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EXECUTIVE SUMMARY
Project Title:A Comparative Study of Financial Performance of Banks Using Ratio Analysis.
Objectives:
• To study the financial performance of Banks.
• To highlight comparison of financial performance of Banks.
• To analyse the performance of the Banks using ratios
•
Research methodology:
In the present study, an attempt has been made to measure, evaluate and compare the financial performance of the Banks which one related to public sector and private sector respectively. The study is based on second data that has been collected from annual reports of the respective Banks, magazines, journals, documents and other published information. The study covers the period of 5 years. Ratio analysis was applied to analyse and compare the trends in banking business and financial performance. Mean and Compound Growth Rate have also been deployed to analyse the trends in banking business profitability.
Major findings / outcome of the study:
Due to constraints of time and resources, the study is likely to suffer from certain limitations. Some of these are mentioned here under so that the findings of the study may be understood in a proper perspective. The limitations of the study are:
• The study is based on the secondary data and the limitation of using secondary data may affect the results.
• The secondary data was taken from the annual reports of the SBI and ICICI Bank. It may be possible that the data shown in the annual reports may be window dressed which does not show the actual position of the banks.
Suggestions:
Financial analysis is mainly done to compare the growth, profitability and financial soundness of the respective banks by diagnosing the information contained in the financial statements. Financial analysis is done to identify the financial strengths and weaknesses of the two banks by properly establishing relationship between the items of Balance Sheet and Profit & Loss Account. It helps in better understanding of banks financial position, growth and performance by analysing the financial statements with various tools and evaluating the relationship between various elements of financial statements.
ICICI BANK
ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution, and was its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank was reduced to 46% through a public offering of shares in India in fiscal 1998, an equity offering in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition of Bank of Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary market sales by ICICI to institutional investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at the initiative of the World Bank, the Government of India and representatives of Indian industry. The principal objective was to create a development financial institution for providing medium-term and long-term project financing to Indian businesses.
In the 1990s, ICICI transformed its business from a development financial institution offering only project finance to a diversified financial services group offering a wide variety of products and services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become the first Indian company and the first bank or financial institution from non-Japan Asia to be listed on the NYSE.
After consideration of various corporate structuring alternatives in the context of the emerging competitive scenario in the Indian banking industry, and the move towards universal banking, the managements of ICICI and ICICI Bank formed the view that the merger of ICICI with ICICI Bank would be the optimal strategic alternative for both entities, and would create the optimal legal structure for the ICICI group's universal banking strategy. The merger would enhance value for ICICI shareholders through the merged entity's access to low-cost deposits, greater opportunities for earning fee-based income and the ability to participate in the payments system and provide transaction-banking services. The merger would enhance value for ICICI Bank shareholders through a large capital base and scale of operations, seamless access to ICICI's strong corporate relationships built up over five decades, entry into new business segments, higher market share in various business segments, particularly fee-based services, and access to the vast talent pool of ICICI and its subsidiaries.
In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the merger of ICICI and two of its wholly-owned retail finance subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital Services Limited, with ICICI Bank. The merger was approved by shareholders of ICICI and ICICI Bank in January 2002, by the High Court of Gujarat at Ahmedabad in March 2002, and by the High Court of Judicature at Mumbai and the Reserve Bank of India in April 2002. Consequent to the merger, the ICICI group's financing and banking operations, both wholesale and retail, have been integrated in a single entity.
1.2AXIS BANK
Axis Bank established in 1993 was the first of the new private banks to have begun operations in 1994 after the Government of India allowed new private banks to be established.Axis Bank Ltd. has been promoted by the largest and the best Financial Institution of the country, UTI. The Bank was set up with a capital of Rs. 115 crore, with UTI contributing Rs. 100 crore, LIC – Rs. 7.5 crore and GIC and its four subsidiaries contributing Rs. 1.5 crore each.Axis Bank is one of the first new generation private sector banks to have begun operations in 1994. The Bank was promoted in 1993, jointly by Specified Undertaking of Unit Trust of India (SUUTI) (then known as Unit Trust of India),Life Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC), National Insurance Company Ltd., The New India Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India Insurance Company Ltd. The shareholding of Unit Trust of India was subsequently transferred to SUUTI, an entity established in 2003.
Erstwhile Unit Trust of India was set up as a body corporate under the UTI Act, 1963, with a view to encourage savings and investment. In December 2002, the UTI Act, 1963 was repealed with the passage of Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 by the Parliament, paving the way for the bifurcation of UTI into 2 entities, UTI–I and UTI–II with effect from 1st February 2003. In accordance with the Act, the Undertaking specified as UTI I has been transferred and vested in the Administrator of the Specified Undertaking of the Unit Trust of India (SUUTI), who manages assured return schemes along with 6.75% US–64 Bonds, 6.60% ARS Bonds with a Unit Capital of over Rs. 14167.59 crores.
The Bank has strengths in both retail and corporate banking and is committed to adopting the best industry practices internationally in order to achieve excellence.
Axis Bank entered a deal in November 2010 to buy the investment banking and equities units of Enam Securities for $456 million. Axis Securities, the equities arm of Axis Bank, will merge with the investment banking business of Enam Securities.As per the deal, Enam will demerge its investment banking, institutional equities, retail equities and distribution of financial products, and non–banking finance businesses and merge them with Axis Securities.
2. RATIO ANALYSIS
2.1 INTODUCTION
Ratio-analysis is a concept or technique which is as old as accounting concept. Financial analysis is a scientific tool. It has assumed important role as a tool for appraising the real worth of an enterprise, its performance during a period of time and its pit falls. Financial analysis is a vital apparatus for the interpretation of financial statements. It also helps to find out any cross-sectional and time series linkages between various ratios.
Unlike in the past when security was considered to be sufficient consideration for banks and financial institutions to grant loans and advances, nowadays the entire lending is need-based and the emphasis is on the financial viability of a proposal and not only on security alone. Further all business decision contains an element of risk. The risk is more in the case of decisions relating to credits. Ratio analysis and other quantitative techniques facilitate assessment of this risk.
Ratio-analysis means the process of computing, determining and presenting the relationship of related items and groups of items of the financial statements. They provide in a summarized and concise form of fairly good idea about the financial position of a unit. They are important tools for financial analysis.
2.2 NATURE
In financial analysis, ratio is used as an index of yardstick for evaluating the financial position and performance of the firm. It is a technique of analysis and interpretation of financial statements. Ratio analysis helps in making decisions as it helps establishing relationship between various ratios and interpret thereon. Ratio analysis helps analysts to make quantitative judgement about the financial position and performance of the firm. Ratio analysis involves following steps:
• Relevant data selection from the financial statements related to the objectives of the analysis.
• Calculation of required ratios from the data and presenting them either in pure ratio form or in percentage.
• Comparison of derived different ratios.
• Interpretation of the ratio
Ratio analysis uses financial report and data and summarizes the key relationship in order to appraise financial performance. The effectiveness will be greatly improved when trends are identified, comparative ratios are available and inter-related ratios are prepared.
2.3 CLASSIFICATION
Accounting ratios can be classified from different point of view. Ratios may be used to evaluate the company's liquidity, efficiency, leverage and profitability. The ratios may be classified as following.
• Liquidity ratio
• Turnover ratio
• Profitability ratio
LIQUIDITY RATIO
Liquidity is a measure of the ability and ease with which assets can be converted to cash. Liquid assets are those that can be converted to cash quickly if needed to meet financial obligations; examples of liquid assets generally include cash, central bank reserves, and government debt.
Liquidity indicators measured as percentage of demand and time liabilities (excluding interbank items) of the banks. The most common liquidity ratios are:
2.3.1.1 CURRENT RATIO
The current ratio also known as Working Capital ratio is a liquidity andefficiency ratio that measures a firm's ability to pay off its short-term liabilities with its current assets. The current ratio is an important measure of liquidity because short-term liabilities are due within the next year.
Current Ratio= Current Assets
Current Liabilities
2.3.1.2 ACID-TEST RATIO
The quick ratio or acid test ratio is a liquidity ratio that measures the ability of a company to pay its current liabilities when they come due with only quick assets. Quick assets are current assets that can be converted to cash within 90 days or in the short-term. Cash, cash equivalents, short-term investments or marketable securities, and current account receivable are considered quick assets.
Acid-test Ratio = Cash + AR + Marketable Securities
Current Liabilities
2.3.2 TURNOVER RATIO
In the case of mutual funds, the percentage of a fund's assets that have changed over the course of a given time period, usually a year. Turnover ratio for a mutual fund is calculated by dividing the average assets during the period by the lesser of the value of purchases and the value of sales during the same period. Mutual funds with higher turnover ratios tend to have higher expenses. The most common turnover ratios are:
2.3.2.1 STOCK TURNOVER RATIO
Inventory turnover ratio is also known as stock turnover ratio. Inventory turnover ratio shows the relationship between the cost of goods sold and the average inventory. This ratio measures how frequently the company's inventory turned into sales. This ratio is calculated by using the following formula:
Inventory turnover ratio = Cost of goods sold / Sales
Average stock / Closing stock
2.3.2.2 DEBTORS TURNOVER RATIO
Debtors turnover ratio is also called receivable turnover ratio. This ratio establishes the relationship between net credit sales and average debtors for the year. Debtors turnover ratio shows how quickly the credit sales of the company have been converted into cash. This ratio can be calculated by using the following formula:
Debtors Turnover Ratio = Net credit sales
Average debtors
2.3.2.3 CREDITORS TURNOVER RATIO
The Creditors turnover ratio is a short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. Accounts payable turnover ratio is calculated by taking the total purchases made from suppliers and dividing it by the average accounts payable amount during the same period.
PROFITABILITY RATIO
The profitability ratios are used to measure how well a business is performing in terms of profit. The profitability ratios are considered to be the basic bank financial ratios. In other words, the profitability ratios give the various scales to measure the success of the firm. Like all businesses, banks profit by earning more money than what they pay in expenses. The major portion of a bank's profit comes from the fees that it charges for its services and the interest that it earns on its assets. Its major expense is the interest paid on its liabilities. To determine the profitability of banks, simply looking at the earnings per share isn't quite enough. It's also important to know how efficiently a bank is using its assets and equity to generate profits. For this reason, three key profitability ratios to look at when evaluating a bank stock are:
2.3.3.1 RETURN ON ASSETS (ROA)
To calculate a bank's return on assets, you need to know two pieces of information. First, you need to find the net income, which can be found on the bank's income statement. Next, you need to find the bank's assets (loans, securities, cash, etc.), which can be found on the bank's balance sheet. To calculate return on assets, simply divide the net income by the total assets, then multiply by 100 to express it as a percentage.
2.3.3.2 RETURN ON EQUITY (ROE)
For return on equity, you'll need the net income as well as the total shareholders' equity, which can be found on the balance sheet. The formula for ROE is similar to the ROA formula, except that you divide by equity instead.
2.3.3.3 NET INTEREST MARGIN (NIM)
Finally, to calculate the net interest margin, you need to determine the bank's net interest income. You can find this on the income statement, or you can subtract the bank's interest expense from its interest income. Then, divide this by the bank's assets. Similarly to the other two metrics, use a five-quarter average of assets in order to produce an accurate NIM.
2.4 LIMITATIONS
Although ratio analysis is very important tool to judge the company's performance, following are the limitations of it.
• Ratios are tools of quantitative analysis, which ignore qualitative points of view.
• Ratios are generally distorted by inflation.
• Ratios give false result, if they are calculated from incorrect accounting data.
• Ratios are calculated on the basis of past data. Therefore, they do not provide complete information for future forecasting.
• Ratios may be misleading, if they are based on false or window-dressed accounting information.