Group 4 - Banking Sector in India - Risk Management

Banking sector in India:Risk Measurement

Comparative Financial Analysis of SBI, HDFC Bank and ICICI Bank

Section B | Group 4Aditya Bansal (15P064)

Chandan Papneja (15P074)Geetika Mittal (15P084)Naman Ratan (15P094)

Samveda Sharma (15P105)Utkarsh Choudhary (15P115)

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Overview of Banking Sector• Banking is a strategic sector in India as it drives the economy – Agriculture,

Industrial Goods and SMEs• Indian Banking sector is largely dominated by Public sector banks with 77% of

the total business• SBI and its associate banks is the most prominent public sector bank in India• Major private banks include – HDFC bank, ICICI bank, Axis Bank• Banking sector is one of the most regulated sectors in India. • The main regulatory body is Reserve Bank of India (RBI)

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Source: http://www.crisilresearch.com

Banking Industry Drivers

GDP and Expansion (GDP Growth and Inflation)

Industrial Production (Calculated through IIP)

Domestic Savings (Savings and Consumption)

Fiscal Situation (Fiscal deficit, Monetary policy)

Technological Innovation (Digital, Social, Analytics)

Financial Inclusion(Jan-Dhan, DBTL etc.)

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Company Analysis and Comparison

Parameter SBI HDFC ICICI

Sector Public Sector Bank Private Sector Bank Private Sector Bank

Market Cap (Rs.) 2.08 trillion 2.68 trillion 1.75 trillion

Profit After Tax (Rs.) 131.01 billion 102.16 billion 111.75 billion

No. of branches 16,333 4,014 4,050

Customer base 273.2 million ~32 million ~52 million

License obtained in 1956 1994 1994

Established in 1921 1977 1955

ATMs 54,560 11,766 12,451

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Legal Framework for Financial Statements in Banking Sector

Financial Statements based on Fiscal year(Apr – Mar)

Reserve Bank of India, 1934

The Companies Act, 2013

(Schedule III)

The Banking Regulation Act, 1949

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Balance sheet of a bank SOURCES OF FUNDS: Amount (crores) Percentage Capital 1159.66 0.18% Reserves Total 79262.26 12.22% Equity Share Warrants - - Equity Application Money 7.44 0.00% Deposits 361562.73 55.73% Borrowings 172417.35 26.58% Other Liabilities & Provisions 34374.72 5.30% Other - - TOTAL LIABILITIES 648784.16 100.00% APPLICATION OF FUNDS: Amount (crores) Percentage Cash & Balances with RBI 25652.91 3.95%

Balances with Banks & money at Call 16651.71 2.57% Investments 186580.03 28.76% Advances 387522.07 59.73% Fixed Assets 4725.52 0.73% Other Assets 27651.91 4.26% Others - - TOTAL ASSETS 648784.15 100.00% Contingent Liability 851977.61

Source: http://www.capitaline.com

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P&L A/C of a BankI. Income Amount (in crores) Percentage

Interest Earned 49091.14 439.47% Other Income 12176.13 109.00% Total 61267.27 548.47% II. Expenditure Amount (in crores) Percentage

Interest expended 30051.53 269.02% Payments to/Provisions for Employees 4749.88 42.52% Operating Expenses & Administrative Expenses 2714.56 24.30% Depreciation 658.95 5.90% Other Expenses, Provisions & Contingencies+ 7277.44 65.15% Provision for Tax 4859.14 43.50% Deferred Tax -219.57 -1.97% Total 50091.92 448.43% III. Profit & Loss Amount (in crores) Percentage

Reported Net Profit 11175.35 100.04% Extraordinary Items 4.79 0.04% Adjusted Net Profit 11170.56 100.00% Prior Year Adjustments 0 0.00% Profit brought forward 13318.59 119.23% IV. Appropriations Amount (in crores) Percentage

Transfer to Statutory Reserve 2793.9 25.01% Transfer to Other Reserves 1265.69 11.33% Trans. to Government /Proposed Dividend + 3172.94 28.40% Balance carried forward to Balance Sheet 17261.42 154.53%

Source: http://www.capitaline.com

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Risks for a Bank

Financial Risk

Operational Risk

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Quantitative Analysis – Financial Ratios

Operating Risk – Ratios & Parameters

Net Interest Income

Net Interest Margin

Cost to Income Ratio

Operating Profit Margin

Other Income to Total Income Ratio

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Net Interest Income(NII)Net Interest Income = Interest earned – Interest Paid

FY 2013 FY 2014 FY 20150

10,000

20,000

30,000

40,000

50,000

60,000

44,32949,282

55,015

19,25422,396

26,074

13,866 16,47519,040

SBI HDFC ICICINet Interest Income

Analysis: For Banking sector, Net Interest Income is analogous to Gross profit Net Interest Income measures the ability to control interest rate risk – Higher the NII lower the risk SBI is by far the largest bank in India and it is reflected in its NII NII for HDFC Bank and ICICI bank have shown CAGR in the range of 17% - 18%

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Net Interest Margin (NIM)

FY 2013 FY 2014 FY 20150

0.51

1.52

2.53

3.54

4.55

3.34 3.17 3.16

4.47 4.37 4.43

3.113.33 3.48

Net Interest Margin SBI HDFC ICICI

Net Interest Margin = Interest earned – Interest Paid Average Interest bearing assets

Analysis: NIM measures the rate of NII earned on bank’s interest earning assets Higher the NIM, more profitable the bank HDFC Bank has one of the best NIM in the industry ICICI Bank has been improving its NIM year on year while NIM for SBI is more or less constant

Industry Average : 2.84% (March ’15)

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Cost to Income Ratio

FY 2013 FY 2014 FY 20150

10

20

30

40

50

60

48.5152.67

49.8549.645.6 44.6

40.49 38.25 36.83

Cost To Income (%) SBI HDFC ICICI

Cost to Income = Operating Expenses *100Net Income (Top Line)

Analysis: Cost to Income ratio measures Operating Efficiency of a bank Smaller the ratio, more efficient the bank HDFC Bank, ICICI Bank have been reducing their cost to income in past few years SBI (Public Sector Bank) has not been as efficient as the private banks in this parameter`

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Operating Profit Margin (OPM)OPM = (Net interest income (NII) - operating expenses) * 100

Total interest income

FY 2013 FY 2014 FY 20150.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

12.58%

9.94%10.72%

13.05%

15.66%17.35%

12.11%

13.96%15.37%

SBI HDFC ICICIOperating Profit Margin

Analysis: Operating Profit Margin measures the profitability of a bank from its core operations Higher the ratio, more profitable the bank HDFC Bank, ICICI Bank have been increasing their operating profit margins in past few years SBI has not been as efficient as private banks on account of lower NIM and higher Cost to Income


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Other Income to Total Income RatioOther Income to Total Income ratio = Other income * 100

Total income

Analysis: Fee based income accounts for a major portion of a bank's other income A bank generates higher fee income through innovative products and adapting new technology The higher ratio indicates increasing proportion of fee-based income The ratio is influenced by gains on government securities, which fluctuates depending on interest rate

movement in the economy ICICI leads the other two banks when it comes to diversified source of income

FY 2013 FY 2014 FY 20150.00%

5.00%

10.00%

15.00%

20.00%

25.00%

11.82% 11.98% 12.91%

16.35% 16.14% 15.65%17.24%

18.83%19.87%

SBI HDFC ICICIOther Income to Total Income Ratio

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Financial Risk – Ratios & Parameters

CASA Ratio

Capital Adequacy Ratio

Asset Quality – (Gross NPA, Net NPA, PCR)

Credit to Deposit Ratio

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CASA Ratio

FY 2013 FY 2014 FY 201538%

40%

42%

44%

46%

48%

43.89%44.43%

42.88%

47.40%

44.80%

44.00%

42.00%42.90%

45.50%

SBI HDFC ICICICASA Ratio

CASA Ratio = CASA Deposit * 100 Total Deposit

CASA Deposit = Current Deposit + Saving Deposit

Analysis: CASA Deposit are a cheaper source of funds and hence preferable High CASA ratio leads to higher operational efficiency and thereby higher profits ICICI Bank has constantly increased its CASA ratio while the CASA ratio for HDFC Bank has been declining

year on year

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Tier I

Capital

• Core capital of the bank. It primarily consists of common stock and retained earnings of the bank. It may also include non-redeemable non-cumulative preferred stock

• Tier I items are deemed to be of the highest quality because they are fully available to cover losses (are set off against the loss carried from the Profit & Loss A/c)

Tier II

Capital

• Supplement capital of the bank. It includes undisclosed reserves, revaluation reserves and general provisions

• Tier II's capital loss absorption capacity is lower than that of Tier I capital

Risk Weighte

d Asse

ts

• Assets of the bank weighted according to the risk associated with them. This risk has been defined by the RBI for different types of securities, investments and loans and ranges between 0 - 150%

• For example, RBI has given risk weight of 150 to investments in venture capital funds whereas loans guaranteed by the Government of India have been given risk weight of 0%.

Capital Adequacy Ratio (CAR/CRAR)Capital Adequacy ratio is the ratio of the bank’s capital to its risk weighted assets Capital Adequacy Ratio = Tier 1 Capital +Tier 2 Capital * 100

Risk Weighted Assets (RWA)

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Capital Adequacy Ratio (CAR)

FY 2013 FY 2014 FY 20150%

4%

8%

12%

16%

20%

12.51% 12.44% 12.00%

16.80% 16.07%16.79%

18.74%17.70% 17.02%

SBI HDFC ICICICapital Adequacy Ratio


Analysis: Capital Adequacy Ratio measures the shock-absorbing ability of a bank High Capital Adequacy enhances a bank’s liquidity and solvency Current Mandatory CAR is 9%. It is to be gradually increased to 11.5% by Mar, 2019 as per Basel III Norms ICICI and HDFC Bank have been doing well on the Capital Adequacy front Capital Adequacy for SBI is below industry standards and it has been going down year on year

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Gross Non

Performing Asset

s (GNP

A)

• Gross NPAs are the total amount of loans that the bank cannot recover from the borrowers.

Net Non

Performing Asset

s (NNP

A)

• Net NPAs are GNPAs minus the provisions made against them, i.e. total NPAs less the expected non-recovery recorded in the books

Provision

Coverage

Ratio (PCR)

• Provisioning Coverage Ratio (PCR) is the ratio of provisioning to gross non-performing assets and indicates the extent of funds a bank has kept aside to cover loan losses

Asset QualitySection BGroup 4

Gross NPAs ratio (GNPA)

FY 2013 FY 2014 FY 20150%

1%

2%

3%

4%

5%

6%

4.75% 4.95%

4.25%

0.97% 0.98% 0.93%

2.68%3.03%

3.78%

SBI HDFC ICICIGross NPA Ratio

Gross NPAs ratio = Gross NPAs * 100 Gross Advances

Analysis: The Gross NPAs ratio is indicative of the quality of credit decisions made by bankers Higher GNPA ratio is indicative of poor credit decision-making HDFC has been very efficient in managing their GNPAs while SBI being public sector bank has high GNPAs Rising GNPAs is a major concern for ICICI bank


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Net NPAs ratio

FY 2013 FY 2014 FY 20150%

1%

2%

3%

2.10%

2.57%

2.12%

0.20% 0.27% 0.25%

0.64%0.82%

1.40%

SBI HDFC ICICINet NPA Ratio


Analysis: The Net NPAs ratio is used as a measure of the overall quality of the bank's loan book Higher NNPA ratio is indicative of poor credit decision-making and provisioning coverage HDFC has been very efficient in managing their NNPAs while SBI being public sector bank has high NNPAs Rising NNPAs is a major concern for ICICI bank as well

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Net NPAs ratio = Gross NPAs - Provisions * 100 Gross Advances - Provisions

Provision Coverage ratio

FY 2013 FY 2014 FY 20150%

10%

20%

30%

40%

50%

60%

70%

80%

90%

66.58% 62.86%69.13%

80.00%72.57% 73.93%76.80%

68.60%

58.60%

SBI HDFC ICICIProvision Coverage Ratio

Provision Coverage Ratio = Cumulative Provisions *100 Gross NPAs

Analysis: RBI earlier required banks to ensure that their total provisioning coverage ratio is not less than 70% PCR for ICICI bank has declined significantly in last 3 years and is well below 70% now Concern of Increase in NNPAs for ICICI bank is reflected in its declining PCR HDFC has been maintaining a healthy PCR of more than 70% SBI has significantly improved its PCR in FY2015 and is almost within the RBI recommended ratio

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Credit to Deposit (C/D) Ratio

FY 2013 FY 2014 FY 201570%

72%

74%

76%

78%

80%

82%

84%

86%

82.40%

80.70%

75.90%

80.90%

82.50%81.10%

78.90% 78.80%

83.80%

SBI HDFC ICICICredit/Deposit Ratio

Analysis: C/D ratio helps to assess a bank’s liquidity Very High C/D makes the bank vulnerable to adverse change in its deposit base Low C/D ratio indicates holding unproductive capital and lower than optimum earnings C/D ratio has increased sharply for ICICI bank in FY 2015 while it has declined sharply for SBI HDFC has been maintaining a comfortable C/D ratio around industry standards

Credit to Deposit ratio = Total Advances * 100 Total Deposits


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Other Ratios and Parameters

Return on Assets

Leverage Ratio

Return on Equity

Price to Book Value

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Return on Assets


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FY 2013 FY 2014 FY 20150.00%

0.50%

1.00%

1.50%

2.00%

2.50%

0.97%

0.65% 0.68%

1.90% 2.00% 2.00%

1.70% 1.78% 1.86%

Return on Assets

SBI HDFC ICICI

Analysis: ROA signifies the efficiency of the assets employed (Net Income Margin* Asset Turnover) SBI being a PSB has lower managerial efficiency and hence by far the lowest ROA HDFC Bank seems strong here as well with consistent ~2% ROA ICICI Bank has been improving their return on assets year on year PSBs have been suffering from lower efficiencies and higher GNPAs

Return on Assets = Net Income * 100 Total Assets

Leverage Ratio

FY 2013 FY 2014 FY 20150

2

4

6

8

10

12

14

16

1815.84

15.1615.95

11.05 11.31

9.528.05 8.12 8.03

Leverage RatioSBI HDFC ICICI

Leverage Ratio = Total Assets Net Worth

Industry Average : 8.52 (March ’15)

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Analysis: Banking Industry, with major source of funds being deposits, is highly leveraged This makes rising NPAs a serious concern because of low shock absorbing capital Leverage ratio for SBI is highest and hence high ROE despite low ROA Leverage ratio is a financial as well as operational risk measure

DuPont Analysis – Return on Equity

FY 2013 FY 2014 FY 20150%

4%

8%

12%

16%

20%

15.94%

10.49% 11.17%

15.13%17.07% 17.07%

12.90% 13.70% 14.30%

Return on Equity SBI HDFC ICICI


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Analysis: DuPont Analysis decomposes ROE in three factors: Income Margin , Turnover & Leverage SBI’s ROE is high due to high leverage, HDFC’s because of high NIM – risk for HDFC is lower ROE for ICICI Bank is moderate on account of consistency and moderate NIM, Turnover and Leverage

Return on Equity = Profit after Tax (PAT) * 100 Net Worth

Price to Book Value Ratio

FY 2013 FY 2014 FY 20150.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

1.491.27

1.70

4.11 4.13 4.13

0.5

2.0

1.5

Price to Book Value SBI HDFC ICICI

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Price to Book Value = Market price of share Book value per share

Analysis: PB ratio compares the Market price of the share with the book value per share of company Reflects how low/ high priced the bank’s stock is compared to its Net Worth Low (or negative) ROE and high P/B ratio would mean the stock is overvalued HDFC outperforms the other two major banks by a wide margin in Earnings and P/B ratio

References

• Annual Reports 2012-13 | 2013-14 | 2014-15– ICICI Bank– HDFC Bank– SBI

• Google Finance – Share Prices• CRISIL Research – Industry Data• Capitaline Database – Industry averages

Thank you!

Section BGroup 4

Group 4 - Banking Sector in India - Risk Management

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