6370a_sbi Icici Bank

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FINANCIAL APPRAISAL OF BANKING INDUSTRY

A Comparative Insight of ICICI Bank and State Bank of India

Introduction

The banking sector is the most dominant sector of the financial system in India,

and with good valuations and increasing profits, the sector has been among the top

performers in the markets. The public sector banks maintained its dominance in the

banking system. As on March 31, 2009, PSBs accounted for 69.9 per cent of the

aggregate assets and 72.7 per cent of the aggregate advances of the Scheduled

Commercial Banking (SCB) system. Private banks are also pacing up in good

number with these public sector banks and provide a good competition to them.

Deregulation has opened new doors for banks to increase revenues by entering into

investment banking, insurance, credit cards, depository services, mortgage,

securitization, etc. The limit for foreign direct investment in private banks has been

increased from 49% to 74%. In addition, the limit for foreign institutional

investment in private banks is 49%. Liberalization and globalization have created a

more challenging environment in the banking sector as well as in the other

segments of the financial sector such as mutual funds, Non Banking Finance

Companies, post offices, capital markets, venture capitalists, etc. Now the

challenges faced by the sector would be gaining profitability, reinforcing

technology, maintaining global standards, corporate governance, sharpening skills,

risk management and, the most important of all, to establish Customer

Intimacy.According to a report by McKinsey and NASSCOM, India has the

potential to process 30 per cent of the banking transactions in the US by the year

2010.


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Purpose of the Study

The purpose of the present article is to analyze the financial strength of the banking

sector on a comparative basis of ICICI and SBI

.The study specifically aims at the following:

To appraise the profitability of the units in detail

To analyze the liquidity trend.

To appraise the operating efficiency

To have an in-depth view of the financial soundness

To find out the value creation

To find out the shortcomings, if any and suggest required remedial measures

thereof.


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they will make a good manager better. They help topinpoint areas that need

investigation and assist in developing an operating strategy for the future."

Virtually any financial statistics can be compared using a ratio. In reality, however,

small business owners and managers only need to be concerned with a small set of

ratios in order to identify where improvements are needed. "As you run your

business youjuggle dozens of different variables," David H. Bangs, Jr. wrote in his

book managing by the Numbers. "Ratio analysis is designed to help you identify

those variables which are out of balance."

It is important to keep in mind that financial ratios are time sensitive; they can only

present a picture of the business at the time that the underlying figures were

prepared. For example, a retailer calculating ratios before and after the Christmas

season would get very different results. In addition, ratios can be misleading when

taken singly, though they can be quite valuable when a small business tracks them

over time or uses them as a basis for comparison against company goals or

industry standards. As a result, business owners should compute a variety of

applicable ratios and attempt to discern a pattern, rather than relying on the

information provided by only one or two ratios. Gill also noted that small business

owners should be certain to view ratios objectively, rather than using them to

confirm a particular strategy or point of view.

Perhaps the best way for small business owners to use financial ratios is to conduct

a formal ratio analysis on a regular basis. The raw data used to compute the ratios

should be recorded on a special form monthly. Then the relevant ratios should be

computed, reviewed, and saved for future comparisons. Determining which ratios

to compute depends on the type of business, the age of the business, the point in

the business cycle, and any specific information sought. For example, if a small
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business depends on a large number of fixed assets, ratios that measure how

efficiently these assets are being used may be the most significant.

In general, financial ratios can be broken down into four main categories

1. Profitability or return on investment

2. Liquidity

3. Leverage

4. Operating or efficiency

With several specific ratio calculations prescribed within each.

1.Profitability or Return on Investment Ratios

Profitability ratios provide information about management's performance in using

the resources of the small business. As Gill noted, most entrepreneurs decide to

start their own businesses in order to earn a better return on their money than

would be available through a bank or other low-risk investments. If profitability

ratios demonstrate that this is not occurringparticularly once a small business has

moved beyond the start-up phasethen the entrepreneur should consider selling

the business and reinvesting his or her money elsewhere.

However, it is important to note that many factors can influence profitability ratios,

including changes in price, volume, or expenses, as well the purchase of assets or

the borrowing of money. Some specific profitability ratios follow, along with the

means of calculating them and their meaning to a small business owner or

manager.

Gross profitability:
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Gross Profits / Net Salesmeasures the margin on sales the company is achieving.

It can be an indication of manufacturing efficiency or marketing effectiveness.

Net profitability:

Net Income / Net Salesmeasures the overall profitability of the company, or

how much is being brought to the bottom line. Strong gross profitability combined

with weak net profitability may indicate a problem with indirect operating

expenses or non-operating items, such as interest expense. In general terms, net

profitability shows the effectiveness of management. Though the optimal level

depends on the type of business, the ratios can be compared for firms in the same

industry.

Return on assets:

Net Income / Total Assetsindicates how effectively the company is deploying its

assets. A very low ROA usually indicates inefficient management, whereas a high

ROA means efficient management. However, this ratio can be distorted by

depreciation or any unusual expenses.

Return on investment 1:

Net Income / Owners' Equityindicates how well the company is utilizing its

equity investment. Due to leverage, this measure will generally be higher than

return on assets. ROI is considered to be one of the best indicators of profitability.

It is also a good figure to compare against competitors or an industry average.

Experts suggest that companies usually need at least 10-14 percent ROI in order to

fund future growth. If this ratio is too low, it can indicate poor management

performance or a highly conservative business approach. On the other hand, a high
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ROI can mean that management is doing a good job, or that the firm is

undercapitalized.

Return on investment 2:

Dividends / Stock Price Change / Stock Price Paidfrom the investor's point of

view, this calculation of ROI measures the gain (or loss) achieved by placing an

investment over a period of time.

Earnings per share:

Net Income / Number of Shares Outstandingstates a corporation's profits on a

per share basis. It can be helpful in further comparison to the market price of the

stock.

Investment turnover:

Net Sales / Total Assetsmeasures a company's ability to use assets to generate

sales. Although the ideal level for this ratio varies greatly, a very low figure may

mean that the company maintains too many assets or has not deployed its assets

well, whereas a high figure means that the assets have been used to produce good

sales numbers.

Sales per employee:

Total Sales / Number of Employeescan provide a measure of productivity,

though a high figure can indicate either good personnel management or good

equipment.

2. Liquidity Ratios

Liquidity ratios demonstrate a company's ability to pay its current obligations. In

other words, they relate to the availability of cash and other assets to cover

accounts payable, short-term debt, and other liabilities. All small businesses

require a certain degree of liquidity in order to pay their bills on time, though start-

up and very young companies are often not very liquid. In mature companies, low
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levels of liquidity can indicate poor management or a need for additional capital.

Any company's liquidity may vary due to seasonality, the timing of sales, and the

state of the economy. But liquidity ratios can provide small business owners with

useful limits to help them regulate borrowing and spending.

Some of the best-known measures of a company's liquidity include:

Current ratio: Current Assets / Current Liabilitiesmeasures the ability of an

entity to pay its near-term obligations. "Current" usually is defined as within one

year. Though the ideal current ratio depends to some extent on the type of

business, a general rule of thumb is that it should be at least 2:1. A lower current

ratio means that the company may not be able to pay its bills on time, while a

higher ratio means that the company has money in cash or safe investments that

could be put to better use in the business.

Quick ratio (or "acid test"): Quick Assets (cash, marketable securities, and

receivables) / Current Liabilitiesprovides a stricter definition of the company's

ability to make payments on current obligations. Ideally, this ratio should be 1:1. If

it is higher, the company may keep too much cash on hand or have a poor

collection program for accounts receivable. If it is lower, it may indicate that the

company relies too heavily on inventory to meet its obligations.

Cash to total assets: Cash / Total Assetsmeasures the portion of a company's

assets held in cash or marketable securities. Although a high ratio may indicate

some degree of safety from a creditor's viewpoint, excess amounts of cash may be

viewed as inefficient.
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Sales to receivables (or turnover ratio): Net Sales / Accounts Receivable

measures the annual turnover of accounts receivable. A high number reflects a

short lapse of time between sales and the collection of cash, while a low number

means collections take longer. It is best to use average accounts receivable to avoid

seasonality effects.

Days' receivables ratio: 365 / Sales to receivables ratiomeasures the average

number of days that accounts receivable are outstanding. This number should be

the same or lower than the company's expressed credit terms. Other ratios can also

be converted to days, such as the cost of sales to payables ratio.

Cost of sales to payables: Cost of Sales / Trade Payablesmeasures the annual

turnover of accountspayable. Lower numbers tend to indicate good performance,

though the ratio should be close to the industry standard.

Cash turnover: Net Sales / Net Working Capital (current assets less current

liabilities)reflects the company's ability to finance current operations, the

efficiency of its working capital employment, and the margin of protection for its

creditors. A high cash turnover ratio may leave the company vulnerable to

creditors, while a low ratio may indicate an inefficient use of working capital. In

general, sales five to six times greater than working capital are needed to maintain

a positive cash flow and finance sales.

3.Leverage Ratios

Leverage ratios look at the extent that a company has depended upon borrowing to

finance its operations. As a result, these ratios are reviewed closely by bankers and

investors. Most leverage ratios compare assets or net worth with liabilities. A high

leverage ratio may increase a company's exposure to risk and business downturns,
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but along with this higher risk also comes the potential for higher returns. Some of

the major measurements of leverage include:

Debt to equity ratio: Debt / Owners' Equityindicates the relative mix of the

company's investor-supplied capital. A company is generally considered safer if it

has a low debt to equity ratiothat is, a higher proportion of owner-supplied

capitalthough a very low ratio can indicate excessive caution. In general, debt

should be between 50 and 80 percent of equity.

Debt ratio: Debt / Total Assetsmeasures the portion of a company's capital that is

provided by borrowing. A debt ratio greater than 1.0 means the company has

negative net worth, and is technicallybankrupt. This ratio is similar, and can easily

be converted to, the debt to equity ratio.

Fixed to worth ratio: Net Fixed Assets / Tangible Net Worthindicates how much

of the owner's equity has been invested in fixed assets, i.e., plant and equipment. It

is important to note that only tangible assets are included in the calculation, and

that they are valued less depreciation. Creditors usually like to see this ratio very

low, but the large-scale leasing of assets can artificially lower it.

Interest coverage: Earnings before Interest and Taxes / Interest Expenseindicates

how comfortably the company can handle its interest payments. In general, a

higher interest coverage ratio means that the small business is able to take on

additional debt. This ratio is closely examined by bankers and other creditors.

Efficiency Ratios

By assessing a company's use of credit, inventory, and assets, efficiency ratios can

help small business owners and managers conduct business better. These ratios can
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show how quickly the company is collecting money for its credit sales or how

many times inventory turns over in a given time period. This information can help

management decide whether the company's credit terms are appropriate and

whether its purchasing efforts are handled in an efficient manner. The following

are some of the main indicators of efficiency:

Annual inventory turnover: Cost of Goods Sold for the Year / Average Inventory

shows how efficiently the company is managing its production, ware-housing,

and distribution of product, considering its volume of sales. Higher ratiosover

six or seven times per yearare generally thought to be better, although extremely

high inventory turnovermay indicate a narrow selection and possibly lost sales. A

low inventory turnover rate, on the other hand, means that the company is paying

to keep a large inventory, and may be overstocking or carrying obsolete items.

Inventory holding period: 365 / Annual Inventory Turnovercalculate the number

of days, on average, that elapse between finished goods production and sale of

product.

Inventory to assets ratio: Inventory / Total Assetsshows the portion of assets tied

up in inventory. Generally, a lower ratio is considered better.

Accounts receivable turnover: Net (credit) Sales / Average Accounts Receivable

gives a measure of how quickly credit sales are turned into cash. Alternatively, the

reciprocal of this ratio indicates the portion of a year's credit sales that are

outstanding at a particular point in time.
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Collection period: 365 / Accounts Receivable Turnovermeasures the average

number of days the company's receivables are outstanding, between the date of

credit sale and collection of cash.

Learning Objective

Explain to the participants on the limitation of ratio analysis.

Important Terms

Creative accounting.

Accounting Policies.

Limitations of Ratios

Accounting Information

Different Accounting Policies

The choices of accounting policies may distort inter company comparisons.

Example IAS 16 allows valuation of assets to be based on either revalued amount

or at depreciated historical cost. The business may opt not to revalue its asset

because by doing so the depreciation charge is going to be high and will result in

lower profit.

Creative accounting

The businesses apply creative accounting in trying to show the better financial


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performance or position which can be misleading to the users of financial

accounting. Like the IAS 16 mentioned above, requires that if an asset is revalued

and there is a revaluation deficit, it has to be charged as an expense in income

statement, but if it results in revaluation surplus the surplus should be credited to

revaluation reserve. So in order to improve on its profitability level the company

may select in its revaluation programme to revalue only those assets which will

result in revaluation surplus leaving those with revaluation deficits still at

depreciated historical cost.

Information problems

Ratios are not definitive measures

Ratios need to be interpreted carefully. They can provide clues to the companys

performance or financial situation. But on their own, they cannot show whether

performance is good or bad.

Ratios require some quantitative information for an informed analysis to be made.

Outdated information in financial statement

The figures in a set of accounts are likely to be at least several months out of date,

and so might not give a proper indication of the companys current financial

position.

Historical costs not suitable for decision making

IASB Conceptual framework recommends businesses to use historical cost of

accounting. Where historical cost convention is used, asset valuations in the

balance sheet could be misleading. Ratios based on this information will not be

very useful for decision making.

Financial statements certain summarised information

Ratios are based on financial statements which are summaries of the accounting

records. Through the summarisation some important information may be left out

which could have been of relevance to the users of accounts. The ratios are based


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on the summarised year end information which may not be a true reflection of the

overall years results.

Interpretation of the ratio

It is difficult to generalise about whether a particular ratio is good or bad. For

example a high current ratio may indicate a strong liquidity position, which is good

or excessive cash which is bad. Similarly Non current assets turnover ratio may

denote either a firm that uses its assets efficiently or one that is under capitalised

and cannot afford to buy enough assets.

Comparison of performance over time

Price changes

Inflation renders comparisons of results over time misleading as financial figures

will not be within the same levels of purchasing power. Changes in results over

time may show as if the enterprise has improved its performance and position

when in fact after adjusting for inflationary changes it will show the different

picture.

Technology changes

When comparing performance over time, there is need to consider the changes in

technology. The movement in performance should be in line with the changes in

technology. For ratios to be more meaningful the enterprise should compare its

results with another of the same level of technology as this will be a good basis

measurement of efficiency.

Changes in Accounting policy

Changes in accounting policy may affect the comparison of results between

different accounting years as misleading. The problem with this situation is that the

directors may be able to manipulate the results through the changes in accounting

policy. This would be done to avoid the effects of an old accounting policy or gain


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the effects of a new one. It is likely to be done in a sensitive period, perhaps when

the businesss profits are low.

Changes in Accounting standard

Accounting standards offers standard ways of recognising, measuring and

presenting financial transactions. Any change in standards will affect the reporting

of an enterprise and its comparison of results over a number of years.

Impact of seasons on trading

As stated above, the financial statements are based on year end results which may

not be true reflection of results year round. Businesses which are affected by

seasons can choose the best time to produce financial statements so as to show

better results. For example, a tobacco growing company will be able to show good

results if accounts are produced in the selling season. This time the business will

have good inventory levels, receivables and bank balances will be at its highest.

While as in planting seasons the company will have a lot of liabilities through the

purchase of farm inputs, low cash balances and even nil receivables.

Inter-firm comparison

Different financial and business risk profile

No two companies are the same, even when they are competitors in the same

industry or market. Using ratios to compare one company with another could

provide misleading information. Businesses may be within the same industry but

having different financial and business risk. One company may be able to obtain

bank loans at reduced rates and may show high gearing levels while as another

may not be successful in obtaining cheap rates and it may show that it is operating

at low gearing level. To un informed analyst he may feel like company two is


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better when in fact its low gearing level is because it can not be able to secure

further funding.

Different capital structures and size

Companies may have different capital structures and to make comparison of

performance when one is all equity financed and another is a geared company it

may not be a good analysis.

Impact of Government influence

Selective application of government incentives to various companies may also

distort intercompany comparison. One company may be given a tax holiday while

the other within the same line of business not, comparing the performance of these

two enterprises may be misleading.

Window dressing

These are techniques applied by an entity in order to show a strong financial

position. For example, MZ Trucking can borrow on a two year basis, K10 Million

on 28th December 2003, holding the proceeds as cash, then pay off the loan ahead

of time on 3rd January 2004. This can improve the current and quick ratios and

make the 2003 balance sheet look good. However the improvement was strictly

window dressing as a week later the balance sheet is at its old position.

Ratio analysis is useful, but analysts should be aware of these problems and make

adjustments as necessary. Ratios analysis conducted in a me chanical, unthinking

manner is dangerous, but if used intelligently and with good judgement, it can

provide useful insights into the firms operations.


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PROFILES

ICICI Bank

ICICI Bank, a private sector bank under the house of ICICI was incorporated in the

year of 1994. It is a multi specialist financial service provider with leadership

position across the spectrum of financial services in India. ICICI Bank is the 2nd

largest bank in India. ICICI runs its business with six principal groups, such as

1.Retail Banking,

2.Wholesale Banking,

3.International Banking,

4.Rural, Micro Banking and Agro-Business,

5.Government Banking

6. Corporate Centre.

The Bank offers a wide spectrum of domestic and international banking services to

facilitate

trade, investment banking, Insurance, Venture Capital, asset management, cross

border business & treasury and foreign exchange services besides providing a full

range of deposit and ancillary services for both individuals and corporate through

various delivery Channels and specialized subsidiaries. ICICI Bank has 14

subsidiaries,out of that 10 in domestic and


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rest of 4 in international level such as UK, Canada and Russia. To efficiently

distribute its products and services, the bank has developed multiple access

channels comprising lean brick

and mortar branches, ATMs, call centers and Internet banking. The Bank has

introduced the concept of mobile ATMs in the remote/rural areas. It has also

extended its mobile banking services to all cellular service providers across India

and NRI customers in USA, UK,

Middle- East and Singapore.

FINANCIALS STATEMENT OF ICICI BANK

Profit & Loss account of ICICI Bank (Value in Crores )

Income / Year 2004-05 2005 -06 2006 -07 2007 -08 2008 -09

Interest Earned 9,409.89 13,784.50 22,994.29 30,788.34 31,092.55

Other Income 3,416.23 5,036.62 6,962.95 8,878.85 8,117.76

Total Income 12,826.12 18,821.12 29,957.24 39,667.19 39,210.31

Expenditure

Interest expended 6,570.89 9,597.45 16,358.50 23,484.24 22,725.93Employee Cost 737.41 1,082.29 1,616.75 2,078.90 1,971.70

Selling and Admin

Expenses1,040.49 2,360.72 4,900.67 5,834.95 5,977.72

Depreciation 590.36 623.79 544.78 578.35 678.60

Miscellaneous 1,881.77 2,616.78 3,426.32 3,533.03 4,098.22


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Expenses

Preoperative Exp

Capitalized0.00 0.00 0.00 0.00 0.00

Operating Expenses 3,177.78 5,274.23 8,849.86 10,855.18 10,795.14

Provisions &

Contingencies1,072.25 1,409.35 1,638.66 1,170.05 1,931.10

Total Expenses 10,820.92 16,281.03 26,847.02 35,509.47 35,452.17

Net Profit for the

Year2,005.20 2,540.07 3,110.22 4,157.73 3,758.13

Extraordinary Items 0.00 0.00 0.00 0.00 -0.58Profit brought

forward53.09 188.22 293.44 998.27 2,436.32

Total 2,058.29 2,728.29 3,403.66 5,156.00 6,193.87

Preference Dividend 0.00 0.00 0.00 0.00 0.00

Equity Dividend 632.96 759.33 901.17 1,227.70 1,224.58

Corporate Dividend

Tax90.10 106.50 153.10 149.67 151.21

Per share data

(annualized)

Earning Per Share (Rs) 27.22 28.55 34.59 37.37 33.78

Equity Dividend (%) 85.00 85.00 100.00 110.00 110.00

Book Value (Rs) 170.35 249.55 270.37 417.64 445.17

Appropriations


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Transfer to Statutory

Reserves547.00 248.69 1,351.12 1,342.31 2,008.42

Transfer to Other

Reserves 600.01 1,320.34 0.00 0.01 0.01

Proposed

Dividend/Transfer to

Govt

723.06 865.83 1,054.27 1,377.37 1,375.79

Balance c/f to Balance

Sheet188.22 293.44 998.27 2,436.32 2,809.65

Total 2,058.29 2,728.30 3,403.66 5,156.01 6,193.8

Balance Sheet of ICICI Bank

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

Capital and

Liabilities:

Total Share

Capital1,086.75 1,239.83 1,249.34 1,462.68 1,463.29

Equity Share 736.75 889.83 899.34 1,112.68 1,113.29


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Capital

Share

Application

Money

0.02 0.00 0.00 0.00 0.00

Preference Share

Capital350.00 350.00 350.00 350.00 350.00

Reserves 11,813.20 21,316.16 23,413.92 45,357.53 48,419.73

Revaluation

Reserves0.00 0.00 0.00 0.00 0.00

Net Worth 12,899.97 22,555.99 24,663.26 46,820.21 49,883.02

Deposits 99,818.78 165,083.17230,510.1

9

244,431.0

5

218,347.82

Borrowings 33,544.50 38,521.91 51,256.03 65,648.43 67,323.69

Total Debt133,363.2

8203,605.08

281,766.2

2

310,079.4

8285,671.51

Other Liabilities

& Provisions21,396.17 25,227.88 38,228.64 42,895.39 43,746.43

Total Liabilities167,659.4

2

251,388.95344,658.1

2

399,795.0

8

379,300.96

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

Assets

Cash & Balances

with RBI

6,344.90 8,934.37 18,706.88 29,377.53 17,536.33

Balance with

Banks, Money at

Call

6,585.07 8,105.85 18,414.45 8,663.60 12,430.23

Advances 91,405.15 146,163.11 195,865.6 225,616.0 218,310.85


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0 8

Investments 50,487.35 71,547.39 91,257.84111,454.3

4103,058.31

Gross Block 5,525.65 5,968.57 6,298.56 7,036.00 7,443.71

Accumulated

Depreciation1,487.61 1,987.85 2,375.14 2,927.11 3,642.09

Net Block 4,038.04 3,980.72 3,923.42 4,108.89 3,801.62

Capital Work In

Progress96.30 147.94 189.66 0.00 0.00

Other Assets 8,702.59 12,509.57 16,300.26 20,574.63 24,163.62

Total Assets167,659.4

0251,388.95

344,658.1

1

399,795.0

7379,300.96

Contingent

Liabilities97,507.79 119,895.78

177,054.1

8

371,737.3

6803,991.92

Bills for

collection9,803.67 15,025.21 22,717.23 29,377.55 36,678.71

Book Value (Rs) 170.35 249.55 270.37 417.64 445.17

Source : Religare Technova

Key Financial Ratios of ICICI Bank

Year 2004-05 2005

-06

2006 -07 2007 -08 2008 -09

Investment Valuation


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Face Value 10.00 10.00 10.00 10.00 10.00

Dividend Per Share 8.50 8.50 10.00 11.00 11.00

Operating Profit Per Share

(Rs)36.37 36.75 42.19 51.29 48.60

Net Operating Profit Per

Share (Rs)160.69 196.87 316.45 354.71 343.77

Free Reserves Per Share (Rs) 110.70 193.24 199.52 346.21 351.22

Profitability Ratios

Interest Spread 3.56 2.67 3.43 3.51 3.66

Adjusted Cash Margin(%) 21.14 17.55 12.30 11.81 11.45

Net Profit Margin 16.32 14.12 10.81 10.51 9.74

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

Return on Long Term

Fund(%)70.54 56.24 82.46 62.34 56.72

Return on Net Worth(%) 18.86 14.33 13.17 8.94 7.58

Adjusted Return on Net

Worth(%)15.99 11.40 12.31 8.80 7.55

Return on Assets Excluding

Revaluations -

1.20 1.01 0.90 1.04 0.99

Return on Assets Including

Revaluations1.20 1.01 0.90 1.04 0.99

Management Efficiency


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Ratios

Interest Income / TotalFunds

8.08 8.36 9.55 10.60 9.82

Net Interest Income / Total

Funds3.60 3.78 4.06 4.29 3.99

Non Interest Income / Total

Funds0.31 0.22 0.10 0.02 0.08

Interest Expended / Total

Funds4.49 4.58 5.49 6.31 5.83

Operating Expense / Total

Funds1.77 2.22 2.79 2.76 2.60

Profit Before Provisions /

Total Funds1.73 1.49 1.19 1.40 1.30

Net Profit / Total Funds 1.37 1.21 1.04 1.12 0.96

Loans Turnover 0.16 0.15 0.17 0.20 0.18

Total Income / Capital

Employed(%)8.39 8.58 9.65 10.62 9.90

Interest Expended / Capital

Employed(%)4.49 4.58 5.49 6.31 5.83

Total Assets Turnover Ratios 0.08 0.08 0.10 0.11 0.10

Asset Turnover Ratio 2.14 2.94 4.52 5.61 5.14

Profit And Loss Account Ratios


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

Interest Expended / Interest

Earned

69.83 69.62 71.14 76.28 73.09

Other Income / Total Income 3.65 2.59 1.07 0.17 0.86


Income21.06 25.86 28.87 26.00 26.22

Selling Distribution Cost

Composition5.08 4.80 6.12 4.43 1.74

Balance Sheet Ratios

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

Capital Adequacy Ratio 11.78 13.35 11.69 13.97 15.53

Advances / Loans Funds(%) 76.65 84.89 77.72 72.67 69.86

Debt Coverage Ratios

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

Credit Deposit Ratio89.17 87.59 83.83 84.99 91.44

Investment Deposit Ratio 55.52 46.07 41.15 42.68 46.35

Cash Deposit Ratio 7.00 5.77 6.99 10.12 10.14

Total Debt to Owners Fund 7.98 7.45 9.50 5.27 4.42

Financial Charges Coverage

Ratio1.48 1.39 1.25 1.25 1.25

Financial Charges Coverage 1.40 1.33 1.22 1.20 1.20


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Ratio Post Tax

Leverage Ratios

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

Current Ratio0.09 0.08 0.09 0.11 0.13

Quick Ratio 4.98 6.64 6.04 6.42 5.94

Cash Flow Indicator Ratios

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

Dividend Payout Ratio Net

Profit

36.05 34.08 33.89 33.12 36.60

Dividend Payout Ratio Cash

Profit27.85 27.36 28.84 29.08 31.00

Earning Retention Ratio 63.98 65.82 64.80 66.35 63.23

Cash Earning Retention

Ratio72.17 72.58 70.22 70.51 68.87

Adjusted Cash Flow Times 38.43 52.30 65.12 52.34 49.41

Earnings Per Share 27.22 28.55 34.59 37.37 33.78

Book Value 170.35 249.55 270.37 417.64 445.17


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

PROFILE OF STATE BANK OF INDIA

State Bank of India

SBI, started as Imperial Bank then named State Bank of India commenced its

operations from the year 1955, is the largest commercial bank in India in terms of

profits, assets, deposits, branches and employees. As of March 2008, the bank has

had 21 subsidiaries and 10,000 branches.

SBI offers the services of banking and as well as nonbanking services to their

customers.

The bank also concentrates in agriculture, for which it took initiative spotlightkharif and spotlight rabi campaigns for higher disbursement. It introduced

Automated Teller Machine with Kishan Credit Cards in all circles to assist

agriculture peoples.

The strategic initiatives that SBI have launched business groups in 2007 namely

rural and agri business; treasury and marketing; corporate strategy and new

business; and fourth mid corporate group is on the anvil. SBI opened its 10,000th

branch in March 2008, it becomes

only the second bank in the world to have more than 10,000 branches after Chinas

ICBC.


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Profit & Loss account of SBI (Rs. in Crores )

Income / Year 2004-05 2005 -06 2006 -07 2007 -08 2008 -09

Income

Interest Earned32,428.0

035,794.93

39,491.0

3

48,950.3

163,788.43

Other Income 7,119.90 7,388.69 7,446.76 9,398.43 12,691.35

Total Income39,547.9

043,183.62

46,937.7

9

58,348.7

476,479.78

Expenditure

Interest expended 18,483.38

20,159.29 23,436.82

31,929.08

42,915.29

Employee Cost 6,907.35 8,123.04 7,932.58 7,785.87 9,747.31

Selling and Admin

Expenses2,634.64 1,853.32 3,251.14 4,165.94 5,122.06

Depreciation 752.21 729.13 602.39 679.98 763.14

Miscellaneous

Expenses6,465.82 7,912.15 7,173.55 7,058.75 8,810.75

Preoperative Exp

Capitalised0.00 0.00 0.00 0.00 0.00

Operating Expenses11,278.1

811,872.89

13,251.7

8

14,609.5

518,123.66

Provisions &

Contingencies5,481.84 6,744.75 5,707.88 5,080.99 6,319.60

Total Expenses35,243.4

038,776.93

42,396.4

8

51,619.6

267,358.55


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Net Profit for the Year 4,304.52 4,406.67 4,541.31 6,729.12 9,121.23

Extraordionary Items 0.00 0.00 0.00 0.00 0.00

Profit brought forward 0.34 0.34 0.34 0.34 0.34

Total 4,304.86 4,407.01 4,541.65 6,729.46 9,121.57

Preference Dividend 0.00 0.00 0.00 0.00 0.00Equity Dividend 657.87 736.82 736.82 1,357.66 1,841.15

Corporate Dividend Tax 93.75 103.34 125.22 165.87 248.03

Per share data

(annualised)

Earning Per Share (Rs) 81.79 83.73 86.29 106.56 143.67

Equity Dividend (%) 125.00 140.00 140.00 215.00 290.00

Book Value (Rs) 457.39 525.25 594.69 776.48 912.73

Appropriations

Transfer to Statutory

Reserves3,552.89 3,566.51 3,682.15 5,205.69 7,032.04

Transfer to Other

Reserves0.01 0.00 -2.88 -0.10 0.01

Proposed

Dividend/Transfer to

Govt

751.62 840.16 862.04 1,523.53 2,089.18

Balance c/f to Balance

Sheet0.34 0.34 0.34 0.34 0.34

Total 4,304.86 4,407.01 4,541.65 6,729.46 9,121.57

Balance Sheet of SBI

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

Capital and

Liabilities:


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Total Share

Capital526.30 526.30 526.30 631.47 634.88

Equity Share

Capital

526.30 526.30 526.30 631.47 634.88

Share

Application

Money

0.00 0.00 0.00 0.00 0.00

Preference Share

Capital0.00 0.00 0.00 0.00 0.00

Reserves 23,545.84 27,117.79 30,772.26 48,401.19 57,312.82

Revaluation

Reserves0.00 0.00 0.00 0.00 0.00

Net Worth 24,072.14 27,644.09 31,298.56 49,032.66 57,947.70

Deposits367,047.5

3

380,046.0

6

435,521.0

9

537,403.9

4742,073.13

Borrowings 19,184.31 30,641.24 39,703.34 51,727.41 53,713.68

Total Debt386,231.8

4

410,687.3

0

475,224.4

3

589,131.3

5795,786.81

OtherLiabilities

& Provisions 49,578.89 55,538.17 60,042.26 83,362.30 110,697.57

Total Liabilities459,882.8

7

493,869.5

6

566,565.2

5

721,526.3

1964,432.08


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

Assets

Cash & Balances

with RBI16,810.33 21,652.70 29,076.43 51,534.62 55,546.17

Balance with

Banks, Money atCall

22,511.77 22,907.30 22,892.27 15,931.72 48,857.63

Advances202,374.4

5

261,641.5

3

337,336.4

9

416,768.2

0542,503.20

Investments197,097.9

1

162,534.2

4

149,148.8

8

189,501.2

7275,953.96

Gross Block 6,691.09 7,424.84 8,061.92 8,988.35 10,403.06

Accumulated

Depreciation4,114.67 4,751.73 5,385.01 5,849.13 6,828.65

Net Block 2,576.42 2,673.11 2,676.91 3,139.22 3,574.41

Capital Work In

Progress121.27 79.82 141.95 234.26 263.44

Other Assets 18,390.71 22,380.84 25,292.31 44,417.03 37,733.27

Total Assets459,882.8

6

493,869.5

4

566,565.2

4

721,526.3

2964,432.08

Contingent

Liabilities

131,325.4

0

191,819.3

4

259,536.5

7

736,087.5

9 614,603.47

Bills for

collection44,794.10 57,618.44 70,418.15 93,652.89 152,964.06

Book Value (Rs) 457.39 525.25 594.69 776.48 912.73


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Source : Religare Technova

Key Financial Ratios of SBI

Investment Valuation

Year 2004-05 2005

-06

2006 -07 2007 -08 2008 -09

Face Value 10.00 10.00 10.00 10.00 10.00

Dividend Per Share 12.50 14.00 14.00 21.50 29.00

Operating Profit Per Share(Rs)

148.50 124.77 147.72 173.61 230.04

Net Operating Profit Per

Share (Rs)692.96 719.54 833.38 899.83 1,179.45

Free Reserves Per Share (Rs) 68.67 178.33 184.43 356.61 373.99

Bonus in Equity Capital -- -- -- -- --

Profitability Ratios

Interest Spread 4.28 4.31 4.20 4.32 4.34

Adjusted Cash Margin(%) 14.54 13.06 11.43 12.81 13.04

Net Profit Margin 11.56 11.21 10.12 11.65 12.03

Return on Long Term

Fund(%)105.35 97.89 99.20 86.83 100.35

Return on Net Worth(%) 19.43 17.04 15.41 13.72 15.74

Adjusted Return on Net

Worth (%)

19.35 15.93 14.47 13.70 15.74

Return on Assets Excluding

Revaluations0.94 0.89 0.80 0.93 0.95

Return on Assets Including

Revaluations

0.94 0.89 0.80 0.93 0.95


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Management Efficiency Ratios

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

Interest Income / Total

Funds8.41 7.94 8.27 8.82 8.88

Net Interest Income / TotalFunds

4.15 3.71 3.85 3.87 3.79

Non Interest Income / Total

Funds0.17 0.30 0.19 0.14 0.11

Interest Expended / Total

Funds4.26 4.23 4.42 4.96 5.09


Funds2.34 2.34 2.39 2.16 2.06

Profit Before Provisions /

Total Funds1.80 1.52 1.54 1.74 1.75

Net Profit / Total Funds 0.99 0.92 0.86 1.04 1.08

Loans Turnover 0.20 0.16 0.15 0.15 0.16

Total Income / Capital

Employed(%)8.58 8.24 8.46 8.96 8.99

Interest Expended / Capital

Employed (%)4.26 4.23 4.42 4.96 5.09

Total Assets Turnover Ratios 0.08 0.08 0.08 0.09 0.09

Asset Turnover Ratio 5.45 5.10 5.44 6.32 7.20

Profit and Loss Account Ratios


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

Interest Expended / InterestEarned

57.00 56.32 59.35 65.23 67.28

Other Income / Total Income 1.99 3.60 2.25 1.56 1.18


Income27.34 28.37 28.19 24.13 22.91

Selling Distribution Cost

Composition0.18 0.28 0.20 0.30 0.33

Balance Sheet Ratios

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

Capital Adequacy Ratio 12.45 11.88 12.34 13.47 14.25

Advances / Loans Funds(%) 56.35 65.66 76.16 78.31 78.34

Debt Coverage Ratios

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

Credit Deposit Ratio 52.55 62.11 73.44 77.51 74.97

Investment Deposit Ratio 55.83 48.14 38.22 34.81 36.38

Cash Deposit Ratio 5.23 5.15 6.22 8.29 8.37

Total Debt to Owners Fund 15.25 13.75 13.92 10.96 12.81


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Ratio1.46 1.40 1.37 1.37 1.36


Ratio Post Tax

1.27 1.25 1.22 1.23 1.23

Leverage Ratios

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

Current Ratio 0.04 0.05 0.05 0.07 0.04

Quick Ratio 4.79 5.50 6.52 6.15 5.74

Cash Flow Indicator Ratios

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

Dividend Payout Ratio Net

Profit17.46 19.06 18.98 22.64 22.90

Dividend Payout Ratio Cash

Profit14.86 16.35 16.75 20.56 21.13

Earning Retention Ratio 83.88 80.93 80.97 77.33 77.11

Cash Earning Retention

Ratio 86.12 83.64 83.21 79.41 78.88

AdjustedCash Flow Times 67.82 74.03 84.87 72.64 75.05

Earnings Per Share 81.79 83.73 86.29 106.56 143.67

Book Value 457.39 525.25 594.69 776.48 912.73


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COMPARATIVE STUDY

ICICI

Following is the comparative trend in the financial position of ICICI with industry

aggregates to give an idea of how the balance sheet is structured in this industry

regarding the

(i) financial risk, and

(ii) operating risk pattern. Also,

there is a discussion on how does the balance sheet of

ICICI and SBI bank differs from their peers.

Table 1

Comparative Trend in Financial position

(31st March 2007 -31st March 2008)

( Rs. cr)

I. Funding pattern

1. Capital

Major components of Capital are:

Equity Share Capital

Preference Share Capital


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The major reason for an increase in capital has been the simultaneous public issue

in India and issue of American Depository Shares (ADS) in the United States. The

public issue in India was subscribed 11.5 times and the ADS issue was subscribed

over 5 times. There was an increase

in the equity capital also because of the merger of The Sangli Bank Ltd with ICICI

Bank Ltd. The shareholders of Sangli Bank were allotted 3,455,008 equity shares

of Rs 10.00 each on May 28, 2007.

The merger has been accounted for as per the purchase method of accounting

in accordance with the scheme of amalgamation. As a result of the issue, the

merger and the exercising of employee stock option plan the Capital has increased.

Comparison with the industry

The dependence of the bank on capital is relatively less than that of the industry

however if you see the dependence of the total shareholder funds it is almost the

same. Another interesting point is that till last year even this total shareholder

funds as a proportion of the

capital employed was less and this may be the prime reason for the bank to go for a

FPO to improve the Debt- Equity ratio and it may have found difficult to raise

funds as borrowings

2. Reserves

The important sub-heads under Reserves are Statutory Reserves compulsorily to

be maintained as per company Law and the Banking Law

Revenue Reserves

Share Premium

Exchange Fluctuation Reserves ICICI Bank has a lot of assets and liabilities

which are denominated in foreign currency. These assets are investments which


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may have to be marked to market on the balance sheet date. While doing so the

bank may face a loss in the

foreign exchange as on the date of preparing the balance sheet and thus this loss is

not written off in the P&L account but is reduced from reserves directly. The total

reserves have increased by Rs. 21,943.61crore and a major portion of this i.e. Rs.

19,231.61crore is because of increase in the Share Premium account and the

remaining being due to increase in Profit and Loss account Balance.

3. Deposits

The components of Deposits are

Term Deposits

Savings Deposit

Demand Deposits

If we notice there has been a tremendous growth in the total sources of funds

however the amount of deposits has not increased so much one major reason for

this is that higher cost of the deposits to attract depositors. Deposits grew by almost

12%. However what improved

was the CASA ((Current Accounts + Saving Accounts) / Total Deposits) margin of

the bank. This ratio determines the banks ability to raised cheap deposits as

current accounts give nominal or zero interest.

4. Borrowings

Borrowings are different from deposits as deposits are collected in the course of

business and borrowings are like loans taken by the bank. Borrowings include

Debentures

Borrowings from various agencies

The external borrowings of the bank increased by almost 28% and as we will

notice further in the common size Balance Sheet of the bank compared to common


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size Balance Sheet of the Industry (Pvt. Sector Banks) in aggregate ICICI Bank

have a higher reliance on external

borrowings and specifically borrowings from outside India. This is attributed

mainly to the factors that availability of cheap credit in UK and Canada and the

ability of ICICI Bank to raise money from these markets due to the presence of its

subsidiaries. The borrowings

from UK and Canada increased by 90%.

II. Utilization trend

1. Cash and Cash Balances

These include cash in hand majorly with RBI for the purpose of maintaining the

CRR.

2. Balances with Banks and money at call

3. Investments

These mainly include investments in subsidiaries, investment in government

securities to meet SLR requirements, holding of equity shares of other companies.

4. Advances

A major portion of this i.e. 78% is towards loans given out, then 15% towards cash

credit and overdraft facilities and the remaining in bills purchased and other

advances Fixed Assets include computers, premises, ATMs, fixtures etc.The

Application of funds side has mainly remained constant with the last year as a

proportion of the total asset except the Cash and Cash Balances this is also only

mainly because of the CRR. Compared to the industry

also the proportion remains the same.

Contingent Liabilities

One important point to make here about ICICI Bank and the other Pvt. Sector

Banks is the amount of Contingent Liabilities forming a part of their notes to


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accounts below the Balance Sheet. For ICICI Bank it is almost 3 times the amount

of total assets it has and it goes up to 9 times for the industry aggregate. Most of

these contingent liabilities are due to the outstanding amount on forward exchange,

futures, interest swaps and option contracts.

The other few reasons for the contingent liabilities include acceptances,

guarantees, obligations and Letter of Credits issued for foreign trade.

Takeover of Sangli Bank Ltd

The net assets worth Rs.2,500 crore has been taken over and merged in to the

balance sheet of ICICI Bank as a reason of the merger with Sangli Bank.

Table 2

Comparative Trend in Profitability

(31st March 2007 - 31st March 2008)

( Rs. Cr.)

III. Income trend

The income of the bank has increased by 36% (y o y) despite higher interest rates

and slows down in the credit market. However the effect of the higher interest rate

can be seen on the interest expended growth which grew by 46%. A major reason

for the banks net profit margin to yet be intact and an increase in the net profit as

compared to last year by 33% is because of its improving operating efficiency and

manpower and employee efficiency which shall be shown in the ratio analysis.

Table 3

Industry Benchmarking

Year ICICI Bank Banks-Pvt Sector


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Industry performance

As we have mentioned earlier and would also be showing in the ratio analysis in

detail one aspect where ICICI Bank has lagged in its performance as compared to

its peers in

the industry is the ability to raise funds at a lower cost and this is evident when we

see the common size Profit and Loss account and even though the interest income

earned as a percentage of the total income is the same as the industry however the

interest expended is 12% points higher and thus as we see the net profit as a

percentage of total income its a little less than its industry peers.

(B.) SBI

Table 4

Comparative Financial Performance and Benchmarking

( 31st March 2007 - 31st March 2008)

Analysing the balance sheet for SBI with the industry, it can be found that the

composition almost very similar with slight variations in each head.

I. Funding pattern

Capital & Reserves and Surplus


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There has been a rise of almost 60% i.e. almost Rs.18,000cr in the total of the

capital and reserves account of which almost Rs.16,000cr. increase is because of

the Rights issue

to the existing shareholders.

The remaining heads under the liabilities side have an almost proportionate

increase as compared to the increase in total liabilities.

Deposits increased by almost 24%

Borrowings increased by 30%

Liabilities and Provisions increased by 38%

II. Utilization trend

Cash and Balances with RBI as explained earlier with ICICI Bank have an increase

due to the hike in CRR.Investments include mainly investments in govt. and govt.

approved securities.

Table 5

Comparative Profitability

(31st March 2007 - 31st March 2008)

III. Income trend

There has been an increase in the total income of the bank by approximately by

31% this has been due to an equal increase both in interest income and other

income. This has been because SBI is now looking to foray into models of

business.

Expenses

Interest expense has increased drastically mainly because of the cost of funds

available in the market and hike in interest rates by RBI. This has impacted the

profitability a lot because the increase is almost 1.5 times that in that of income.


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Even though the interest expense has risen so much the main reason SBI has been

able to control its total expenditure is because of a very minor increase in the

employee expense and a decrease in the operating and administrative expense. The

above will be explained with the help of ratios later in the presentation.

The total profitability has increased by 48% because the increase in total expenses

has been much lesser than those in total income.

Table 6

Comparative Financial Performance

ICICI Bank vs. State Bank of India

Borrowings The borrowings of ICICI Bank represent approx 16% of the

liabilities as compared to the 7% of SBI. As explained earlier this is because of its

ability to raise funds abroad at lesser cost.

Investments Though the size of Investments as a proportion of the total assets is

the same however the composition is slightly different where major component in

both their investments is in government or government approved securities, for

SBI the next major portion is the investments in subsidiaries, whereas for ICICI, it

is in other investments which include future contracts and other riskier assets.

Fixed Assets - The proportion of fixed assets for ICICI is almost double that of SBI

is an important point here as even though SBI has 10 times the branches than ICICI

has, its investment in premises is lesser not only in % terms but also in Rupee

terms. Major reason for this is that many of its premises are on lease and thus do

not appear on the balance sheets.


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Contingent Liabilities the major reason for such a difference in the contingent

liabilities of the banks is because SBI has major contingent liabilities in forward

exchange contracts and guarantees and acceptances only. However for ICICI Bank

not only are these heads high

but also because the have a large exposure to the futures market and other

instruments where only initial margins are high these are recorded as contingent

liabilities.

Profitability Appraisal

1. Net Profit Margin (%) - Net profit margin aims to find the net amount that is

available after all expenses,as a percentage of revenue earned. In simple terms, it

can be said that this ratio calculates the amount of revenue that is converted into

net profit.

Net Profit

Turnover

Table 7

Net profit margin

2007-08 2006-07

ICICI 13.5% 14.1%

SBI 13.74% 12.19%

Explanation: Net Profit Margin has taken a dip for ICICI bank because of higher

cost of funds along with higher growth in interest earned than that in net profit.

SBI, on the other hand, has shown a 48.17% growth in its net profit compared to

31.4% growth in

interest earned.


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2. Operating Ratio (%) - A ratio that shows the efficiency of companys

management by comparing operating expense to net sales. The smaller the ratio,the

greater the organizations ability to generate profit if revenues decrease. When

using this ratio, however,

investors should be aware that it doesnt take debt repayment or expansion into

account.

Operating Expense

Net Sales

Table 8

Operating margin

Explanation: This ratio is the Operating Expenses by Total Sales of the bank and

this mainly includes administrative expenses and salaries. This ratio has drastically

improved for SBI and this has led to an improvement in the net profit margin for

SBI.

3. Interest Expended/ Interest Earned (%) - This ratio is similar to the COGS in a

manufacturing concern to find that for the interest it is earning how much is it

paying out.

Interest Expended Interest Earned


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Table 9

Interest margin

Explanation: This has increased for both the banks because of the increasing CRR

(as CRR earn zero or very less interest) and rising interest rates. This again

supports our argument above of the high interest cost that ICICI bears due to its

inability to raise cheaper funds.

4. Net Interest Margin (%) - This is the ratio which determines the difference

between the interest margins earned and the cost of borrowed capital. To calculate

the margins generally weighted average of the interest margin and the cost of funds

are taken. It examines

how efficiently the interest is generated on the average earning assets. A bank at

first wants to

increase this net interest margin.

Investment Returns Interest Expense

Average Earning Assets

Table 10

Net interest margin


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Explanation: Net interest margin for ICICI is expected to continue to be lower than

other banks in India until they increase the proportion of low-cost deposits and

retail deposits in their total funding.

5. CASA Ratio This ratio tells us that percentage of the total deposits which

comes in the form of current account and saving account. It is important to know

this ratio as these funds which come in the form of current and saving account

deposits are available at a very cheap cost to the bank and thus reduce the interest

cost of the bank. For eg. current account has

an interest earning rate of any where between 0-1% and savings from 3-5%.

Table 11

CASA margin

There been an increase in the CASA ratio of ICICI

Bank because during the past year there was an

increased focus on the Retail Banking model. SBI

Retail Banking has been its core focus and thus it

has always maintained such a high CASA Ratio

6. Net NPAs to Net Advances (%) - Non Performing

Assets (NPAs) are the advances which have become

bad and these are not expected to pay back the loans

and advances taken by them. The ratio shows what

percentage of Net advances have become NPAs. This

ratio helps to find the quality of assets.

Net NPA

Net Advances

Table 12


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NPA margin

Explanation: Banks try to keep this ratio to a minimum

possible because NPAs cut the profits as well as

reduce the customer base of the bank. The increase

in non-performing assets was due to higher level of

non-performing assets in the retail portfolio mainly

due to increase in non-performing loans in rural

segment. ICICI has a better NPA rate than SBI which

shows that they are maintaining their assets better

than SBI

Solvency

1. Debt to Equity Ratio* Debt to Equity in banking

industry is quite high unlike other industries due to

high debts that these companies owe. Unlike other

industries where high D/E ratio indicates bad longterm

liquidity, the business of the banks is carried

out due to debts.

* As such we do not concentrate on this ratio, instead

there is another solvency ratio which is of much

importance to the banks called the capital adequacy

ratio, which is discussed below. In the year 2006-07,

SBI had a D/E ratio of around 15 whereas ICICI had

the same around 11. This shows that SBI had more

deposit strength than ICICI.

2. Capital Adequacy Ratio - CAR is a measure the ability

of a banks to meet its credit risk, operational risk etc.


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It is measured by dividing capital by risk weighted

assets.

Table 13

Capital adequacy margin

Tier-I Capital (%) - Equity of Capital adequacy is

divided into two parts Tier I capital and Tier II

capital. Tier I capital includes equity issued and

reserve and surplus. Tier 2 capital included preference

shares and 50% of subordinate debt.

Table 14

Tier I Capital margin

Interpretation: As per the capital adequacy guidelines

under Basel I, a bank is required to maintain a

minimum ratio of total capital to risk weighted assets

(CRAR) of 9.0%, at least half of which is required to

be Tier-1 capital. In April 2007, RBI issued the final

guidelines on Basel II. As per Basel II guidelines,

applicable from March 31, 2008, banks are required to

maintain a minimum CRAR of 9.0%, with minimum

Tier I capital ratio of 6%. Both SBI and ICICI are well

above the statutory requirements. Higher the capital

adequacy ratio, the better it is for lenders as the losses


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are well covered for them. SBI board has decided to

maintain capital adequacy ratio of more than 11% so

that there is enough space to cover any addition of

riskier assets to the companys balance sheet. There

is a marked increase in the CAR of ICICI due to

increase in Tier-I Capital of the bank as explained above.

Operating Efficiency

1. Interest income to working funds (%) Interest

income as a percent of working funds explains the

efficiency with which working funds are used to

generate interest.

Interest Income

Working Funds

Table 15

Interest income margin

Explanation: Working fund is the part of the total

assets that is put to earn income for the bank. SBI

has shown a slight dip in this ratio whereas ICICI has

shown an increase. This shows a better utilization of

resources in generating interest on the part of ICICI.

2. Non - Interest income to working funds Non-

Interest income as a percent of working funds explains

the efficiency with which working funds are used to

generate income from sources other than interest.

Non-Interest Income

Working Funds

Table 16


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Non-interest income margin

Explanation: SBI, though, is lagging behind ICICI in

terms of efficiency in generating non-interest income

from its working funds, but it has shown a rise on

this front whereas ICICI has witnessed a slight fall.

3. Business and Income per Employee (Rs. Cr.) -

Banking being a service industry there is very less

usage of fixed assets and current assets to generate

business. The main business and income generators

are the people or the service providers. Thus it is

very important to identify the efficiency of these

people as we do in a manufacturing firm by identifying

how much income is generated per rupee of

investment.

Table 17

Employee efficiency

Explanation: Similar to all other PSUs, SBI lags behind

in its manpower efficiency. The prime reason why in

spite of having higher cost of funds ICICI Bank

manages a somewhat similar net profit margin is

because of the manpower efficiency that it has.

4. Fixed Asset Turnover Ratio (times)* - This ratio

shows the efficiency of the fixed assets in generating


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sales.

Sales

Fixed Assets

Table 18

Fixed assets efficcincy

Explanation: This is very high for SBI because even

though the Net Revenue of SBI is almost 40% higher

than ICICI the Fixed Asset base is almost the same.

This is not because the efficiency of SBI is low but

because much of the premises has been taken on

lease by SBI.

*Again, this ratio is not very significant in a banking

industry.

Return Generation

1. Return on Assets (%): An indicator of how profitable

a company is relative to its total assets. ROA gives

an idea as to how efficient management is at using its

assets to generate earnings.

Net Profit

Average Assets

Table 19

ROAExplanation: Return on assets depicts the profit that

the Bank is generating on its assets. SBI has shown

remarkable improvement in its ROA.


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2. Operating profit to working funds It shows the

operational efficiency of the working funds.

Operating Profit

Working Funds

Table 20

Operating profit margin

Explanation: ICICI has shown an increase of 9 basis

points whereas SBI witnessed an increase of 10 basis

points. This year has been a turnaround year for SBI

as it had shown a decrease of nearly 30 basis points

in the last fiscal. The major reason for this increase is

the staggering growth of 31.08% that SBI has

witnessed in its Operating Profits.

3. Return on Net Worth (%) - Ratio of net income after

taxes to total end of the year Net Worth. This ratio

indicates the return on stockholders total equity.

Net Profit after Tax

Net Worth

Table 21

RONW

Explanation: There has been a declining trend in the

RONW for the past 3 years for both the banks one of

the reasons in 2006 07 was a reduction in the


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profitability margin and another reason has been the

fresh issuance of capital in the past year by both the

banks. An effect of the increase of this capital on the

net profit would take time however the net worth

increases that moment itself thus it reduces the

RONW.

4. EPS, DPS, DPR

Table 22

Earning and Dividend trend

As we see that RONW has reduced quite a lot

however there has been an increase in the EPS this is

because there has been an increase in the NPAT but

not to such an extent that it can impact the RONW.

And in EPS the number of shares are increasing but

not the extent by how much Net Worth is increasing.

5. PE Ratio ( as on 31st March 2008)

ICICI Bank - 19.66

State Bank of India - 15.5

6. Book Value/Share (Rs., as on 31st March 2008)

ICICI Bank - 417.64


Explanation: Book value alone does not really say

much otherwise, but in the case of banking business

where most of the liabilities and assets are more liquid

than in any other industry the book value tells the

value of the share if the company were to be


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liquidated.

7. Price : BV (as on 31st March 2008)

ICICI Bank - 1.85


Explanation: Book Value of the share when compared

to the market price helps the investor determine the

value of the share and whether the price for the stock

is expensive or cheap.

Investment Perspective

The long-term investment horizon of the bank is

analyzed as under:

1. Credit : Deposit Ratio (%) - This ratio helps

determine how much of the funds that the bank is

getting are used for giving out credit.

Table 23

Credit margin

Explanation: This helps us understand what

percentage of the funds is being used by the bank in

its core activities. If a bank is using lesser and lesser

of the funds in giving out credit that means it is

focusing on all other activities and not its core

activity. ICICI is far ahead of SBI on this front which

reflects its emphasis on core banking activities. The

hike in the ratio in case of ICICI can be explained due

to the loss in the I-Banking business faced by the

same.

2. Cash Flow Analysis


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Table 24

Cash flow ICICI

Table 25

Cash flow SBI

Explanation: An interesting point to be noted in the

banking industry is that though most of the banks

have high profits and even higher cash profits from

operations, many banks have a negative cash inflow

due to operating activities.

The major reason being that when advances are more

than the deposits in the year the banks would

generally have a negative cash flow from operating

activities. Thus a positive cash flow from operating

activities generally indicates declining credit/deposit

ratio.

Conclusion

Though both ICICI and SBI have been performing well,

but one aspect where ICICI Bank has lagged in its

performance as compared to its peers in the industry is

the ability to raise funds at a lower cost and even though

the interest income earned as a percentage of the total

income is the same as the industry however the interest

expended is 12% points higher and thus as we see the netprofit as a percentage of

total income its a little less than

its industry peers . Net Profit Margin has taken a dip for

ICICI bank during the said period because of higher cost


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of funds along with higher growth in interest earned than

that in net profit. SBI, on the other hand, has shown a

48.17% growth in its net profit compared to 31.4% growth

in interest earned. Regarding CASA, there has been an

increase in the CASA ratio of ICICI Bank because during

the past year there was an increased focus on the Retail

Banking model. SBI Retail Banking has been its core focus

and thus it has always maintained such a high CASA

Ratio. On cash front, an interesting point to be noted in

the banking industry is that though most of the banks

have high profits many banks have a negative cash inflow

due to operating activities. This is true of IACAI and SBI

both for 2008. The major reason being that when advances

are more than the deposits in the year the banks would

generally have a negative cash flow from operating

activities. Thus a positive cash flow from operating

activities generally indicates declining credit/deposit ratio.

Policy Suggestions

Financial strength is the key to any sector, in particular to

banking sector being the backbone of an economy. As

we have seen above that though both ICICI and SBI have

been performing well, still to improve the situation further,

it is suggested that:

According to a FICCI survey, the chief strong point

of the Indian banking industry is the regulatory

system, which has enabled India to carve a place for

itself in the global banking scene. Therefore, the


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regulatory systems of Indian banks should be more

strengthened to ensure stability, soundness, and

efficiency of the financial sector.

There should be a Lessening Quality of the Loan

Portfolio. Although there was a general deterioration

in the quality of the loan portfolio of the banks, the

extent of the deterioration varied substantially among

individual banks. Overall, these indicators call for an

eye to watch.

There should be an adequate level of short-term and

long-term financing. There is always a need for the

development of financial structure and policies to

encourage the financial sector to provide both type

of financing. A major issue is the apparent mismatch

between the type of funds required by the private

sector and those provided by the financial system.

Thus the issue is more one of the types of funds

rather than the lack of funds.

As for the commercial banking sector, the major

objective is to promote the viability of the banking

system while preserving competitiveness and sound

financial environment. The mobilisation of financial

savings should be in a way which is consistent with

the stability of the financial system. Stability in this

context refers to the ability of the financial system to

withstand disturbances, including those that may arise

internally.


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Reporting and accounting standards and practices

should be more streamlined, particularly in private

sector banks. An improvement of accounting and

disclosure practice would enhance transparency in

financial markets.

References:

Ali Ataullah,etal. (2006),Economic reforms and bank

efficiency in developing countries: the case of the

Indian banking industry ,Applied Financial

Economics, Volume 16, Number 9, 1 June.

Annual Report08 - SBI

Annual Report08 - ICIC

Documents

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