financial performance analysis of select...
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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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