------------------- x 100

Total asset

Cost To Income Ratio

Controlling overheads are critical for enhancing the bank‟s return on equity. Branch

rationalization and technology up gradation account for a major part of operating expenses

for new generation banks. Even though, these expenses result in higher cost to income

ratio, in long term they help the bank in improving its return on equity. The ratio is

calculated as a proportion of operating profit including non-interest income (fee based

income).

3.

RATIOS SPECIFIC TO BANKING SECTOR

It includes the following ratios:

1. Credit To Deposit Ratio (CD Ratio)

2. Capital Adequacy Ratio (CAR)

Credit To Deposit Ratio (CD Ratio)

The ratio is indicative of the percentage of funds lent by the bank out of the total amount

raised through deposits. Higher ratio reflects ability of the bank to make optimal use of the

available resources. The point to note here is that loans given by bank would also include

its investments in debentures, bonds and commercial papers of the companies (these are

generally included as part of investments in the balance sheet). A decrease in the CD ratio

shows the decrease in the rate of lending

Advances

---------------- x100

Deposits

Operating expenses

------------------------------------------------------------ x100

Net interest income + Non interest income

Capital Adequacy Ratio (CAR)

A bank's capital ratio is the ratio of qualifying capital to risk adjusted (or weighted)

assets. The RBI has set the minimum capital adequacy ratio at 10% as on March 2002 for

all banks. A ratio below the minimum indicates that the bank is not adequately capitalized

to expand its operations. The ratio ensures that the bank do not expand their business

without having adequate capital.

4 OTHER RATIOS

1. PAT EBT Ratio

2. Financial Leverage Ratio

3. Debt Equity Ratio

4. Payout Ratio

5. Book Value Ratio

6. Proprietary Ratio

7. Price Earnings Ratio

PAT EBT Ratio

Here the relationship between Profit after Taxes and Earnings

Before Tax. These two ratios we can take from the profit. PAT we can determine from

profit with Taxes and EBT we can determine from EBIT

Tier I capital + Tier II capital

---------------------------------------- x100

Risk weighted capital

PAT EBT Ratio=

Financial Leverage Ratio

This ratio determines how much of a company‟s assets are supported by its

equity base. Many of the meltdowns in the banking sector occurred because companies

had high financial leverage ratios. When the asset base is high, it only takes a minimal

decline in value to eliminate the equity base and push a company toward ban

Financial Leverage Ratio=

Debt Equity Ratio

This ratio summarizes the capital structure of a business. Companies with high

debt levels will often see high returns on equity, but the risk exists that the high amount

of debt could topple the firm. The ratio will vary by industry so it is difficult to establish

one guideline for an acceptable debt level. Instead, watch the direction and trend of the

ratio. Over time, mature companies will balance sheet as earnings predictability allows

them to manage the fixed charge. However, this transition should be gradual. A company

for which this ratio increases sharply over a short period may be having trouble finding

alternate methods to finance its business

PAT

--------------------------------

EBT

TOTAL ASSET

--------------------------------

TOTAL EQUITY

DEBT Equity Ratio=

Payout Ratio

The size of the payout ratio is often dependent on the growth stage the company

is in. For a young, rapidly growing company, the payout ratio is going to be small (or zero) as

the company keeps most or all of its earnings to reinvest in growing the business. As the

company matures and begins to pay a dividend, the payout ratio increases.

Payout Ratio=

Book Value Ratio

A company book value, as an asset held by a separate economic entity, is the

company shareholders' equity the acquisition cost of the shares, or the market value of the

shares owned by the separate economic entity. A company book value is used in fundamental

financial analysis to help determine whether the market value of company shares is above or

below the book value of company shares. Neither market value nor book value is an unbiased

estimate of a company's value.

Book Value Ratio =

NETWORTH

--------------------------------

TOTAL DEBT

DIVIDEND PER SHARE

--------------------------------

EARNINGS PER SHARE

NETWORTH

--------------------------------

NUMBER OF SHARES

Proprietary Ratio

Proprietary ratio refers to a ratio which helps the creditors of the

company in seeing that their capital or loans which the creditors have given to the

company are safe. Proprietary funds includes equity and preference share capital of the

company and reserves and surplus of the company, while total assets of company includes

both fixed assets and current assets of the company

Proprietary Ratio =

Price Earnings Ratio

A valuation ratio of a company's current share price compared to its per-

share earnings. 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

. Price Earnings Ratio =

PROPRIETORS FUND

--------------------------------

TOTAL ASSET

CURRENT MARKET PRICE

--------------------------------

ANNUAL EARNINGS PER SHARE

Profitability Ratios

4.2 Table

Ratios Equation 2005 2006 2007 2008 2009 2010

1. Net Profit

Ratio

(Net profit /

Total

income)

100

6.42 13.62 13.61 12.65 13.06

11.05

2. Return on

Total Assets

Ratio

(Net profit /

Total

assets) 100

0.54 1.09 1.17 1.11 1.29 1.05

3. Return on

Equity

(Net profit /

Net worth)

100

12.44 18.02 19.49 9.38 11.60 9.90

4. Earnings

Power Ratio

(Profit

before tax /

Total

assets) 100

0.69 1.36 1.59 1.54 2.04 1.99

5. Operating

Ratio

(Operating

cost / Total

income)

100

5.96 5.81 5.94 6.51 6.61 6.72

1. Earnings per

share (EPS)

Net profit /

No. Of

equity

shares

13.73 32.71 34.20 32.42 29.26 27.16

OPERATING PERFORMANCE RATIOS

4.3 Table

RATIOS SPECIFIC TO BANKING SECTOR

4.4 Table

Ratio Equation 2005 2006 2007 2008 2009 2010

1. Operating

Performance

Margin

Operating profit /

Total Interest

Income) 100

28.54 27.35 29.13 27.29 32.88 30.09

2. Cost to Income

Ratio

(Operating

Expenses / Net

Interest Income +

Non Interest

Income) 10

43.94 44.64 39.85 38.54 31.24 34.86

Ratio Equation 2005 2006 2007 2008 2009 2010

1. Credit to

Deposit

Ratio ( C/D

Ratio)

(Advances /

Deposits) 100

58.07 65.64 69.03 72.95 69.54 74.74

2. Capital

adequacy

Ratio

(CAR)

(Teir1

Capital+Teir2

Capital / Risk

Weighted

Capital) 100

11.27 13.75 13.43 22.46 20.14 17.27

OTHER RATIOS

4.5 Table

Ratio Equation 2005 2006 2007 2008 2009 2010

PAT to EBT

ratio

PAT/EBT 0.77 0.80 0.74 0.74 0.63 0.54

Capitalizati

on Ratio

Long term

Debt/Long term

Debt+owners

equity

27.97 23.35 26.68 8.24 8.24 10.91

Financial

leverage

Ratio

Total Asset/

Total Equity

23.25 16.51 16.70 8.28 8.98 9.31

Debt Equity

Ratio

Net worth/total

Debt

0.04 0.06 0.06 0.14 0.13 0.12

Payout

Ratio

Dividend per

share/Earning

per share

0.18 0.13 0.1 0.19 0.17 0.18

Book Value

Ratio

Book Value/

Number of

shares

110.26 181.53 175.49 345.76 273.24

Proprietary

Ratio

Proprietors

fund/Total Asset

0.04 0.06 0.06 0.12 0.11 0.11

Price

Earnings

Ratio

Current Market

Price/Annual

Earnings per

Share

6.14 6.75 6.66 4..71 9.83

RATIO ANALYSIS

Profitability Ratios

Net profit ratio for the period of 2005-2010

Table 4.6 in thousands

Graph 4.2

0

5

10

15

2005 2006 2007 2008 2009 2010

Net Profit Ratio

Net Profit Ratio

Year Net Profit Total Income Net Profit Ratio

2005 900859 14030056 6.42

2006 2252057 16534772 13.62

2007 2927328 21040417 13.61

2008 3680538 29101627 12.65

2009 5004936 38311515 13.06

2010 4645451 42041439 11.05

INTERPRETATION:

This ratio helps in determining the efficiency with which the affairs of the

business are being managed. An increase in the ratio from 6.42 to 11.05 indicates

improvement in the operational efficiency of the bank. The ratio is an effective measure to

check the profitability.

Return on total asset ratio for the period of 2005-20110

Table 4.7 in thousands

Graph 4.3

0

0.5

1

1.5

2005 2006 2007 2008 2009 2010

Return on Total Asset Ratio

Return on Total Asset Ratio

Year Net Profit Total Asset Return on Total asset Ratio

2005 900859 168209623 0.54

2006 2252057 206429063 1.09

2007 2927328 250899325 1.17

2008 3680538 325064570 1.11

2009 5004936 388508646 1.29

2010 4645451 436756051 1.05

INTERPRETATION:

The graph shows the upward trend of Return on total assets. The return on total asset was

increasing from 0.54 in the year 2005 to 1.05 in the year 2010

Return on equity ratio for the period of 2005-2010

Table 4.8 in thousands

Graph 4.4

0

5

10

15

20

2005 2006 2007 2008 2009 2010

Return on Equity Ratio

Return on Equity Ratio

year Net Profit Net Worth Return on equity Ratio

2005 900859 7233484 12.45

2006 2252057 12499873 18.02

2007 2927328 15022078 19.49

2008 3680538 39256972 9.38

2009 5004936 43258758 11.60

2010 4645451 46904485 9.90

INTERPRETATION:

The graph shows the upward trend of return on equity. ROE was decreasing from 12.45 in the

year 2005 to 9.90 in the year 2010. Return on equity is the indicate profitability from the

point of view of equity share holders

Earning power ratio for the period of 2005-2010

Table 4.9 in thousands

Graph 4.5

year EBT Total Asset Earning power Ratio

2005 1160727 168209623 0.69

2006 2807661 206429063 1.36

2007 3982274 250899325 1.59

2008 5001549 325064570 1.54

2009 7930095 388508646 2.04

2010 8595420 436756051 1.99

0

0.5

1

1.5

2

2.5

2005 2006 2007 2008 2009 2010

Earnings Power Ratio

Earnings Power Ratio

INTERPRETATION:

The graph shows the upward trend of earning power ratio. Earning power ratio was

increasing from 0.69 in the year 2005 to 1.99 in the year 2010

Operating Ratio for the period of 2005-2010

Table 4.10 in thousands

year Operating cost(Interest

expepended+Operating expenses’)

Total Income Operating Ratio

2005 10026138 14030056 71.45

2006 12012981 16534772 72.65

2007 14910589 21040417 70.86

2008 21160435 29101627 72.71

2009 25713795 38311515 67.11

2010 29392967 42041439 69.91

Graph 4.6

64

66

68

70

72

74

2005 2006 2007 2008 2009 2010

Operating Ratio

Operating Ratio

INTERPRETATION:

The operating ratio indicates the operational efficiency of the bank. The lowest operating

ratio was in the year 2006 and highest ratio was in the year 2010The graph shows that there

is a decrease in the operating ratio from 5.96 in the year 2005 to 6.72in the year 2010.

Earnings per share (EPS) for the period of 2005-2010

Table 4.11 in thousands

Graph 4.7

0

5

10

15

20

25

30

35

2005 2006 2007 2008 2009 2010

Earnings Per Share

Earnings Per Share

year Net Profit Number of equity share Earnings per share (EPS

2005 900859 65602 13.73

2006 2252057 68857 32.71

2007 2927328 85603 34.20

2008 3680538 113539 32.42

2009 5004936 171033 29.26

2010 4645451 171033 27.16

INTERPRETATION:

This helps in determining the market price of equity shares of the company and in

estimating the company‟s capacity to pay dividend to its equity share holders. EPS was

increased 34.19 in the year 2007 and it declined to 21.52 in the year 2008

OPERATING PERFORMANCE RATIOS

OPERATING PROFIT MARGIN FOR THE PERIOD OF 2005-2010

Table 4.12 in thousands

year Operating profit Total Income Operating profit Margin

2005 4003918 14030056 28.54

2006 4521791 16534772 27.35

2007 6129828 21040417 29.13

2008 7941192 29101627 27.29

2009 12597720 38311515 32.88

2010 12648472 42041439 30.09

Graph 4.8

0

10

20

30

40

2005 2006 2007 2008 2009 2010

Operating Profit Margin

Operating Margin

INTERPRETATION:

Operating profit margin was increasing from (2005) to (2007).But in the next year

decreased, the next year the result was a shocking one, then it maintained It shows the bank

was able to maintain a healthy operating margin and will be able to pay for its fixed cost.

Cost to Income Ratio for the period of 2005-2010

Table 4.13 in thousands

year Operating

Expenses

Net Interest income

+Non interest income

Cost to Income

Ratio

2005 3138624 7142548 43.94

2006 3645693 8167483 44.64

2007 4061006 10190770 39.85

2008 4866186 12627285 38.54

2009 5714557 18312353 31.24

2010 6768937 19417376 34.86

Graph.4.9

0

20

40

60

2005 2006 2007 2008 2009 2010

Cost to Income Ratio

Cost to Income Ratio

INTERPRETATION:

The cost to income ration indicates the changes in the cost/asset

ratio and in interest margin. It is useful to measure how costs are changing compared to

income - for example, if a bank's interest income is rising but costs are rising at a higher

rate looking at changes in this ratio will highlight the fact. The highest cost to income

ratio was in the year 2006 and the lowest cost to income ratio was in the year 2009

indicating a downward trend of cost to income ratio In 2010 it gone up at minimum

Specially for banking sector –Ratios

Credit to Deposit Ratio for the period of 2005-2010

Table 4.14 in thousands

Year

Advance

Deposit

Credit to

Deposit Ratio

2005 88225905 151928796 58.07

2006 117364667 178787372 65.64

2007 148991002 215844402 69.03

2008 189046616 259133558 72.95

2009 223918752 321981915 69.54

2010 269501113 360579508 74.74

Graph.4.10

INTERPRETATION: This ratio indicates the proportion of loan-assets created by

banks from the deposits received..The ratio indicates that the proportion of loan assets

created by banks from the deposits received had an increasing trend in the all the financial

year under consideration.

Capital adequacy Ratio (CAR) Ratio for the period of 2005-2010

Table.4.15

year Capital adequacy Ratio

2005 11.27

2006 13.75

2007 13.43

2008 22.46

2009 20.14

2010 17.27

0

10

20

30

40

50

60

70

80

2005 2006 2007 2008 2009 2010

Credi to Deposi Ratio

Credi to Deposi Ratio

Graph 4.11

INTERPRETATION:A bank's capital ratio is the ratio of qualifying capital to risk adjusted

(or weighted) assets. It is expressed as a percentage of a bank's risk weighted credit

exposures. This ratio is also known as capital to risk weighted assets ratio. The ratio was

increasing from 2005 to 2008. The next years bank gone through some trouble situations, but

in 2011 records we can see the developments it indicates that the bank will be able to absorb

a reasonable amount of losses in the event of operating losses and winding up.

Other Ratios

Capitalization Ratio for the period of 2005-2010

Table.4.16 in thousands

0

20

40

2005 2006 2007 2008 2009 2010

Capital Adeqacy Ratio

Capital Adeqacy Ratio

year Long term Debt Long term Debt +owners

Equity

Capitalization Ratio

2005 2809400 10042884 27.97

2006 3809900 16309773 23.35

2007 5467400 20489478 26.68

2008 3527900 42784872 8.24

2009 3889300 47148058 8..24

2010 5744700 52649185 10.91

Graph .4.12

Interpretation

Provides information about the company‟s ability to absorb asset reductions

arising from losses without jeopardizing the interest of creditors. Here the capitalization ratio

we can see the changes directly

Debt Equity Ratio for the period of 2005-2010

Table.4.17 in thousands

0

10

20

30

2005 2006 2007 2008 2009 2010

Capitalization Ratio

Capitalization Ratio

year Net worth Debt Debt Equity Ratio

2005 7233484 153787800 0.04

2006 12499873 184892319 0.06

2007 15022078 223546479 0.06

2008 39256972 267053077 0.14

2009 43258758 329471266 0.13

2010 46904485 376047072 0.12

Graph.4.13

Interpretation

This ratio summarizes the capital structure of a business. Companies with high

debt levels will often see high returns on equity, but the risk exists that the high amount of

debt could topple the firm. The ratio will vary by industry so it is difficult to establish one

guideline for an acceptable debt level

PAT to EBT Ratio for the period of 2005-2010

Table 4.18 in thousands

0

0.05

0.1

0.15

2005 2006 2007 2008 2009 2010

Debt Equity Ratio

Debt Equity Ratio

year PAT EBT PAT to EBT

Ratio

2005 900859 1160727 0.77

2006 2252057 2807661 0.80

2007 2927328 3982274 0.74

2008 3680538 5001549 0.74

2009 5004936 7930095 0.63

2010 4645451 8595420 0.54

Table 4.14

Interpretation

Profit after Tax to Earnings before Tax, this ratio gives the information

about the earnings of the firm. The continuous improvements give the positive sign to the

company

Financial Leverage Ratio for the period of 2005-2010

Table 4.19 in thousands

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

2005 2006 2007 2008 2009 2010

PAT to EBT Ratio

PAT to EBT Ratio

year Total Asset Total Equity Financial Leverage Ratio

2005 168209623 7233484 23.25

2006 206429063 12499873 16.51

2007 250899325 15022078 16.70

2008 325064570 39256972 8.28

2009 388508646 43258758 8.98

2010 436756051 46904485 9.31

Graph 4.15

Interpretation

Provides information about the company’s ability to absorb asset reductions arising from

losses without jeopardizing the interest of creditors.

Pay Out Ratio For the Period of 2005-2010

Table 4.20 in rupees

0

5

10

15

20

25

2005 2006 2007 2008 2009 2010

Financial Leverage Ratio

Financial Leverage Ratio

Year Dividends

per share

Earnings per share Pay Out Ratio

2005 2.50 13.73 0.18

2006 4.35 32.71 0.13

2007 3.40 34.20 0.10

2008 6.03 32.41 0.19

2009 5.0 29.26 0.17

2010 5.0 27.16 0.18

Graph 4.16

Interpretation: The ratio is also dependent on the industry in which the company operates.

Utilities, for instance, don't grow very fast and have relatively large payout ratios. Computer

hardware companies, on the other hand, always need money for research & development and

are reinvesting in themselves, so the payout ratio is quite small.

Book Value Ratio For the Period of 2005-2010

Table 4.21 in thousands

0

0.05

0.1

0.15

0.2

2005 2006 2007 2008 2009 2010

Pay Out Ratio

Pay Out Ratio

Year NETWORTH Number of

Shares

Book Value Ratio

2005 7233484 65602 110.26

2006 12499873 68857 181.53

2007 15022078 85603 175.49

2008 39256972 113539 345.76

2009 43258758 171033 252.93

2010 46904485 171033 273.24

Graph 4.17

Interpretation: Well BV is considered to be the accounting value of each share, drastically

different than what the market is valuing the stock at. Market value is what the investment

community's expectations are and book value is based on costs and retained earnings.

Proprietary Ratio for the Period of 2005-2010

Table 4.22 in thousands

0

100

200

300

400

2005 2006 2007 2008 2009 2010

Book Value Ratio

Book Value Ratio

Year Proprietors fund Total Asset Proprietary Ratio

2005 7233484 168209623 0.04

2006 12499873 206429063 0.06

2007 15022078 250899325 0.06

2008 39256972 325064570 0.12

2009 43258758 388508646 0.11

2010 46904485 436756051 0.11

Graph 4.18

Interpretation: It is also known as equity ratio. This ratio establishes the relationship

between shareholders‟ funds to total assets of the firm. The shareholders‟ fund is the sum of

equity share capital, preference share capital, reserves and surpluses. Out of this amount,

accumulated losses should be deducted

Price Earnings Ratio for the Period of 2005-2010

Table 4.23 in rupees

0

0.02

0.04

0.06

0.08

0.1

0.12

2005 2006 2007 2008 2009 2010

Proprietory Ratio

Proprieory Ratio

Year Current Market

Price

Annual Earnings

per share

Price Earnings Ratio

2006 201 32.71 6.14

2007 230 34.20 6.75

2008 216 32.41 6.66

2009 138 29.26 4.71

2010 267 27.16 9.83

Graph 4.19

Interpretation: The price-to-earnings ratio of a stock is a measure of the price paid for a

share relative to the annual net income or profit earned by the firm per share. The P/E ratio

can therefore alternatively be calculated by dividing the company's market capitalization by

its total annual earnings. Here 2010 the ratio increased, it gives appositive sign to the

company as well as share holders

0

2

4

6

8

10

2006 2007 2008 2009 2010

Price Earnings Ratio

Price Earnings Ratio

CHAPTER 5

FINDINGS AND SUGGESTIONS

5.1. FINDINGS

CRAR is above the regulatory minimum of 9%.

Various promotion techniques using by the Federal Bank to attract the customers

(Indian Premier League)

Federal Bank is the principal sponsor of Cochin Tuskers Kerala

Federal Bank expanding the network, increasing through the ATM and Branches,

these increased the past year 60 and 115 respectively. Presently the total number of

ATM is 732 and the Branches are 672

Federal Bank credit rating doing by CRISIL , CARE and FITCH

The expenditure increased in the last financial year and the Net Profit decreased

A drastic change we can see in Price to Earnings Ratio

The profit percentage proves the strength of Bank

Through the analysis I understood the Capital Structure of Federal Bank is more

stronger

5.2. SUGGESTIONS

Complaints from the customers should be considered and steps should be taken to

improve the satisfaction of customers

Management should take steps for the timely collection of debtors. Cash discount

should offer to those debtors who make payment in time..

Concerned authority should spend the time to hear the suggestions of their

employees and consider their innovative ideas.

Diversification is the another important tool for success of business (IDBI FEDERAL

Life insurance)

CHAPTER 6

CONCLUSION AND

BIBLIOGRAPHY

6.1. CONCLUSION

The study was conducted at FEDERAL BANK Aluva

(Accounts Department, Federal Towers, and Marine Drive Cochin). The project work

titled „Capital Structure‟ of Federal Bank was an attempt to study about capital structure

and to make some recommendations and suggestions for the improvement and

development and smooth functioning of the organization. From the analysis, it is

concluded that Federal Bank limited, has a satisfactory financial performance So that

forecast may be made for future earnings ability to pay interest and debt maturities and

profitability of sound dividend policy.

6.2. BIBLIOGRAPHY

BOOKS

Financial Management-IM Pandey

Management accounting-principles and practice; R.K. Sharma & Shashi K.Gupta

Cost and management accounting; S.P. Jain & K.L.Narang.

Management accounting; J. Made GOWDA

JOURNAL

Annual reports of the bank in the year 2004 to 2009

WEBSITE

www.federalbank.co.in

APPENDIX

BALANCE SHEET

In Crores

Schedule

No.

As at

31st Mar

2004

As at

31st Mar

2005

As at

31st Mar

2006

As at

31st Mar

2007

As at

31st Mar

2008

As at

31st Mar

2009

CAPITAL&

LIABILITIES

capital

1

21.76

65.60

85.60

85.60

171.0

3

171.03

Reserves

&Surplus

2

627.08

657.75

1164.38

1416.6

0

3754.66 4154.84

Deposits

3

13476.68

15192.88

17878.74

21584.44

25913.3

6

32198.1

9

Borrowings

4

126.72

185.90

610.50

770.21

791.9

5

748.93

Other &

provisions

5

862.03

718.83

903.69

1233.08

1875.45 1577.86

TOTAL

15114.2

7

16820.96

20642.91

25089.93

32506.4

5

38850.8

6

ASSETS

Cash &

balance

Reserve

Bank Of

India

6

725.89

689.27

1214.58

1231.54

2355.6

9

2214.39

Balances

with banks

& money at

cal and

short notice

7

565.71

866.62

657.91

1081.60

389.7

9

1222.69

Investments

8

5521.0

3

5799.16

6272.38

7032.66

10026.6

0

12118.9

6

Advances

9

7700.53

8822.59

11736.47

14899.10

18904.66 22391.8

7

Fixed assets

10

175.72

185.44

173.87

186.10

232.8

4

280.77

Other assets

11

425.39

457.88

587.70

658.93

596.8

7

622.14

TOTAL

15114.27

16820.96

20642.91

25089.93

32506.4

5

38850.8

6

Contingent

liabilities

12

8519.54

12204.53

16543.57

12960.69

13315.9

3

7588.28

Bills for

collection

372.52

321.39

436.12

524.75

816.5

7

788.81

PROFIT & LOSS A/C

In Crores

Sched

ule

No.

For the

year

ended

31st Mar

2004

For the

year

ended

31st Mar

2005

For the

Year

ended

31st Mar

2006

For the

year

ended

31sr Mar

2007

For the year

ended

31st Mar

2008

For the

year ended

31st Mar

2009

1.Income

Interest

earned

13

1192.06

1191.07

1436.52

1817.35

2515.44

3315.37

Other

incomes

14

298.22

211.97

216.94

286.68

394.99

516.73

TOTAL 1490.29 1403.04 1653.48 2104.04 2910.43 3831.39

2.Expend

iture

Interest

expended

15

770.23

688.69

836.66

1084.88

1646.82

1999.24

Operatin

g

expenses

16

282.93

313.90

364.64

406.13

470.51

572.29

Provision

s and

continge

ncies

300.80

310.29

226.97

320.26

426.08

759.32

Share of

loss

associate

6.93 28.51

TOTAL 1353.97 1312.89 1428.29 1811.28 2550.36 3359.38

3.PROFI

T /LOSS

Net profit

for the

year

136.31

90.15

225.18

292.75

360.06

472.01

Add

profit b/f

from

previous

year

-relating to

holding

company

2.31

49.19

2.30

13.46

14.45

7.68

-relating

to

subsidiary

company

21.77 22.71 29.26 27.21 29.27 75.46

138.83 90.8 227.78 306.49 374.81 478.93

4.APPRO

PIATION

Transfer

to

revenue

reserve

nil

20.83

100.57

130.21

131.74

197.25

Transfer

to

statutory

reserve

34.08

22.53

56.31

73.19

92.02

125.12

Transfer

to capital

reserve

13.22 14.17 5.00 15.64 27.68 29.75

Transfer

to

investme

nt

fluctuatio

n reserve

64.64 0 0 14.64 18.41 0

Transfer

to

contingen

cies

reserve

30.00

Transfer

to special

reserve

9.00 12.00 18.00 18.00 18.00 11.00

Provision

for

proposed

dividend

15.22 16.44 29.96 34.24 68.41 85.52

Provision

for

divided

tax

1.95 2.30 4.20 5.82 11.63 14.54

Balance

carried

over to

balance

sheet

71.90 2.59 13.73 14.74 6.92 -14.24

Total 138.8

3

90.87 227.78 306.49 374.81 478.93

Earnings

per share

17 20.89 13.74 32.70 34.20 31.73 27.60

Principal

accounti

ng

policies

18

Notes on

accounts

19