Financial Statement Analysis of Axis Bank

MOCB Case
Submitted to: Prof. Vinay Dutta
Submitted by: Group 10, MOCB-E Manjima Chatterjee, 063023 Ritu Agarwal, 063041 Shantanu Mittal, 211134 Yatin Chauhan, 063063 Yukti Agarwal, 211169

PART 1: Inter-relationships between Balance sheet and Income statement items

The lines of connection in the figure, starting from the top and working down to the bottom:

Interest is earned from Investments and Advances/Loans Interest earned increases the cash balances, Investments and lending of Loans Interest is expended on Deposits, Borrowings Depreciation expense is recorded in operating expenses for the use of fixed assets (long-term operating resources). Operating expenses also include costs encompassing administrative, and general expenses. Earning Net Profit increases Capital and Reserves &Surplus

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DEPOSITS-BORROWINGS-INTEREST

Deposits Borrowings Interest expended

300,000.00 250,000.00 200,000.00

2013 252,613.59 43,951.10

17,516.31

2012 220,104.30 34,071.67

13,976.90

2011
189,237.80

26,267.88
8,591.82

Deposits 150,000.00 100,000.00 50,000.00 0.00 2013 2012 2011 Borrowings Interest expended

ADVANCES-INVESTMENTS-CASH-INTEREST EARNED

Advances Investments Cash & Balances with RBI Interest earned

250,000.00

2013 196,965.96 113,737.54 14,792.09 27,182.57

2012 169,759.54 93,192.09 10,702.92 21,994.65

2011 142,407.83 71,991.62 13,886.16 15,154.81

200,000.00

Advances Investments Cash & Balances with RBI Interst earned

150,000.00

100,000.00

50,000.00

0.00 2013 2012 2011

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FIXED ASSETS-OPERATING EXPENSES

2013 Fixed Assets Operating Expenses

2,355.64 6,914.23

2012
2,188.55 6,867.53

2011
2,250.46 5,734.55

8,000.00 7,000.00 6,000.00 5,000.00 4,000.00 3,000.00 2,000.00 1,000.00 0.00 2013 2012 2011 Fixed Assets Operating Expenses

NET PROFIT-CAPITAL-RESERVES

2013 Net Profit Capital Reserves

35,000.00 30,000.00 25,000.00 20,000.00 15,000.00 10,000.00 5,000.00 0.00 2013 2012
5,179.43 467.95 32,639.91

2012
4,242.21 413.2 22,395.34

2011
3,388.49 410.55 18,588.28

Net Profit Capital Reserves

2011

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PART 2: Different Functional Areas reflecting in Balance Sheet and Income Statement

RETAIL BANKING: CORPORATE BANKING: TREASURY: BUSINESS BANKING: SEGMENTS NET PROFIT

Balance Sheet Deposits, Cross-selling, Cash, Loans Investment, Loans/Credit, Capital, Reserves Investment, Borrowings Cash, Funds borrowed

Income Statement Interest earned and paid Interest earned and paid Interest earned and paid Interest earned and paid

Treasury Corp Banking Retail Banking Busi Banking

6000 5000 4000

2013 984.96 5662.28 527.86 377.59

2012 836.4 5165.13 -4.67 290.98

2011 732.21 3883.05 390.3 130.1

Treasury 3000 2000 1000 0 2013 -1000

SEGMENTS NET ASSETS

Corp Banking Retail Banking Busi Banking

2012

2011

Treasury Corp Banking Retail Banking Busi Banking

2013 8684.08 64830.64 -41035.11 216.25

2012 -8051.34 66,386.09 -36047.34 149.16

2011 -10917.13 57839.36 -28198.2 151.76

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80000 60000 40000 Treasury 20000 0 2013 -20000 -40000 -60000 2012 2011 Corp Banking Retail Banking Busi Banking

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PART 3: CAMEL Ratios

1. CAPITAL ADEQUACY Capital Adequacy Ratio: It is measured by Capital Adequacy Ratio (CAR), also known as Capital to Risk (Weighted) Assets Ratio (CRAR). It is the ratio that measures a banks capacity to meet time liabilities and risks like operational risks, credit risks and other risks. A bank with a higher capital adequacy is considered safer because if its loans go bad, it can make up for it from its net worth. The Reserve Bank of India (RBI), currently prescribes a minimum capital of 9% of risk-weighted assets. CRAR= Capital/Risk Weighted Assets Year CRAR 2010-11 12.65% 2011-12 13.66% 2012-13 17.00% I.

CRAR
20.00%

15.00% CRAR (%)

10.00%

5.00%

0.00% CRAR

2010-11 12.65%

2011-12 13.66%

2012-13 17.00%

In all the three years, the CRAR is above the RBI prescribed rate of 9%. This means that the bank is highly capitalizes and its loan making capacity has been enhanced in each year. It has thus also been able to provide its shareholders with increasing amount of cash dividends each year, while maintaining a healthy CAR for future growth. The dividends have increased from Rs. 14 in 10-11 to Rs. 16 in 11-12 to Rs. 18 in 12-13. Increasing CAR also suggests that Axis bank has a high risk absorbing capacity and is in a better position to counter future losses.

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Year 2010-11 2011-12 2012-13

CRAR 12.65% 13.66% 17.00%

Tier 1 Capital 9.41% 9.45% 12.23%

Tier 2 Capital 3.24% 4.21% 4.77%

Tier 1 capital has been raised in 2012-13 in the form of preferential equity share capital. This means that the scope for future growth is very high. Tier 2 capital has been raised through issuing sub ordinate bonds. 2. ASSET QUALITY Asset quality of a bank can be measured using various ratios. They are described below: I. Net Non-performing Assets Ratio A Non-performing asset (NPA) is defined as a credit facility in respect of which the interest and/or installment of principal has remained past due for a specified period of time (90 days). The NPA ratio is one of the most important ratios in the banking sector. It helps identify the quality of assets that a bank possesses. Gross NPA ratio= Gross NPA/Net advances Net NPA ratio= Net NPA/Net advances Year 2010-11 2011-12 2012-13 Gross Ratio 1.01% 1.06% 1.2% Non-performing Asset Net Non-performing Ratio 0.29% 0.27% 0.36% Asset

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1.40% 1.20% 1.00% Net NPA Ratio 0.80% 0.60% 0.40% 0.20% 0.00% Net NPA Ratio Gross NPA Ratio 2010-11 0.29% 1.01% 2011-12 0.27% 1.06% 2012-13 0.36% 1.20%

The NPA ratios have increased but are still considerably low. Addition of fresh NPAs through the year on 12-13 can be the cause of increase as it surpasses the recoveries ad write offs made during the year. 3. MANAGEMENT I. Interest income to working fund: Expressed as a percentage, this ratio shows a banks ability to leverage its average total resources in enhancing its main stream of operational interest income. Year 2010-11 2011-12 2012-13 Interest income to working funds ratio 7.49% 8.71% 8.90%

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Interest income to working fund ratio

9.50% 9.00% 8.50% in % 8.00% 7.50% 7.00% 6.50% Interest income to working fund ratio 2010-11 7.49% 2011-12 8.71% 2012-13 8.90%

The interest income to working fund ratio has been increasing which implies that the companys assets, especially loans have been used in the right way to increase the interest income. In 2012-13, while the total assets increased by 19%, the interest income increased by 23%. This shows how effectively the working funds have been used. II. Non-interest income to average working funds: This ratio denotes a banks ability to earn from non-conventional sources. Non- interest income includes items such as exchange commission, brokerage, gains on sale and revaluation of investments and fixed assets and profits from exchange transactions. In a liberalized environment, this ratio assumes significance for it mirrors a banks ability to take full advantage of its operational freedom. Non-Interest income to working funds ratio 2.29% 2.15% 2.15%

Year 2010-11 2011-12 2012-13

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Non-interest income to working funds ratio

2.35% 2.30% 2.25% 2.20% 2.15% 2.10% 2.05% 2010-11 2011-12 2012-13 Non-interest income to working funds ratio

The decline in the ratio on 2011-12 may be attributed to lower recoveries of loans written off and adverse market conditions in the debt and equity markets. In the year 2012-13, the non- interest income increased by 20.82% showing relatively higher earnings. But there was a loss in the sale of fixed assets. III. Net interest Margin: is a measure of the difference between the interest income generated by banks or other financial institutions and the amount of interest paid out to their lenders (for example, deposits), relative to the amount of their (interest-earning) assets. Net interest margin= (Interest earned-Interest paid)/Working funds Year Net interest margin 2010-11 3.65% 2011-12 3.59% 2012-13 3.53%

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3.66% 3.64% 3.62% 3.60% 3.58% Net interest margin 3.56% 3.54% 3.52% 3.50% 3.48% 3.46% 2010-11 2011-12 2012-13

In the year 2011-12, the cost of funds increased because of increase of interest rates on term deposits from 6.81% to 8.92% In 2012-13, although the interest earned increased, cost of funds also increased due to increase of interest rates on term deposits from 8.92% to 9.10%. 2012-13 also saw an increase in net NPA ratio, which may have also contributed to decline in NIM. Hence, the net interest margin has been declining. IV. Profit per employee: This indicator simply measures the amount of sales or revenue, generated per employee. Profit per employee= net profit/total employees Year 2010-11 2011-12 2012-13 Profit per employee(Rs.) 14.35 lakhs 14.34 lakhs 14.58 lakhs

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Profit per employee

14.6 14.55 in lakh rupees 14.5 14.45 14.4 14.35 14.3 14.25 14.2 Profit per employee 2010-11 14.35 2011-12 14.34 2012-13 14.58

After a slight decline in 2011-12, profit per employee increased considerably in 2012-13. This is because the net profit during 2012-13 increased by 22.09% compared to the previous year. The high figures of this ratio indicate high levels of productivity in Axis Bank. V. Business per employee: This tool is used to measure the efficiency of employees in generating business for the bank. Business is equal to total deposits(less inter-bank deposits) plus total advances. Business per employee= total business/total no. of employees. Year Business per employee(Rs.) 2010-11 13.66 crores 2011-12 12.76 crores 2012-13 12.15 crores

Business per employee(Rs.)

14 13.5 13 in crores 12.5 12 11.5 11 Business per employee(Rs.) 2010-11 13.66 2011-12 12.76 2012-13 12.15

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 Although the total business has been increasing, there is a decline in business per employee in the company. This is due to the massive hiring done by the company through the year to meet its expansion demands. Total number of employees increased from 26,435 in 2010-11 to 31,738 in 2011-12 and 37,901 in 2012-13. 4. EARNINGS I. Operating profit: It is defined as total earnings less total expenses, excluding provisions and contingencies. Year Operating profit (in Rs. Crores) 2010-11 6415.69 2011-12 7430.87 2012-13 9303.13

Operating profit (in Rs. Crores)

10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 Operating profit (in Rs. Crores) in crore rupees

2010-11 6415.69

2011-12 7430.87

2012-13 9303.13

In 2012-13, although operating expenses increased by 15.1%, largely due to growth in banks network and infrastructure requirement, operating profit increased by 25.2%. This is due to an increase in net interest income and other income by 20.56% and 20.86% respectively. II. Net profit margin: Net profit margin is the percentage of revenue remaining after all operating expenses, interest, taxes and preferred stock dividends (but not common stock dividends) have been deducted from a company's total revenue. Year Net profit margin 2010-11 17.12% 2011-12 15.47% 2012-13 15.35%

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Net profit margin

17.50% 17.00% 16.50% In % 16.00% 15.50% 15.00% 14.50% 14.00% Net profit margin 2010-11 17.12% 2011-12 15.47% 2012-13 15.35%

The decline in net profit margin may be a result of the increase in the figures for provisions and contingencies by 5.33% and 29.32% in 2011-12 and 2012-13 respectively. In 2012-13, the provision for NPAs was increased by 37.09%, which can be backed by the increase in NPAs over the year. III. Return on Assets: The return on assets (ROA) ratio illustrates how well management is employing the company's total assets to make a profit. The higher the return, the more efficient management is in utilizing its asset base. Return on assets= Net profit/Total assets Year ROA 2010-11 1.68% 2011-12 1.68% 2012-13 1.7%

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ROA
1.71% 1.70% 1.70% 1.69% 1.69% 1.68% 1.68% 1.67% 2010-11 2011-12 2012-13 ROA

The increase in ROA in 2012-13 may be because he Banks retail businesses grew steadily during the year and there was credible growth of both retail deposits and loans, supported by an expanding network that is critical to the retail franchise. They added 325 branches and 1,321 ATMs in FY 2012-13. IV. Return on Equity: The return on equity ratio (ROE) measures how much the shareholders earned for their investment in the company. The higher the ratio percentage, the more efficient management is in utilizing its equity base and the better return is to investors. ROE= Net income/Average shareholders equity Year ROE 2010-11 20.13% 2011-12 21.22% 2012-13 20.51%

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ROE
21.40% 21.20% 21.00% 20.80% 20.60% 20.40% 20.20% 20.00% 19.80% 19.60% 19.40% ROE

in %

2010-11 20.13%

2011-12 21.22%

2012-13 20.51%

The decline in 2012-13 in ROE may be attributed to the increase in equity holdings of the company during the year. 5. LIQUIDITY I. Cash- Deposit Ratio: It is the amount of money a bank has available (liquidity) as a percentage of the total amount of money its customers have put into the bank (deposits). Cash deposit ratio= (Cash in hand+ balances with RBI)/Total deposits Year Cash deposit ratio 2010-11 7.30% 2011-12 4.86% 2012-13 5.86% II. Advances to Deposits Ratio: This ratio is used for assessing a bank's liquidity by dividing the banks total loans by its total deposits. This number, also known as the LTD ratio, is expressed as a percentage. If the ratio is too high, it means that banks might not have enough liquidity to cover any unforeseen fund requirements; if the ratio is too low, banks may not be earning as much as they could be. LTD= Total loans/total deposits Year Advances deposit ratio 2010-11 75.25% 2011-12 77.12% 2012-13 77.97%

III.

Investment to Deposit Ratio: This is the ratio of total investments (including investments I non approved securities) and total deposits Investment deposit ratio=Total investments/ total deposits MOCB-E_GROUP 10 17 | P a g e

Year 2010-11 2011-12 2012-13

Investments deposit ratio 38.04% 42.34% 45.02%

90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Cash Deposit Ratio Loans Deposit Ratio Investment Deposit Ratio 2010-11 7.30% 75.25% 38.04% 2011-12 4.86% 77.12% 42.34% 2012-13 5.86% 77.97% 45.02%

The cash deposit ratio has reduced through the years. This means that the spare/idle cash available with the banks have reduced over and above the statutory cash that remains with the RBI. (CRR) The loans deposit ratio has been increasing. This means that the customers deposits are being used to provide loans that fetch the back an increasing interest income. The investment deposit ratio has been increasing. This indicates that the bank is increasing investment in government securities, bonds and debentures, which is a step it is taking to avoid risk in the period of economic slowdown. Since the investment deposit ratio has been consistently above 23%, it can be said that the banks is sitting on excess securities.

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PART 4: Other Key Ratios

1. RATIOS UNDER ANNEXURE-1 I. Non-Banking Assets to Total Assets A bank cannot acquire certain asset but can lend against such assets. This means that sometimes, in case of failure on the part of the loan taker to repay the loans, the bank may have to take possessions of such assets. In that case, the assets will be shown in the balance sheet as "non banking assets." these assets must be disposed off in maximum seven years. = Non banking Assets / Total Assets Year 2010-11 2011-12 2012-13 Non Banking Assets to Total Assets 0.006% 0.009% 0.002%

Non Banking Assets to Total Assets

0.010% 0.009% 0.008% 0.007% 0.006% 0.005% 0.004% 0.003% 0.002% 0.001% 0.000% Non Banking Assets to Total Assets

Non Banking Assets to Total Assets

2010-11 0.006%

2011-12 0.009%

2012-13 0.002%

The non banking assets rose sharply in the year 2011-12 showing a five-fold increase over the previous year. The growth in 2012-13 was comparatively less which results in a fall in the ratio.

II. Total Deposits and Total Advances Year 2010-11 2011-12 2012-13 Total Deposits (Rs. 000) 1892378010 2201043033 2526135881 Total Advances (Rs. 000) 1424078286 1697595386 1969659574

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3,000,000,000 2,500,000,000 2,000,000,000 1,500,000,000 1,000,000,000 500,000,000 0 2010-11 2011-12 2012-13 Total Deposits (Rs. 000) Total Advances (Rs. 000)

Total Deposits (Rs. 000) 1892378010 2201043033 2526135881 Total Advances (Rs. 000) 1424078286 1697595386 1969659574

The deposits have grown by 14.77% in 2012-13 over the previous year. The growth rate in 2011-12 over the previous year has been 16.31% The advances have grown by 16.03% in 2012-13 over the previous year. The growth rate in 2011-12 over the previous year has been 19.21%

III. CASA Ratio (%) The CASA (current and savings account) ratio is the ratio of deposits in the current and savings accounts of a bank to its total deposits. A high CASA ratio indicates that a higher portion of the bank deposits come from current and savings accounts. This means that the bank is getting money at low cost, since no interest is paid on the current accounts and the interest paid on savings account is usually low. CASA Ratio = CASA Deposits / Total Deposits

IV. Term Deposits Ratio (%) This is the ratio of the term deposits to the total deposits. Higher the term deposits, higher is the cost of funds for the bank since the interest rates on term deposits are generally higher than the interest rates on CASA deposits (taken together) Term Deposits Ratio = Term Deposits / Total Deposits Year 2010-11 2011-12 CASA Deposits 41.10% 41.54% MOCB-E_GROUP 10 Term Deposits 58.90% 58.46% 20 | P a g e

2012-13
70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% CASA Deposits Term Deposits 2010-11 41.10% 58.90%

44.38%

55.62%

CASA Deposits Term Deposits

2011-12 41.54% 58.46%

2012-13 44.38% 55.62%

As can be seen from the above graph, the CASA deposits have been increasing, which is a good sign as higher the CASA deposits, lower the cost of funds. During 2011-12, a steady growth of low-cost CASA deposits, which on a daily average basis increased by 18.96% to Rs. 70,845 crores from Rs. 59,551 crores last year, helped in containing the cost of funds. During 2012-13, a steady growth of low-cost CASA deposits, which on a daily average basis increased to Rs. 80,941 crores from Rs. 70,845 crores, helped in containing the cost of funds, which had risen over the period due to the hardening of interest rates on term deposits. The reduction in term deposits is a good sign as the cost of funds goes down when the proportion of term deposits goes down.

V. Cost of Funds (%) This ratio determines the expenses incurred by a bank on the funds that it raises by way of deposits and borrowings. Cost of Funds = Total Interest Paid / (Total deposits + Borrowings) Year 2010-11 2011-12 2012-13 Cost of Funds 3.99% 5.50% 5.91%

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Cost of Funds
7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Cost of Funds 2010-11 3.99% 2011-12 5.50% 2012-13 5.91% Cost of Funds

Overall, in the year 2011-12, the daily average cost of funds in the year increased to 6.28% from 4.96% last year. During the year, the cost of deposits increased to 6.47% from 4.96% last year primarily due to an increase in cost of term deposits by 211 basis points (from 6.81% to 8.92%) as well as the cost of savings bank deposits. Overall, in the year 2012-13, the daily average cost of funds in the year increased to 6.55% from 6.28% last year. During the year, the cost of deposits increased to 6.73% from 6.47% last year primarily due to an increase in cost of term deposits by 18 basis points (from 8.92% to 9.10%).

2. SOME MORE IMPORTANT RATIOS I. Operating Profits to Total Assets (%) This ratio tells about how well the banks assets are being used to generate operating profits. This ratio is given by: = Operating Profits/Total Assets Year 2010-11 2011-12 2012-13 Operating Profits to Total Assets 2.73% 2.60% 2.64%

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Operating Profits to Total Assets

2.75% 2.70% 2.65% 2.60% 2.55% 2.50% Operating Profits to Total Assets 2010-11 2.73% 2011-12 2.60% 2012-13 2.64% Operating Profits to Total Assets

The operating profits increased by 15.82% in 2011-12 over the previous year and by a significant 25.20% in 2012-13 over the previous year while the growth in assets stood at 17.68% in 2011-12 and at 19.23% in 2012-13. Since the growth in assets was more in 2011-12 as compared to the growth in operating profits, the ratio declined marginally.

II. Business per Branch This denotes the total business averaged out over the total no. of branches. An increase in this ratio denotes a general growth in the overall business of a bank. Business per Branch = Total Business / No. of Branches Year 2010-11 2011-12 2012-13 Business per Branch Rs. 1450687983 Rs. 2403599518 Rs. 2309088575

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Business per Branch

Rs.3,000,000,000 Rs.2,500,000,000 Rs.2,000,000,000 Rs.1,500,000,000 Rs.1,000,000,000 Rs.500,000,000 Rs.0 2010-11 2011-12 Rs.2,403,599,518 2012-13 Rs.2,309,088,575 Business per Branch

Business per Branch Rs.1,450,687,983

The business of Axis bank has been expanding with a steady positive trend, which is a good sign and presents a healthy picture of the business growth. The total business (deposits + advances) grew by 17.55% in 2011-12 as compared to the previous year and by 15.31% as compared to the previous year. The business per branch shows a marginal dip in the year 2012-13 because of the relatively slow growth of business (as compared to the previous period) and a substantial addition of 325 new branches as compared to the 231 new branches that were added in 2011-12.

III. Borrowings to Assets Ratio This ratio determines as to how well are the bank borrowings covered by the assets of the bank. = Total Borrowings / Total Assets Year 2010-11 2011-12 2012-13 Borrowings to Assets Ratio 10.82% 11.93% 12.91%

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Borrowings to Assets Ratio

13.50% 13.00% 12.50% 12.00% 11.50% 11.00% 10.50% 10.00% 9.50% Borrowings to Assets Ratio 2010-11 10.82% 2011-12 11.93% 2012-13 12.91% Borrowings to Assets Ratio

The overall increasing trend in the borrowings to assets ratio shows a healthy sign in the sense that more and more borrowings are covered by the assets of the bank. This gives a positive sign to the lenders as they see their funds as increasingly getting secured.

IV. Provisioning Coverage Ratio (%) This indicates the extent of funds that a bank has kept aside to cover loan losses. Greater the provisioning ratio, better it is for the bank. Provisioning Coverage Ratio = Provisioning / Gross non-performing Assets Year 2010-11 2011-12 2012-13 Provisioning Coverage Ratio 80.90% 80.91% 79.15%

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Provisioning Ratio
81.50% 81.00% 80.50% 80.00% 79.50% 79.00% 78.50% 78.00% Provisioning Ratio 2010-11 80.90% 2011-12 80.91% 2012-13 79.15% Provisioning Ratio

The provisioning coverage ratio has been consistently high and well above the regulatory guidelines of 70%. The ratio is decreasing because the Gross NPAs show an increasing trend.

V. Financial Leverage (Equity Multiplier) The equity multiplier is a way of examining how a company uses debt to finance its assets. This is also known as the financial leverage ratio or leverage ratio. In other words, this ratio shows a company's total assets per dollar of stockholders' equity. A higher equity multiplier indicates higher financial leverage, which means the company is relying more on debt to finance its assets. Equity Multiplier = Total Assets / Total Shareholders Equity Year 2010-11 2011-12 2012-13 Equity Multiplier 12.78 12.52 10.9

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Equity Multiplier
13 12.5 12 11.5 11 10.5 10 9.5 Equity Multiplier 2010-11 12.78 2011-12 12.52 2012-13 10.9 Equity Multiplier

The equity multiplier has been falling, which means that the bank is reducing its reliance on debt to finance its assets. Banks generally have a high equity multiplier since advances (major part of assets) are funded by the amount of deposits that they receive.

VI. Secured Advances to Total Advances A secured advance is a loan in which the borrower pledges some asset as collateral for the loan. The asset can be forfeited in case the borrower defaults. Higher the percentage of secured advances in the total loan portfolio of a bank, the more secured it is against losses on account of defaults. = Secured Advances / Total Advances Year 2010-11 2011-12 2012-13 Secured Advances to Total Advances 81.70% 86.44% 82.84%

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Secured Advances to Total Advances

87.00% 86.00% 85.00% 84.00% 83.00% 82.00% 81.00% 80.00% 79.00% Secured Advances to Total Advances 2010-11 81.70% 2011-12 86.44% 2012-13 82.84% Secured Advances to Total Advances

Axis Bank maintains a very healthy secured advances to total advances ratio. The figure, which has been remaining in excess of 80% suggests that a very major part of the banks loans are secured by tangible assets or bank/government guarantees. Such a healthy figure shows that the bank is well protected from borrower defaults.

VII. Spread as Percentage of Working Funds (%) Spread is the difference between the interest received and the interest paid. When calculated as a percentage of the working funds, it gives a fair idea about the profitability on the assets of a bank. Higher the ratio, better it is. Spread as percentage of working funds = Interest earned as percentage of working funds Interest paid as percentage of working funds Year 2010-11 2011-12 2012-13 Spread as % of working funds 2.70% 2.80% 2.84%

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Spread as % of working funds

2.90% 2.85% 2.80% 2.75% 2.70% 2.65% 2.60% Spread as % of working funds 2010-11 2.70% 2011-12 2.80% 2012-13 2.84% Spread as % of working funds

It is a good sign that the interest spread has been showing an upward trend since it highlights the profitability of the bank. During both the years, the net interest income showed growth, which may be attributed to an expansion in the balance sheet size and healthy low-cost Current Account and Savings Bank (CASA) deposits.

VIII. Burden as Percentage of Working Funds (%) Burden is the difference between non-interest expenditure and the non-interest income of a bank. It is the amount of non-interest expenditure not covered by non-interest income. When burden is taken as a percentage of the working funds, it gives a fair idea about profitability and how it might get affected on account of non-interest expenditure. Lower the ratio, higher the efficiency of the bank. Burden as percentage of working funds = Non-interest expenditure as percentage of working funds Non-interest income as percentage of working funds Year 2010-11 2011-12 2012-13 Burden as % of working funds 0.061% 0.205% 0.107%

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Burden as % of working funds

0.25% 0.20% 0.15% 0.10% 0.05% 0.00% Burden as % of working funds 2010-11 0.06% 2011-12 0.21% 2012-13 0.11% Burden as % of working funds

In 2011-12, the other income comprising fees, trading profit and miscellaneous income increased by 17.01% while the operating expenses increased by 25.69%. This explains the increase in burden in this year. In 2012-13, the other income comprising fees, trading prot and miscellaneous income increased by 20.86% to Rs. 6,551.11 crores in 2012-13 from Rs. 5,420.22 crores last year while the operating expenses increased by 15.10% largely as a result of the growth of the banks network and other infrastructure required for supporting the existing and new businesses. Since the rise in other income is more than the rise in operating expenses, hence the fall in burden.

IX. Cost to Income Ratio This ratio measures the income generated per rupee of cost incurred i.e. how expensive it is for the bank to produce a unit of output. The lower the C/I ratio, the better is the performance of the bank. Cost to Income Ratio = Operating Expenses / Total Income Year 2010-11 2011-12 2012-13 Cost to Income Ratio 24.15% 21.91% 20.50%

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Cost to Income Ratio

25.00% 24.00% 23.00% 22.00% 21.00% 20.00% 19.00% 18.00% Cost to Income Ratio 2010-11 24.15% 2011-12 21.91% 2012-13 20.50% Cost to Income Ratio

The declining trend in the cost to income ratio presents a positive picture about Axis Bank. The trend transcends into an increase in the operating efficiency of the bank. The value of the ratio in 2011-12, 21.91% declined by 6.44% to come down to 20.50% in 2012-13 primarily because the increase in income during 2012-13 was 23.05%, which is greater than the increase in operating expenses, which amounted to 15.10%. A similar trend can be noticed in change from 2010-11 to 2011-12.

X. Earnings per Share (Rs.) The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability. EPS = (Net Income Dividends on Preferred Stock) / Average Outstanding Shares Year 2010-11 2011-12 2012-13 EPS 82.95 102.94 119.67

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EPS
140 120 100 80 60 40 20 0 EPS 2010-11 82.95 2011-12 102.94 2012-13 119.67 EPS

XI. Diluted Earnings per Share (%) It shows the potential effect on earnings per share of converting convertible securities into common shares. = (Net Income Preferred dividends) / (The average number of common shares outstanding + Average number of common shares issued on the assumed conversion of convertible securities) Year 2010-11 2011-12 2012-13 Diluted EPS 81.61 102.2 118.85

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Diluted EPS
140 120 100 80 60 40 20 0 Diluted EPS 2010-11 81.61 2011-12 102.2 2012-13 118.85 Diluted EPS

The consistent strong performance in earnings resulted from the robust growth across all segments. The growth in earnings may be attributed to the performance of the Banks core income streams: net interest income (NII), fee and other income. NII increased by 20.56% to Rs. 9,666.26 crores in 2012-13 from Rs. 8,017.75 crores last year. Fee, trading and other income increased by 20.86% to Rs. 6,551.11 crores in 2012-13 from Rs. 5,420.22 crores last year. The increase in earnings was partly offset by an increase in operating expenses by 15.10% to Rs. 6,914.24 crores in 2012-13. The growth in earnings in 2011-12 over 2010-11 can be attributed to the same reasons as in the case of growth in 2012-13. Both EPS and Diluted EPS show a healthy growth in business as the quantum of net profit ranking for dividend for each share held by shareholders shows an increase. Dividend per share has gone up from Rs. 16 to Rs. 18 in 2012-13 and Rs. 14 to Rs. 16 in 2011-12. The dilution in 2012-13 is on account of 2,975,646 stock options.

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DU PONT ANALYSIS: The DuPont System of Analysis merges the income statement and balance sheet into two summary measures of profitability: Return on Assets (ROA) and Return on Equity (ROE). The system uses three financial ratios to express the ROA and ROE: Operating Profit Margin Ratio (OPM), Asset Turnover Ratio (ATR), and Equity Multiplier (EM).

THREE STEP DUPONT MODEL

Profit Margin (Profit/Net Sales * 100)

Total Asset Turnover (Sales/Assets)

Return on Total Assets (ROTA)

Equity Multiplier (Assets/Equity)

Return on Equity (ROE)

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The method goes beyond profit margin to understand how efficiently a company's assets generate sales or cash and how well a company uses debt to produce incremental returns. Using these three factors, a DuPont analysis, helps efficiently determine where the company is weak and strong and quickly know what areas of the business to look at (i.e., inventory, debt structure, margins) for more answers. The measure is still broad, however, and is not a substitute for detailed analysis. Now, comparative analysis was done for AXIS bank with its competitors HDFC and ICICI to compare their ROE using DuPont analysis:

ROE (%)
25 20 15 10 5 0 AXIS BANK HDFC ICICI 2010-11 20.13 14.21 11.36 2011-12 21.22 14.63 12.67 2012-13 20.51 16.94 13.2

The DuPont analysis on Axis Bank highlights the companys ROE figures over the last 3 years in comparison to its competitiors HDFC and ICICI. Even though the ROE of Axis Bank has been high in comparison to its competitors but there was a decrease in the value over last year. All three banks has been utilizing their assets effectively to generate sales over the last three years. The performance of Axis bank in terms of profit margins has declined in the last three years as its profit margins are lower than HDFC and ICICI. Another reason behind the decrease in ROE could be the equity mulitplier whereas it has incresed for HDFC and ICICI which shows that Axis Bank is reducing their debt levels in order to finance their operations.

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Profit Margin (%)

17.5 17 16.5 16 15.5 15 14.5 14 AXIS BANK HDFC ICICI 2010-11 17.12 16.18 15.79 2011-12 15.47 15.35 15.75 2012-13 15.35 16.04 17.19

Asset turnover
0.12 0.1 0.08 0.06 0.04 0.02 0 AXIS BANK HDFC ICICI 2010-11 0.08 0.087 0.08 2011-12 0.096 0.099 0.083 2012-13 0.09 0.1 0.09

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Equity Multiplier
14 12 10 8 6 4 2 0 AXIS BANK HDFC ICICI 2010-11 12.78 10.92 7.37 2011-12 12.52 11.29 8.09 2012-13 10.29 11.05 8.04

Market Reach: AXIS Bank:

No. Of Branches
3500 3000 2500 2000 1500 1000 500 0 AXIS BANK HDFC ICICI 2010-11 1390 1966 2529 2011-12 1622 2544 2752 2012-13 1947 3062 3100

Here we can see that Axis Bank has less no. of branches as compared to HDFC and

ICICI.

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No. of ATMs
12000 10000 8000 6000 4000 2000 0 AXIS BANK HDFC ICICI 2010-11 6270 5471 6104 2011-12 9924 8913 9006 2012-13 11245 10743 10481

The number of ATMs for Axis bank has been the highest over the last three years. We can see that HDFC bank has been the most aggressive in order to provide these personal services to the customers in order to increase its reach.

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PART 7: Profitability of various Lines of Business

SEGMENT PROFITABILITY:

Segment Profit/Total Profit

90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% -10.00% Treasury corporate/wholesale Banking Retail Banking Other Banking Business

in %

2010-11 15.11% 75.65% 6.84% 2.40%

2011-12 13.30% 82.14% -0.07% 4.63%

2012-13 13.04% 74.97% 6.99% 5.00%

Corporate banking is the highest contributor to the total profit of the bank.

Segement Assets/Total Assets

50.00% 45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Treasury corporate/Wholesale Banking Retail Banking Other Banking Business

in %

2010-11 39.06% 43.13% 17.74% 0.07%

2011-12 38.10% 41.36% 20.48% 0.06%

2012-13 41.38% 37.78% 22.19% 0.07%

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3. OTHER QUESTIONS IN ANNEXURE-I Q: What will be the impact on cost of funds of Axis Bank, if market rates move upward tomorrow? A: If the market rates of funds move upward tomorrow morning, the cost of funds is bound to go up. The reason behind this is that as the interest rates on deposits go up in the market, the interest that is to be expended by Axis Bank is bound to go up, which ultimately transcends into cost of funds going up.

Q: Would the bank have been significantly impacted by the downslide in the equity markets in 2012-13? A: The effect of the downslide in the equity markets can be seen from two angles: From the Banks POV: In case the equity markets go down, the bank would not want to invest in the equity market on account of the uncertainties involved in the market and lower returns. In such a case, investments will be made in fixed income and risk-free securities. As a result, the return on investments might be lower than what could be got if the investments were made in the equity market. From an investors point of view: In case the equity markets go down, investors would want to deposit their funds in savings accounts (instead of investing in the equity market). This will mean an increase in the deposits for the banks.

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PART 8: Key Drivers of Non-Interest Income and Non-Interest Expense

1. Key drivers of non interest income: Commission, exchange and brokerage Profit/(Loss) on sale of investments Profit/(Loss) on sale of fixed assets Profit on exchange/derivative transactions Income earned by way of dividends etc. from subsidiaries/companies and/or joint venture abroad/in India Miscellaneous income including recoveries on account of advances/investments written off in earlier years and net loss on account of portfolio sell downs/securitization.

2. Key drivers of non-interest expense: Payments to and provisions for employees Rent, taxes and lighting Printing and stationery Advertisement and publicity Depreciation on banks property Directors fees, allowance and expenses Auditors fees and expenses Law charges Postage, telegrams, telephones etc. Repairs and maintenance Insurance Other expenditure

Apart from the operating expenses, other expenses include provisions and contingencies.

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PART 9: Peer to Peer Comparision

For the purpose of this analysis, some of the important ratios have been used to compare Axis Bank, HDFC Bank and ICICI Bank. The figures have been taken for FY 2012-13. Ratio Capital Adequacy Ratio Net NPA to Net Advance Ratio Interest income to working fund ratio Profit per employee Business per employee Return on Assets Net Interest Margin Cash to Deposit Earnings per share Dividend per share Axis Bank 17.00% 0.36% 8.90% Rs. 14.58 lacs Rs. 12.15 crores 1.70% 3.53% 5.86% Rs. 102.94 Rs. 18 HDFC Bank 16.80% 0.2% 9.91% Rs. 10 lacs Rs. 7.5 crores 1.90% 4.5% 4.94% Rs. 28.5 Rs. 5.5 ICICI Bank 18.74% 0.77% 8.17% Rs. 14 lacs Rs. 7.35 crores 1.66% 3.11% 6.51% Rs. 72.20 Rs. 20

While the capital adequacy ratio of all the three banks are above the RBI stipulated 9%, ICICI Bank has the highest figure. This means that compared to its peers, ICICI is the safest bank and has the highest capacity to meet its time liabilities and risks. Net NPA to Net advance ratio is highest for ICICI and lowest for HDFC. This means that the quality of assets is best in case of HDFC, followed by Axis bank. The measures for interest income to working fund ratio and return on assets are highest for HDFC bank which indicated that the total assets in this bank have been most effectively employed to generate income by the bank. Net interest margin is highest for HDFC bank followed by Axis, which again indicates managerial adeptness. Profit per employee and business per employee are highest for Axis Bank indicating highest level of productivity compared to its peers. Cash to deposit ratio is highest for ICICI bank as compared to its peers. While this can mean that the bank has adequate cash to meet its liquidity requirements, it can also indicate the existence of idle cash which can be used by the bank to generate income. While earnings per share are highest for Axis bank, Dividend per share is highest for ICICI, followed by Axis. This indicated the financial soundness of both companies in terms of shareholders money. Hence, we can conclude that: Capital adequacy is highest in ICICI bank. MOCB-E_GROUP 10 42 | P a g e

 Asset quality is best in HDFC bank. Management is most sound both in HDFC bank and Axis bank. Earnings are highest in HDFC bank. Liquidity is maximum in ICICI bank.

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PART 10: Key Measures of Risks in Axis Bank

Capital Adequacy Ratio o Implications - CAR is the ratio that measures a banks capacity to meet time liabilities and risks. A bank with a higher capital adequacy is considered safer because if its loans go bad, it can make up for it from its net worth. High CAR also means that a bank's large amount of money is stuck in provisions or risk management , meaning that there will be fewer money left for investment or for the continuation of the activity. Lower capital adequacy ratios serve to protect depositors and promote the stability and efficiency of the financial system.

Leverage Ratios o Implications They imply the trade-o of a regulator between the banking stability and the credit banking activity. Lower leverage can improve the banking stability. But high leverage is thought to be more risky because they have more liabilities and less equity and less ability to meet its financial obligations.

Liquidity Ratios o Implications High liquidity ratios means banks ability to satisfy cash demands or payment obligations or financial emergency is good. But then credit multiplier effect is far less.

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