ASIAN SCHOOL OF BUSINESS

QUANTITATIVE
TECHNIQUES
PROJECT
Analysis of the Financial Statements of Banks

Priyanka Nair; Mathew Sam; Siji Sujathan; Annu Mathew

TOPICS
Objective of Analysis
Framework for Financial Analysis
Financial Statements
Banks Balance Sheet Structure
Financial Analysis
Overview of the Banks
Inference from the Financial Statements
A Comparison of the 3 Banks using Statistical tools
Conclusion
Sources of Data

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OBJECTIVE OF ANALYSIS
The underlying objective of financial analysis is the comparative measurement of risk and
return useful for making investment, credit or regulatory decisions. Usually these decisions
require a very good understanding of the past events and the macro-economic environment
prevailing then. This understanding represents the basis for estimating the future, be it a
month, six months or several years. Information as to the past, provide a basis for assessing
projecting the future earnings and cash flows.
Banking supervision, which is based on an ongoing analytical review of banks, continues to
be one of the key factors in maintaining stability and confidence in the financial system.
The objectives are to:
assess the capacity of the bank to operate safely and productively
ensure compliance with regulatory requirement
diagnose problems early,
identify the reasons for problems (if any)
assess problems in the context of the industry as a whole or a peculiarity of the bank
formulate effective and practical course of action
Various persons are also interested in the performance of banks or various reasons:

Creditors
Government
Equity investors
General public
Staff
Various interest groups

The starting point for everyone is the financial statements of the business. Hence, the
requirement for financial statements to be prepared in line with prescribed accounting
standards.

FRAMEWORK FOR FINANCIAL ANALYSIS

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The level of development of the financial sector in every economy will impact the nature of
the financial statement to be analyzed and the interpretation to be made. Factors such as

The competitiveness and volatility of the market

Stability of the financial systems and markets
Adequacy of financial sector infrastructure
Level of market discipline
Sufficiency of the safety net

All these factors make it essential that the analyst have knowledge of the particular
regulatory, market and economic environment of the entity being analyzed. An analyst must
have a holistic perspective on the financial system even when considering a particular bank.
THE FINANCIAL STATEMENT
It is interesting to see what information published company accounts contain, and what they
do not show. Published accounts normally contain information that is required by law or by
various other regulations but not much else.
Companies, quite naturally, like to keep their affairs secret from the eyes of competitors, and
so are reluctant to publish more information than they have to meet regulations e.g.
International Accounting Standards, Securities and Exchange Commission and Stock
Exchange Regulations.
A Companys annual report and accounts will contain the following statements and reports:

Chairmans statement
Directors report
Auditors report
Profit and loss account
Balance sheet
Cash flow statement
Explanatory notes to the accounts
A five year summary of results

Peer comparison is also essential together with industry norms especially as it relates to
significant issues such as profitability, structure of the balance sheet and capital adequacy.
BANKS BALANCE SHEET STRUCTURE
The composition of a banks balance sheet is one of the key factors that determine the risk
level faced by the institution. Growth in the balance sheet and resulting changes in the
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relative proportion of assets and liabilities, impact the risk management process. Monitoring
key balance sheet components may alert the analyst to negative trends in relationships
between asset growth and capital retention capability. It is particularly important to monitor
the growth of low, non-earning, and off-balance sheet items
FINANCIAL ANALYSIS
The analysis undertaken is based to a large extent on regulatory reporting data and annual
accounts. It is undertaken to make past performance comparisons for individual banking
institutions and also for setting benchmarks of financial performance for different peer
groups in order to identify outlier banks.
The banks that have been taken for comparisons are ICICI Bank, HDFC Bank and SBI. The
Balance Sheet of the respective banks for the past 5 years have been taken into consideration
for the purpose of analysis and report preparation.

OVERVIEW OF THE BANKS

ICICI BANK
ICICI Bank is an Indian multinational banking and financial services company headquartered
in Vadodara, Gujarat, India. As of 2014, it is the second largest bank in India in terms of
assets and market capitalisation. It offers a wide range of banking products and financial
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services for corporate and retail customers through a variety of delivery channels and
specialised subsidiaries in the areas of investment banking, life, non-life insurance, venture
capital and asset management. The Bank has a network of 4,050 branches and
12,919 ATMs in India, and has a presence in 17 countries including India. ICICI Bank is one
of the Big Four banks of India, along with State Bank of India, Punjab National
Bank and Bank of Baroda.

SBI

State Bank of India is an Indian multinational, Public Sector banking and financial
services company. It is a government-owned corporation with its headquarters in Mumbai,
Maharastra and also its corporate office in Mumbai, Maharashtra. As of December 2013, it
had assets of US$388 billion and 17,000 branches, including 190 foreign offices, making it
the largest banking and financial services company in India by assets. State Bank of India is
one of the Big Four banks of India, along with Bank of Baroda, Punjab National
Bank and ICICI Bank.

HDFC BANK
HDFC Bank Limited is an Indian banking and financial services company headquartered
in Mumbai, Maharashtra. Incorporated in 1994, it is the fifth largest bank in India as
measured by assets. It is the largest private sector bank[8] in India by market capitalization as
of February 2014. The bank was promoted by the Housing Development Finance
Corporation, a premier housing finance company (set up in 1977) of India.[9] According to
the Brand Trust Report 2014, HDFC was ranked 32nd among India's most trusted
brands. HDFC was ranked 45th on the list of top 50 Banks in the world in terms of their
market capitalization.

INFERENCE FROM THE FINANCIAL STATEMENTS

1. Total Share Capital

It refers to the portion of a company's equity that has been obtained by trading stock to a
shareholder for cash. The share capital of ICICI and SBI has remained more constant over the
past 5 years as compared to that of HDFC Bank. SBI and ICICI have got paid-up capital for
the same amount and probably for the same number of shares for the past 5 years.

2. Reserves

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Reserves are ordinarily part of the equity of the company and are therefore liabilities.
Bank reserves, on the other hand, are part of the bank's assets. In a bank's annual report,
bank reserves are referred to as "cash and balances at central banks". The reserves of all the
three banks have been steadily increasing over the past 5 years and that of SBI is increasing
the most in comparison with HDFC and ICICI Bank.

3. Net Worth

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Net worth (sometimes called net or wealth) is the total assets minus total outside liabilities of
an individual or a company.[1] Net worth is used when talking about the value of a company
or in personal finance for an individual's net economic position. net worth is what is owned
minus what is owed. The net worth (Capital + Reserves) has been growing for all the three
banks. However, for SBI the net worth has been increasingly at a high rate and there is steady
growth for HDFC Bank.

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4. Bank Deposits

Bank deposits are made to deposit accounts at a banking institution, such as savings accounts,
checking accounts and money market accounts. The account holder has the right to withdraw
any deposited funds, as set forth in the terms and conditions of the account. The Deposits for
ICICI and HDFC for the years 2011, 2012 and 2013 are almost the same but after that HDFC
grew more than SBI. But SBIs deposits have always been much higher than the other two
banks. Even there has been steady growth for SBI.

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5. Borrowings

Banks also borrow money, usually from other banks in what is called the federal funds
market, so-called because funds kept in their reserve accounts at the Federal Reserve are
called federal funds, and it is these accounts that are credited or debited as money is
transferred between banks. Banks with excess reserves, which are usually smaller banks
located in smaller communities, lend to the larger banks in metropolitan areas, which are
usually deficient in reserves. HDFCs borrowings has steadily increased over the five years.

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In the year of 2013, SBI experienced a steep hike in its borrowings and a steep hike was
experienced for ICICI Bank in the year of 2012.

6. Cash & Balances with RBI

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This head includes the cash in hand and in ATMs that a bank maintains as well as the
amount of money deposited with the RBI. A bank will need to reserve a certain amount to
satisfy withdrawal demands. The proportion of deposits that a bank needs to keep with
the RBI is determined by the prevailing 'cash reserve ratio' (CRR). As such, CRR is
essentially the percentage of cash reserves to total deposits. The rate of the same is
determined by the RBI in its monetary policies.
ICICI has maintained the same cash deposits with the RBI from 2011 to
2014. But, SBI has withdrawn its cash deposits to more than 50% in the
year of 2012. However, HDFC first withdrew in 2012 and then again
deposited in the year of 2014.

7. Balances with bank, Money at call

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This head again has two parts - balance with other banks (which can be in the
form of current account or other deposit accounts) and money at call and short
notice. Banks do show these types of balances with institutions that are in and
outside India separately.
These funds are those which banks provide (or take) to (or from) other financial
institutions at inter-bank rates. These types of loans are very short in nature,
usually lasting no longer than a week. More often than not, these funds are used
for helping banks meet reserve requirements.
Both ICICI and HDFC have shown the same kind of difference in the balance with
banks but at different levels.SBI kept increasing its balance with the banks till
2014 and then withdrew about 10,000 crores. Later in 2015, it again increased
the deposits with the banks and money at call.

8. Net Block
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Gross block is the sum total of all assets of the company valued at their cost of
acquisition. This is inclusive of the depreciation that is to be charged on each
asset. Net block is the gross block less accumulated depreciation on assets. Net
block is actually what the assets are worth to the company. The Net Block of SBI
has been steadily increasingly at a very high rate especially after 2012. However,
for HDFC and SBI, the net block has not been increasingly as much as that of
HDFC.

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A COMPARISON OF THE THREE BANKS USING STATISTICAL TOOLS.

1. Average / Mean
It is the number that measures the central tendency of a given set of numbers. It is the
sum of the list of numbers divided by the total number of numbers in that list. The
arithmetic mean is used frequently in fields such as economics, sociology, and history,
and it is used in almost every academic field to some extent.
If we have a data set containing the values
defined by the formula

, the arithmetic mean

.
Here, the averages for 5 years for the banks are considered:

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is

2. Median
It is the number that separating the higher half of the data sample, a population, or a
probability distribution, from the lower half. The median of a finite list of numbers
can be found by arranging all the observations from lowest value to highest value and
picking the middle one.

Here, the median for 5 years for the banks are considered:

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3. Geometric Mean
The geometric mean is a type of mean or average, which indicates the central
tendency or typical value of a set of numbers by using the product of their values. : It

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is the nth root of the product of n numbers. It is relevant on those sets of data that are
products or exponential in nature.

Here, the geometric means for 5 years for the banks are considered:

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4. Forecast in 2016
Forecasting is the process of making predictions of the future based on past and
present data and analysis of trends. Risk and uncertainty are central to forecasting and
prediction. Quantitative forecasting models are used to forecast future data as a
function of past data. They are appropriate to use when past numerical data is
available and when it is reasonable to assume that some of the patterns in the data are
expected to continue into the future. These methods are usually applied to short- or
intermediate-range decisions.

Here, while considering the past trends, the forecast for the year 2016 has been made.

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CONCLUSION

After the analyses of the three banks using the various statistical methods are done,
the conclusion is that SBI stands at a better position as compared to ICICI and HDFC.
ICICI follows SBI Bank and then comes HDFC Bank. Customers prefer to deposit
their money more with the SBI than with ICICI or HDFC. SBIs deposits with other
banks also are much higher than the other two banks taken for analyses.

The forecast for the year of 2016 can vary. Only an estimate is shown.

SOURCES OF DATA:

www.moneycontrol.com

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