Section B

Group 4

Banking sector in India:

Risk Measurement
Comparative Financial Analysis of
SBI, HDFC Bank and ICICI Bank
Section B | Group 4
Aditya Bansal
Chandan Papneja
Geetika Mittal
Naman Ratan
Samveda Sharma
Utkarsh Choudhary

(15P064)
(15P074)
(15P084)
(15P094)
(15P105)
(15P115)

Section B
Group 4

Overview of Banking Sector

Banking is a strategic sector in India as it drives the economy

Agriculture, Industrial Goods and SMEs
Indian Banking sector is largely dominated by Public sector
banks with 77% of the total business
SBI and its associate banks is the most prominent public
sector bank in India
Major private banks include HDFC bank, ICICI bank, Axis
Bank
Banking sector is one of the most regulated sectors in India.
The main regulatory body is Reserve Bank of India (RBI)

Source: http://www.crisilresearch.com

Section B
Group 4

Banking Industry Drivers

GDP and Expansion
(GDP Growth and
Inflation)
Industrial Production
(Calculated through IIP)
Domestic Savings
(Savings and
Consumption)
Fiscal Situation
(Fiscal deficit, Monetary
policy)
Technological Innovation
(Digital, Social,
Analytics)
Financial Inclusion
(Jan-Dhan, DBTL etc.)

Section B
Group 4

Company Analysis and Comparison

Parameter

SBI

HDFC

ICICI

Sector

Public Sector
Bank

Private Sector
Bank

Private Sector
Bank

Market Cap
(Rs.)

2.08 trillion

2.68 trillion

1.75 trillion

Profit After
Tax (Rs.)

131.01 billion

102.16 billion

111.75 billion

No. of
branches

16,333

4,014

4,050

Customer base 273.2 million

~32 million

~52 million

License
obtained in

1956

1994

1994

Established in

1921

1977

1955

ATMs

54,560

11,766

12,451

Section B
Group 4

Legal Framework for

Financial Statements in
Banking Sector
The
Companies
Act, 2013
(Schedule
III)

The
Banking
Regulation
Act, 1949

Reserve
Bank of
India, 1934

Financial Statements
based on Fiscal
year(Apr Mar)

Section B
Group 4

Balance sheet of a bank

SOURCES OF FUNDS:
Capital
Reserves Total
Equity Share Warrants
Equity Application Money
Deposits
Borrowings
Other Liabilities & Provisions
Other
TOTAL LIABILITIES
APPLICATION OF FUNDS:
Cash & Balances with RBI

Amount (crores) Percentage

1159.66
0.18%
79262.26
12.22%
7.44
0.00%
361562.73
55.73%
172417.35
26.58%
34374.72
5.30%
648784.16
100.00%
Amount (crores) Percentage
25652.91
3.95%

Balances with Banks & money at Call

Investments
Advances
Fixed Assets
Other Assets
Others
TOTAL ASSETS

16651.71
186580.03
387522.07
4725.52
27651.91
648784.15

Contingent Liability

851977.61

2.57%
28.76%
59.73%
0.73%
4.26%
100.00%

Source: http://www.capitaline.com

Section B
Group 4

P&L A/C of a Bank

I. Income
Interest Earned
Other Income
Total
II. Expenditure
Interest expended
Payments to/Provisions for Employees
Operating Expenses & Administrative
Expenses
Depreciation
Other Expenses, Provisions &
Contingencies+
Provision for Tax
Deferred Tax
Total
III. Profit & Loss
Reported Net Profit
Extraordinary Items
Adjusted Net Profit
Prior Year Adjustments
Profit brought forward
IV. Appropriations
Transfer to Statutory Reserve

Amount (in
crores)
49091.14
12176.13
61267.27
Amount (in
crores)
30051.53
4749.88
2714.56
658.95

Percentage
439.47%
109.00%
548.47%
Percentage
269.02%
42.52%
24.30%
5.90%

7277.44
65.15%
4859.14
43.50%
-219.57
-1.97%
50091.92
448.43%
Amount (in
crores)
Percentage
11175.35
100.04%
4.79
0.04%
11170.56
100.00%
0
0.00%
13318.59
119.23%
Amount (in
crores)
Source: Percentage
http://www.capitaline.com
2793.9
25.01%

Section B
Group 4

Risks for a Bank

Financial
Risk

Operational
Risk

Quantitative Analysis Financial Ratio

Section B
Group 4

Operating Risk Ratios &

Parameters

Net Interest Income

Net Interest Margin
Cost to Income Ratio
Operating Profit Margin
Other Income to Total Income Ratio

Section B
Group 4

Net Interest Income(NII)

Net Interest Income = Interest earned Interest Paid

Net Interest Income

SBI

60,000
50,000

HDFC

ICICI

55,015
49,282
44,329

40,000
30,000
20,000

26074

22396

19254
13866

16475

19040

10,000
0
FY 2013

FY 2014

FY 2015

Analysis:
For Banking sector, Net Interest Income is analogous to Gross profit
Net Interest Income measures the ability to control interest rate risk Higher the
NII lower the risk
SBI is by far the largest bank in India and it is reflected in its NII
NII for HDFC Bank and ICICI bank have shown CAGR in the range of 17% -

Net Interest Margin (NIM)

Section B
Group 4
Net Interest Margin = Interest earned Interest Paid
Average Interest bearing assets

Net Interest MarginSBI

5

4.47

4.5

HDFC

4.43

4.37

4
3.5
3

3.34

3.11

3.17

ICICI

3.33

3.16

3.48

2.5
2
1.5
1
0.5
0
FY 2013

FY 2014

Industry Average : 2.84%

(March 15)

FY 2015

Analysis:
NIM measures the rate of NII earned on banks interest earning assets
Higher the NIM, more profitable the bank
HDFC Bank has one of the best NIM in the industry
ICICI Bank has been improving its NIM year on year while NIM for SBI is more or less

Section B
Group 4

Cost to Income Ratio

Cost to Income = Operating
Expenses *100
Net Income (Top Line)

Cost To Income (%)SBI

60
50
40

48.5149.6
40.49

52.67
45.6
38.25

HDFC

ICICI

49.85
44.6
36.83

30
20
10
0
FY 2013

FY 2014

FY 2015

Analysis:
Cost to Income ratio measures Operating Efficiency of a bank
Smaller the ratio, more efficient the bank
HDFC Bank, ICICI Bank have been reducing their cost to income in past few years
SBI (Public Sector Bank) has not been as efficient as the private banks in this

Section B
Group 4

Operating Profit Margin (OPM)

OPM = (Net interest income (NII) - operating expenses)
* 100
Total interest income

20.00%

Operating Profit
Margin
15.66%

16.00%

12.00%

HDFC

ICICI

17.35%

18.00%

14.00%

SBI

13.96%

12.58%13.05%12.11%

9.94%

10.00%

15.37%

10.72%

8.00%
6.00%
4.00%
2.00%
0.00%
FY 2013

FY 2014

FY 2015

Industry Average : 14.30%

Analysis:
(March 14)
Operating Profit Margin measures the profitability of a bank from its core
operations
Higher the ratio, more profitable the bank
HDFC Bank, ICICI Bank have been increasing their operating profit margins in past

Other Income to Total Income Ratio

Section B
Group 4

Other Income to Total Income ratio = Other income * 100

Total income

Other Income to Total Income RatioSBI

HDFC

ICICI

25.00%

20.00%

17.24%
16.35%

16.14%

15.00%
11.82%

19.87%

18.83%

11.98%

15.65%
12.91%

10.00%

5.00%

0.00%
FY 2013

FY 2014

FY 2015

Analysis:
Fee based income accounts for a major portion of a bank's other income
A bank generates higher fee income through innovative products and adapting
new technology
The higher ratio indicates increasing proportion of fee-based income
The ratio is influenced by gains on government securities, which fluctuates
depending on interest rate movement in the economy

Section B
Group 4

Financial Risk Ratios &

Parameters

CASA Ratio
Capital Adequacy Ratio
Asset Quality (Gross NPA, Net NPA, PCR)
Credit to Deposit Ratio

CASA Ratio

Section B
Group 4
CASA Ratio = CASA Deposit *CASA Deposit = Current Deposit +
100
Saving Deposit
Total Deposit
48%

47.40%

CASA
Ratio

SBI

HDFC

46%
44%
42%

ICICI

45.50%
44.80%
44.43%

43.89%

42.90%

42.88%

42.00%

40%
38%
FY 2013

FY 2014

44.00%
FY
2015

Analysis:
CASA Deposit are a cheaper source of funds and hence preferable
High CASA ratio leads to higher operational efficiency and thereby higher profits
ICICI Bank has constantly increased its CASA ratio while the CASA ratio for HDFC
Bank has been declining year on year

Capital Adequacy Ratio (CAR/CRAR)

Section B
Group 4

Capital Adequacy ratio is the ratio of the banks capital to its risk
weighted assets
Capital Adequacy Ratio = Tier 1 Capital +Tier 2 Capital * 100
Risk Weighted Assets (RWA)
Core capital of the bank. It primarily consists of common stock and
retained earnings of the bank. It may also include non-redeemable
non-cumulative preferred stock
Tier I Tier I items are deemed to be of the highest quality because they
Capital are fully available to cover losses (are set off against the loss
carried from the Profit & Loss A/c)
Supplement capital of the bank. It includes undisclosed reserves,
revaluation reserves and general provisions
Tier II Tier II's capital loss absorption capacity is lower than that of Tier I
Capital capital
Assets of the bank weighted according to the risk associated with
them. This risk has been defined by the RBI for different types of
securities, investments and loans and ranges between 0 - 150%
Risk
Weighte For example, RBI has given risk weight of 150 to investments in
d Assets venture capital funds whereas loans guaranteed by the
Government of India have been given risk weight of 0%.

Section B
Group 4

Capital Adequacy Ratio (CAR)

Industry Average : 12.70%
(March 15)

Capital
Adequacy
Ratio
18.74%

20%

16.80%

16%
12.51%

SBI

17.70%
16.07%

12.44%

12%

HDFC

ICICI

17.02%
16.79%

12.00%

8%
4%
0%
FY 2013

FY 2014

FY 2015

Analysis:
Capital Adequacy Ratio measures the shock-absorbing ability of a bank
High Capital Adequacy enhances a banks liquidity and solvency
Current Mandatory CAR is 9%. It is to be gradually increased to 11.5% by Mar, 2019 as
per Basel III Norms
ICICI and HDFC Bank have been doing well on the Capital Adequacy front

Section B
Group 4

Gross Non
Performin
g Assets
(GNPA)

Net Non
Performin
g Assets
(NNPA)

Provision
Coverage
Ratio
(PCR)

Asset Quality

Gross NPAs are the total amount of loans that the

bank cannot recover from the borrowers.

Net NPAs are GNPAs minus the provisions made

against them, i.e. total NPAs less the expected
non-recovery recorded in the books
Provisioning Coverage Ratio (PCR) is the ratio of
provisioning to gross non-performing assets and
indicates the extent of funds a bank has kept
aside to cover loan losses

Section B
Group 4

Gross NPAs ratio (GNPA)

Gross NPAs ratio =

Gross NPAs

* 100

Gross Advances
6%
5%

Gross NPA
Ratio

SBI

ICICI

4.95%

4.75%

4.25%
3.78%

4%
3%

HDFC

2.68%

3.03%

2%
1%

0.97%

0.98%

0.93%

FY 2013

FY 2014

FY 2015

0%

Industry Average : 4.45%

(March 15)

Analysis:
The Gross NPAs ratio is indicative of the quality of credit decisions made by
bankers
Higher GNPA ratio is indicative of poor credit decision-making
HDFC has been very efficient in managing their GNPAs while SBI being public sector
bank has high GNPAs

Section B
Group 4

Net NPAs ratio

Net NPAs ratio =
Gross NPAs Provisions
* 100
Gross Advances Provisions
SBI

Net NPA Ratio

HDFC

ICICI

3%
3%

2.57%
2.12%

2.10%

2%
1.40%

2%
1%
1%

0.64%

0.82%

0.20%

0.27%

0.25%

FY 2013

FY 2014

FY 2015

0%

Industry Average : 2.36%

(March 15)

Analysis:
The Net NPAs ratio is used as a measure of the overall quality of the bank's loan
book
Higher NNPA ratio is indicative of poor credit decision-making and provisioning
coverage
HDFC has been very efficient in managing their NNPAs while SBI being public sector

Section B
Group 4

Provision Coverage ratio

Provision Coverage Ratio = Cumulative Provisions *100
Gross NPAs

90%
80%
70%

Provision Coverage
Ratio

80.00%

76.80%

66.58%

72.57%

68.60%

62.86%

60%

SBI

HDFC

ICICI

73.93%

69.13%

58.60%

50%
40%
30%
20%
10%
0%
FY 2013

FY 2014

FY 2015

Analysis:
RBI earlier required banks to ensure that their total provisioning coverage ratio is not
less than 70%
PCR for ICICI bank has declined significantly in last 3 years and is well below 70% now
Concern of Increase in NNPAs for ICICI bank is reflected in its declining PCR
HDFC has been maintaining a healthy PCR of more than 70%

Section B
Group 4

Credit to Deposit (C/D) Ratio

Credit to Deposit ratio = Total Advances
* 100
Total Deposits
86%
84%
82%
80%

Credit/Deposit
Ratio

SBI

HDFC

ICICI

83.80%
82.40%

82.50%

80.90%
78.90%

81.10%

80.70%
78.80%

78%
75.90%

76%
74%
72%
70%
FY 2013

FY 2014

Industry Average : 79.4%

(March 14)

FY 2015

Analysis:
C/D ratio helps to assess a banks liquidity
Very High C/D makes the bank vulnerable to adverse change in its deposit base
Low C/D ratio indicates holding unproductive capital and lower than optimum
earnings
C/D ratio has increased sharply for ICICI bank in FY 2015 while it has declined sharply

Section B
Group 4

Other Ratios and Parameters

Return on Assets
Leverage Ratio
Return on Equity
Price to Book Value

Return on Assets

Section B
Group 4

Return on Assets = Net Income

* 100
Total Assets
Return on Assets
SBI

HDFC

ICICI

2.50%
2.00%

1.90%

2.00%

2.00%

1.86%

1.78%

1.70%
1.50%
1.00%

0.97%
0.65%

0.68%

0.50%
0.00%
FY 2013

FY 2014

FY 2015

Industry Average : 1.20%

s:
(March 15)
ignifies the efficiency of the assets employed (Net Income Margin* Asset Turnover)
eing a PSB has lower managerial efficiency and hence by far the lowest ROA
Bank seems strong here as well with consistent ~2% ROA
Bank has been improving their return on assets year on year
have been suffering from lower efficiencies and higher GNPAs

Leverage Ratio

Section B
Group 4

Leverage Ratio = Total Assets

Net Worth

Leverage Ratio
SBI
18
16

15.84

HDFC

ICICI

15.95

15.16

14
12

11.31

11.05

9.52

10

8.05

8.12

8.03

6
4
2
0
FY 2013

FY 2014

Industry Average : 8.52

(March 15)

FY 2015

s:
ng Industry, with major source of funds being deposits, is highly leveraged
makes rising NPAs a serious concern because of low shock absorbing capital
age ratio for SBI is highest and hence high ROE despite low ROA
age ratio is a financial as well as operational risk measure

DuPont Analysis Return on Equity

Section B
Group 4

Return on Equity = Profit after Tax (PAT) *

100
Net Worth
Return on Equity

SBI

HDFC

ICICI

20%
16%

17.07%

15.94%

17.07%

15.13%

12%

14.30%

13.70%

12.90%
10.49%

11.17%

8%
4%
0%
FY 2013

FY 2014

FY 2015

Industry Average : 13.23%

(March 15)

Analysis decomposes ROE in three factors: Income Margin , Turnover & Leverage
E is high due to high leverage, HDFCs because of high NIM risk for HDFC is lower
ICICI Bank is moderate on account of consistency and moderate NIM, Turnover and

Section B
Group 4

Price to Book Value Ratio

Price to Book Value = Market price of share
Book value per share
SBI
Price to Book Value
4.50

HDFC
4.13

4.13

4.11

ICICI

4.00
3.50
3.00
2.50
2.00
1.50

2.0
1.49

1.00

1.70

1.27

1.5

0.5

0.50
0.00
FY 2013

FY 2014

FY 2015

compares the Market price of the share with the book value per share of compan
how low/ high priced the banks stock is compared to its Net Worth
r negative) ROE and high P/B ratio would mean the stock is overvalued
utperforms the other two major banks by a wide margin in Earnings and P/B ratio

Section B
Group 4

References

Annual Reports 2012-13 | 2013-14 |

2014-15
ICICI Bank
HDFC Bank
SBI

Google Finance Share Prices

CRISIL Research Industry Data
Capitaline Database Industry
Thank you!
averages