A STUDY ON THE FINANCIAL

STATEMENT ANALYSIS OF

INDIAN BANK

By N.Santhoshni

B.Com(General)III Year

INTRODUCTION• Balance sheet is a statement of the financial position of an enterprise

at a particular point of time. Profit and loss account shows the net profit or net loss of a company for a specified period of time.

• When these statements of the last few year of any organization are studied and analyzed, significant conclusions may be arrived regarding the changes in the financial position, the important policies followed and trends in profit and loss etc.

• Analysis and interpretation of the financial statement has now become an important technique of credit appraisal. The investors, financial experts, management executives and the bankers all analyze these statements.

• Analysis of financial statement is necessary because it help in depicting the financial position on the basis of past and current records. Analysis of financial statement helps in making the future decision and strategies.

FINANCIAL STATEMENT ANALYSIS

• After preparation of the financial statements (Balance Sheet and Trading and Profit and Loss Account), one may be interested in analyzing the financial statements with the help of different tools such as comparative statement, common size statement, ratio analysis, trend analysis, etc. In this process a meaningful relationship is established between two or more accounting figures for comparison.

Objectives:• To explain the meaning, need and

purpose of financial statement analysis;

• To identify the parties interested in analysis of financial statements;

• To explain the various techniques and tools of analysis of financial statements.

The analysis and interpretation of financial statements is very essential to measure the efficiency, profitability, financial soundness and future prospects of the business units. Financial analysis serves the following purposes:

•Measuring the profitability•Indicating the trend of achievement•Assessing the growth potential of the business•Comparative position in relation to other firms•Assess overall financial strength•Assess solvency of the firm

INDUSTRY PROFILE-BANKING SECTOR

• The word bank was borrowed in Middle English from Middle French banque, from Old Italian banca, from Old High German banc, bank "bench, counter". Benches were used as desks or exchange counters during the Renaissance by Florentine bankers, who used to make their transactions atop desks covered by green tablecloths.

• Another possible origin of the word is from the Sanskrit words (ब्यय) 'byaya' (expense) and 'onka' (calculation) = byaya-onka. This word still survives in Bangla, which is one of Sanskrit's child languages. ব্যায় + অঙ্ক = ব্যাঙ্ক . Such expense calculations were the biggest part of mathematical treatises written by Indian mathematicians as early as 500 B.C.

STRUCTURE OF INDIAN BANKING INDUSTRY

INDIAN BANK

INTRODUCTION

INDIAN BANK is an Indian state-owned financial services company headquartered in Chennai, India. It has 22,000 employees, 2033 branches and is one of the big public sector banks of India. It has overseas branches in Colombo, Jaffna, Sri Lanka, Singapore, and 229 correspondent banks in 69 countries. Since 1969 the Government of India has owned the bank, which celebrated its centenary in 2007. It is the only Indian Bank other than State Bank of India to feature in the List of Fortune 500 Companies in the World.

COMPANY PROFILEINDIAN BANK

Type Public Company

Traded As BSE:523465NSE:INDIANB

Industry Banking and Financial services

Founded 1907

Headquarters Chennai, Tamil Nadu, India

Key people T.M.Bhasin(Chairman & MD)

Revenue IncreaseINR211,988 crore(US$42.29 billion) (2011)

Net income IncreaseINR12,745 crore(US$2.54 billion) (2011)

Total assets IncreaseINR121,841 crore(US$223.81 billion) (2011)

Employees 19,632

Website www.indianbank.in

Tagline/Slogan Your tech friendly bank

USP High end banking technology support

Target group International banking

Positioning Complete banking solutions

NEED FOR THE STUDY• The analysis of financial statements of Indian Bank is an attempt to

assess the efficiency and performance of the company.– To assess the efficiency and performance of the company it is

necessary– To know earnings capacity of the company i.e., the profitability of

the company.– To have a view of the company’s efficiency.– To know the comparative position in relation to previous year.– To have an idea about financial strength of the company.– To know the solvency of the company.

OBJECTIVES OF THE STUDY• The main objectives of this study are the following:-

– To study about INDIAN BANK and its related aspects like its products & services, history, organizational structure, subsidiary companies etc.

– To analyse the financial statement i.e Profit & Loss account and Balance sheet of INDIAN BANK.

– To learn about Profit & Loss Account, Balance-sheet and different type of Assets& Liabilities.

– To portray the financial position of INDIAN BANK with the help of balance sheet and profit and loss account.

– To evaluate the financial soundness, stability and liquidity of INDIAN BANK.

RESEARCH METHODOLOGY• Research methodology is a way to

systematically solve the research problems. It is necessary to know not only the research methods/ techniques but also the methodology. Research methodology is a scientific study of various steps that are adopted in research problem.

• Descriptive research is used to obtain information concerning the current status of the phenomena to describe “what exists” with respect to variables or conditions in a situation. In this study, I used secondary data i.e., Annual Report.

LIMITATIONS OF THE STUDY • Financial statement analysis tools have some inherent limitations of

financial statements. This study has also suffered from those limitations.• The nature of financial statements is historical. Here, analysis and

interpretation are made on those historical data, which tells only about the past performance and the financial weakness of the bank.

• Change in accounting procedure by a firm often makes ratio analysis misleading.

• The analysis and interpretation are based on secondary data contained in the published annual reports of Indian Bank for the study period.

• The study of financial performance can be only a means to know about the financial condition of the company and cannot show a through picture of the activities of the company.

• Further, the conclusions drawn from the study are applicable only to the Indian Bank and not for other banks.

ANALYSIS AND INTERPRETATION

TOOLS USED:• Comparative Statement• Trend Analysis• Cash Flow Statement• Ratio Analysis• Using these tools analysis and

interpretation has made in the financial statements of Indian Bank for five years

COMPARATIVE FINANCIAL STATEMENT

Comparative Balance Sheet:

• Deposits and Advances are the main liability and asset of a banking company. Every banking company likes to increase the both items. For the past five years i.e., 2008-2012 there is no change in the share capital.

• Deposits are increasing at a decreasing rate. During 2008-2009 it increases by 18.90% and in 2009-2010 it increases by 21.56% but thereafter it increases by 19.92% in 2010-2011 and 14.18% in 2011-2012. This represents deposits are repaid during those years.

• During 2008-2009 borrowings decreases by 58.64%. It means borrowings are repaid. And thereafter are increases at increasing rate.

Comparative Income Statement:

• For banking company the major income and expenditure are interest income and interest expenses. The interest incomes are increases by 32.61% in 2008-2009, 19.14% in 2010-2011 and 30.66% during 2011-2012.

• The interest expenses are also increases by 7.85% in 2009-2010 and 46.73% during 2011-2012. This is due to increases in borrowings.

• The net profits for the year are increases at a decreasing rate. This is because of the increases in expenses than increases in income.

TREND ANALYSISBalance Sheet:

• Deposits increases to Rs.1,20,803.80 crores in 2012 from Rs.1,05,804.18 crores in 2011. In 2008, it was only Rs.61,045.95 crores.

• Borrowings decreases in 2009 and thereafter increases at increasing rate.

• Advances and Investments are also increased, in the last five years.

• Fixed assets increase as well as decreases in the last five years. This is due to change in depreciation rates and revaluation of assets.

• Finally in 2012, the capital WIP decreases at a greater amount. It is also a good sign for efficient work management.

Income Statement:

• Interest income as well as other income increases in the last five years.

• Interest Expenses increased from Rs.3159.08 crores in 2008 to Rs.7813.32 crores in 2012.

• The Net profit increased to Rs.1755.27 crores in 2012 compared to the previous years profit.

CASH FLOW STATEMENT• A cash – flow statement is a

statement showing inflows (receipts) and outflows (payments) of cash during a particular period. In other words, it is a summary of sources and applications of each during a particular span of time.

• It is revealed that the cash flow from operating activities is in negative in 2011 and 2012.

• This is due to increase in Interest Expenses and Extra ordinary loss of Rs.8.30 crores in 2012.

• The cash flows of the bank are in a good condition. In 2012 the cash flow from financing activities increased at high level. It is a good sign.

RATIO ANALYSISCAMEL Model:

• The CAMEL approach was developed by bank regulators in the United States as a means of measurement of the financial condition of a financial institution. (Uniform Financial Institutions Rating System established by the Federal Financial Institutions Examination Council). RBI too analysis the banks performance through CAMEL methodology.

• The acronym CAMEL stands for:– Capital Adequacy– Asset Quality– Management Efficiency– Earning's (Profitability) Efficiency– Liquidity & Funding

CAPITAL ADEQUACY RATIOS

“The Capital of a Bank protects the Bank against unexpected future losses”. Capital adequacy reflects the overall financial position of a bank and also the ability of the management to meet the need for additional capital requirement. Capital Adequacy Ratio Debt Equity Ratio Advances to Asset Ratio

ASSET QUALITY RATIOS• The asset quality is to

ascertain the proportion of non-performing assets as a percentage of the total assets .It also ascertains the Non performing asset movement and the amount locked up in investments as a percentage of the total assets.– Net Non Performing Assets

to Total Assets – Net Non Performing Assets

To Net Advances – Percentage change in Net

Non Performing Assets

MANAGEMENT EFFICIENCY RATIOS

• It refers to the efficiency of the Management in managing the bank, in all the ratios higher the better.– Total Advances to Total

Deposits – Profit per Employee – Return on Net Worth

EARNINGS EFFICIENCY RATIOS

“A Bank with no profit is like a human body with no blood”. Much of a bank's income is earned through non-core activities like investments, treasury operations, and corporate advisory services and so on. Percentage Growth in Net

Profit Net Interest Margin Non-interest

Income/Working Funds

LIQUIDITY RATIOS• “Inadequate Liquidity of a Bank may

cause an accident similar to an airplane crash.” Liquidity is the ability of the bank to meet its financial obligations.

• A high liquidity ratio indicates a bank's comfort level vis-à-vis its ability to manage its obligations, both short-term as well as long-term.

• Liquidity of a bank can be measured using metrics such as Liquid Assets (LA) to Demand Deposits (DD) and LA to Total Assets (TA).

– Liquid Assets/Demand Deposits – Liquid Assets/Total Assets

FINDINGS

FINDINGSComparative Statement:• There are five types of liabilities in a

bank. Among that, the most important liabilities are Deposits and Borrowings. The growth rate of deposits portfolio is decreasing. During 2008-09, it has increased by 18.90%, and in 2009-10 it increased by 21.56% but in 2011-12 it increased by only 14.18%. Here the growth should be compared to overall banking sector. (This is because the deposits are repaid and increase in new customers are low.)

• The most important and major assets for a bank, are advances and investments. It is observed that the advances are increased at a marginal level. Investments are increased significantly. But in 2011-12 it increases by 9.18% only. Here compare the growth rate with overall Industrial Production.

Trend Analysis:• The deposits are increased marginally.

But the borrowings are increased tremendously.

• Both Advances and investments are increased marginally.

• The interest earned are increased marginally. But the interest expenses are increased at tremendously. So, the net profit increases slowly.

Cash Flow Statement:• Cash flow statement shows the inflow

and outflow of a cash for a particular period. It is observed that the bank is good at maintaining the flows of cash.

FINDINGSCapital Adequacy Ratios:• It is observed that, the bank has better

ability to deal with proable loan defaults because the capital adequacy ratio is higher.

• And also the bank’s ability to borrow and repay the money is also good because the debt equity ratio is low.

• Though the advances to assets ratio has increased in the last five years, it is revealed that the bank has good risk taking ability.

Asset Quality Ratios:• Generally asset quality ratio should be

reduced as compared to the previous years. But, the bank’s asset quality ratios are increased which is not a good sign.

• From the year 2010 to 2012, the non performing assets are increased which is not good sign.

Management Efficiency Ratios:• Higher the management efficiency

ratios means higher the efficiency of the management. It is found that the advances to deposits ratio and profit per employee are increased which is a good sign. It means the employee’s efficiency is good, and the bank is better able to convert its advances to deposits.

• But the return on net worth is reduced from 23.74% to 21.50% and to 18.73% in 2010,2011,2012 respectively.

Earnings Efficiency & Liquidity Ratios:• Overall, the bank’s earnings efficiency

is not satisfactory. Because all the earnings efficiency ratios are reduced in the last five years.

• The bank is able to maintain its liquidity position.

SUGGESTIONS• The Reserve Bank of India issued prudential norms for banking companies.

According to that more non performing assets may leads to bankruptcy. Hence, the bank tries to reduce its non performing assets to a extent.

• The prime motive of any type of business is to earn profits. For banking company, rendering financial services and earning profits are the primary objectives. As a nationalized bank, it also has the same objectives. The growth rate of profits is decreasing. So, the bank tries to improve its profits. For that the bank needs to concentrate on both core and non core banking activities.

• The major income for any financial institution is interest income. A banking company will get more interest income only when it lends money for the productive purposes. Advances are the major assets of a banking company. The bank tries to increase the advances because it is the core business of a bank. Increase in advances pays a way to increase in interest income which automatically increases the profits of the bank.

• Every company must try to control their borrowings. Because more borrowings leads to increase their interest expenses which reduces their profits. At the same time, low borrowings are also not good for the company. Here, the borrowings are increasing to an extent. So, the bank shall try to reduce the borrowings which automatically reduce the interest expenses to a certain extent.

SUGGESTIONS• Deposits are of two types. One is term deposits and the other is demand

deposits. The important source of funds for bank is deposits. More deposits means the bank are attracting the customers. The bank provides advances against his/her deposits to the needy person. This provides the bank to get interest income as well as safety for its funds. So, the bank needs to increase its deposits.

• The bank has to focus on work than the work achieved. It means the bank has to work to attract the new customers and rendering all types of financial services.

• As compared to its competitors, the bank has low number of branches and ATMs. It is a major disadvantage to the bank. Due to low number of branches and ATM, both the customers and bank may feel uncomfortable to contact and render services. So, the bank has to increase its number of branches and ATMs.

• Nowadays competition takes in every sector. In banking sector, the competition is high. In general, a both good and bad product needs advertisement. Advertisements pursue the people to buy. Other banks are giving continues advertisements about their services to the public. So, the bank has to promote its services through advertisements which increase the new customers.

CONCLUSION• I here by conclude that the ratio analysis and trend analysis and

analysis of cash flow statement and comparative statement shows that INDIAN Bank’s financial position is fair. Bank’s profitability is increasing but not at high rate. Bank’s liquidity position is good because bank invests more in liquid assets than the current assets. The INDIAN Bank needs to pay attention on commercial activities like promoting more schemes for industrial customers etc. Bank’s position is stable.