Financial Performance Analysis of Select Banks

Financial Analysis is a process o f synthesis and summarization o f financial

and operative data with a view to getting an insight into the operative

activities o f a business enterprise. By establishing strategic relationships between

the components o f the Balance Sheet and profit and loss Account and other

operative data, it unveils the meaning and significance o f the various items

embodied in the financial statements-the financial blue prints’ - o f a business

concern (Wessel, 1961). Financial Analysis consists o f comparisons for the same

company over periods o f time and/or comparisons o f different companies either

in the same industry or in different industries. It may be done for a variety o f

purposes, which may range from a simple analysis o f the short term liquidity

position o f the firm to a comgrehensive assessment o f the strengths and

weaknesses o f the firm in various areas. It is helpful in assessing corporate

excellence, judging credit worthiness, forecasting bond ratings, predicting

bankruptcy and assessing market risk. The financial analysis can be performed

by analysts who work for the firm or by outsiders like investors creditors,

lenders, suppliers, customers, security analysts, academics, re. searchers,

environmental protection organizations, government and other regulatory bodies,

special interest lobbying groups and so on. So the financial analysis, which aims

at measuring the performance o f the organization is intended for both.(a) for

internal use by managementjand (b) for external use by external parties. Exhibit

5.1 list?the parties who are interested in the financial statement analysis, their

focus o f interests and purposes o f analysis; and the nature o f the infom (ation that

they need for taking their decisions. Shareholders and potential investors use the

analysis for investment decision purposes; lenders, and suppliers have an interest

to know whether the company can pay back the amount they lend or supply;

customers are interested in the company’s ability to sustain so that their

warranty, guarantee and quality o f products is ensured; employees are interested

in knowing the position o f the company so that their salary, retirement benefits,

and other incentives and benefits are not in jeopardy; the security analysts focus c.n knowing

Exhibit 5.1Target Audience for Financial Statem ent Analysis

S.No.

Interested Parties Purpose for which information is Required Type of informat'on Required

1. Shareholders and Potential investors

(a) Investment focus: For Investment decisions, i.e. which Shares to buy, retain or sell? At which time should such transactions be made?

(b) Stewardship focus: How does management use resources under its control? Is the capacity fully utilised.

Risk, return, divider d yield liquidity and so on. The share holders want to predict the timing, amounts & uncertainties of future cash flows of the firm. Sustainability of cash flows earnings, etc.

2. Lenders and Suppliers

Do they get back their money in time? What are the prospects of the firm?

Short-term and lone;-term liquidity and profitability.

3. Customers Customers have a vested interest in monitoring the financial viability of firms with which they have long­term relationships e.g. guarantees, warrantees, deferred benefits, etc.

Profitability, liquidity, tBfficiency with which resources are put to use.

4. Security analysts They help shareholders, investors, lenders and auditors. The focus of their attention varies depending upon the needs of their clients.

Risk, return, sustainability of cash flows, efficient management of resources, etc.

5. Government/other regulatory bodies

Revenue raising "{direct and indirect taxes), government contract (cost plus information), regulatory intervention (whether to provide a loan guarantee to a financially distressed firm), equitable resource allocation, etc.

All such information that may help In ascertaining and maintaining good health of the capital market and the economy th ough good corporate qovernaocj.

6. Employees Employees have a vested interest in the continued and profitable operations of the firm. In the long­term, they are interested in pension, stock option, payment of retirement benefits, etc. In the short­term, their focus of attention would be bonus, incentive schemes, etc.

Production, profits, liquidity, solvency, and stability.

7. Management Managers need financial statement information for financial, investment, dividend and operating decision. They also need to estimate the linkages between compensation (or incentives schemes) and financial statement variables such as earnings per share, cash flows per share, etc.

Information for ca| al structure planning, investmt nt decisions, dividend decision, 3‘.c.

Source: Babatosh Banerjee (2005), Financial Policy and Management Accounting, Prentice Hail: 318

the risk and return, sustainability of company’s returns, efficient management of

resources etc. so that they can advise their clients so far as their investment in the

organization’s securities are concerned. Similarly, the govt, is interested to know

whether the company follows the legal norms as a corporate citizen. The

management o f the company uses the financial analysis in taking investment,

financing and dividend decisions, as well as use the input o f an a ly s t in future

planning and control activities (Banerjee, 2005).

T ools o f F inancia l A nalysis

Just like a doctor examines a human being by measuring his body

temperature, blood pressure and making diagnostic tests like X-Ray, ECG,USG,

etc. before making his conclusion regarding the illness, a financial analyst

analyses the financial statements with various tools o f analysis before

commenting upon the financial health or illness o f an enterprise. These tools are

comparative analysis, trend analysis, common size analysis, fund flow analysis,

cash flow analysis and Ratio Analysis. O f all the tools, the most popular

tool/technique is Ratio Analysis.

F in an cia l R atio A nalysisA ratio shows an arithmetical relationship between two figures. It is an

assessment o f the significance o f one figure in relation to the other. It takes the

form o f a quotient by dividing one figure by the other. In financial analysis, these

ratios are customarily expressed in the form o f ‘tim es’, ‘j/.voportion’,

‘percentage’, or ‘per one’. They describe the significant relationship which exists

between figures shown on a Balance Sheet, in a Profit & Loss a/c or 1 any other

part o f the accounting organization (Batty, 1966).

Financial ratios provide the analyst with a very useful tool for gleaning

information from a firm’s financial statements. The particular ratio or ratios

selected for use by the analyst depends upon the reason for pertorming the

analysis. For example, a Commercial Loan Officer analyzing a loan application

would be interested in determining the ability o f the applicant to repay the loan

when due. In this case, the analyst would be concerned with the level o f cash

flow o f the firm in relation to its existing and proposed levels o f interest and

principal payments. There exist an almost limitless number o f conceivable

financial ratios that can be devised. (Bowlin, M artin & ScotL 1990). A

purposeful financial ratio analysis could lead the highlighting o f management

issues and problems and thus aid in identifying alternative courses o f actions for

responding to such issues and problems, and thus aid in identifying, alternative

courses o f actions for responding to such issues and problems. Sucii issues and

problems could give birth to find answers to the following questions:

I. whether the profitability o f the enterprises is satisfactory,

II. whether the enterprise’s financial condition is basically sound?

III. whether the company is credit worthy;

IV. whether the capital structure o f the business is in proper alignment; &

V. whether the companies operations are doing well so far as turnover is concerned.

To answer the above questions to gauge the financial performance o f a

company, various ratios over the years have been developed. These are

profitability ratios, solvency ratios, and liquidity ratios and turn over ratios

(Keown, Martin, Petty & Scott, “2002).

A b rief description o f these ratios is given hereunder:

P rofitab ility R atiosProfitability reflects the final result o f business operations. T h;re are two

types o f profitability ratios: Profit margins ratios and rate o f return 1 itios. Profit

margin ratios show the relationship between profit and sales. The -wo popular

profit margin ratios are: gross profit margin ratio and net profit margii ratio. Rate

o f return ratios reflects the relationship between profit and invest.aent. The

important rate o f return measures are: return on total assets, earning power, and

return on equity.

S o lv en cy R atiosFinancial solvency refers to the use o f debt finance. While debt capital is a

cheaper source o f finance, it is also a riskier source o f finance. Solvency ratios

help in assessing the risk arising from the use o f debt capital. Two types o f ratios

are commonly used to analyse financial solvency: Structural ratios and coverage

ratios. Structural ratios are based on the proportions o f debt and equity in the

financial structure o f the firm. The important structural ratios are: debt-equity

ratio and debt-assets ratio. Coverage ratios show the relationship between debt

servicing commitments and the sources for meeting these burdens. The important

coverage ratios are: interest coverage ratio, fixed charges coverage ratio, and

debt service coverage ratio.

Liquidity R atiosLiquidity refers to the ability o f a firm to meet its obligations in the short

run, usually one year. Liquidity ratios are generally based on the relationship

between current assets (The sources for meeting short-term obli gations) and

current liabilities. The important liquidity ratios are: Current ratio, acid-test ratio,

and bank finance to working capital gap ratio (Chandra, Prasanna-1997).

Turnover R atiosTurnover ratios, also referred to as activity ratios or asset management

ratios, measure how efficiently the assets are employed by a firm. r' hese ratios

are based on the relationship between the level o f activity, represented by sales or

cost o f goods sold, and levels o f various assets. The important turnover ratios

are: inventory turnover, average collection period, receivables turnover, fixed

assets turnover, and total assets turnover.

F in ancia l A nalysis o f BanksSo far as the financial analysis o f a bank is concerned its analysis can be

done with the help o f ratio analysis. Ratio analysis enables the management o f

banks to identify the causes o f the changes in their advances, income, deposits,

expenditure, profits and profitability over the period o f time and thus help in

pinpointing the direction o f action required for increasing the deposi ts, income,

advances and reducing the expenditure and for altering the profitabili;/ prospects

o f the banks in future. To be really helpful and practically useful for vhe bankers,

the package o f ratios should be small in size, simple in calculations., logically

consistent and statistically valid. Over the years, various experts propounded a

plothora o f ratios for analyzing the financial position o f a bank S inkey (1998)

argues that the financial analysis o f a bank can be done with the help o f four

general categories o f ratios viz. profitability ratio, liquidity ratio, leverage ratio

and activity ratio.

Profitability is the most important and reliable indicator as it gives a broad

indication o f the capability o f a bank to increase its earnings. Evaluation of

banking companies in terms o f profitability instead o f profits is better since the

former is obtained after purging with effect o f size variable on the absolute level

profits. It is the relative concept and indicates net profits as percentage of

working funds. It serves as an index to the degree o f asset utilization and

managerial effectiveness by sharing the efficiency with which a bank deploys its

total resources for optimizing its profits (Joo, 1996). Generally, the profitability

is measured with the help o f net interest margin, spread ratios, bui den ratios,>

interest earned and expended as % o f working funds, etc.

The major components o f bank profitability are net interes': margin,

establishment costs, and provisioning and the best route to higher earnings is

through improvement in the net interest margin which is the difference between

interest earnings and interest expenses, expressed as a percentage 01 working

funds. A good margin reflects effective deployment o f high qualiU earning

assets, a judicious mix o f liabilities and good yields (Discussion paper-, Govt, o f

India, 1993) o f late, the most important measure o f profitability has came up as

Return on Equity.

Return on Equity (ROE) measures profitability from the shareholder’s

perspective. Accounting ROE, however, should not be confused with investment

profitability (or return) as measured by dividends and stock-price appreciation.

Accounting ROE measures bank accounting profits per dollar / rupee o f book

equity capital. It is generally defined as net income divided by average equity.

Because ROE can be decomposed into a leverage factor (the equity multiplier, or

EM) and return on assets (ROA), ROE=ROAxEM. Return on assets (ROA),

defined as net income divided by average or total assets, measures bank profits

per dollar o f assets. The equity multiplier (EM) is average assets livided by

average equity, the reciprocal o f the capital- to- asset ratio. It provides a gauge of

bank’s leverage (l-l/EM =debt-to-asset ratio) or the dollar amount o f assets

pyramided on the bank’s base o f equity capital. The equity multipli er provides

the leverage that makes ROE a multiple o f ROA.

The ROE M odel

Return on Equity = Return on A ssets x Equity Multiplier

ROA x EM

= Profit Margin x Asset utilization * Equity Multiplier

PM x A U x EM

N et In com e/ A verage E quity = N et Incom e / O perating Incom e xO perating Incom e

/ Average Assets + Average Assets / Averagi. Equity

R O A a

N e tin c o m e

d iv id e dby

T o ta l in c o m e (R )

m in u s

In te re s t e x p e n s e (C )

D e p o s it

p lus

N o n d e p o s it

m in u s

O p e ra t in g a n d o th e r e x p e n s e s ( O )

m in u s

In c o m e ta x e s (T )

S a la r ie s a n d w s c je s

plus

N e t o c c u p a n c y e x p e n s e s

p lu s

P ro v is io n fo r loar. lo sse s

p lu s

O th e r e x p e n s e s

A U C

T o ta lin c o m e

T o ta lin c o m e

In te re s t a n d fe e s o n lo a n s

p lu s

In te re s t o n in v e s tm e n t

p lu s

S e rv ic e c h a rg e s

p lu s B a la n c e s h e e t

O th e r in c o m e

O ff-b a la n c e s h e e t

d iv id e db y

A v e ra g ea s s e ts

C a s h a n d d u e

p lu s

In v e s tm e n ts

- T a x a b le

p lu s

p lu s

T a x -e x e m p t

L o a n s

plus

O th e r a s s e ts

C o m m e rc ia l a n d in d u s tr

p lu s

C o n s u m e r

p lu s

R e a l e s ta te

p lu s

F a rm

p lu s

O th e r lo a n s

: □

::::a ROA=Return on Assets; b PM -Profit Margin; c AU Asset Utilization.

Source; Sinkey, Joseph F (1998) Commercial Bank Financial Management, Prentice Hall; 91

= Net Income/ Average Assets x Average Assets / Average Equity =Net Income / Average Equity

The ROE model contains three alternative measures o f profitability:

(1) return on equity, (2) return on assets, and (3) profit margin. Because the ratios

ROE, ROA, and PM all have the same numerator (net income), the different

denominators (i.e., average or total equity capital, average or total assets, and

total revenue) simply provide alternative perspectives on the measurement o f

profitability. Accounting ROE measures profitability from the: owner’s

perspective. Its primary shortcoming as a measure o f bank performance is that

ROE can be high because a bank has inadequate equity capital. In addition, a

bank with negative book equity (book insolvency) and positive prcfits would

show a negative return on equity, whereas a bank with negative bool equity and

negative profits would show a positive return on equity. By splitting ROE into

ROA and EM, we can resolve this dilemma. Thus, ROA is the preferred

accounting measure o f overall bank performance. It measures how profitable all

o f a bank’s (on-balance sheet) assets are employed. By splitting ROA into PM

and AU, we focus on the third measure o f profitability, PM, and on asset

utilization, AU, or “ total asset turnover”. (Because banks do not generate sales

volumes greater than their total assets, as most non-financial corporations do,

“asset utilization” describes the ratio better than “asset turnover” ). Given a

bank’s ability to generate revenue (sales) as measured by AU, the profit-margin

component o f the ROE model focuses on a bank’s ability to control expenses.

(Sinkey, 1998).

L iquidity R ating is Based On:-

I. the volatility o f deposits;

II. reliance on interest sensitive funds and level o f borrowings;

III. technical competence relative to structure o f liabilities;

IV. availability o f assets readily convertible into cash and

V. access to money market and other sources o f funds.

Liquidity is evaluated on the basis o f th:: bank’s capacity to promptly meet

the demand payment o f its obligations and to readily satisfy the reasonable credit

needs o f the community it serves. Consideration is given to the overall asset-

liability management strategies and compliance with the laid down policies. The

main liquidity ratios applied are Cash Reserve Ratio (CRR), Liquid Assets to

total Deposits Ratio, Demand deposits to aggregate deposits etc. (Patheja, 1994).

C apital A dequacy / Leverage R atioFor a longtime, the ratio o f capital to deposits was conceived >-.s an ideal

measure o f capital adequacy. However, over-the years, the capital adequacy

norms in terms o f capital deposit ratio was found to be inadequate in as much as

it did not truly reflect the shock absorption capacity o f capital. Even this proved

to be an ineffective indicator as it did not take into account the composition o f

the assets classified in terms o f risk associated with each categoiy o f assets.

These basic inadequacies o f the system gave rise to the present concept o f capital

adequacy o f the banks in terms o f “Risk-Asset Ratio” approach. The modified

concept o f capital adequacy ratio became a key parameter for assessing a bank’s

intrinsic strength. In the current decade because o f the importance o f capital

adequacy ratio, on the basis o f modified concept, has remained poten' subject o f

research for banking economists world over (Joo, 1996).

Capital is rated in relation-to (1) the volume o f risk assets; (2) t ie volume

o f marginal and inferior quality assets; (3) bank growth experience, plans and

prospects and (4) the strength o f the management in terms o f 1 to 3 above.

Consideration is also given to the bank’s capital ratios compared to its peer

group, its earnings retention and its access to capital markets or its other

appropriate sources o f financial assistance (Godse, 1996). Capital adequacy, an

indicator o f long-term solvency, is measured by capital adequacy ratio, leverage

ratio( shareholder’s equity to total capital) net worth protection rate

(Shareholder’s equity to non-performing loan) ( Purohit and M azumdar, 2003).

A ctiv ity R atios

Activity ratios are also known as efficiency ratios. These ratios measure

how efficiently the firm is using its resources like turnover o f working capital

and turnover o f fixed assets etc. (Gupta, R.K. 1990).

C am el Param etres

The recent innovation in the area o f financial performance evaluation o f

banks is CAMEL Rating. Although the system was evolved by US regulating

agencies in 1979, but in recent years it became widely applicable tool in the

hands o f all regulators worldwide. In India, the system was adopted by the RBI

on the recommendations o f the Padmanabhan Committee. Under this system, the

rating o f individual banks is done along five key parameters-capital adequacy,

Asset quality, M anagement Capacity, Earnings analysis, and liquidity-yielding

the rating system ’s acronym, CAMEL (Cole and Gunther, 1996). E ich o f the

five dimension o f performance is rated on a scale o f 1 to 5. Rating 1 denotes that

the bank is fundamentally sound, while the rating 2 signifies that lie bank is

fundamentally sound, but may show modest weaknesses. Rating 3 indicates that

the bank has a combination o f weaknesses fair to moderately severe. The bank

with marginal performance that is significantly below average is rated as 4. The

worst rating is 5, meaning thereby £hat the institution has eritiowi ilnanoml

weaknesses that render the probability o f failure extremely high in the near

future. The aggregate rating is the sum total o f the ratings under all five

components. These ratings 1 to 5 are described as strong, satisfactory, fair,

marginal and unsatisfactory in that order (Godse, 1996). In the present study the

CAMEL Parametres have been used to test the performance o f the banks under £

study. This model has already been applied and proved useful by the researchers

like Cole and Gunther, 1996, Purohit et. al , 2003, Kapil, et.al 2003 and so on.

The CAMEL dimensions as evaluated in the banks under study are discussed as

follows:

CAPITAL ADEQUACY ANALYSIS

Capital adequacy is a reflection o f the inner strength o f a bank, which

would stand it in good stead during times of crisis. Capital adequacy may have a

bearing on the overall performance of a bank, like opening o f new branches,

fresh lending in high risk but profitable areas, manpower recruitment and

diversification of business through subsidiaries or through specially designated

branches, as the RBI could think these operational dimensions to the bank's

capital adequacy achievement (Shankar, 1997). Realizing the importance of

capital adequacy, the Reserve Bank o f India (RBI) issued directive in 1992.

whereby each banks in India was required to meet the capital adequacy standard

of 8%. the norm fixed on the basis of the recommendations o f Basel Committee.

As a sequel to this direction almost all banks in India try to adhere to this norm,

thus compute the ratios o f capital adequacy.

The computation o f capital adequacy ratio is done by taking ratio of

equitv capital and loan loss provisions minus non-performing loans to total

assets. Expressed as a percentage* the ratio shows the ability of a bank to

withstand losses in the value of its assets. The simultaneous monitoring of two

important elements, viz. the level of NPAs and equity capital is facilitated by the

use o f this ratio (Joshi & Joshi. 2002). For computation o f the capital adequacy

ratio, capital is classified as Tier-1 and Tier-2 capitals. Tier-1 capital comprises

the equity capital and free reserves, while Tier-2 capital comprises subordinated

debt o f 5-7 year tenure. The higher the capital adequacy ratio (CAR), the

stronger the bank. However, a very high CAR indicates that the bank is

conservative and has not utilized the full potential of its capital. The capital

adequacy ratios o f the banks under study are giv en in tables 5.1 and 5.2.

TABLE 5.1

CAPITAL ADEQUACY RATIOS OF PUNJAB NATIONAL BANKS.No

Capital Adequacy Ratios 2001 2002 2003 2004 2005 Mean Standard

Deviation

a Capital Adequacy Ratio 10.24% 10.70% 12.02% 13.10% 14.78% 12.16c % 1.843

b Leverage Ratio 1.762 1.682 1.580 1.876 1.827 1.746 0.119

c Net worth protection 7714.235 7768.841 8098.281 10731.622 21813.839 11225 6050

Source: Annual Reports o PNB (2001-2005.)

The position o f capital adequacy o f the Punjab National Ban'; (PNB) has

been measured with the help o f Capital Adequacy Ratio (CAR), Leverage ratio

and N et worth protection. An introspection o f the table 5.1 reveals that the

capital adequacy ratio o f the PNB in the last five years have been well above the

norm o f RBI i.e. 8% level. This ratio has been increasing year after year 10.24%

in the year 2001 and 14.78% in the year 2005. The average o f the five years also

is good 12.16% which seems quite consistent as standard deviation oeing only

1.84.

Similarly the leverage ratio (Total outside liability to shareholders funds

also show a healthy sign; Although the ratio declined from 1.76 in 2001 to 1.68

in 2002, but has picked up in the subsequent years.

However, the mean value o f the leverage ratio is 1.74 with .119 standard

deviation. So far as N et worth protection (Net W orth to Non-Performing assets)

is concerned. The ratio has been all along rising during the period under study

w ith 7714.235 in 2001 to 21813.839 in 2005 with the mean value 11225.To

maintain the capital adequacy, the bank has mobilised capital from the stock

market. Thus the bank has been able to maintain the confidence o f im ustors and

depositors.

The position o f capital adequacy o f the Jammu & Kashmir Bank (JKB)

has been measured with the help o f Capital Adequacy Ratio (CAR), Leverage

( T f T )

ratio and Net worth protection. An introspection o f the table 5.2 reveals that the

capital adequacy ratio o f the JKB in the last five years has been well above the

norm o f RBI i.e. 8% level, although decreasing year after year I 7 .44% in the

year 2001 and 15.15% in the year 2005. But still it is comfortably much above

the minimum stipulated standard. The average o f the five years a'so is good

16.28% which seems quite consistent as standard deviation being only .961.

T A B L E 5.2

C A P IT A L A D E Q U A C Y R A T IO S O F JA M M U & K A SH M IR B A N K

s.No.

CapitalAdequacy Ratios 2001 2002 2003 2004 2005 Mean Standard

Deviation

a Capital Adequacy Ratio 17.44% 15.46% 16.48% 16.88% 15.15% 16.282% 0.961

b Leverage Ratio 1.217 0.907 0.706 0.596 0.702 0.828 0.246

c Net worth protection 28,786.493 39,539.240 49,090.758 55,725.052 52,536.343 45136 10968

Source: Annual Reports of JKB (2001-2005)

Similarly, the leverage ratio (Total outside liability to shareholders funds)

also shows a bit weak sign as the ratio declined from 1.21 in 2001 to 0.90 in

2002 and has gone down in the subsequent years. The mean value o f the leverage

ratio is .82 with .246 standard deviation. The bank needs to be careful here about

the declining trend o f leverage ratio. So far as Net worth protection (Net worth to>

Non-performing assets) is concerned, the ratio has been all along rising during

the period under study with 28786.493 in 2001 to 52536.343 in 200.* with the

mean value 45136. To maintain the capital adequacy, the bank has mobilised

capital from the stock market. Thus the bank has been able to maintain the

confidence o f investors and depositors. Also the bank continued its efforts to

reduce its non-performing assets. W ith the strenuous efforts and enhanced

recovery drive coupled with stress on sound asset quality and prevention o f fresh

slippages, the bank has been able to further reduce its NPA level. Which has

strengthened its capital base as otherwise too many loss making efforts would

have eroded the capital position o f the bank.

A sset Q uality A nalysisAsset quality is another important aspect o f the evaluation o f a bank’s

performance under the Reserve Bank o f India guidelines, the advances o f a bank

are to be disclosed in a classified manner as:

(i) Standard

(ii) Sub-Standard

(iii) Doubtful and loss asset

(i) Standard Asset/Advance

Standard assets are those assets that are performing and loar t;e is paying

interest and installment at due date, further they do not carry more than normal

risk. Formerly, no provisions were required. However, banks will r.ow have to

make a general provision o f 0.25 percent on standard assets as well.

(ii) Sub-Standard Asset/Advance

Sub-standard assets are those assets that have been classified as non­

performing for a period less than or equal to three quarters. In sud i cases, the

current networth o f the borrower/guarantor or the current market value o f the

security charged is not enough to ensure recovery fully. It has full)' developed

weaknesses that jeopardize the liquidation o f a debt.

(iii) Doubtful Asset/AdvanceDoubtful assets are those assets that have remained substandard for 18

months. The provision o f 100% of the provisions are to be made by the realizable

value o f the security to which a bank has recourse. The provisions for this is to

be done as:

First year o f doubtful status ----- Deficit 4 20% o f security

Second year o f doubtful status ----- Deficit + 30% o f ; 'jcurity

Third year o f doubtful status ----- Deficit + 50% ol i. ecurity.

(iv) Loss Asset/AdvanceLoss assets are the ones where loss has been identified but the amount has

not been written off wholly or partly. Such an asset is ui collectible/

unrecoverable and o f such little value that its continuance as a bankable asset is

not warranted although there may be some salvage value. Since the loss assets

are to be written off, 100% provision needs to be made for loss asset s

Under the above classification, the advance/asset which cease to earn

income/interest is termed as non-performing asset and a bank hay to keep a

provision for its probable loss. More NPAs means more sub-standard, doubtful

and loss assets which is total for the future financial performance o f a bank.

Therefore, keeping the NPAs minimum should be the attempt o f ev er/ conscious

bank. The main ratios o f asset quality o f the banks under study is given in tables

5.3 and 5.4.

TA BLE 5.3

A SSET Q U A LITY R A TIO S O F PU N JA B N A TIO N A L BA NK

s.No Asset Quality Ratios. 2001 2002 2003 2004 2005 Mean

StandardDeviation

a Net NPA to NET Advances 6.74% 5.32% 3.86% 0.98% 0.20% 3.42% 2.79

b Loan Loss Cover 9.415% 9.452% 9.497% 8.587% 4.490% 8.288% 2.156

The analysis in table 5.3 reveals that the PNB has been successful to

manage its NPAs. The Net NPAs which were 6.74% o f total Net advan.'-es o f the

bank in 2001 have comedown to 0.20% in 2005. This has been possible by using

various strategies by the bank. The bank through a well defined .Recovery

M anagement Policy, was able to effect reduction o f Rs 1647 crore in NPAs

during the year as against Rs 1354 crore last year. NPAs with outstanding o f Rs. 1

crore and above continued to be monitored at corporate level. The Dank also

made effective use o f the Securitization and Reconstruction o f Financial Assets

and Enforcement o f Security Interest Act 2002(SARFAESI) to accelerate

reduction o f NPAs. For enforcement o f security interest under SARFAESI Act,

notices were issued to 9640 defaulters and consequently a large number o f

borrowers came forward for resolution of their accounts. Sale o f financ al assets

to Asset Reconstruction Company (ARC) enabled the bank to take o ff NPAs

from its books and release funds for further recycling. During the year, 34 non-

performing loans amounting to Rs. 239 crore were sold to ARC.

M oreover, under the scheme o f one time settlement o f the cases for small

and marginal farmers, NPAs to the tune o f Rs. 513 lakhs were cleared during the

period 2004-2005.

Thus the bank has been able to manage the Net NPA to Net Advances at

an average o f 3.42%.

To be secure and safe the bank has been maintaining the provisions for

NPAs as per norms fixed by RBI. It has been in a position to consistently

m aintain such provision with 9.415% o f Gross NPAs in 2001 with an average o f

8.28% having standard deviation o f 2.156. In this way the asset quality' position

o f the bank seems good as the loan loss cover for NPAs has been provided prudently.

Under RB I’s non-discretionary and non-discriminatory guidelines for

compromise settlements, there was an encouraging response from the borrowers.

During April-October, 2004, settlements were approved in 2610-cases for Rs.

44.46 crore.

Recovery o f NPAs received focussed attention. Apart from other recovery

efforts, the bank also organized 20661 Recovery Camps during the year 2004-05

compared to 17125 camps organized in the previous year. In most o f such camps

locally elected representatives also participated. Awareness campaigns for

recovery were also launched in different Zones. Besides these, services o f Debt

Recovery Tribunals and hok Adalats were also utilized for supplementing the

recovery efforts. The bank also initiated the process o f engaging Recovery

Agencies for effecting recovery in NPAs. A special drive was launched in the

bank towards execution of decrees allowed by the courts. In deserving cases,

restructuring o f debts under CDR mechanism was pursued with encouraging

results.

TABLE 5.4

ASSET QUALITY RATIOS OF JAMMU & KASHMIR BANK

S.No Asset Quality Ratios. 2001 2002 2003 2004 2005 Mean Standard

Deviation

a Net NPA to Net Advances 2.45% 1.88% 1.58% 1.48% 1.41% 1.760% 0.425

b Loan Loss Cover 8.691% 11.552% 5.110% 10.374% 11.902% 9.52% 2.77

Source: Annual Reports of PNB (2001-2005)

The analysis in table 5.4 reveals that the JKB has been successful to

manage its NPAs. The Net NPAs which were 2.45% o f total Net advances o f the

bank in 2001 have comedown to 1.41% in 2005. This has been possible by using

various strategies by the bank. The bank continued its efforts to reduce its non­

performing assets. With the strenuous efforts and enhanced recovery drive, the

bank has been able to further reduce its NPA level. Thus the bank has been

successful to manage the Net NPA to Net Advances at an average o f 1.76%. To

be secure and safe, the bank has been maintaining the provisions for NPAs as per

norms fixed by RBI. It has been in a position to consistently maintain such

provision with 8.691% o f Gross NPAs in 2001 with an average o f 9.52% having

standard deviation o f 2.77. In this way, the asset quality position o f the bank

seems quite good as the loan loss cover for NPAs has been provided prudently.

M anagem ent C apability R atiosThe Performance o f Management capacity is usually qualitative and can

be understood through the subjective evaluation o f M anagement systems,

organization culture, control mechanisms and so on. However, the capacity o f the

management o f a bank can also be gauged with the help o f certain ratios o f off-

site evaluation o f a bank. The capability o f the management to deploy its

resources, aggressively to maximize the income, utilize the facilities in the bank

productively and reduce costs etc. (Purohit, et.al-2003).

This can be evaluated with reference to the following ratios given in tables

5.5, 5.6. 5.7 and 5.8.

M ANAGEM ENT CAPABILITY RATIOS OF PUNJAB NATIONAL BANK

Growth in Various Parameters

S.No 2001 2002 2003 2004 2005 Compound

growth rate

a Advances 280,29.0530 343,69.4161 402,28.1209 472,24.7197 604,12.75.4 16%

b Deposits 56131.1302 64123.4752 75813.4973 87916.3958 103166.8869 13%

c Business 84160.1832 98492.8913 116041.6182 135141.1155 163579.6383 14%

d Total Expenses 5696.6912 6151.7862 6418.0244 6525.7167 7428.3229 5%

e Operating Profit 945.2087 1473.8010 2317.2946 3120.8582 2707.2064 24%

f Net Profit 463.6434 562.3891 842.2002 1108.6904 1410.1201 24%

9 E.P.S 21.85 26.49 31.74 41.79 44.72 15%

Source: Annua Reports of PNB (2001-2005)

TABLE 5.6

M ANAGEM ENT CAPABILITY RATIOS OF PUNJAB NATIONAL BANK

S.No

Mgt. Capability Ratios 2001 2002 2003 2004 2005 Moan StandardDeviation

aExpenditure to Income Ratio

0.857 0.806 0.734 0.676 0.732 C.762 0.071

b Credit- Deposit Ratio 0.499 0.535 0.530 0.537 0.585 0.540 0.032c Asset Utilization Ratio 0.104 0.104 0.101 0.094 0.080 0.0&4 0.008d Diversification Ratio 11.719% 12.821% 14.313% 19.360% 16.532% 14.95% 3.05e Earnings per employee 79.514 97.t99 142.791 188.427 241.752 149.9 66.5

fExpenditure per employee

976.983 1063.237 1088.151 1109.080 1273.521 1102.2 108.2

Source: Annual Reports oi PNB (2001 -2005)

In the table 5.5, it is exhibited that the PNB has been a quite successful

bank so far as its business is concerned. During the period under reference the

bank has been able to mark a rising trend in its advances and depos ts with Rs.

28029.05 crores, and 56131.13 crores respectively in the year 2001 to Rs.

60412.75 crores and 103166.88 crores in 2005. Thus advances and deposits have

registered a compound growth rate o f 16% and 13% respectively, with the total

fund based business (advances + deposits) marking a growth o f 14% p.a.

The management has been successful to manage a compound growth rate

o f 24% in its operating and Net profits but keeping the total expen:; ss under

control, as they grew only at a growth rate o f 5% p.a. In the similar way, the

efficiency o f the management is explained by the growth o f earning p ,v share it

grew at about 15% o f compound growth rate.

The M anagement Capacity has also been explained in the table 5.6 with

the help o f various productivity rates, like expenditure to Income ratio, credit

deposit ratio, asset utilization ratio, Diversification ratio, earnings per employee

and expenditure per employee. The ratio o f expenditure visa-viz to Income which

was 0.857 in 2001 has gone down to 0.732, in 2005 explaining thereby that for

every rupee generated as income only 0.85 paise were incurred as cost :n 2001

and so on. The mean value o f this ratio is 0.76 with minor standard deviation o f

.071 is an encouraging fact. The credit deposit ratio which was 0.499 in 2001 has

slightly improved to 0.585 in 2005 with the mean value 0.540 slow s its

consistency during the period under study. However, the asset utilization ratio

which was 0.104 in 2001 has shown a declining trend as it has come :ow n to

0.080 in 2005, but the mean value o f the ratio remains by and large consistent at

0.09 level. Since modern days, the opportunities o f sustaining on spread are

squeezing day in and day out, the success o f any bank lies in diversifying its

business from fund based business to the fee based business. In this direction, the

bank understudy has also achieved good results as the ratio o f non-interest

income to total income has increased from 11.71% in 2001 to 16.53% in 2005.

This ratio has shown consistency with the average o f 14.95% having a Standard

deviation o f 3.05.The trend in the productivity o f employees so far as earnings

are concerned are significantly improved. The earnings per employee were 79.51

in 2001 which has gone up to 241.75 in the year 2005, with the mean value

149.9. However, the expenditure per employee has gone up from 976.98 , i 2001

to 1273.52 in 2005 which needs to be taken care of.

MANAGEMENT CAPABILITY RATIOS OF JAMMU & KASHMIR BANKGrowth in various Param eters

s.No 2001 2002 2003 2004 2005 Compound

growth rate

a Advances 47,62.89,58 64,23.88,51 80,10.94,95 92,84.93,62 1,15,17.14,13 24%

b Deposits 1,11,68.08,26 1,29,11.11,17 1,46,74.89,96 1,86,61.38,38 2,16,44.97,'// 14%

c Business 159,30.9,784 193,34.9,968 226,85.8,491 279,46.3,200 331,62.1,140 16%

d Total Expenses 8,84.4,829 11,49.6,214 11,60.8,345 11,94.5,257 12,75.7,917 7%

e Operating Profit 2,72.7,951 4,61.2,419 5,53.7,241 6,28.4,207 3,55.4,660 5%

f Net Profit 1,67.56,19 2,59.80,09 3,37.75,09 4,06.33,00 1,15.06, £0 1%

9 E.P.S 34.83 53.94 70.07 84.22 23.72 1%

Source: Annual Reports of JKB (2001-2005)

In the table 5.7, it is exhibited that the JKB has been a quite successful

bank so far as its fund based business is concerned. During the period under

reference, the bank’s business has shown a rising trend in its advances and

deposits with Rs. 4762.89 crores, and 11168.08 crores-respectively t i the year

2001 to Rs. 11517.14 crores and 21644.97 crores in 2005. The advances have

registered a compound growth rate o f 24% and a growth rate o f 14% s observed

in case o f deposits, with the total business marking a growth o f 16% p.a. A

further analysis o f the table reveals that management has been successful to

manage a compound growth rate o f 5% and 1% in its operating profits and Net

Profits and keeping the total expenses under control, as the expenditure only

grew at a growth rate o f 7% p.a. In the similar way, the efficiency o f the

m anagem ent is explained by the growth o f earning per share which grew at about

1% o f compound growth rate.

The M anagement capacity has also been explained in the table 5.8 with

the help o f various productivity ratios, like expenditure to Income ratio, credit

deposit ratio, asset utilization ratio, diversification ratio, earnings per employee

and expenditure per employee. The ratio o f expenditure vis-a-vis o Income

which was 0.764 in-2001 has gone slightly up to 0.782 in 2005, explaining

thereby that for every rupee generated as income only 0.76 paise were incurred

as cost in 2001 and so on. The mean value o f this ratio is 0.71, with minor

standard deviation o f .051 is an encouraging fact. The credit deposit . atio which

was 0.426 in 2001 has slightly improved to 0.532 in 2005 w ith the mean value

0.48 shows its consistency during the period under study. However, the asset

utilization ratio which was 0.090 in 2001 has shown a declining trend as it has

come down to 0.066 in 2005, but the mean value o f the ratio remains by and

large consistent.

So far as diversifying the business from fund based to fee based, the JKB

has not achieved good performance in the last two years as the ratio o f non­

interest income to total income has decreased from 6.97% in 2001 to 5.02% in

2005. This ratio is highly skewed, with the average o f 12.25% having a standard

deviation o f 5.75.

TABLE 5.8

MANAGEMENT CAPABILITY RATIOS OF JAMMU & KASHMIR BANKS.No Mgt Capability Ratios 2001 2002 2003 2004 2005 Mean

Standarddeviation

a Expenditure to Income Ratio 0.764 0.713 0.677 0.655 0.782 0.718 0.051

b Credit-Deposit Ratio 0.426 J3.497 0.645 0.497 0.532 0.502 0.045

c Asset Utilization Ratio 0.090 0.109 0.102 0.085 0.066 0.092 0.014

d Diversification Ratio 6.979% 15.961% 16.750% 16.550% 5.028% 12.25% 5.75

e Earnings per employee 258.982 400.001 474.902 573.507 167.421 375.0 163.2

f Expenditure per employee 1367.052 1770.009 1632.219 1685.992 1856.237 1662.3 185.6

Source: Annual Reports of JKB (2001-2005)

The trend in the productivity o f employees so far as Earnings are

concerned have gone done. The earnings per employee were 258.98 in 2001

which has gone upto Rs. 573.50 in 2004, however, declined to Rs. 167.42 in the

year 2005, w ith the mean value 375.0. Similarly, the expenditure per employee

has gone up from 1367.05 in 2001 to 1856.23 in 2005 which needs to be taken

care o f i f the banks wants to be successful in the long run.

Earnings R atios

The Earnings/Profit’ is a Conventional Parameter o f measuring financial

performance. Higher income generally reflects a lack o f financial difficulties and

so would be expected to reduce the likelihood o f failure o f a bank (Cole and

Gunther, 1996). In the pre-liberalization phase (before 1991), interest income

used to be reckoned on accrual basis with little variation therein. In the absence

o f any uniform norm on provisioning against bad debts and depreciation in

investment, the variation in accounting profit was mainly due to provisions and

contingencies. Some semblance o f uniformity was first introduced in 1992-93

with the phased implementation o f prudential accounting standards which

however brought about a wide variation in the current period income, -is interest

income was henceforth required tc be reckoned on a realization basis. This is

reflected in the emergence o f operational performance measure in th>-: shape o f

earnings analysis (Hansda, 1995). The earnings analysis has beer, done by

analysts like Sankaranarayan, (1995). Business India Study (2002), Kapil et.al,

(2003), Parera, et.al (2005), M ohite Vikram (2005), and so on, with ihe help o f

various accounting ratios. However, for the present study the accour ling ratios

calculated for the purpose o f earnings analysis are depicted in tab k s 5.9 and

5.10.

TABLE 5.9

EARNINGS (PROFITABILITY) RATIOS OF PUNJAB NATIONAL BANK

S.No.

Earnings Ratios 2001 2002 2003 2004 2005 MeanStandardDeviation

1 R.0.A 0.729% 0.771% 0.976% 1.083% 1.117% 0.936% 0.177

2 R.O.E 13.027% 12.793% 14.970% 15.043% 13.424% 13.850% 1.078

3 (a) Spread Ratio 0.306 0.300 0.357 0.375 0.395 0.350 0.043

(b) Net Interest Margin 0.032 0.031 0.036 0.035 0.031 0.034 0.005

Source: Annual Reports of PNB (2001-2005)

It is exhibited in the table 5.9 that the return on assets which hi equal to

Net profit to working funds has significantly gone up from 0.729% to 1.117% in

the year 2001 to 2005, with the mean value o f 0.93% having consistency, as the

standard deviation is 0.177. However, the return on shareholders funds (R.O.E)

has by and large remained constant with the mean value o f 13.85%. I >. this way it

seems the profitability o f the bank is quite satisfactory. A further analysis o f the

table 5.9 reveals that the spread i.e. Interest earned on loans minus interest paid

on deposits has been constantly rising from 0.306 in 2001 to 0.395 in 2005, with

the mean value o f .35 having a standard deviation o f .043. Similarly, the

contribution o f the spread vis-a-vis to total earning asset has sligh ; ly shown a

down trend from 0.032 in 2001 to 0.031 in the year 2005, with the mean value of 0.03.

TA BLE 5.10

EA R N IN G S (P R O F IT A B IL IT Y ) R A TIO S O F JA M M U & K A SH M IR BANKS.No.

Earnings Ratios 2001 2002 2003 2004 2005 Mean StandardDeviation

1 R.O.A 1.317% 1.767% 2.111% 1.916% 0.470% 1.498% 0.633

2 R.O.E 21.304% 25.369% 25.413% 24.175% 6.566% 20.57% 8.00

3 (a) Spread Ratio 0.308 0.272 0.307 0.340 0.365 0.320 0.037

(b) Net Interest Margin 0.028 0.029 0.031 0.029 0.024 0.028 0.004

Source: Annual Reports of JKB (2001-2005)

It is exhibited in the table 5.10 that the return on assets which is equal to

N et Profit to working funds has gone down from 1.317% to 0.470% in the year

2001 to 2005, with the mean value of 1.49% having consistency, as tlia standard

deviation is 0.633. However, the return on shareholders funds (R.O.E) has by and

large remained constant with the mean value o f 20.57%. In this way, it seems the

profitability o f the bank is quite satisfactory. A further analysis o f tin- table 5.10

reveals that the spread i.e. Interest earned on loans minus interest paid on

deposits has been constantly rising from 0.308 in 2001 to 0.365 in the year 2005,

with the mean value ol .32 having a standard deviation o f .037. Sintilarly, the

contribution of the spread vis-a-vis to total earning asset has slightly shown a

down trend from 0.028 in 2001 to 0.024 in the year 2005, with the mean value of .02.

L iquidity R atios

a) The ability o f a bank to provide liquidity requires the existenc e o f a highly

liquid and readily transferable stock o f financial assets. L iquidity and

transferability are the key ingredients for such transactions. The liquidity

requirement means that financial assets must be available to owners on

short notice (a day or less) at par. The transferability requirement means

that ownership rights in financial assets must be portable, at par, to other

economic agents, and in a form acceptable to the other party (Sinkey,

Joseph F, JR. 1998).

b) Liquid assets such as investment securities, enable a bank fo respond

quickly to unexpected demands for cash and typically reflect. relatively

conservative financial strategies, whereas volatile liabilities, si.oh as large

certificates o f deposits, often reflect relatively aggressivi; financial

strategies impose high interest expenses, and are subject to quick

withdrawal. As a result, we expect higher values o f investment securities

to reduce the chance o f failure, whereas higher values o f large certificates

o f deposit should increase the probability o f failure (Cole and Gunther,

1996). Thus liquidity management is one o f the most important functions

o f a bank. I f funds tapped are not properly utilized, the institution should

suffer loss. Idle cash balance in hand has no yield. On the other hand if the

bank does not keep balanced liquid cash in hand, it cannot be able to pay

the demand withdrawal o f depositors, as well as, instalment o f creditors

and ultimately payment for other contingent liabilities. These will lead

overtrading position to the institution and create problems to borrow funds

at high rate. So proper balanced liquidity should be maintained by

avoiding inadequate cash position, or excess cash position (Panigrahi,

1996). The liquidity position o f the banks understudy is presented in

tables 5.11 and 5.12 .

TABLE 5.11

LIQUIDITY RATIOS OF PUNJAB NATIONAL BANK

S.No. Liquidity Ratios 2001 2002 2003 2004 2005 Mean Standard

Deviation

a Liquid Assets to total Assets Ratio. 0.095 0.087 0.093 0.086 0.064 0.086 0.015

b Govt. & other Securities to total Assets. (Investment to total Assets)

0.392 0,383 0.392 0.409 0.398 0.394 0.011

c Liquid Assets to Deposits 0.108 0.099 0.106 0.100 0.078 0.100 0.012

d Investment to Deposits. 0.443 0.436 0.445 0.476 0.488 0.460 0.023

Source: Annual Reports of PNB (2001-2005)

In the table 5.11, it is depicted that the liquid assets which consist o f cash,

balances with RBI and other banks as well as money at call and short notice,

formed Re 0.095 vis-a-vis to rupee 1 (total assets). This ratio has go, e down in

2005 0.064, but at an average it has remained consistent with average 0.08. The

investment in Govt, and other securities held by the bank vis-a-vis to total assets

are clear indicators o f banks liquidity position, as this investment ratio has

remained consistent around an average o f 0.39. The total liquid assets

(combination o f the above two ratios vis-a-vis to depositors has brought the fact

to the forefront that the bank has the ability to meet any eventuality in case o f

depositors demand cash/liquid assets, as this ratio has also remained by and large

consistent at an average o f 0.10 with the standard deviation o f 0.012. Similarly,

the investment in securities (Govt, as well others) shows a satisfactory position

o f the bank as the ratio o f investment in securities compared to deposits also

remained consistent around an average o f 0.46 with 0.023 standard deviation.

In the table 5.12, it is depicted that the liquid assets which consist o f cash,

balances with RBI and other banks as well as money at call and short notice,

formed Re. 0.161 vis-a-vis to (total assets). This ratio has gone do\vn in 2005

0.129, but at an average it has remained consistent with average 0.13. The

investment in Govt, and other securities held by the bank vis-a-vis to votal assets

are clear indicators o f banks liquidity position, as this investment ratio has

remained consistent around an average o f 0.39. The total liqu d assets

(combination o f the above two ratios v is -a -v is to d ep o s ito rs h as e x p o s e d t i e fact that

the bank has the ability to meet any eventuality in case o f depositors demand for

cash/liquid assets, as this ratio has also remained by and large consistent at an

average o f 0.14 with the standard deviation o f 0.029. Similarly, the investment in

securities (Govt, as well others) shows a satisfactory position o f the bank as the

ratio o f investment in securities compared to deposits also remained consistent

around an average o f 0.45 with 0.022 standard deviation.

TABLE 5.12

LIQUIDITY RATIOS OF JAMMU AND KASHMIR BANK

S.No. Liquidity Ratios 2001 2002 2003 2004 2005 Mean Standard

Deviation

a Liquid Assets to total Assets Ratio.

0.161 0.133 0.090 0.137 0.129 0.130 0.025

bGovt. & other Securities to total Assets. (Investment to total Assets)

0.421 0.390 0.400 0.398 0.370 0.396 0.018

c Liquid Assets to Deposits 0.184 0.152 0.103 0.156 0.146 0.148 0.029

d Investment to Deposits. 0.480 0.444 0.458 0.452 0.419 0.450 0.022

Source: Annual Reports of JKB (2001-2005)

O verall F in ancia l Perform ance o f th e Banks u nderstudy

The overall Financial Performance o f the Banks as exhibited n the table

5.13 reveals that both the Banks have maintained their capital adequacy ratio

well above the RBI standard o f 10%. The other three ratios viz Expenditure to

Income, N et Interest Margin, and Return on Assets show a mixture oi behaviour,

some are more in PNB and less in JKB and vice-versa. However, the overall

Index (which has been calculated by dividing the average o f individual banks by

the average o f all items o f both banks in part first o f table 5.13) which is more in

case o f PNB compare to JKB but part second and part third in the table show a

reverse trend.

Table 5.13

OVERALL FINANCIAL PERFORMANCE OF THE BANKS UNDERSTUDY

PNB JKB

Capital Adequacy 12.16 16.28

Expenditure/Income 76.2 71.8

Parti Net Interest Margin 3.4 2.8

Return on Assets 0.93 1.49

Overall Index 1.006 0.998

Rank 1 2

NPA to Net Advances 3.42 1.76

Part II Index 3.42 1.76

Rank 2 1

Part III Liquid assets to Total Deposits 10.00 14.8

Rank 2 1

Source: Annua] Reports of PNB and JKB (2001-2005).

Note: Overall Performance Index has been calculated by dividing the average of individual banks by theaverage of all items of both banks in Part I.

>

C onclusionThe analysis and the discussion in the preceding pages reveals that both

the banks are financially viable as both have adopted prudent policies o f financial

management. Both the banks have managed their capital adequacy ratio well

above the minimum standard o f 10% fixed by RBI. The average leverage ratio in

case o f PNB is more (1.746) compared to JKB (0.828).

So far as Asset quality is concerned both the banks have shown significant

performance. The PNB has been able to maintain the ratio o f Net NPAs to Net

advances at 3.42%. The JKB bank has been more efficient by maintaining the

average ratio o f Net NPAs to Net advances at 1.760%. Similarly, the average

loan loss cover maintained by JKB (9.52%) is more than that o f PNB (8.288%).

The business (Advances + Deposits) o f the PNB and the JKB have

registered a compound growth rate o f 14% & 16% respectively. However, the

compound growth rate o f operating profit has been 24% in PNB and 5% in JKB.

The PNB has succeeded in diversifying its business from fund-based to fee-based

activities and registered an average income o f 14.95% while as JKB has

generated 12.25% from this activity. The JKB, in view o f the squeezing o f spread

scenario needs to add more fee based products and services in its portfolio.

However, the productivity ratios like earnings per employee and expenditure per

employee are more in case o f JKB compare to the PNB.

The PNB has generated an average Net Interest margin o f 0.034 compare

to 0.028 generated by JKB. However, return on assets is more (1.498%) in case

o f JKB compare to PNB (0.936%).

The spread management shows that PNB has received more interest on

advances vis-a-vis interest paid on deposits, the average spread ratio being 0.350.

With average spread ratio o f 0.320, the JKB has not been as successful as PNB in

the management o f its spread (interest received-interest paid).

The liquidity in a bank is what is blood in a human body. The bank should

be in a position to meet its liability holders as an when demand arises. Thus the

appropriate mixture o f liquid and non liquid asset is maintained. For this an

appropriate strategy o f liability and assets management is designed. The liquidity

position o f JKB, with 0.148 liquid assets to deposits ratio is better than the PNB

where the same ratio is only 0.100. However, the investment to deposit ratio is

better in PNB (0.460) compare to JKB (0.450).

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