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I N F I N E E T I R e s e a r c h M a g a z i n e | A n n u a l I s s u e 2 0 1 1I N F I N E E T I R e s e a r c h M a g a z i n e | A n n u a l I s s u e 2 0 1 1

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Abstrac t :I ndian economy has provided

t r e m e n d o u s g r o w t h o p p o r -

tunit ies for a l l the industr ies

o v e r t h e l a s t t w o d e c a d e s .

S cheduled commercia l banks

i n I n d i a h a ve u s e d t h e p l a t -

form provided by the economy

a n d h a v e g r o w n a t a f a s t e r

t h a n m a n y s e c t o r s . B a n k i n g

s t o c k s h a v e i d e a l l y b e c o m e

o n e o f t h e b e s t c h o i c e s f o r

i n v e s t o r s . T h e r e t u r n s o f

b a n k i n g s t o c k s w e r e o n e o f

t h e h i g h e s t i n t h e m a r k e t i n

l a s t d e c a d e ( C A G R o f 2 7 % ) .

T h o u g h b a n k i n g u n i v e r s e

i n I n d i a i s h i g h l y re g u l a t e d ,

there were s igni f icant d i f fer-

e n c e s e x i s t i n t h e i r u n d e r -

l y i n g o p e r a t i o n s a n d h e n c e

their per formance. This paper

a ims at per for mance rank ing

o f I n d i a n C o m m e r c i a l b a n k s

b a s e d o n s t a t i s t i c a l p a r a m -

e t e r s ( q u a n t i t a t i v e p a r a m e -

ters) for each year f rom 2008

to 2011. Based on the changes

i n t h e r a n k i n g , t h e p a p e r

t r ies to show the cor re lat ion

bet ween the rank ing changes

a n d t h e m a r k e t v a l u a t i o n o f

the respec t ive stocks through

the corresponding changes in

t h e P / B V ( Pr i c e / B o o k v a l u e )

o f t h o s e s t o c k s . Th e r a n k i n g

model i s based on Analyt ica l

h ierarchica l process method.

We h a v e u s e d q u a n t i t a t i v e

parameters in AHP method to

rank the banks

I ntroduc t ion :

O v e r t h e l a s t t w o d e c a d e s ,

I n d i a n b a n k s h a v e c a p i t a l -

i z e d o n t h e g r o w t h o f t h e

I n d i a n e c o n o m y a n d g r o w n

a t a f a s t e r p a c e t h a n m a n y

o t h e r i n d u s t r i e s . E c o n o m i c

grow t h g ave ra i s e to grow t h

o f ca p i t a l m ar k e ts w h ic h t h e

b a n k s u s e d f o r c a p i t a l i z i n g

t h e i r g r o w t h . T h e b a n k i n g

s e c t o r h a s m a d e t r e m e n -

d o u s s u c c e s s i n t h e r e c e n t

past as many of the commer-

c i a l b a n k s t h a t a p p r o a c h e d

t h e c a p i t a l m a r k e t t h r o u g h

p u b l i c o f f e r s a n d q u a l i f i e d

inst itutional placements (QIP)

t o r a i s e t h e i r c a p i t a l b a s e .

C a p i t a l m a r k e t s s h o we d t re -

m e n d o u s r e s p o n s e w h e n -

e ve r I n d i a n g o ve r n m e n t l i q -

uidated i ts equit y posit ion in

the publ ic sec tor banks (PSB) .

The re - capita l izat ion success

o f t h e b a n k s w a s a l m o s t

s i m u l t a n e o u s l y f o l l o w e d b y

increased demand for banking

s e c to r s to c k s t h e re by g i v i n g

r i s e t o i n c r e a s e d m a r k e t

p r i c e s o f b a n k i n g s h a r e s ,

i n c re a s e d e a r n i n g s a n d to t a l

m a r k e t t u r n o v e r w h i c h i s

h i g h e s t a m o n g a l l s e c t o r s

stocks. According to the latest

market condit ions, Aggregate

bank ing stocks have a weight

o f 3 0 p e rce n t a p p rox i m a te l y

i n t h e t o t a l m a r k e t c a p o f

Bombay stock exchange. Thus,

bank ing stocks are one of the

most traded and most watched

in the market . Nat ional stock

e xc h a n g e h a s c re a t e d a s e c -

to r i a l I n d e x a s “ B A N K N I F T Y ”

w h i c h c o m p r i s e s o f a l l t h e

l i s ted bank`s stocks.

Indian Banking universe is one

o f t h e h i g h l y r e g u l a t e d a n d

s t a b l e i n t h e w o r l d . T h o u g h

b a n k i n g u n i ve r s e i n I n d i a i s

h i g h l y re g u l ate d, t h e re we re

s i g n i f i c a n t d i f f e r e n c e s e x i s t

i n t h e i r u n d e r l y i n g o p e r a -

t i o n s a n d h e n c e t h e i r f i n a n -

c i a l p e r f o r m a n c e . T h e i d e a

behind publ ishing rank ings is

to provide an oppor tunit y to

benchmark once per formance

A Framework for I ndian Commercia l Banks Per formance R ank ing and Study of Correlat ion of I nvestor Percept ion with Per formance R ank ing-

By Sanjeev kumar V, Senthi l Kumar Subramanian.

( The authors are student of PGDIM,NITIE . The ar t ic le i s the winning entr y of Nat ional Research Paper Competit ion organized by INIF INEE TI )


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grouped var ious per formance

p a r a m e t e r s u n d e r d i f f e r e n t

clusters vis. Capital Adequacy,

A s s e t Q u a l i t y , F i n a n c i a l

Ef f ic ienc y, Earnings

P a r a m e t e r s , L i q u i d i t y

Parameters , Operat ional e f f i -

c i e n c y a n d G r o w t h p a r a m -

e t e r s . I n t h i s p a p e r we h a ve

u s e d A H P t o c r e a t i n g t h e

r a n k i n g m o d e l . A H P m e t h o d

( s a a t y, 1 9 8 0 ) i s o n e o f t h e

most commonly used methods

f o r d e c i s i o n m a k i n g w h e r e

multiple attr ibutes are used to

make the dec is ion . The dec i -

sion making process is divided

i n t o m u l t i p l e s t e p s a n d t h e

p ro b l e m i s d e co m p o s e d i nto

h i e r a r c h y s t r u c t u r e w h i c h

consists of the e lements such

as : the goal , the cr i ter ia (sub -

cr i ter ia) and the a l ternat ives.

AHP is a mathematical model

in which we can ass ign pr ior i -

t ies to the parameters used in

decis ion mak ing.

AHP method is used to rank the

di f ferent c lusters and param-

e t e r s w i t h i n e a c h c l u s t e r .

Accordingly, with the arr ived

w e i g h t s f o r p a r a m e t e r a n d

c luster, they were mult ip l ied

t o g e t t h e w e i g h t s fo r e a c h

parameter. From the rank ings

change we have found I ndus

I nd Bank and Bank of Baroda

h a s m a d e h u g e p r o g r e s s i n

t h e i r r a n k i n g f r o m 2 0 0 8 t o

2011. Accordingly, market has

c h a n g e d I n d u s I n d b a n k ’s P /

BV valuat ion f rom 2.21 to 3 .28

and Bank of Baroda’s P/BV from

1.26 to 1 .82

D i s c u s s i o n o n p o s s i b l e p a r a m e t e r s f o r p e r f o r -mance rank ing:I n d i a n b a n k i n g u n i v e r s e h a s

u n d e r g o n e m a j o r c h a n g e s

p o s t l i b e r a l i z a t i o n , m o r e s o,

a f t e r t h e e n t r y o f f o r e i g n

banks and new I ndian pr ivate

banks. Hence, form the inves-

tor ’s point of v iew ; rank ing of

b a n k s h a s t o b e i n d i f f e r e n t

w a y t h a n c u r r e n t l y a v a i l a b l e

rat ings methodologies.

Though, for stat ist ical analys is

and per formance rank ing most

agencies use parameters which

a re co m m o n . B u t t h e we i g h t-

i n g s g i ve n t o t h e p a r a m e t e r s

v a r y f r o m a g e n c y t o a g e n c y

and a lso depend on the objec-

t ive of the rank ing.

Di f ferent parameters used for

ra n k i n g a B a n k a re i d e n t i f i e d

f rom the paper Cr i t ica l analy-

s i s o f p a ra m e te r s o f rat i n g o f

I n d i a n c o m m e r c i a l b a n k s b y

Mukta Mani (2011) .

CAMELS rat ings are one of the

prominent ly used methods to

c h o o s e p a r a m e t e r s f o r a n a -

l y z i n g b a n k s a c r o s s w o r l d .

This rat ing provides a general

f ra m e wo r k fo r e v a l u a t i n g t h e

b a n k s . I n t h i s p a p e r we h ave

m o d i f i e d t h e C A M E L r a t i n g s

to ident i fy the parameters for

rank a bank f rom the investor

perspec t ive.

For an investor, ear n ings are

a n i m p o r t a n t m e a s u r e o f

p e r fo r m a n c e. B a n k e a r n i n g s

c o m e f r o m I n t e r e s t i n c o m e

a n d o t h e r i n c o m e s . I n t e r e s t

i n c o m e c o m e s f r o m t h e i r

lending ac t iv it ies. Parameters

such as Advance growth, Net

I n t e re s t M a rg i n c a n b e u s e d

to m e a s u re t h e i r s t re n g t h i n

i n t e r e s t i n c o m e . T h e r e i s a

n e e d to fo c u s o n we l l d i ve r-

s i f i e d o t h e r i n c o m e s t r e a m .

Earnings from non-fund based

s e r v i c e s l i k e c r e d i t g u a r -

a n t e e s ; L / C s , c a s h m a n a g e -

ment , logist ics management ,

t a x co l l e c t i o n a n d o t h e r s e r -

vices are more permanent and

involve less amount of credit

and market r isk . On the other

h a n d , f o r e a r n i n g i n t e r e s t

i n co m e a n d t re a s u r y i n co m e

b a n k h a s t o b e a r c r e d i t r i s k

and mar ket r i sk respec t ive ly.

This can be measured by using

r a t i o s s u c h a s n o n - i n t e r e s t

income to total assets.

Banks are one of the most lever-

aged inst itut ions. Their assets

per formance depends on the

customer credit quality. Banks

use the por t ion of their earn-

i n g s a s t h e d e f e n s e a g a i n s t

t h e n o n p e r f o r m i n g a s s e t s .

B a n k s a l l o c a t e a p o r t i o n o f

their prof i ts for provis ions for

n o n - p e r f o r m i n g a s s e t s . T h i s

with i ts competitors and peers

in the sec tor.

T h e r a t i n g a g e n c i e s e v a l u -

ate var ious companies on the

b a s i s o f d i f f e r e n t q u a n t i t a -

t i v e a n d q u a l i t a t i v e p a r a m e -

ters . However the parameters

d i f fer f rom one rat ing agenc y

t o a n o t h e r. M a n y a g e n c i e s

have ranked Indian Commercial

B a n k s b a s e d o n d i f f e r e n t

o b j e c t i v e s a n d p a r a m e t e r s .

M a j o r f o r e i g n a g e n c i e s t h a t

rank I ndian Commercia l banks

are Standard & Poor, Fitch, and

M o o d y. I n d i a n a g e n c i e s t h a t

rank I ndian Commercia l Banks

a r e B u s i n e s s Wo r l d , B u s i n e s s

S t a n d a rd , a n d B u s i n e s s I n d i a

etc.

Standard & Poor rate the banks

on the bas is of economic r isk ,

industr y r isk , corporate struc-

t u r e , m a n a g e m e n t s t r u c t u r e ,

accounting & f inancia l repor t-

ing, credit r i sk & r isk manage -

m e nt , l i q u i d i t y, c a p i t a l , e a r n -

i n g s, p ro f i t a b i l i t y, a s s e t co m -

p o s i t i o n a n d a s s e t q u a l i t y o f

the banks.

Fitch rating emphasizes that to

rate a bank one needs to under-

s t a n d t h e b u s i n e s s p ro f i l e o f

the bank , the r isks inherent to

t h e b u s i n e s s , t h e o b j e c t i v e s

o f i t s m a n a g e m e n t , t h e e nv i -

ronment i t operates in and the

most l ikely future development

of i ts business. The parameters

c o n s i d e r e d b y Fi t c h i n c l u d e s

profi le of the bank, Governance

and org anizat ion , ope rat ions,

capita l , funding and l iquidit y,

credit r i sk , concentrat ion r isk ,

equit y r isk , prof i tabi l i t y, asset

qual i t y, leverage, Market envi -

ronment and r isk management.

M o o d y ’s c r e d i t r a t i n g s a r e

o p i n i o n s o n t h e c r e d i t w o r -

t h i n e s s o f t h e b a n k s . T h e s e

rat ings include long-term obli-

gation ratings, syndicated loan

rat ing s, b a n k d e p o s i t rat i n g s,

n a t i o n a l s c a l e r a t i n g s a n d

i n s u r a n c e f i n a n c i a l s t r e n g t h

rat ings. Moody rates the banks

o n t h e b a s i s o f c a p i t a l , a s s e t

q u a l i t y , e a r n i n g s , l i q u i d i t y ,

m a r k e t l e a d e r s h i p, r i s k m a n -

a g e m e n t , o w n e r s h i p , s t r u c -

ture and so on. M oody focuses

more on stat ist ica l fac tors for

rank ing. The stat ist ica l param-

eters are Capital, Asset qual ity,

Earnings and L iquidit y.

The Business I ndia has ranked

t h e c o m m e rc i a l b a n k s o n t h e

b a s i s o f C a p i t a l a d e q u a c y ,

R e s o u r c e s D e p l o y e d , A s s e t

quality, Management, Earnings

qual i ty and Liquidit y. Business

S t a n d a r d R e s e a r c h B u r e a u

( B S R B ) h a s r a n k e d t h e b a n k s

on the basis of f ive broad indi-

c a t o r s n a m e l y P r o f i t a b i l i t y ,

Safety, Produc t iv it y, Ef f ic ienc y

a n d G r o w t h . B u s i n e s s Wo r l d

( B W ) h a s d i v i d e d t h e r a n k i n g

p a r a m e t e r s o f b a n k s i n t o

s i x b r o a d g r o u p s n a m e l y

Prof itabi l i ty, Ef f ic ienc y, Safety,

S ize, Valuat ion and Growth.

The Reser ve Bank of I ndia had

u s e d s i x k e y p a r a m e t e r s f o r

r a t i n g o f I n d i a n c o m m e r c i a l

banks. These are called CAMELS

r a t i n g p a r a m e t e r s , w h e r e C

s t a n d s fo r C a p i t a l Ad e q u a c y,

A s t a n d s f o r A s s e t Q u a l i t y ,

M s t a n d s fo r M a n a g e m e n t , E

s t a n d s f o r E a r n i n g s p e r f o r -

m a n ce, L s t a n d s fo r L i q u i d i t y

and S stands for Systems. The

k e y p a r a m e t e r s u n d e r t h e

C A M E L r a t i n g p a r a m e t e r s a re

capita l to total assets, capita l

m i n u s e s t i m a t e d l o s s e s t o

tota l assets , de l inquent loans

to to t a l l o a n , n e t c h a rg e o f fs

to ave r a g e l o a n , n o n - e a r n i n g

a s s e t s t o t o t a l a s s e t s , o p e r -

a t i n g e x p e n s e s m i n u s p r o v i -

s ions for loan losses and inter-

est expenses to average assets,

n e t i n c o m e b e f o r e s t a t u t o r y

r e s e r v e t r a n s f e r s t o a v e r a g e

a s s e t s a n d n e t i n c o m e a f t e r

t ransfers to average assets.

I n th is paper, we have ranked

t h e I n d i a n c o m m e rc i a l b a n k s

f r o m t h e p o i n t o f v i e w o f a n

i n v e s t o r f o r e a c h y e a r f r o m

2 0 0 8 t o 2 0 1 1 . B a s e d o n t h e

c h a n g e s i n t h e r a n k i n g , t h e

p a p e r t r i e s t o s h o w t h e c o r -

re l at i o n b e t we e n t h e ra n k i n g

changes and the market valu-

at ion of the respec t ive stocks

t h r o u g h t h e c o r r e s p o n d i n g

c h a n g e s i n t h e P / B V o f t h o s e

stocks.

I n t h i s e x e r c i s e w e h a v e

I N F I N E E T I R e s e a r c h M a g a z i n e | A n n u a l I s s u e 2 0 1 1

12

The absolute s ize of the banks

m a y a l s o b e i n c l u d e d i n t h e

r a t i n g s a s i t g i v e s a b r a n d

name and good perception for

the investors. Also, s ize of the

bank is impor tant for business

d i ve r s i f i c a t i o n , b ro a d e r g e o -

graphical reach, reduced con-

centrat ion r isk and economies

of scale.

W i t h t h e o p e n i n g u p o f t h e

e c o n o m y, t h e I n d i a n b a n k s

face competit ion from foreign

banks in terms of both business

a n d t a l e n t s . Wi t h t h e g r a n t -

i n g o f n e w b a n k i n g l i c e n s e s

by RBI , competit ion for ta lent

h a s b e c o m e i n t e n s e. Th o u g h

i t i s c h a l l e n g i n g t o m e a s u r e

h o w b a n k s r e s p o n d t o t h i s

c o m p e t i t i o n , we b e l i e ve t h i s

w o u l d b e c a p t u r e d i n b u s i -

ness per employee and prof i t

p e r e m p l o y e e . N o n - b a n k i n g

f inancia l inst i tut ions are a lso

giv ing compet i t ion for banks

w h i c h b a n k s a re o ve rc o m i n g

b y c o m i n g o u t w i t h i n n o v a -

t ive f inancia l produc ts. These

k i n d o f q u a nt i t at i ve p a ra m e -

ters are not captured as these

w o u l d f i n a l l y c o n t r i b u t e t o

b o t t o m l i n e w h i c h a r e c a p -

tured in terms of growth rates.

S i m i l a r l y a t t r i b u t e s l i k e c u s -

t o m e r s e r v i c e , c u s t o m e r s a t -

isfac t ion, locat ion advantages

e t c . a r e a l s o n o t c o n s i d e r e d

as a l l of these f inal ly contr ib -

ute to the prof i tabi l i t y of the

bank .

I n t h i s p a p e r we h ave l i n k e d

the rank ing changes with the

c o r r e s p o n d i n g c h a n g e s i n

t h e P r i c e / b o o k v a l u e ( P / B v )

w h i c h re p re s e nt s t h e m a r k e t

p e r c e p t i o n a b o u t t h e b a n k .

There i s a lot of l i terature in

t e x t b o o k s d i s c u s s i n g p r i c e

mult iples. I n the paper t i t led

V a l u i n g F i n a n c i a l s e r v i c e s

f i r m b y A s h w a t h D a m o d r a n

( 2 0 0 9 ) d i s c u s s e s t h e d i f f e r -

e n t m e t h o d s o f v a l u a t i o n o f

a b a n k i n g f i r m . I n t h e p a p e r

t i t led Equit y Valuat ion Us ing

Price Multiples: A Comparative

S t u d y f o r B R I C K S b y S a n j a y

S e h g a l a n d A s h e e s h Pa n d e y

(2010) d iscuss about the key

v a l u e d r i v e r o f t h e c o m p a -

nies in the Brazi l , Russia, India

China, Korea and South Afr ica.

As per the result most of the

companies in I ndia are us ing

relative valuation of price with

respec t to book value. I n the

paper t it led Relative Valuation

o f U. S . I n s u r a n ce Co m p a n i e s

(2011) by Doronniss im clear ly

d e f i n e s t h e r e l a t i v e v a l u a -

t ion method for f inancia l ser-

v i c e s f i r m a n d B a n k s a c r o s s

the wor ld. He concludes that

m a r k e t p r i c e a s a p r o x y f o r

i n t r i n s i c v a l u e o f t h e f i r m

which is termed as book value

of the f i rm.

I n t h e p a p e r t i t l e d a p p l i c a -

t i o n o f a n a l y t i c h i e r a r c h y

p ro ce s s (A H P ) to i nve s t m e n t

p o r t f o l i o s e l e c t i o n i n t h e

banking sector of the Nigerian

capita l market by E .O.oyatoye

(2010) , G.U.ok poko(2010) and

G . A A d e k o y a ( 2 0 1 0 ) u n d e r -

l i n e s t h e i m p o r t a n c e o f d i f -

f e r e n t c r i t e r i a , f a c t o r s a n d

a l t e r n a t i v e s t h a t a r e e s s e n -

t i a l i n v e s t m e n t d e c i s i o n b y

a p p l y i n g A n a l y t i c a l h i e r a r -

chica l process (AHP ) . AHP is

o n e o f t h e b e s t m a t h e m a t i -

ca l techniques in the case of

multi cr iteria decision making.

I n t h e p a p e r t i t l e d a n a l y s i s

o f t h e e f f i c i e n c y o f b a n k s i n

M o n t e n e g r o u s i n g t h e A H P

b y S v e t l a n a R a k o c e v i c a n d

Zd e n k a D ra g a s e v i c u s e s A H P

m e t h o d t o c o m p a r e b a n k s

d e p e n d i n g o n t h e d i f f e r e n t

q u a n t i t a t i v e a n d q u a l i t a t i v e

cr i ter ia .

Methodology :

C A F E L O G S M o d e l Formulat ion -

A s d i s c u s s e d e a r l i e r, i n t h i s

p a p e r we h ave m o d i f i e d t h e

CAMEL rat ings to ident i fy the

p a r a m e t e r s f o r r a n k a b a n k

f r o m t h e i n v e s t o r p e r s p e c -

t ive .The replacement of M –

Management capabil it ies with

operat ional and f inancial eff i -

c i e n c i e s . Two o t h e r p a r a m e -

t e r s n a m e l y t h e g r o w t h a n d

m a r k e t s h a re p a ra m e te r s a re

added at the end .The

modif ied model can be named

a s C A F E LO G S . T h e c l u s t e r s

w h i c h co nt r i b u te to t h e n e w

m o d e l C A F E L O G S a r e d i s -

cussed below.

C a p i t a l A d e q u a c y –

Capital adequacy is the cluster

to deter mine the capaci t y of

b a n k t o m e e t l i a b i l i t i e s a n d

r isk such as credit r i sk , oper-

a t i o n a l r i s k , m a r k e t r i s k a n d

b u s i n e s s r i s k . C a p i t a l a d e -

quac y parameters has cer ta in

i n f l u e n c e o n B a n k s e x p a n -

s i o n . C A R p a r a m e t e r s wo u l d

i n c o r p o r a t e t h e r i s k l e v e l s

. R e s e r ve B a n k o f I n d i a g i ve s

cer tain guidance on minimum

CAR parameters which would

b u i l d s h a r e h o l d e r s c o n f i -

dence in the bank ing system.

T h e p a r a m e t e r s i d e n t i f i e d

under this c luster are Capita l

Ad e q u a c y R a t i o (C A R ) , T i e r - I

Capita l and div idend payout .

Asset Qual i t y -

I n a b a n k b a l a n c e s h e e t t h e

mai n h eads und er the asset s

s ide are Investment, advances

, B a l a n c e s w i t h o t h e r b a n k s

, B a l a n c e s w i t h R e s e r ve B a n k

o f I n d i a a n d Fi xe d As s e t s . I n

banks the major par t i s under

a s s e t s i s u n d e r A d v a n c e s

h e a d . R e s e r v e B a n k o f I n d i a

h a s c l a s s i f i e d a s s e t i n to c a t-

e g o r i e s l i k e s t a n d a rd a s s e t s ,

s u b s t a n d a r d a s s e t s , d o u b t -

f u l a s s e t s a n d L o s s a s s e t s .

R B I h a s g i ve n ce r t a i n g u i d e -

l ines for provis ioning of Non-

p e r f o r m i n g l o a n s d e p e n d -

i n g o n t h e d u r a t i o n o f i t ’s

comparing the per formance of

d i f ferent banks. These param-

eters ref lec t the management

c a p a b i l i t y t o g e n e r a t e m o r e

business form the exist ing set

up.

A n o t h e r m e a s u r e t h a t w i l l

impact the investor sentiments

i s t h e g r o w t h p a r a m e t e r s .

G ro w t h o f p r o f i t s , a d v a n c e s ,

deposits , and ent i re business

p l a y s a n i m p o r t a n t r o l e i n

investment decis ion mak ing.

For a commercia l bank , main-

t e n a n c e o f l i q u i d i t y i s a s

i m p o r t a n t a s i t s p r o f i t a b i l -

i t y. L iquidit y r isk can be mea-

s u r e d f r o m m a t u r i t y m i s -

m a t c h o f a s s e t s a n d l i a -

b i l i t i e s . I t i s m a n a g e d b y

A s s e t L i a b i l i t y M a n a g e m e n t

C o m m i t t e e ( A LC O ) t h r o u g h

ALM techniques.

Capita l adequac y is an impor-

tant factor to judge the bank ’s

a b i l i t y to m e e t s i t s r i s k s a n d

l i a b i l i t i e s . C a p i t a l a d e q u a c y

also shows the room for bank ’s

g r o w t h w i t h t h e a v a i l a b l e

c a p i t a l . A l s o , t o i m p l e m e n t

Basel I I norms, banks need to

h ave a s t ro n g f r a m e wo r k fo r

credit r isk and operational r isk

m a n a g e m e n t . M e a s u r e s l i k e

CAR (Capita l adequac y

rat i o) & Ti e r - 1 c a p i t a l to R i s k

we i g h te d a s s e t s c a n b e u s e d

t o j u d g i n g t h e c a p i t a l a d e -

quac y of banks.

provis ion a l locat ion depends

o n t h e a s s e t q u a l i t y o f t h e i r

b o o k s . Pa r a m e te r s l i k e G ro s s

N PA , N e t N PA , a n d Pro v i s i o n

c o v e r a g e r a t i o c a n b e u s e d

t o m e a s u r e a s s e t q u a l i t y o f

b a n k s . H e r e , n o n - p e r f o r m -

i n g a s s e t s h ave l a rg e l y b e e n

taken in comparison with total

assets or net advances. O ther

measures l ike, s l ippage

r a t i o w h i c h m e a s u r e s t h e

i n c re a s e i n N PA s c a n a l s o b e

used. Another way to analyze

t h e l o a n b o o k q u a l i t y i s t o

c h e c k t h e e x p o s u r e o f t h e

loans v iz . sec tors or large cus-

tomer wise. Credit r isk concen-

t ra t i o n i s m e a s u re d by re l a t -

ing a volat i le loan categor y to

c a p i t a l . I t s h o u l d b e t r i e d to

ascer ta in what would happen

to core earnings (and possibly

to capita l ) i f a bank needed to

wr i te - of f several of i ts largest

loans.

B e s i d e s , i n c r e a s i n g t h e

r e v e n u e a n o t h e r w a y t o

i n c re a s e p ro f i t m a rgi n s i s , to

reduce the cost of operat ions.

A m a j o r c h u n k o f o p e r a t i n g

c o s t i n P u b l i c S e c t o r B a n k s

i s t h e s t a f f co s t , a l s o te r m e d

e s t a b l i s h m e n t c o s t . C o s t t o

i n c o m e p a r a m e t e r h e l p s i n

compar ing the operat ing cost

incurred with the income gen-

erated. O ther fac tors such as

Business per employee, prof i t

p e r e m p l o y e e , B u s i n e s s p e r

b r a n c h c a n a l s o b e u s e d fo r


14 15

n o n - p e r fo r m i n g. B a n k s h a ve

t o a l l o c a t e s u i t a b l e a m o u n t

of provis ions according to the

non-per forming loans in that

y e a r. T h e p a r a m e t e r s i d e n -

t i f i e d u n d e r t h i s c l u s t e r a r e

Gross Non-Per forming Assets

(G N PA) , N e t N o n - Pe r fo r m i n g

L o a n ( N N PA ) a n d Pr o v i s i o n s

Coverage R at io (PCR) .

Fi n a n c i a l E f f i c i e n c i e s -

T h e s e a re Fi n a n c i a l p a r a m e -

ters which can help the bank

to determine the effectiveness

o f i t s u t i l i z a t i o n o f f i n a n c i a l

resources available with them.

These parameters depends on

the economic parameters such

as Repo, Reverse repo,

C a s h r e s e r v e r a t i o a n d s t a t -

u t o r y l e n d i n g r a t i o . T h e s e

p a r a m e t e r s d e p e n d o n t h e

s h o r t t e r m a n d l o n g t e r m

s t r a t e g i e s o f t h e b a n k . T h e

p a r a m e t e r s i d e n t i f i e d u n d e r

t h i s c l u s t e r a r e N e t i n t e r e s t

margin (NIM), Interest Income

to To t a l As s e t s , N o n - i n te re s t

i n c o m e t o t o t a l A s s e t s , N e t

i n t e r e s t i n c o m e t o I n t e r e s t

i n c o m e a n d N e t p r o f i t s t o

total assets.

Earnings –

Commonly known as the return

rat io in a Banks R at io analys is

. T h e y a r e t h e a c t u a l r e t u r n s

w h i c h t h e b a n k s a n d s h a r e -

holders get on their business

a c t i v i t i e s . T h e p a r a m e t e r s

under this c luster contr ibutes

to the future valuat ion of the

b a n k s . Th e p a r a m e te r s i d e n -

t i f ied under this categor y are

Return on Equity (ROE), Return

o n A s s e t s ( R OA) , p e rce n t a g e

increase in earnings per share

(EPS) and percentage increase

in book value (BV ) .

L iquidit y –

L i q u i d i t y i s a b i l i t y t o m e e t

s h o r t t e r m a n d l o n g t e r m

o b l i g a t i o n s w i t h o u t l o s s e s .

O n e o f t h e k e y p r o b l e m s o f

l i q u i d i t y i n b a n k s a r i s e s d u e

to Asset l iabi l i t ies mismatch.

L i q u i d i t y c a n c a u s e a h u g e

shor t term demand for money

which would af fec t the earn-

i n g s o f t h e b a n k . I n o rd e r to

m e e t t h e s h o r t t e r m o b l i g a -

tions banks should either raise

money though LAF (L iquidit y

A d j u s t m e n t Fa c i l i t y ) o r C a l l

m o n e y m a r k e t . I n L A F t h e

R e s e r v e B a n k o f I n d i a l e n d s

at 1 p e rce nt h i g h e r t h a n t h e

Repo rate f ixed by them .The

p a r a m e t e r s i d e n t i f i e d u n d e r

this c luster are Credit- deposit

rat i o (C D rat i o) , Ad va n ce s to

tota l as s e t , D e pos i t s to tot a l

l iabil it ies, Investments to total

a s s e t a n d C u r r e n t a c c o u n t

savings account (CASA) .

O p e r a t i o n a l Ef f ic iencies -

O p e r a t i n g co s t i s o n e o f t h e

impor tant cost head in bank ’s

P & L s t a t e m e n t . I n d i a h a s a

huge oppor tunity for Bank ing

i n t h e c o m i n g y e a r s w h i c h

c a n b e t a p p e d b y i n c re m e n -

tal branches of banks .Reser ve

Bank of India has forced Indian

commercia l banks to open 25

% of t he i r branches in Tier 5

and Tier 6 cit ies (rural ) . Indian

banks have more opportunities

to explore new technologies in

the bank ing system .The pen-

etrat ion of mobi le commerce

and elec tronic commerce can

h e l p t o re d u c e t h e i r o p e r a t-

ing cost . Operat ing ef f ic ien-

c ies determine the long term

p ro f i t a b i l i t y o f t h e c o m m e r -

c ia l banks. E f f ic ient usage of

the resources wi l l reduce the

operat ional cost and enhance

the bank ing prof i t . The major

head under operat ing cost i s

t h e s a l a r i e s f o r e m p l o y e e s .

T h e p a r a m e t e r s i d e n t i f i e d

u n d e r t h i s c l u s t e r a r e b u s i -

ness per employee, operat ing

prof i t per employee and Cost

to income, Operat ing income

to total assets.

Growth -

G r o w t h r a t e d e t e r m i n e s r e l -

a t i v e p e r f o r m a n c e o f t h e

b a n k w i t h o t h e r s . G r o w t h

i s a n i m p o r t a n t c o n c e r n fo r

i nve s to r s i n a ny b u s i n e s s . I n

bank ing sec tor the growth is

benchmarked by the guidance

o f G D P g row t h r a te a n d n o n

fo o d c re d i t grow t h ra te p ro -

vided by the Reser ve Bank of

I ndia . I nvestors would prefer

the banks which outper for m

t h e g u i d a n c e o f R e s e r v e b a n k o f

I n d i a . T h e p a r a m e t e r s i d e n t i f i e d

u n d e r t h i s c l u s te r a re p e rce n t a g e

change in total assets, percentage

c h a n g e i n a d v a n c e s , p e r c e n t a g e

change in investments, percentage

change in deposits and percentage

change in net prof i ts .

Market Share –

M a r k e t s h a r e o f t h e b a n k i s a n

impor tant fac tor for future growth

o f t h e b a n k i n c u r r e n t g r o w i n g

e c o n o m y. A s p e r t h e l a t e s t 2 0 1 0

R B I s t a t i s t i c s o n l y 4 4 % o f c u r re n t

earning populat ion is having bank

account. The parameters ident i f ied

u n d e r t h i s c l u s te r a re m a r k e t s h a re o f a d va n ce s , m a r k e t

share of deposits and market share of business.

( F i g u r e 2 : D i a g r a m m a t i c r e p r e s e n t a t i o n o f A n a l y t i c a l

H ierarchical process)

Analyt ica l h ierarchicalProcess :Analytical hierarchy process is a procedural approach which

i nv o l v e s s t r u c t u r i n g o f m u l t i p l e o p t i o n s i n t o a s y s t e m .

AHP is a st ruc tured technique to solve complex decis ions.

m a k i n g p ro b l e m s. A H P Pro ce s s i n e va l u at i n g t h e ove ra l l

R ank ing of I ndian commercia l banks

A H P te c h n i q u e u s e s d i a gra m m at i c re p re s e nt at i o n i n t h e

form of h ierarchy as shown in the f igure below to model

real l i fe s i tuat ion.

The identi f ied parameters of di f ferent c luster in CAFELOGS

model are conver ted into a questionnaire format. The ques-

t ionnaire format was sent to capital market investment and

brok ing f i rms in I ndia . The responses was consol idated to

arr ive at the ranking of the different parameters . In order to

calculatethe re lat ive weight of d i f ferent c lusters and their

parameters , E igen Value method is used in th is paper.


16 17

Th e p a i r w i s e co m p a r i s o n w a s b a s e d u p o n s e ve n p o i n t w i s e

compar ison. The weightage of each c luster and parameters in

t h e c l u s te r i s i d e nt i f i e d a p a i r w i s e co m p a r i s o n a s s h ow n i n

A n n ex u re s . Th e co n s o l i d ate d we i g ht a g e o f t h e i d e nt i f i e d 3 2

parameters of CAFELOGS model are shown below table

The pr imar y data col lec ted is ranked according to charac ter is -

t ics of each parameter. The data under four parameter namely

G r o s s N o n - Pe r f o r m i n g A s s e t s ( G N PA ) , N e t N o n - p e r f o r m i n g

M ethodology to determine

P/B rat io for I ndian Bank ing

stocks

The c lose stock pr ices of

I ndian commercia l banks are

col lec ted f rom the Bombay

stock exchange. The aver-

ages of c lose pr ices of these

stocks are captured in a snap

shot per iod of one year. The

snap shot per iod date range

is f rom Apr i l 1st to March 31st

respec t ively. Book value is

repor ted in the audited f inan-

c ia l s tatement of the banks.

I t i s repor ted only once in

year in the Annual Repor t .

The Pr ice /Book value is

determined us ing the below

formula

Pr ice /Book value = Average

of c lose pr ices / Book value Results and Discuss ion

R ank ing and Pr ice/Book value

o f l i s te d s c h e d u l e d co m m e r-

cial banks are calculated as per

the above methodologies. The

ra n k s a s s i gn e d to e a c h b a n k

is studied over the given t ime

durat ion and re lat ive change

in the ranks are noted . I t was

i d e n t i f i e d t h a t i n a p p r o x i -

mately 70 % of the cases when

the ranks of the bank moved

in either direction the Pr ice to

book value a lso moved in the

same direc t ion . I n the below

d i a g r a m , t h e s u c c e s s r a t e o f

the correlat ion of rank ing and

p r i c e / b o o k v a l u e i s g i v e n .

I n 2 0 0 8 / 2 0 0 9 p e r i o d t h e

markets over reac ted because

of the global economic reces-

s i o n . D u r i n g t h a t p e r i o d t h e

model has a success rate of 66

% respec t ively. I n the case of

b a n k i n g t h e i n v e s t o r s g i v e s

a h i g h e r w e i g h t a g e t o t h e

b a n k i n g f u n d a m e n t a l r a t h e r

t h a n e c o n o m i c c o n d i t i o n s

during valuation of a commer-

c ia l bank ing stock in I ndia .

Conclus ion:

Th e re a re s e ve r a l a rg u m e n t s

f o r p e r f o r m a n c e r a n k i n g o f

Banks and the objec t ive of the

rank ing also differs from agenc y

to agency. Ranking banks per for-

mance from the investor`s point

of v iew is a complex process as

i t depends on quant i tat ive and

q u a l i t a t i v e p a r a m e t e r s . A l s o ,

the va luat ion the mar ket gives

f o r a b a n k s t o c k d e p e n d s o f

m u l t i p l e f a c to r s s u c h a s i nve s -

t o r p e rc e p t i o n , m a r k e t l i q u i d -

i t y, i n t e r e s t r a t e e n v i r o n m e n t

a n d c o u n t r i e s m a c r o e c o n o m i c

s c e n a r i o . T h r o u g h t h i s p a p e r,

we have shown that changes in

t h e ra n k i n g o b t a i n e d f ro m t h e

C A F É LO G S m o d e l a n d t h e c o r-

r e s p o n d i n g P / B V c h a n g e s a r e


18 19

more than 66% correlated. This may be because we have not considered the quantitat ive param-

eters such as the promoters background, change in management, corporate governance of the

bank , brand equit y of the bank and except ional cases l ike State bank group, i t ’s get suppor t in

terms of business form government . Fur ther research can be carr ied out by incorporat ing quan-

t i tat ive parameters, market condit ions and economic scenar ios which can lead to a model that

i s h ighly correlated with the market sent iments

References :

1. Saat y, T.L . (1980) , The Analyt ic H ierarchy Process, M cGraw-H i l l , New York

2. F I Cr i ter ia : Bank R at ing Analys is Methodology Prof i le, Standard and Poor (2004)

3 . Model ing bank credit rat ings A struc tural approach to M oody ’s (2007)

4 . Analys is of the ef f ic ienc y of Banks in M ontenegro us ing the AHP, Svet lana R akocevic, Facult y

of Economics Univers i t y of M ontenegro Podg or ica , Zde nk a D rag as e v ic , Facul t y of Economics

Univers i t y of Montenegro Podgor ica

5. Benchmark ing Per formance of Publ ic S ec tor Banks in I ndia , Bhagirathi Nayak and C Nahak

6 . Pa r a m e t e r s o f R a t i n g o f I n d i a n C o m m e r c i a l B a n k s - A c r i t i c a l A n a l y s i s , D r. M u k t a M a n i

, I nte r n at i o n a l J o u r n a l o f R e s e a rc h i n Co m m e rce, I T a n d M a n a g e m e nt , V O LU M E N O : 1 ( 2 0 1 1 ) ,

ISSUE NO. 2 ( JULY )

7. AHP based Model for Bank Per formance Evaluation and Rating,Tihomir Hunjak ,Drago Jakovčević,

ISAHP 2001, Berne, Switzer land, August 2-4 , 2001

I N F I N E E T I R e s e a r c h M a g a z i n e | A n n u a l I s s u e 2 0 1 1

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