Analysis Of Financial Statements.docx

COMPARATIVE STUDY OF SBI & HDFC REGARDING PROFITABILITY RATIO

Dissertation Submitted to the Burhani College of Commerce and Arts Institute of Management Studies (Affiliated to University of Mumbai)

BACHELOR OF MANAGEMENT STUDIES

Submitted by: Husain Kader (Roll No-14 , Div-A) DEC 2016

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DECLARATION

I, Husain Qutbuddin Kader, student of T.Y.B.M.S. Semester V (2016- 2017) hereby declare that the dissertation titled “Comparative Study of SBI & HDFC regarding Profitability Ratio.” submitted for the BMS Degree of University of Mumbai at BCCA’s Institute of Management Studies, is my original work and the dissertation has not been plagiarized or formed the basis for the award of any other diploma or degree, associate ship, fellowship or any other similar titles.The information submitted is true and original to the best of my knowledge.

(Signature of Student) Husain Qutbuddin Kader Roll number:- 14

BURHANI COLLEGE OF COMMERCE AND ARTS MUMBAI

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ACKNOWLEDGEMENT

To list who all have helped me is difficult because they are so numerous and the depth is so enormous. I would like to acknowledge the following as being idealistic channels and fresh dimensions in the completion of this project. I take this opportunity to thank the University of Mumbai for giving me chance to do this project. I would like to thank my Principal, Dr. Haider-E-Karrar for providing the necessary facilities required for completion of this project. I would also like to express my sincere gratitude towards my Project Guide Prof. Naheed Ansari whose guidance and care made the project successful. I would like to thank my College Library, for having provided various reference books and magazines related to my project. Lastly, I would like to thank each and every person who directly or indirectly helped me in the completion of the project especially my Parents and Peers who supported me throughout my project.

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TABLE OF CONTENTS Chp. No

TITLE

Page No

A

LIST OF TABLES

6

B

LIST OF FIGURES

7

C

LIST OF ABBREVIATIONS

8

1

EXECUTIVE SUMMARY

9

2

RESEARCH METHODOLOGY

10-11

2.1

Research Problem

2.2

Objectives

2.3

Method of Collecting Data

2.4

Limitation

2.5

Review of Literature

3

ANALYSIS OF FINANCIAL STATEMENTS 3.1

Introduction

3.2

Objectives of Financial Statement Analysis

3.3

Limitations of Financial Statement Analysis

3.4

Methods of Analyzing Financial Statements

4

RATIO ANALYSIS 4.1

Introduction

4.2

Accounting Ratios

4.3

Uses of Ratio Analysis

4.4

Classification of Ratios

4.5

Advantages of Ratio Analysis

4.6

Limitations of Ratio Analysis

12-14

15-20

3

5

PROFITABILITY RATIOS 5.1

Return on Investment

5.2

Return on Shareholders’ Funds

5.3

Return on Assets

5.4

Gross Profit Ratio or Gross Margin

5.5

Net Profit Ratio

5.6

Operating Ratio

6 6.1

Introduction

6.2

Banking in India

7

21-27

BANKING INDUSTRY

28-30

STATE BANK OF INDIA

31-41

7.1

Overview of SBI

7.2

Introduction of SBI

7.3

Board of Directors

7.4

Listing and Shareholding

7.5

Recent awards and recognitions

7.6

Balance Sheet of SBI

7.7

Profit & Loss Account of SBI

7.8

Key Performance Ratios

7.9

SWOT Analysis

7.10

Profit Before Tax & Profit After Tax

7.11

Net Worth

4

8

Housing Development Finance Corporation Limited 8.1

Overview of HDFC

8.2

Introduction of HDFC

8.3

Listing and Shareholding

8.4

Board of Directors

8.5

Recent Awards and Recognitions

8.6

Balance Sheet of HDFC

8.7

Profit & Loss Account of HDFC

8.8

Key Performance Ratios

8.9

SWOT Analysis

8.10

Profit Before Tax & Profit After Tax

8.11

Net Worth

9

SBI v/s HDFC 9.1

Profitability Ratios of SBI

9.2

Profitability Ratios of HDFC

9.3

SBI v/s HDFC Ratio Comparison

42-49

50-51

10

PUBLIC SECTOR V/S PRIVATE SECTOR

52-53

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CONCLUSION

54

ANNEXURE

55-58

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11.1

General

11.2

Based on Profitability

5

LIST OF TABLES Table No.

TITLE

Page No.

7.1

Board of Directors of SBI

36

7.2

Listing and Shareholding of SBI

37

7.3

Balance sheet of SBI

38

7.4

Profit & Loss Account of SBI

39

7.5

Key Performance Ratio of SBI

40

7.6

SWOT Analysis of SBI

40

8.1

Listing and Shareholding of HDFC

44

8.2

Recent awards and recognitions of HDFC

45

8.3

Balance Sheet of HDFC

46

8.4

Profit & Loss Account of HDFC

47

8.5

Key Performance Ratio of HDFC

48

8.6

SWOT Analysis of HDFC

48

9.1

Profitability Ratios of SBI

50

9.2

Profitability Ratios of HDFC

50

9.3

SBI v/s HDFC Ratio Comparison

51

10.1

Banks Growth

52

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LIST OF FIGURES Fig No.

TITLE

Page No.

5.1

Profitability Ratio

27

6.1

Need for Banks

29

7.1

Profit Before Tax & Profit After Tax of SBI

41

7.2

Net Worth of SBI

41

8.1

Profit Before Tax & Profit After Tax of HDFC

49

8.2

Net Worth of HDFC

49

9.1

SBI v/s HDFC

51

10.1

Banks Network

52

10.2

Capital Adequacy

53

10.3

Management Efficiency

53

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LIST OF ABBREVIATIONS SBI HDFC

State Bank of India Housing Development Finance Corporation Limited

RBI

Reserve Bank of India

INR

Indian National Rupee

NSE

National Stock Exchange

BSE

Bombay Stock Exchange

NYSE

New York Stock Exchange

ADR

American Depository Receipts

GDR

Global Depository Receipts

FII

Foreign Institutional Investors

NP

Net Profit

NPAT

Net Profit After Tax

NPBT

Net Profit Before Tax

C.E

Capital Employed

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Chapter 1 EXECUTIVE SUMMARY This project is specially designed to understand the subject matter of Financial Statement Analysis through profitability ratios in the banks. This project gives us information and report about bank's Financial Position. Throughout the project the focus has been on presenting information and comments in easy and intelligible manner. This project concentrates on two major banks in their respective sectors , SBI and HDFC. The purpose is to determine profitability of the respective banks and conclude who is superior in terms of profits and performance. Based on the data of two banks a comparative analysis of public and private sector banks have also been made. Ratio analysis is used to evaluate relationships among financial statement items. Ratio Analysis is an important tool for any business organization. The computation of ratios facilitates the comparison of firms which differ in size. Ratios can be used to compare a firm's financial performance with industry averages. In addition, ratios can be used in a form of trend analysis to identify areas where performance has improved or deteriorated over time. Profitability ratios give some yardstick to measure the profit in relative terms with reference to sales, assets or capital employed. These ratios highlight the end result of business activities. The main objective is to judge the efficiency of the business. This project is very useful for those who want to know about the banks and financial position of the banks.

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Chapter 2 RESEARCH METHODOLOGY 2.1 Research Problem The research is conducted to gain knowledge of profitability enjoyed by two bank namely SBI and HDFC and provide a comparison between the two regarding their profitability. Research indicates where the problem is being faced by the respective banks with regards to profitability and what are the aspects leading to such problems. The research problem is to find out where each of the bank is lacking in terms of improving its financial statements and profitability ratios.

2.2 Objectives Following are the objectives of the study 1) To understand the uses of ratios. 2) To determine various advantages of including ratios in decision making. 3) To understand how comparison of ratios can help in studying financial positions of different entities. 4) To provide an overview of banking industry and two of its leading banks in India. 5) To determine which bank succeeds in terms of overall profitability. 6) To compare public and private sector banks.

2.3 Method of Collecting Data  Primary Data The primary data was collected mainly with interactions and discussions with personals possessing sound financial knowledge and persons working in the field of analyzing financial statements. Some of the data regarding banks financial information and its overview is obtained through interacting with SBI and HDFC staff members.

 Secondary Data Most of the calculations are based on the financial statements of the banks and banks provided financial statements for 5 years. Other information including theoretical aspects were collected by referring ICSI modules, bulletins, journals, news articles and through internet.

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2.4 Limitation 1. Certain data provided regarding banks is limited to selected branches in Mumbai. Data may differ elsewhere. 2. Certain assumptions are based on personal interviews therefore such assumptions may differ from person to person. 3. Calculation of ratios are done with limited financial data due to no access to all the financial data required. Therefore ratios are near to accurate but may not be used to provide base for decision making. 4. Difficulty in collection of primary data. Many biased replies were received and many were too busy to respond 5. Most of the data is limited to the year 2016. Data may differ in comparison with other years.

2.5 Review of Literature Findings by others relating to Comparative study of SBI and HDFC regarding Profitability ratio. 1. Arvind Mahandhwal:- Comparative Analysis of SBI & HDFC Bank Focus:-Customer Satisfaction While there is no doubt that HDFC has high maintenance charges and high interest rates but against these flaws it satisfies its customers with excellent service guarantee which may not be available at SBI.SBI may be more customer friendly in case of rates and charges but its services are not good enough to compete with those provided by HDFC . 2. Siddartha Swamy :-Ratio Analysis Project Report Focus:-Importance of Ratio Major policy and decisions are based on financial statements and to gain a clear understanding of financial statement use of ratio is essential. Ratios not only provide base for major policy decisions but also indicates the current financial position of the entity and helps to compare the performance of entity with either itself in previous years or with other entities. 3. Saurabh Sharma:-Financial Ratios Focus:- Understanding and Applicability of Ratios Financial ratios are a useful by-product of financial statement and provide standardized measures of firms financial position, profitability and riskiness. It is an important and powerful tool in the hands of financial analyst. By calculating one or other ratio or group of ratios he can analyze the performance of a firm from different point of view.

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Chapter3 ANALYSIS OF FINANCIAL STATEMENTS

3.1 Introduction Published financial statements are the only source of information about the activities and affairs of a business entity available to the public, shareholders, investors and creditors, and the governments. These various groups are interested in the progress, position and prospects of such entity in various ways. But these statements howsoever, correctly and objectively prepared, by themselves do not reveal the significance, meaning and relationship of the information contained therein. For this purpose, financial statements have to be carefully studied, dispassionately analyzed and intelligently interpreted. This enables a forecasting of the prospects for future earnings, ability to pay interest, debt maturities both current as well as long-term, and probability of sound financial and dividend policies. According to Myers, “financial statement analysis is largely a study of relationship among the various financial factors in business as disclosed by a single set of statements and a study of the trend of these factors as shown in a series of statements”. Thus, analysis of financial statements refers to the treatment of information contained in the financial statement in a way so as to afford a full diagnosis of the profitability and financial position of the firm concerned. The process of analyzing financial statements involves the rearranging, comparing and measuring the significance of financial and operating data. Such a step helps to reveal the relative significance and effect of items of the data in relation to the time period and/or between two organizations. Interpretation, which follows analysis of financial statements, is an attempt to reach to logical conclusion regarding the position and progress of the business on the basis of analysis. Thus, analysis and interpretation of financial statements are regarded as complimentary to each other.

3.2 Objectives of Financial Statement Analysis Financial statement analysis is very much helpful in assessing the financial position and profitability of a concern. The main objectives of analyzing the financial statements are as follows: (i) The analysis would enable the present and the future earning capacity and the profitability of the concern. (ii) The operational efficiency of the concern as a whole as well as department wise can be assessed. Hence the management can easily locate the areas of efficiency and inefficiency.

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(iii) The solvency of the firm, both short-term and long-term, can be determined with the help of financial statement analysis which is beneficial to trade creditors and debenture holders. (iv) The comparative study in regard to one firm with another firm or one department with another department is possible by the analysis of financial statements. (v) Analysis of past results in respects of earning and financial position of the enterprise is of great help in forecasting the future results. Hence it helps in preparing budgets. (vi) It facilitates the assessments of financial stability of the concern. (vii) The long-term liquidity position of funds can be assessed by the analysis of financial statements.

3.3 Limitations of Financial Statement Analysis (i) Owing to the fact that financial statements are compiled on the basis of historical costs, while there is a market decline in the value of the monetary unit and resultant rise in prices, the figures in the financial statement loses its functions as an index on current economic realities. Again the financial statements contain both items. So an analysis of financial statements can not be taken as an indicator for future forecasting and planning. (ii) Analysis of financial statements is a tool which can be used profitably by an expert analyst but may lead to faulty conclusions if used by unskilled analyst. So the result can not be taken as judgements or conclusions. (iii) Financial statements are interim reports and therefore can not be final because the final gain or loss can be computed only at the termination of the business. Financial statement reflects the progress of the position of the business so analysis of these statements will not be a conclusive evidence of the performance of the business. (iv) Financial statements though expressed in exact monetary terms are not absolutely final and accurate and it depends upon the judgement of the management in respect of various accounting methods. If there is change in accounting methods, the analysis may have no comparable basis and the result will be biased. (v) The reliability of analysis depends on the accuracy of the figures used in the financial statements. The analysis will be vitiated by manipulations in the income statement or balance sheet and accounting procedure adopted by the accountant for recording. (vi) The results for indications derived from analysis of financial statements may be differently interpreted by different users. (vii) The analysis of financial statement relating to a single year only will have limited use. Hence the analysis may be extended over a number of years so that results may be compared to arrive at a meaningful conclusion.

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(viii) When different firms are adopting different accounting procedures, records, policies and different items under similar headings in the financial statements, the comparison will be more difficult. It will not provide reliable basis to access the performance, efficiency, profitability and financial condition of the firm as compared to industry as a whole. (ix) There are different tool of analysis available for the analyst. However, which tool is to be used in a particular situation depends on the skill, training, and expertise of the analyst and the result will vary accordingly.

3.4 Methods of Analyzing Financial Statements The analysis of financial statements consists of a study of relationship and trends, to determine whether or not the financial position and results of operations as well as the financial progress of the company are satisfactory or unsatisfactory. The analytical methods or devices, listed below, are used to ascertain or measure the relationships among the financial statements items of a single set of statements and the changes that have taken place in these items as reflected in successive financial statements. The fundamental objective of any analytical method is to simplify or reduce the data under review to more understandable terms. Analytical methods and devices used in analyzing financial statements are as follows: 1. Comparative Statements 2. Common Size Statements 3. Trend Ratios 4. Ratio Analysis 5. Cash Flow Statements 6. Fund Flow Statement.

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Chapter 4 RATIO ANALYSIS

4.1 Introduction Ratio analysis is used to evaluate relationships among financial statement items. The ratios are used to identify trends over time for one organization or to compare two or more organizations at one point in time. Ratio analysis focuses on three key aspects of a business: liquidity, profitability, and solvency. Ratio Analysis is an important tool for any business organization. The computation of ratios facilitates the comparison of firms which differ in size. Ratios can be used to compare a firm's financial performance with industry averages. In addition, ratios can be used in a form of trend analysis to identify areas where performance has improved or deteriorated over time. Ratios are the symptoms like the blood pressure, the pulse or the temperature of an individual. Just as in the case of an individual, a doctor or a valid by reading the pulse of a patient or by studying the blood pressure or the temperature of a patient can diagnose the cause of his ailment, so also a financial analyst through ration analysis of the employment of resources and its overall financial position. Just as in medical science the symptoms are passive factors, to diagnose them properly depends upon the efficiency and the expertise of the doctor, so also to derive right conclusions from ratio analysis will depend upon the efficiency and depth of understanding of the financial analyst.

4.2 Accounting Ratios An absolute figure often does not convey much meaning. Generally, it is only in the light of other information that significance of a figure is realized. A weighs 70 kg Is he fat? One cannot answer this question unless one knows A’s age and height. Similarly, a company’s profitability cannot be known unless together with the amount of profit and the amount of capital employed. The relationship between the two figures expressed arithmetically is called a ratio. The ratio between 4 and 10 is 0.4 or 40% or 2:5. “0.4", “40%" and “2:5" are ratios. Accounting ratios are relationships, expressed in arithmetical terms, between figures which have a cause and effect relationship or which are connected with each other in some other manner. Accounting ratios are a very useful tool for grasping the true message of the financial statements and understanding them. Ratios naturally should be worked out between figures that are significantly related to one another. Obviously no purpose will be served by working out ratios between two entirely unrelated figures, such as discount on debentures and sales. Ratios may be worked out on the basis of figures contained in the financial statements.

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Ratios provide clues and symptoms of underlying conditions. They act as indicators of financial soundness, strength, position and status of an enterprise. Interpretation of ratios form the core part of ratio analysis. The computation of ratio is simply a clerical work but the interpretation is a taste requiring art and skill. The usefulness of ratios dependent on the judicious interpretations.

4.3 Uses of Ratio Analysis A comparative study of the relationship, between various items of financial statements, expressed as ratios, reveals the profitability, liquidity, solvency as well as the overall financial position of the enterprises. Ratio analysis helps to analyze and understand the financial health and trend of a business, its past performance makes it possible to have forecast about future state of affairs of the business. Inter-firm comparison and intra-firm comparison becomes easier through the analysis. Past performance and future projections could be reviewed through the ratio analysis easily. Management uses the ratio analysis in exercising control in various areas viz. budgetary control, inventory control, financial control etc. and fixing the accountability and responsibility of different departmental heads for accelerated and planned performance. It is useful for all the constituents of the company as discussed under: 1. Management: Management is interested in ratios because they help in the formulation of policies, decision-making and evaluating the performances and trends of the business and its various segments. 2. Shareholders: With the application of ratio analysis to financial statements, shareholders can understand not only the working and operational efficiency of their company, but also the likely effect of such efficiency on the net worth and consequently the price of their shares in the Stock Exchange. With the help of such analysis, they can form opinion regarding the effectiveness or otherwise of the management functions. 3. Investors: Investors are interested in the operational efficiency, earning capacities and ‘financial health’ of the business. Ratios regarding profitability, debt-equity, fixed assets to net worth, assets turnover, etc., are some measures useful for the investors in making decisions regarding the type of security and industry in which they should invest. 4. Creditors: Creditors can reasonably assure themselves about the solvency and liquidity position of the business by using ratio-analysis. Such analysis helps to throw light on the repayment policy and capability of an enterprise. 5. Government: The Government is interested in the ‘financial health’ of the business. Carefully worked ratios will reflect the policy of the management and its consistency or otherwise with the overall regional and national economic policies. Such ratios help in better understanding of cost structures and may justify price controls by the Government to save the consumers.

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6. Analysts: Ratio analysis is the most important technique available to the financial analysis to study the financial statements to compare the progress and position of various firms with each other and vis-a-vis the industry.

4.4 Classification of Ratios Different ratios calculated from different financial figures carry different significance for different purposes. For example, for the creditors liquidity and solvency ratios are more significant than the profitability ratios, which are of prime importance for an investor. This means that ratios can be grouped on different basis depending upon their significance. The classification is rather crude and unsuitable to determine the profitability or financial position of the business. In general, accounting ratios may be classified on the following basis leading to overlap in many cases.

1. According to the statement upon which they are based Ratios can be classified into three groups according to the statements from which they are calculated: i.

ii.

iii.

Balance Sheet Ratios: They deal with relationship between two items appearing in the balance sheet, e.g., current assets to current liability or current ratio. These ratios are also known as financial position ratios since they reflect the financial position of the business. Operating Ratios or Profit and Loss Ratios: These ratios express the relationship between two individual or group of items appearing in the income or profit and loss statement. Since they reflect the operating conditions of a business, they are also known as operating ratios, e.g., gross profit to sales, cost of goods sold to sales, etc. Combined Ratios: These ratios express the relationship between two items, each appearing in different statements, i.e., one appearing in balance sheet while the other in income statement, e.g., return on investment (net profit to capital employed); Assets turnover (sales) ratio, etc. Since both the statements are involved in the calculation of each of these ratios, they are also known as inter-statement ratios.

Since the balance sheet figures refer to one point of time, while the income statement figures refer to events over a period of time, care must be taken while calculating combined or interstatement ratios. For example while computing assets turnover ratio, average assets should be taken on the basis of opening and ending balance sheets.

2. Classification according to "IMPORTANCE" This classification has been recommended by the British Institute of Management for interfirm comparisons. It is based on the fact that some ratios are more relevant and important than others in the process of comparisons and decision-making. Therefore, ratios may be treated as primary or secondary.

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i.

Primary Ratio: Since profit is primary consideration in all business activities, the ratio of profit to capital employed is termed as ‘Primary Ratio’. In business world this ratio is known as “Return on Investment”. It is the ratio which reflects the validity or otherwise of the existence and continuation of the business unit. In case if this ratio is not satisfactory over long period, the business unit cannot justify its existence and hence, should be closed down. Because of its importance for the very existence of the business unit it is called ‘Primary Ratio’. Secondary Ratios: These are ratios which help to analyse the factors affecting “Primary Ratio”. These may be sub-classified as under: a) Supporting Ratios: These are ratios which reflect the profit-earning capacities of the business and thus support the “Primary Ratio”. For example sales to operating profit ratio reflects the capacity of contribution of sales to the profits of the business. Similarly, sales to assets employed reflects the effectiveness in the use of assets for making sales, and consequently profits. b) Explanatory Ratios: These are ratios which analyze and explain the factors responsible for the size of profit earned. Gross profit to sales, cost of goods sold to sales, stock-turnover, debtors turnover are some of the ratios which can explain the size of the profits earned. Where these ratios are calculated to highlight the effect of specific activity, they are termed as ‘Specific Explanatory Ratios’. For example, the effect of credit and collection policy is reflected by debtors turnover ratio.

ii.

3. Functional Classification The classification of ratios according to the purpose of its computation is known as functional classification. On this basis ratios are categorized as follows: i.

ii.

iii.

iv.

Profitability Ratios: Profitability ratios give some yardstick to measure the profit in relative terms with reference to sales, assets or capital employed. These ratios highlight the end result of business activities. The main objective is to judge the efficiency of the business. Turnover Ratios or Activity Ratios: These ratios are used to measure the effectiveness of the use of capital/assets in the business. These ratios are usually calculated on the basis of sales or costs of goods sold and are expressed in integers rather than as percentages. Financial Ratios or Solvency Ratios: These ratios are calculated to judge the financial position of the organization from short-term as well as long-term solvency point of view. Thus, it can be subdivided into: (a) Short-term Solvency Ratios (Liquidity Ratios) and (b) Long-term Solvency Ratios (Capital Structure Ratios). Market Test Ratios: These are of course, some profitability ratios, having a bearing on the market value of the shares.

The classification of the structure of ratio analysis cuts across the various bases on which it has been made. The determination of activity and profitability ratios is drawn partly from the

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balance sheet and partly from the Statement of Profit & Loss. Ratios satisfying the test of liquidity or solvency partake the items of both the balance sheet and income statement, some activity ratios coincide with those satisfying the test of liquidity, some leverage ratios belong to the category of income statement. This clearly indicates that one basis of classification crosses into other category.

4.5 Advantages of Ratio Analysis Ratio analysis is a powerful tool of financial analysis. An absolute figure generally conveys no meaning. It is seen that mostly figure assumes importance only in background of other information. Ratios bring together figures which are significantly allied to one another to portray the cause and effect relationship. From a study of the various ratios and their practical applications, the following advantages can be attributed to the technique of ratio analysis: 1. It helps to analyze and understand financial health and trend of a business, its past performance, and makes it possible to forecast the future state of affairs of the business. They diagnose the financial health by evaluating liquidity, solvency, profitability etc. This helps the management to assess the financial requirements and the capabilities of various business units. It serves as a media to link the past with the present and the future. 2. It serves as a useful tool in management control process, by making a comparison between the performance of the business and the performance of similar types of business. 3. Ratio analysis plays a significant role in cost accounting, financial accounting, budgetary control and auditing. 4. It helps in the identification, tracing and fixing of the responsibilities of managerial personnel at different levels. 5. It accelerates the institutionalization and specialization of financial management. 6. Accounting ratios summarize and systematize the accounting figures in order to make them more understandable in a lucid form. They highlight the inter-relationship which exists between various segments of the business expressed by accounting statements.

4.6 Limitations of Ratio Analysis Ratio analysis is a widely used technique to evaluate the financial position and performance of a business. But these are subject to certain limitations: (i) Usefulness of ratios depend on the abilities and intentions of the persons who handle them. It will be affected considerably by the bias of such persons.

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(ii) Ratios are worked out on the basis of money-values only. They do not take into account the real values of various items involved. Thus, the technique is not realistic in its approach. (iii) Historical values (specially in balance sheet ratios) are considered in working out the various ratios. Effects of changes in the price levels of various items are ignored and to that extent the comparisons and evaluations of performance through ratios become unrealistic and unreliable. (iv) One particular ratio, in isolation is not sufficient to review the whole business. A group of ratios are to be considered simultaneously to arrive at any meaningful and worthwhile opinion about the affairs of the business. (v) Since management and financial policies and practices differ from concern to concern, similar ratios may not reflect similar state of affairs of different concerns. Thus, comparisons of performance on the basis of ratios may be confusing. (vi) Ratio analysis is only a technique for making judgements and not a substitute for judgement. (vii) Since ratios are calculated on the basis of financial statements which are themselves affected greatly by the firm’s accounting policies and changes therein, the ratios may not be able to bring out the real situations.

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Chapter 5 PROFITABILITY RATIOS A measure of ‘profitability’ is the overall measure of efficiency. In general terms efficiency of business is measured by the input-output analysis. By measuring the output as a proportion of the input, and comparing result of similar other firms or periods the relative change in its profitability can be established. The income (output) as compared to the capital employed (input) indicates profitability of a firm. Thus the chief profitability ratio is: 𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐏𝐫𝐨𝐟𝐢𝐭 (𝐍𝐞𝐭 𝐌𝐚𝐫𝐠𝐢𝐧) × 𝟏𝟎𝟎 𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐄𝐦𝐩𝐥𝐨𝐲𝐞𝐝

Once this is known, the analyst compares the same with the profitability ratio of other firms or periods. Then, when he finds some contrast, he would like to have details of the reasons. These questions are sought to be answered by working out relevant ratios. The main profitability ratio and all the other sub-ratios are collectively known as ‘profitability ratios’. Profitability ratio can be determined on the basis of either investments or sales. Profitability in relation to investments is measured by return on capital employed, return on shareholders’ funds and return on assets. The profitability in relation to sales are profit margin (gross and net) and expenses ratio or operating ratio.

5.1 Return on Investment This ratio is also known as overall profitability ratio or return on capital employed. The income (output) as compared to the capital employed (input) indicates the return on investment. It shows how much the company is earning on its investment. This ratio is calculated as follows:

𝐑𝐞𝐭𝐮𝐫𝐧 𝐨𝐧 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 =

𝐍𝐞𝐭 𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐏𝐫𝐨𝐟𝐢𝐭 × 𝟏𝟎𝟎 𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐄𝐦𝐩𝐥𝐨𝐲𝐞𝐝

Operating profit means profit before interest and tax. In arriving at the profit, interest on loans is treated as part of profit (but not the interest on bank overdraft or other short-term finance) because loans themselves are part of the input, i.e., the capital employed and hence, the interest on loans should also be part of the output. All non-business income or rather income not related to normal operations of the company should be excluded. Thus net

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operating profit figure shall be IBIT, i.e., Income Before Interest and Taxation (excluding non-business income). The income figure is reckoned before taxation because the amount of tax has no relevance to the operational efficiency. Both interest and taxation are appropriations of profit and do not reflect operational efficiency. Moreover, to compare the profitability of two different organizations having different sources of finance and different tax burden, the profit before interest and taxation is the best measure. Capital employed comprises share capital and reserves and surplus, long-term loans minus non-operating assets and fictitious assets. It can also be represented as net fixed assets plus working capital (i.e. current assets minus current liabilities). Capital employed = Share Capital + Reserve and Surplus + Long-term Loans − NonOperating Assets − Fictitious Assets OR Capital employed = Net fixed assets + working capital

In using overall profitability ratio as the chief measure of profitability, the following two notes of caution should be kept in mind. First, the figure of operating profit shows the profit earned throughout a period. The figure of capital employed on the other hand refers to the values of assets as on a balance sheet date. As the values of assets go on changing throughout a business period it may be advisable to take the average assets throughout a period, so that the profits are compared against average capital employed during a period. Secondly, in making comparison between two different units on the basis of the overall profitability ratio, the time of incorporation of the two units should be taken care off. If a company incorporated in 2000 is compared with that incorporated in 2010, the first company’s assets will be appearing at a much lower figure than those of second company. Thus the former will show a lower capital base and if profits of both the companies are the same, the former will show a higher rate of return. This does not indicate higher efficiency; only the capital employed is lower because of the reason that it started 10 years earlier. Hence, in such cases the present value of the fixed assets should be considered for calculating the capital employed. “Return on capital employed” should be used cautiously with clear understanding of its limitations. The ‘profits’ and “capital employed” figures are the result of a number of approximations (example, depreciation) and human judgement (valuation of assets). Therefore, the purpose of calculation of the ratio should be kept in view and appropriate figures should be selected having regard to impact of changing price levels.

22

Suppose a company has the following items on the liabilities side and it shows underwriting commission of INR 1,00,000 on the assets side: 13% Preference capital Equity capital Reserves Loans @ 15% Current Liabilities

10,00,000 30,00,000 26,00,000 30,00,000 15,00,000

Its profit, after paying tax @ 50% is INR 14,00,000. Profit before interest and tax will be INR 32,50,000 which can be calculated as shown below:

Profit after tax Tax Interest @ 15% on INR 30,00,000

14,00,000 14,00,000 4,50,000 32,50,000

The operating capital employed is INR 95,00,000 i.e. total of all the items on liabilities side (excluding current liabilities) less INR 1,00,000, a fictitious asset (underwriting commission). The ROI comes to = (32,50,000 / 95,00,000) × 100 or 34.21% The overall profitability ratio has two components. These are the net profit ratio (operating profit/sales x 100) multiplied by turnover ratio (sales/capital employed). Therefore, ROI, in terms of percentage: 𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐏𝐫𝐨𝐟𝐢𝐭 × 𝟏𝟎𝟎 𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐄𝐦𝐩𝐥𝐨𝐲𝐞𝐝 𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐏𝐫𝐨𝐟𝐢𝐭 𝐒𝐚𝐥𝐞𝐬 × × 𝟏𝟎𝟎 𝐒𝐚𝐥𝐞𝐬 𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐄𝐦𝐩𝐥𝐨𝐲𝐞𝐝 If a management wants to maximize its profitability, it could do so by improving its net profit ratio and turnover ratio. The former refers to the margin made in each sale in terms of percentage whereas, the latter shows the utilization, i.e., rotation of the capital in making the sale. If the selling price of an article is INR 10 whose cost is INR 6, there is a margin of INR 4 or 40%. This shows the gap between selling price and cost price in the percentage form. The overall profitability is also dependent upon the effectiveness of employment of capital. If in this case, sales INR 200 were made with a capital of INR 100 then the rotation, i.e. the turnover is 200/100 or 2 times. Thus the business has earned a total profit of INR 80 with a capital of INR 100, profitability ratio being 80%, i.e.,

23

Net profit ratio x Turnover ratio = 40% x 2 = 80%.

5.2 Return on Shareholders’ Funds It is also referred to as return on net worth. In this case it is desired to work out the profitability of the company from the shareholders’ point of view and it is computed as follows: 𝐍𝐞𝐭 𝐏𝐫𝐨𝐟𝐢𝐭 𝐚𝐟𝐭𝐞𝐫 𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐚𝐧𝐝 𝐓𝐚𝐱 × 𝟏𝟎𝟎 𝐒𝐡𝐚𝐫𝐞𝐡𝐨𝐥𝐝𝐞𝐫𝐬’ 𝐅𝐮𝐧𝐝𝐬

Modifications of the ‘return on capital employed’ can be made to adopt it to various circumstances. Thus if it is required to work out the profitability from the shareholders’ point of view, then the profit figure should be after interest and taxation and the capital employed should be after deducting the long-term loans. This ratio would reflect the profitability for the shareholders. To extend the idea further, the profitability from equity shareholders’ point of view can also be worked out by taking the profits after preference dividend and comparing against capital employed after deducting both long-term loans and preference capital.

5.3 Return on Assets Here the profitability is measured in terms of the relationship between net profits and assets. It shows whether the assets are being properly utilized or not. It is calculated as: 𝐍𝐞𝐭 𝐏𝐫𝐨𝐟𝐢𝐭 𝐚𝐟𝐭𝐞𝐫 𝐓𝐚𝐱 × 𝟏𝟎𝟎 𝐓𝐨𝐭𝐚𝐥 𝐀𝐬𝐬𝐞𝐭𝐬 This ratio is a measure of the profitability of the total funds or investment of the organization.

5.4 Gross Profit Ratio or Gross Margin Gross profit ratio expresses the relationship of gross profit to net sales or turnover. Gross profit is the excess of the proceeds of goods sold and services rendered during a period over their cost, before taking into account administration, selling and distribution and financing charges. Gross profit ratio is expressed as follows: 𝐆𝐫𝐨𝐬𝐬 𝐏𝐫𝐨𝐟𝐢𝐭 × 𝟏𝟎𝟎 𝐍𝐞𝐭 𝐒𝐚𝐥𝐞𝐬

24

This ratio is important to determine general profitability since it is expected that the ratio would be quite high so as to cover not only the remaining costs but also to allow proper returns to owners. Any fluctuation in the gross profit ratio is the result of a change either in ‘sales’ or the ‘cost of goods sold’ or both. The rise or fall in the selling price may be an external factor over which the management may have little control, especially when prices are controlled. The management, however, must try to keep the other end of the margin (i.e., cost) at least steady, if not reduce it. If the gross profit ratio is lower than what it was previously, when the selling price has remained steady, it can be reasonably concluded that there is an increase in the manufacturing cost. Since manufacturing overheads include a fixed element as well, a fall in the volume of sales will also lower the rate of gross profit and vice-versa.

5.5 Net Profit Ratio One of the components of return on capital employed is the net profit ratio (or the margin on sales) calculated as:

𝐍𝐞𝐭 𝐏𝐫𝐨𝐟𝐢𝐭 𝐑𝐚𝐭𝐢𝐨 =

𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐏𝐫𝐨𝐟𝐢𝐭 × 𝟏𝟎𝟎 𝐒𝐚𝐥𝐞𝐬

It indicates the net margin earned in a sale of INR 100. Net profit is arrived at from gross profit after deducting administration, selling and distribution expenses; non-operating incomes, such as dividends received and non-operating expenses are ignored, since they do not affect efficiency of operations.

5.6 Operating Ratio The ratio of all operating expenses (i.e., materials used, labour, factory overheads, office and selling expenses) to sales is the operating ratio. A comparison of the operating ratio would indicate whether the cost content is high or low in the figure of sales. If the annual comparison shows that the sales has increased, the management would be naturally interested and concerned to know as to which element of the cost has gone up. It is not necessary that the management should be concerned only when the operating ratio goes up. If the operating ratio has fallen, though the unit selling price has remained the same, still the position needs analysis as it may be the sum total of efficiency in certain departments and inefficiency in others. A dynamic management should be interested in making a fuller analysis.

25

It is, therefore, necessary to break up the operating ratio into various cost ratios. The major components of cost are: material, labour and overheads. Therefore, it is worthwhile to classify the cost ratio as:

𝐌𝐚𝐭𝐞𝐫𝐢𝐚𝐥 𝐜𝐨𝐬𝐭 𝐫𝐚𝐭𝐢𝐨

=

𝐌𝐚𝐭𝐞𝐫𝐢𝐚𝐥 𝐜𝐨𝐧𝐬𝐮𝐦𝐞𝐝 × 𝟏𝟎𝟎 𝐒𝐚𝐥𝐞𝐬

𝐋𝐚𝐛𝐨𝐮𝐫 𝐜𝐨𝐬𝐭 𝐫𝐚𝐭𝐢𝐨

=

𝐋𝐚𝐛𝐨𝐮𝐫 𝐜𝐨𝐬𝐭 × 𝟏𝟎𝟎 𝐒𝐚𝐥𝐞𝐬

𝐅𝐚𝐜𝐭𝐨𝐫𝐲 𝐨𝐯𝐞𝐫𝐡𝐞𝐚𝐝𝐬 𝐜𝐨𝐬𝐭 𝐫𝐚𝐭𝐢𝐨

=

𝐎𝐯𝐞𝐫𝐡𝐞𝐚𝐝𝐬 𝐜𝐨𝐬𝐭 × 𝟏𝟎𝟎 𝐒𝐚𝐥𝐞𝐬

𝐀𝐝𝐦𝐢𝐧𝐢𝐬𝐭𝐫𝐚𝐭𝐢𝐯𝐞 𝐞𝐱𝐩𝐞𝐧𝐬𝐞𝐬 𝐫𝐚𝐭𝐢𝐨

=

𝐀𝐝𝐦𝐢𝐧𝐢𝐬𝐭𝐫𝐚𝐭𝐢𝐯𝐞 𝐞𝐱𝐩𝐞𝐧𝐬𝐞𝐬 × 𝟏𝟎𝟎 𝐒𝐚𝐥𝐞𝐬

𝐒𝐞𝐥𝐥𝐢𝐧𝐠 𝐚𝐧𝐝 𝐝𝐢𝐬𝐭. 𝐞𝐱𝐩. 𝐫𝐚𝐭𝐢𝐨

=

𝐒𝐞𝐥𝐥𝐢𝐧𝐠 𝐚𝐧𝐝 𝐝𝐢𝐬𝐭. 𝐞𝐱𝐩. × 𝟏𝟎𝟎 𝐒𝐚𝐥𝐞𝐬

Generally all these ratios are expressed in terms of percentage. They total upto the Operating Ratio. This, deducted from 100 will be equal to the Net Profit Ratio. If possible, the total expenditure for effecting sales should be divided into two categories, viz., fixed and variable-and then ratios should be worked out. The ratio of variable expenses to sales will be generally constant; that of fixed expenses should fall if sales increase; it will increase if sales fall.

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PROFITABILITY RATIO

On Sales

On Capital

1) Gross Profit Ratio

1) Return on Capital Employed OR Return on Investment

2) Net Profit Ratio 3) Operating Expense Ratio

2) Return on Shareholders Fund OR Return on Net Worth

4) Operating Ratio

3) Return on Equity 4) Return on Total Asset

Fig 5.1

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Chapter 6 BANKING INDUSTRY 6.1 Introduction 1. Origin of the word The name bank derives from the Italian word banco "desk/bench", used during the Renaissance by Florentine bankers, who used to make their transactions above a desk covered by a green tablecloth. However, there are traces of banking activity even in ancient times 2. History Banks have influenced economies and politics for centuries. Historically, the primary purpose of a bank was to provide loans to trading companies. Banks provided funds to allow businesses to purchase inventory, and collected those funds back with interest when the goods were sold. For centuries, the banking industry only dealt with businesses, not consumers. Banking services have expanded to include services directed at individuals, and risk in these much smaller transactions are pooled.

6.2 Banking in India Banking in India, in the modern sense, originated in the last decades of the 18th century. Among the first banks were the Bank of Hindostan, which was established in 1770 and liquidated in 1829-32; and the General Bank of India, established in 1786 but failed in 1791. The largest bank, and the oldest still in existence, is the State Bank of India (S.B.I). It originated as the Bank of Calcutta in June 1806. In 1809, it was renamed as the Bank of Bengal. This was one of the three banks funded by a presidency government, the other two were the Bank of Bombay and the Bank of Madras. The three banks were merged in 1921 to form the Imperial Bank of India, which upon India's independence, became the State Bank of India in 1955. For many years the presidency banks had acted as quasi-central banks, as did their successors, until the Reserve Bank of India was established in 1935, under the Reserve Bank of India Act, 1934. In 1960, the State Banks of India was given control of eight state-associated banks under the State Bank of India (Subsidiary Banks) Act, 1959. These are now called its associate. In 1969 the Indian government nationalized 14 major private banks. In 1980, 6 more private banks were nationalized. These nationalized banks are the majority of lenders in the Indian economy. They dominate the banking sector because of their large size and widespread networks. Generally banking in India is fairly mature in terms of supply, product range and reach-even though reach in rural India and to the poor still remains a challenge.

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Need for Banks

Channel household savings

Risk Transformation

Service Provider

Fig 6.1

The Banking System in India consists of: 1. Reserve Bank 2. Development Banks 3. Public Sector Bank. 4. Foreign Banks 5. Private Sector Banks 6. Cooperative Banks 7. Regional Rural Banks  The Reserve Bank of India The Reserve Bank of India is the Central Bank of the Country and came into being by the Reserve Bank of India Act 1934. It was nationalized in 1948. Reserve Bank of India is the bank that issues and regulates the issue of currency in India .The banker to the Government of India and the State governments. It manages the public debt. It has the obligation to transact the banking business of the Central Government. It undertakes to accept money on behalf of the Government and make payment on its behalf. The banker’s bank. Commercial banks maintain their current account with the Reserve Bank of India. The bank that manages the volume of credit created by the commercial banks to ensure price stability. The bank that manages the external value of the currency (Indian rupee).

 Development Banks These were set up to give long term finance for the development of the country. These are the Industrial Finance Corporation of India and the Industrial Development Bank of India, The Industrial Reconstruction Bank of India and the National Bank for Agriculture and Rural Development. A former development bank, the Industrial Credit and Investment Corporation of India Ltd. by a reverse merger in 2002,became a normal commercial bank.It is expected

29

that the other development banks, having outlived their utility would also be either converted to commercial banks or merged with commercial banks  Public Sector Banks These are banks which the Government either owns or has a majority stake in it. The largest is the State Bank of India which was formed by the merger of the Presidency Banks – the Bank of Bengal, the Bank of Bombay and the Bank of Madras in 1921. It was then known as the Imperial Bank. It was nationalized in 1955 by the passing of the State Bank of India Act, 1955. It has seven subsidiaries or associates.  Foreign Banks These are branches of banks incorporated outside India. In 1995/ 96 many other foreign banks (optimistic in view of India’s liberalization) opened branches in India. However, after banking began to become increasingly competitive and margins began to be squeezed coupled with large non performing assets, many banks closed their branches  Private Sector Banks These are banks which are not government owned or controlled. Their shares are freely traded in the Stock Markets.  Cooperative Banks:Cooperative Banks are those that are created by a group of individual to support either a community or a religious group. They operate in metropolitan, urban and semi urban centers to cater to the needs of small borrowers.  Regional Rural Banks These came into being on October 2, 1975 when 5 regional rural banks were established under what became the Regional Rural Banks Act 1975. These were to bridge the gap in rural credit granting loans and advances to small and marginal farmers, artisans, small entrepreneur and persons of small means engaged in trade, commerce, industry or other productive ,activities within their area of operation.

 Local Area Banks Local Area Banks came into existence in 1999 and licenses were given for these banks as it was felt that regular commercial banks were not financial the rural/ agricultural sector adequately. Licenses were given to open branches in three districts. Branches in urban/ semi urban areas were granted only after ten branches were established in rural areas/ villages.

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CHAPTER 7 STATE BANK OF INDIA

7.1 Overview of SBI

Logo

Type

Public company (Public Sector Bank)

Traded as

NSE: SBIN BSE: 500112 LSE: SBID BSE SENSEX Constituent CNX Nifty Constituent

Industry

Banking, financial services

Founded

2 June 1806, Bank of Calcutta 27 January 1921, Imperial Bank of India 1 July 1955, State Bank of India 2 June 1956, nationalization

Headquarters

Mumbai, Maharashtra, India

Area served

Worldwide

Key people

Arundhati Bhattacharya (Chairperson)

Products

Consumer banking, corporate banking, finance and insurance, investment banking, mortgage loans, private banking, private equity, savings, securities, asset management, wealth management, credit cards,

Revenue

Increase INR2.7287103 trillion (US$41 billion) (2016)

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Profit

Increase INR127 billion (US$1.9 billion) (2016)

Total assets 15)

Decrease INR20.480 trillion (US$300 billion) (2014-

Owner

Government of India

Number of employees

293,459 (2016)

Slogan

The Banker to Every Indian

Website

sbi.co.in

Registered Address

State Bank Bhavan, Corporate Centre, ,Madame Cama Marg, Mumbai Maharashtra 400021

Tel

022-22740841 022-22740842

Fax

022-22855348

Email

[email protected]

Group

SBI Group

Registrars

Datamatics Financial Services Ltd. Plot No. B-5, MIDC, Part B Cross Lane, Andheri (E) Mumbai - 400093 Maharashtra

Tel

022-66712151 – 160

Fax

022-66712230

Email

[email protected]

Website

http://www.dfssl.com

Auditors

Amit Ray & Co.

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7.2 Introduction of SBI State Bank of India (SBI) is an Indian multinational, public sector banking and financial services company. It is a government-owned corporation with its headquarters in Mumbai, Maharashtra. As of 2014-15, it had assets of INR20.480 trillion (US$300 billion) and more than 14,000 branches, including 191 foreign offices spread across 36 countries, making it the largest banking and financial services company in India by assets. The company is ranked 232nd on the Fortune Global 500 list of the world's biggest corporations as of 2016. The bank traces its ancestry to British India, through the Imperial Bank of India, to the founding, in 1806, of the Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent. Bank of Madras merged into the other two "presidency banks" in British India, Bank of Calcutta and Bank of Bombay, to form the Imperial Bank of India, which in turn became the State Bank of India in 1955. Government of India owned the Imperial Bank of India in 1955, with Reserve Bank of India (India's Central Bank) taking a 60% stake, and renamed it the State Bank of India. In 2008, the government took over the stake held by the Reserve Bank of India.

State Bank of India is a banking behemoth and has 20% market share in deposits and loans among Indian commercial banks.

Evolution of SBI The origin of the State Bank of India goes back to the first decade of the nineteenth century with the establishment of the Bank of Calcutta in Calcutta on 2 June 1806. Three years later the bank received its charter and was re-designed as the Bank of Bengal (2 January 1809). A unique institution, it was the first joint-stock bank of British India sponsored by the Government of Bengal. The Bank of Bombay (15 April 1840) and the Bank of Madras (1 July 1843) followed the Bank of Bengal. These three banks remained at the apex of modern banking in India till their amalgamation as the Imperial Bank of India on 27 January 1921. Primarily Anglo-Indian creations, the three presidency banks came into existence either as a result of the compulsions of imperial finance or by the felt needs of local European commerce and were not imposed from outside in an arbitrary manner to modernise India's economy. Their evolution was, however, shaped by ideas culled from similar developments in Europe and England, and was influenced by changes occurring in the structure of both the local trading environment and those in the relations of the Indian economy to the economy of Europe and the global economic framework.

Establishment The establishment of the Bank of Bengal marked the advent of limited liability, joint-stock banking in India. So was the associated innovation in banking, viz. the decision to allow the

33

Bank of Bengal to issue notes, which would be accepted for payment of public revenues within a restricted geographical area. This right of note issue was very valuable not only for the Bank of Bengal but also its two siblings, the Banks of Bombay and Madras. It meant an accretion to the capital of the banks, a capital on which the proprietors did not have to pay any interest. The concept of deposit banking was also an innovation because the practice of accepting money for safekeeping (and in some cases, even investment on behalf of the clients) by the indigenous bankers had not spread as a general habit in most parts of India. But, for a long time, and especially upto the time that the three presidency banks had a right of note issue, bank notes and government balances made up the bulk of the investible resources of the banks. The three banks were governed by royal charters, which were revised from time to time. Each charter provided for a share capital, four-fifth of which were privately subscribed and the rest owned by the provincial government. The members of the board of directors, which managed the affairs of each bank, were mostly proprietary directors representing the large European managing agency houses in India. The rest were government nominees, invariably civil servants, one of whom was elected as the president of the board.

Business The business of the banks was initially confined to discounting of bills of exchange or other negotiable private securities, keeping cash accounts and receiving deposits and issuing and circulating cash notes. Loans were restricted to Rs.one lakh and the period of accommodation confined to three months only. The security for such loans was public securities, commonly called Company's Paper, bullion, treasure, plate, jewels, or goods 'not of a perishable nature' and no interest could be charged beyond a rate of twelve per cent. Loans against goods like opium, indigo, salt woollens, cotton, cotton piece goods, mule twist and silk goods were also granted but such finance by way of cash credits gained momentum only from the third decade of the nineteenth century. All commodities, including tea, sugar and jute, which began to be financed later, were either pledged or hypothecated to the bank. Demand promissory notes were signed by the borrower in favour of the guarantor, which was in turn endorsed to the bank. Lending against shares of the banks or on the mortgage of houses, land or other real property was, however, forbidden. Indians were the principal borrowers against deposit of Company's paper, while the business of discounts on private as well as salary bills was almost the exclusive monopoly of individuals Europeans and their partnership firms. But the main function of the three banks, as far as the government was concerned, was to help the latter raise loans from time to time and also provide a degree of stability to the prices of government securities

34

Presidency Banks Act The presidency Banks Act, which came into operation on 1 May 1876, brought the three presidency banks under a common statute with similar restrictions on business. The proprietary connection of the Government was, however, terminated, though the banks continued to hold charge of the public debt offices in the three presidency towns, and the custody of a part of the government balances. The Act also stipulated the creation of Reserve Treasuries at Calcutta, Bombay and Madras into which sums above the specified minimum balances promised to the presidency banks at only their head offices were to be lodged. The Government could lend to the presidency banks from such Reserve Treasuries but the latter could look upon them more as a favour than as a right.

First Five Year Plan In 1951, when the First Five Year Plan was launched, the development of rural India was given the highest priority. The commercial banks of the country including the Imperial Bank of India had till then confined their operations to the urban sector and were not equipped to respond to the emergent needs of economic regeneration of the rural areas. In order, therefore, to serve the economy in general and the rural sector in particular, the All India Rural Credit Survey Committee recommended the creation of a state-partnered and statesponsored bank by taking over the Imperial Bank of India, and integrating with it, the former state-owned or state-associate banks. An act was accordingly passed in Parliament in May 1955 and the State Bank of India was constituted on 1 July 1955. More than a quarter of the resources of the Indian banking system thus passed under the direct control of the State. Later, the State Bank of India (Subsidiary Banks) Act was passed in 1959, enabling the State Bank of India to take over eight former State-associated banks as its subsidiaries (later named Associates). The State Bank of India was thus born with a new sense of social purpose aided by the 480 offices comprising branches, sub offices and three Local Head Offices inherited from the Imperial Bank. The concept of banking as mere repositories of the community's savings and lenders to creditworthy parties was soon to give way to the concept of purposeful banking subserving the growing and diversified financial needs of planned economic development. The State Bank of India was destined to act as the pacesetter in this respect and lead the Indian banking system into the exciting field of national development.

35

7.3 Board of Directors List of Directors on the Central Board of State Bank of India w.e.f. 28.09.2016

Sr.No

Name

Designation

Under Section of SBI Act 1955

1.

Smt. Arundhati Bhattacharya

Chairman

19(a)

2.

Shri B. Sriram

Managing Director

19 (b)

3.

Shri Rajnish Kumar

Managing Director

19 (b)

4.

Shri P.K. Gupta

Managing Director

19 (b)

5.

Shri Dinesh Kumar Khara

Managing Director

19 (b)

6.

Shri Sanjiv Malhotra

Director

19 (c)

7.

Shri Sunil Mehta

Director

19 (c)

8.

Shri M.D. Mallya

Director

19 (c)

9.

Shri Deepak I. Amin

Director

19 (c)

10.

Shri Girish K. Ahuja

Director

19 (d)

11.

Dr. Pushpendra Rai

Director

19 (d)

12.

Ms. Anjuly Chib Duggal

Director

19 (e)

13.

Shri Chandan Sinha

Director

19 (f)

Table 7.1

7.4 Listing and Shareholding As on 31 March 2014, Government of India held around 58.59% equity shares in SBI. Life Insurance Corporation of India is the largest non-promoter shareholder in the company with 14.99% shareholding.

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Shareholders

Shareholding

Promoters: Government of India

58.60%

Banks & Insurance Companies

16.79%

FIIs/GDRs/OCBs/NRIs

12.04%

Mutual Funds & UTI

03.78%

Private Corporate Bodies

02.87%

Others

5.92%

Total

100.0%

Table7.2 The equity shares of SBI are listed on the Bombay Stock Exchange, where it is a constituent of the BSE SENSEX index, and the National Stock Exchange of India, where it is a constituent of the CNX Nifty. Its Global Depository Receipts (GDRs) are listed on the London Stock Exchange.

7.5 Recent awards and recognitions    

SBI was ranked as the top bank in India based on tier 1 capital by The Banker magazine in a 2014 ranking. SBI was ranked 298th in the Fortune Global 500 rankings of the world's biggest corporations for the year 2012. SBI was named the 29th most reputed company in the world according to Forbes 2009 rankings. SBI was 50th Most Trusted brand in India as per the Brand Trust Report 2013, an annual study conducted by Trust Research Advisory, a brand analytics company and subsequently, in the Brand Trust Report 2014, SBI finished as India's 19th Most Trusted Brand in India.

37

7.6 Balance Sheet of SBI

------------------- in Rs. Cr. -------------------

Mar 16

Mar 15

Mar 15

Mar 14

Mar 13

12 mths

12 mths

12 mths

12 mths

12 mths

746.57 746.57 127,691.65 127,691.65 128,438.22 1,576,793.24 205,150.29

746.57 746.57 127,691.65 127,691.65 128,438.22 1,576,793.24 205,150.29

746.57 746.57 117,535.68 117,535.68 118,282.25 1,394,408.51 183,130.88

684.03 684.03 98,199.65 98,199.65 98,883.69 1,202,739.57 169,182.71

137,698.05

137,698.05

96,412.96

95,455.07

EQUITIES AND LIABILITIES SHAREHOLDER'S FUNDS Equity Share Capital 776.28 Total Share Capital 776.28 Reserves and Surplus 143,498.16 Total Reserves and Surplus 143,498.16 Total Shareholders Funds 144,274.44 Deposits 1,730,722.44 Borrowings 224,190.59 Other Liabilities and 159,875.57 Provisions Total Capital and Liabilities 2,259,063.03 ASSETS Cash and Balances with 129,629.33 Reserve Bank of India Balances with Banks Money 37,838.33 at Call and Short Notice Investments 477,097.28 Advances 1,463,700.42 Fixed Assets 10,389.28 Other Assets 140,408.41 Total Assets 2,259,063.03 OTHER ADDITIONAL INFORMATION Number of Branches 16,784.00 Number of Employees 207,739.00 Capital Adequacy Ratios (%) 13.00 KEY PERFORMANCE INDICATORS Tier 1 (%) 10.00 Tier 2 (%) 3.00 ASSETS QUALITY Gross NPA 98,172.80 Gross NPA (%) 7.00 Net NPA 55,807.02 Net NPA (%) 4.00 Net NPA To Advances (%) 4.00 CONTINGENT LIABILITIES, COMMITMENTS Bills for Collection 199,140.17 Contingent Liabilities 865,027.48

2,048,079.80 2,048,079.80 1,792,234.60 1,566,261.04 115,883.84

115,883.84

84,955.66

65,830.41

58,977.46

58,977.46

47,593.97

48,989.75

495,027.40 1,300,026.39 9,329.16 68,835.55 2,048,079.80

495,027.40 1,300,026.39 9,329.16 68,835.55 2,048,079.80

398,308.19 1,209,828.72 8,002.16 43,545.90 1,792,234.60

350,927.27 1,045,616.55 7,005.02 47,892.03 1,566,261.04

16,524.00 213,238.00 12.00

16,333.00 213,238.00 12.00

16,059.00 222,033.00 13.00

15,002.00 228,296.00 13.00

10.00 2.00

10.00 2.00

10.00 3.00

9.00 3.00

56,725.00 4.00 0.00 2.00 2.00

56,725.00 4.00 0.00 2.00 2.00

61,605.00 5.00 0.00 3.00 3.00

51,189.39 5.00 21,956.48 2.00 2.00

92,795.25 190,560.35 1,000,627.26 902,862.16

74,028.42 66,639.54 1,017,329.95 926,378.91

Table 7.3

38

7.7 Profit & Loss account of SBI

INCOME Interest / Discount on Advances / Bills Income from Investments Interest on Balance with RBI and Other Inter-Bank funds Others Total Interest Earned Other Income Total Income EXPENDITURE Interest Expended Payments to and Provisions for Employees Depreciation Operating Expenses (excludes Employee Cost & Depreciation) Total Operating Expenses Provision Towards Income Tax Provision Towards Deferred Tax Provision Towards Other Taxes Other Provisions and Contingencies Total Provisions and Contingencies Total Expenditure Net Profit / Loss for The Year Net Profit / Loss After EI & Prior Year Items Profit / Loss Brought Forward Total Profit / Loss available for Appropriations APPROPRIATIONS Transfer To / From Statutory Reserve Transfer To / From Capital Reserve Transfer To / From Revenue And Other Reserves Dividend and Dividend Tax for The Previous Year Equity Share Dividend Tax On Dividend Balance Carried Over To Balance Sheet

------------------- in Rs. Cr. -------------------

Mar 16

Mar 15

Mar 15

Mar 14

Mar 13

12 mths

12 mths

12 mths

12 mths

12 mths

115,666.01 112,343.91 112,343.91 102,484.10

90,537.10

42,303.98

37,087.77

37,087.77

31,941.87

27,200.63

621.07

505.12

505.12

409.31

545.14

5,094.25 2,460.27 2,460.27 1,515.52 1,374.23 163,685.31 152,397.07 152,397.07 136,350.80 119,657.10 28,158.36 22,575.89 22,575.89 18,552.92 16,034.84 191,843.67 174,972.96 174,972.96 154,903.72 135,691.94 106,803.49

97,381.82

97,381.82

87,068.63

75,325.80

25,113.82

23,537.07

23,537.07

22,504.28

18,380.90

1,700.30

1,116.49

1,116.49

1,333.94

1,139.61

14,968.24

14,024.08

14,024.08

11,887.63

9,763.91

41,782.37 3,577.93 245.47 0.00 29,483.75

38,677.64 6,689.95 -477.56 0.00 19,599.54

38,677.64 6,689.95 -477.56 0.00 19,599.54

35,725.85 4,227.47 1,055.25 0.00 15,935.35

29,284.42 5,951.06 -107.97 2.82 11,130.83

33,307.15

25,811.93

25,811.93

21,218.07

16,976.74

181,893.01 161,871.39 161,871.39 144,012.55 121,586.96 9,950.65 13,101.57 13,101.57 10,891.17 14,104.98 9,950.65

13,101.57

13,101.57

10,891.17

14,104.98

0.32

0.32

0.32

0.34

0.34

9,950.98

13,101.89

13,101.89

10,891.51

14,105.32

2,985.20

4,029.08

4,029.08

3,339.62

4,417.86

345.27

0.00

0.00

0.00

19.17

4,267.35

5,994.56

5,994.56

5,013.40

6,453.26

0.01

0.00

0.00

0.01

0.00

2,018.32 334.51

2,557.28 520.65

2,557.28 520.65

2,239.71 298.45

2,838.74 375.95

0.32

0.32

0.32

0.32

0.34

39

Total Appropriations OTHER INFORMATION EARNINGS PER SHARE Basic EPS (Rs.) Diluted EPS (Rs.)

9,950.98

13,101.89

13,101.89

10,891.51

14,105.32

12.98 12.98

17.55 17.55

18.00 18.00

156.76 156.76

210.06 210.06

6.07 -11.12 0.44 6.89 2.51 39.14 7.24

8.59 -6.21 0.63 10.20 2.68 36.85 7.44

7.98 -5.61 0.60 9.20 2.74 36.76 7.60

11.78 -1.61 0.90 14.26 2.83 34.09 7.63

10.99 -2.48 0.87 13.94 3.24 38.00 7.97

1.24

1.10

1.03

1.02

1.07

-0.80 1.84 4.72

-0.46 1.88 4.75

-0.42 1.99 4.85

-0.12 1.86 4.80

-0.19 1.95 4.73

Table 7.4

7.8 Key Performance Ratios Net Profit Margin (%) Operating Profit Margin (%) Return on Assets (%) Return on Equity / Networth (%) Net Interest Margin (X) Cost to Income (%) Interest Income/Total Assets (%) Non-Interest Income/Total Assets (%) Operating Profit/Total Assets (%) Operating Expenses/Total Assets (%) Interest Expenses/Total Assets (%)

Table 7.5

7.9 SWOT Analysis STRENGTH  Brand Name  Market Leader  Government Owned  Diversified Portfolio

OPPURTUNITIES  High Approach of ATM  2000 Branches coming on various location  Merged with associated banks

WEAKNESSES  Less Modernisation  Higher NPA  Customer does not have full information about getting facilities. THREAT  Employee Strike  Other Nationalized Bank and private banks.  Advent of MNC bank

Table 7.6

40

7.10 Profit Before Tax & Profit After Tax PBT stands for Profit Before Tax, and PAT stands for Profit After Tax. The graph visually shows how the net profit of the company stand reduced due to the impact of Tax.

Fig 7.1 7.11 Net Worth Net Worth is the difference between a company's total assets and its total liabilities. It is also known as shareholder`s equity.

Fig7.2

41

Chapter 8 Housing Development Finance Corporation Limited

8.1 Overview of HDFC Logo

Type

Public Company (Private Sector Bank)

Traded as

BSE: 500180 NSE: HDFCBANK NYSE: HDB BSE SENSEX Constituent CNX Nifty Constituent

Industry

Banking, Financial services

Founded

August 1994

Headquarters

Mumbai, Maharashtra, India

Area served

India

Key people

Aditya Puri (MD)

Products

Investment Banking, Investment Management, Wealth Management, Private Banking, Corporate Banking, Private Equity, Finance and Insurance, Consumer Banking, Mortgages, Credit Cards

Revenue

INR10,588.1 crore (US$1.6 billion) (2016)

Profit

INR3,238.9 crore (US$480 million) (2016)

Total assets

INR755,100 crore (US$110 billion)(2016)

Total equity

INR507.1 crore (US$75 million)

Number of employees

87,555 (April 2016)

Website

hdfcbank.com

42

Registered Address

Tel: Fax: Email: Group: Registrars

Tel Fax Email Website Auditors

HDFC Bank House, Senapati Bapat Marg,, Lower Parel Mumbai Maharashtra 400013 022-66521000 022-24988484 022-24960737 022-24965235 [email protected] HDFC Group Datamatics Financial Services Ltd. Plot No. B-5, MIDC, Part B Cross Lane, Andheri (E) Mumbai - 400093 Maharashtra 022-66712151 – 160 022-66712230 [email protected] http://www.dfssl.com Deloitte Haskins & Sells

8.2 Introduction of HDFC The Housing Development Finance Corporation Limited (HDFC) was amongst the first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as part of RBI's liberalisation of the Indian Banking Industry in 1994. The bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial Bank in January 1995. HDFC is India's premier housing finance company and enjoys an impeccable track record in India as well as in international markets. Since its inception in 1977, the Corporation has maintained a consistent and healthy growth in its operations to remain the market leader in mortgages. Its outstanding loan portfolio covers well over a million dwelling units. HDFC has developed significant expertise in retail mortgage loans to different market segments and also has a large corporate client base for its housing related credit facilities. With its experience in the financial markets, strong market reputation, large shareholder base and unique consumer franchise, HDFC was ideally positioned to promote a bank in the Indian environment.

Business focus HDFC Bank's mission is to be a World Class Indian Bank. The objective is to build sound customer franchises across distinct businesses so as to be the preferred provider of banking services for target retail and wholesale customer segments, and to achieve healthy growth in profitability, consistent with the bank's risk appetite. The bank is committed to maintain the highest level of ethical standards, professional integrity, corporate governance and regulatory compliance. HDFC Bank’s business philosophy is based on five core values: Operational Excellence, Customer Focus, Product Leadership, People and Sustainability.

43

8.3 Listing and Shareholding The equity shares of HDFC Bank are listed on Bombay Stock Exchange and the National Stock Exchange of India. Its American Depository Shares are listed on NYSE and the Global depository receipt are listed on theLuxembourg Stock Exchange where two GDRs represent one equity share of HDFC Bank..

Shareholders

Shareholding

Promoter Group (HDFC)

21.57%

Foreign Institutional Investors (FII)

32.4%

Individual shareholders

8.5%

Bodies Corporate

7.5%

Insurance companies

5.38%

Mutual Funds/UTI

8.65%

NRI/OCB/Others

0.29%

Financial Institutions/Banks

2.75%

ADS/GDRs

18.78%

Table 8.1

44

8.4 Board of Directors Mrs. Shyamala Gopinath Mr. Partho Datta Mr. Bobby Parikh Mr. A. N. Roy Mr. Malay Patel Mr. Keki Mistry Mrs. Renu Karnad Mr. Aditya Puri Mr. Paresh Sukthankar Mr. Kaizad Bharucha Mr. Umesh Chandra Sarangi Mr. Srikanth Nadhamuni

8.5 Recent awards and recognitions

NABARD Award

Best Bank in JLG-Bank Linkage programme in Assam

Business Today - KPMG India's Best Bank

- Bank of the year - Best Digital Banking Initiative awards Best Bank in SHG Credit Linkage in Tamil Nadu Best CEO Award - Mr. Aditya Puri Best Equity Deal in Asia Award - Best Asian Bank - Best Domestic Bank - India Fab 50 Companies List for the 9th year - Business Leader of the Year - Aditya Puri - World's 30 Best CEOs - Mr Aditya Puri

NABARD Award Business Today Award FinanceAsia Awards FinanceAsia Country Awards 2015 Forbes Asia AIMA Managing India Awards 2015 Barron's

- Best Managed Public Company - India' Best CEO- Aditya Puri Best Corporate Governance- Rank 3 Best Investor Relations- Rank 3

Finance Asia poll on Asia's Best Companies 2015

- Best in class straight Through Processing Rates Table 8.2

J. P Morgan Quality Recognition Award

45

8.6 Balance Sheet of HDFC

------------------- in Rs. Cr. ------------------Mar 16

Mar 15

Mar 15

Mar 14

Mar 13

12 mths

12 mths

12 mths

12 mths

12 mths

EQUITIES AND LIABILITIES SHAREHOLDER'S FUNDS Equity Share Capital 505.64 Total Share Capital 505.64 Reserves and Surplus 72,172.13 Total Reserves and Surplus 72,172.13 Total Shareholders Funds 72,677.76 Deposits 546,424.19 Borrowings 53,018.47 Other Liabilities and Provisions 36,725.13 Total Capital and Liabilities 708,845.57 ASSETS Cash and Balances with Reserve 30,058.31 Bank of India Balances with Banks Money at Call 8,860.53 and Short Notice Investments 163,885.77 Advances 464,593.96 Fixed Assets 3,343.16 Other Assets 38,103.84 Total Assets 708,845.57 OTHER ADDITIONAL INFORMATION Number of Branches 4,520.00 Number of Employees 87,555.00 Capital Adequacy Ratios (%) 16.00 KEY PERFORMANCE INDICATORS Tier 1 (%) 13.00 Tier 2 (%) 2.00 ASSETS QUALITY Gross NPA 4,392.83 Gross NPA (%) 1.00 Net NPA 1,320.37 CONTINGENT LIABILITIES, COMMITMENTS Bills for Collection 55,242.58 Contingent Liabilities 821,565.54

501.30 501.30 479.81 475.88 501.30 501.30 479.81 475.88 61,508.12 61,508.12 42,998.82 35,738.26 61,508.12 61,508.12 42,998.82 35,738.26 62,009.42 62,009.42 43,478.63 36,214.15 450,795.64 450,795.64 367,337.48 296,246.98 45,213.56 45,213.56 39,438.99 33,006.60 32,484.46 32,484.46 41,344.40 34,864.17 590,503.07 590,503.07 491,599.50 400,331.90 27,510.45

27,510.45

25,345.63

14,627.40

8,821.00

8,821.00

14,238.01

12,652.77

166,459.95 166,459.95 120,951.07 111,613.60 365,495.03 365,495.03 303,000.27 239,720.64 3,121.73 3,121.73 2,939.92 2,703.08 19,094.91 19,094.91 25,124.60 19,014.41 590,503.07 590,503.07 491,599.50 400,331.90 4,014.00 76,286.00 17.00

4,014.00 76,286.00 17.00

3,403.00 68,165.00 16.00

3,062.00 69,065.00 17.00

14.00 3.00

14.00 3.00

12.00 4.00

11.00 6.00

3,438.38 1.00 896.28

3,438.38 1.00 896.28

2,989.28 1.00 820.03

2,334.64 1.00 468.95

22,304.93 22,304.93 20,943.06 26,103.96 975,233.95 975,233.95 723,154.91 720,122.43

Table 8.3

46

8.7 Profit & Loss account of HDFC

INCOME Interest / Discount on Advances / Bills Income from Investments Interest on Balance with RBI and Other Inter-Bank funds Others Total Interest Earned Other Income Total Income EXPENDITURE Interest Expended Payments to and Provisions for Employees Depreciation Operating Expenses (excludes Employee Cost & Depreciation) Total Operating Expenses Provision Towards Income Tax Provision Towards Deferred Tax Provision Towards Other Taxes Other Provisions and Contingencies Total Provisions and Contingencies Total Expenditure Net Profit / Loss for The Year Net Profit / Loss After EI & Prior Year Items Profit / Loss Brought Forward Total Profit / Loss available for Appropriations APPROPRIATIONS Transfer To / From Statutory Reserve Transfer To / From Capital Reserve Transfer To / From General Reserve Transfer To / From Investment Reserve Dividend and Dividend Tax for The Previous Year Equity Share Dividend

------------------- in Rs. Cr. ------------------Mar 16

Mar 15

Mar 15

Mar 14

Mar 13

12 mths

12 mths

12 mths

12 mths

12 mths

44,827.86

37,180.79

37,180.79

31,686.92

26,822.39

14,120.03

10,705.61

10,705.61

9,036.85

7,820.26

361.61

517.10

517.10

355.99

281.63

911.95 60,221.45 10,751.72 70,973.17

66.41 48,469.90 8,996.35 57,466.26

66.41 48,469.90 8,996.35 57,466.26

55.78 41,135.53 7,919.64 49,055.18

140.59 35,064.87 6,852.62 41,917.50

32,629.93

26,074.24

26,074.24

22,652.90

19,253.75

5,702.20

4,750.96

4,750.96

4,178.98

3,965.38

705.84

656.30

656.30

671.61

651.67

10,571.66

8,580.29

8,580.29

7,191.61

6,619.07

16,979.70 6,507.59 -165.88 0.00 2,725.61

13,987.54 5,204.03 -91.23 0.75 2,075.01

13,987.54 5,204.03 -91.23 0.75 2,075.01

12,042.20 4,269.41 24.27 0.75 1,587.27

11,236.12 3,275.76 -251.42 0.60 1,676.40

9,067.32

7,188.56

7,188.56

5,881.70

4,701.34

58,676.96 12,296.21

47,250.34 10,215.92

47,250.34 10,215.92

40,576.80 8,478.38

35,191.21 6,726.28

12,296.21

10,215.92

10,215.92

8,478.38

6,726.28

18,627.79

14,654.15

14,654.15

11,132.18

8,399.65

30,924.01

24,870.07

24,870.07

19,610.56

15,125.93

3,074.05

2,553.98

2,553.98

2,119.59

1,681.57

222.15 1,229.62

224.92 1,021.59

224.92 1,021.59

58.27 847.84

85.85 672.63

-8.52

27.54

27.54

3.22

17.66

-11.71

0.84

0.84

4.85

4.47

2,401.78

2,005.20

2,005.20

1,643.35

1,309.08

47

Tax On Dividend Balance Carried Over To Balance Sheet Total Appropriations OTHER INFORMATION EARNINGS PER SHARE Basic EPS (Rs.) Diluted EPS (Rs.)

488.95

408.21

408.21

279.29

222.48

23,527.69

18,627.79

18,627.79

14,654.15

11,132.18

30,924.01

24,870.07

24,870.07

19,610.56

15,125.93

48.84 48.26

42.15 41.67

42.00 42.00

35.47 35.21

28.49 28.18

Table 8.4

8.8 Key Performance Ratios Net Profit Margin (%) Operating Profit Margin (%) Return on Assets (%) Return on Equity / Net worth (%) Net Interest Margin (X) Cost to Income (%) Interest Income/Total Assets (%) Non-Interest Income/Total Assets (%) Operating Profit/Total Assets (%) Operating Expenses/Total Assets (%) Interest Expenses/Total Assets (%)

20.41 2.56 1.73 16.91 3.89 36.69 8.49 1.51 0.21 2.39 4.60

21.07 2.51 1.73 16.47 3.79 36.84 8.20 1.52 0.20 2.36 4.41

20.61 1.35 1.72 19.50 3.75 36.53 8.36 1.61 0.11 2.44 4.60

19.18 -0.36 1.68 18.57 3.94 38.02 8.75 1.71 -0.03 2.80 4.80

18.93 -0.28 1.52 17.26 3.63 38.03 8.07 1.55 -0.02 2.54 4.43

Table 8.5

8.9 SWOT Analysis STRENGTH    

WEAKNESSES   

Segmentation Product features Work environment Low documentation

Timing short Maintenance charges high High interest rate  Customer does not have full information about getting facilities

OPPURTUNITIES  

Merged with Centurion Bank 1300 branches coming on various location  Name and logo will be new

THREAT 

SBI BANK  Other Private Bank (ICICI,AXSIS etc)

Table 8.6

48

8.10 Profit Before Tax & Profit After Tax PBT stands for Profit Before Tax, and PAT stands for Profit After Tax. The graph visually shows how the net profit of the company stand reduced due to the impact of Tax.

Fig 8.1

8.11Net Worth Net Worth is the difference between a company's total assets and its total liabilities. It is also known as shareholder`s equity.

Fig 8.2

49

Chapter 9 SBI v/s HDFC 9.1 Profitability Ratios of SBI Ratio Name

Ratio

Answer

Net Profit Ratio

NPAT x100 Interest Income

9951 x100 = 6.07% 163685

Operating Expense Ratio

Operating Expense x100 Interest Income

41782 x100 = 25.53% 163685

Return on Total Asset

NPBT x100 Total Asset

13774 x100 = 061% 2259063

Return on Net Worth

NPAT x100 Net Worth

9951 x100 = 6.87% 144274

Return on Capital Employed

NPBT x100 C. E

13774 x100 = 9.55% 144274

Table 9.1

9.2 Profitability Ratios of HDFC Ratio Name

Ratio

Answer

Net Profit Ratio

NPAT x100 Interest Income

12296 x100 = 20.42% 60221

Operating Expense Ratio

Operating Expense x100 Interest Income

16980 x100 = 28.19% 60221

Return on Total Asset

NPBT x100 Total Asset

18638 x100 = 2.63% 708846

Return on Net Worth

NPAT x100 Net Worth

12296 x100 = 16.92% 72678

Return on Capital Employed

NPBT x100 C. E

18638 x100 = 25.64% 72678

Table 9.2

50

9.3 SBI v/s HDFC Ratio Comparison RATIO

SBI

HDFC

Net Profit Ratio

6.07%

20.42%

Operating Expense Ratio

25.53%

28.19%

Return on Total Asset

0.61%

2.63%

Return on Net Worth

6.87%

16.92%

Return on Capital Employed

9.55%

25.64%

Table 9.3

Graphical Depiction of SBI v/s HDFC 30 25 20 SBI

15

HDFC 10 5 0 Net Profit Ratio Operating Expense Ratio Return on Total Asset Return on Net Return Worth on Capital Employed

Fig 9.1

51

Chapter 10 PUBLIC SECTOR V/S PRIVATE SECTOR Parameter1: Banks Network 45.00% 40.00% 35.00% 30.00%

State Bank of India and its Associates

25.00%

Nationalised Banks

20.00%

15.00%

Private Sector Banks

10.00% 5.00% 0.00% 2012

2013

2014

2015

2016

Fig 10.1 The private sector banks are spreading its wings at a much faster rate than public sector banks. The customer base of these banks has grown manifold since they are able to provide innovative services to the customers at a much faster pace. This is leading them to capture more market share and eating up some of the share of their public sector counterparts.

Parameter2: Banks Growth % Growth in Balance Sheet % Growth in Total Income Size 2015

2016

2015

2016

New Private Sector Banks

10.86%

23.51%

-2.19%

14.63%

Public Sector Banks

17.93%

26.21%

12.46%

19.71%

Table 10.1 The public sector banks’ asset base and income grew at a decent rate in the last 2 years likewise there were equal fluctuation in case of new private sector banks.

52

Parameter3: Capital Adequacy

18

16 14 12 10

Private Sector Banks

8

Public Sector Banks

6 4 2 0 2014

2015

2016

Fig 10.2 The Capital Adequacy ratio (BASEL-II) of new private sector banks is way above RBI’s minimum requirement of 9%. This shows that these banks are in comfortable position to absorb losses since they have more capital to cover for their risk weighted assets. Or on the other hand they have less risky assets in their portfolio for a fixed capital base.

Parameter4: Management Efficiency 3.00% 2.50% 2.00% 1.50%

Pvt. Sector Bank (Net Int. Inc./TA)

1.00%

Public Sector Banks (Net Int. Inc./ TA)

0.50%

0.00% 2014

2015

2016

Fig 10.3 The efficiency ratios of new private sector banks are better than public sector banks which eventually lead to enhanced bottom line.

53

Chapter 11 CONCLUSION 11.1 General In general sense SBI overtakes HDFC in many aspects. This situation of SBI is purely due to its presence in market for a very long amount of time and with the help of its subsidiaries it manages to acquire a very large market share. On the other hand HDFC is not that old as compared to SBI and because it is new therefore does not enjoy advantage of a prestigious brand name like SBI has. HDFC has brilliant setup and good service performance which landed it in the second position in private sector banks whereas SBI is the largest bank in the country.

11.2 Based on Profitability Based on the financial statements of SBI and HDFC and various calculations of ratios regarding profitability it can be easily concluded that HDFC has an upper hand over SBI as far as profitability is concerned. Though SBI is the largest and one of the oldest banks in India and surpasses HDFC in various aspects such as area covered, number of employes, customers, branches, ATMs etc but still HDFC is better in providing performance. SBI may have larger amount of profits as compared to HDFC but the expenditure done to gain such amount is also much higher as compared to HDFC. Since HDFC earns profits against low expenditure whereas SBI earns profits against high expenditures, this helps HDFC to improve its profitability ratios. If recent trends and news is to be believed then HDFC has all the potential to match and overtake SBI in various aspects.

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Chapter 12 ANNEXURE Questionnaire Questionnaire was taken among 5 people. 2 of them are given below. I.

NAME: Abhishek Sharma OCCUPATION : Financial Analyst AGE:37 1. According to you what are the problems faced by SBI and HDFC banks regarding their profitability? Problems faced by SBI:- One of the major problems faced by SBI is employee problems and sudden strikes. Such problems interrupts management which further affects profits. Problems faced by HDFC:- As compared to SBI it has less area coverage and entered the market late so it is a negative point which affects its profits

2. Who according to you has an upper hand over the other? I would say HDFC is currently maintaining an upper hand over SBI due its excellent performance. Even the financial statements indicate the same scenario. Mostly HDFC is ahead of SBI in many aspects.

3. As a customer which bank do you prefer? Well though I believe that HDFC has an upper hand over SBI still I would prefer SBI. This decision is based on my belief in SBI bank. I have been dealing with SBI for a very long time without any problems. Provided SBI's long history and the fact that it is governed under a separate act provides me a sense of security. 4. Which bank is better in your opinion based on profitability ? o State Bank of India o Housing Development Finance Corporation Limited 5. Based on Financial Statements what are the trends in SBI profits? o Increasing o Rapidly Increasing o Decreasing o Rapidly Decreasing

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6. Based on Financial Statements what are the trends in HDFC profits? o Increasing o Rapidly Increasing o Decreasing o Rapidly Decreasing

7. In near future what are your opinions regarding these bank's profitability? Though presently HDFC is ahead of SBI but provided the rapid growth of banking industry in India it is hard to select a winner in future. SBI is also working hard enough and stable in competition. So maybe HDFC remain reigning over SBI or SBI may equalize or pass ahead of HDFC can't say right now. Banking industry is rapidly growing and fluctuating.

II.

NAME: Mustafa Nimbaherawala OCCUPATION : Chartered Accountant AGE:42 1. According to you what are the problems faced by SBI and HDFC banks regarding their profitability? Problems faced by SBI:- One major problem is employee mismanagement. One other problem faced could be difficulty and expense in management of its huge banking network provided it is one of the largest banks in the country. Problems faced by HDFC:- Many customer may avoid HDFC due to high maintenance charges and high interest rates. Losing of customers directly affects profits.

2. Who according to you has an upper hand over the other? Though Financial statements speak in favor of HDFC but I assume that SBI enjoys customer support. SBI has been in the market for a very long time and gathered many loyal customers. People don't accept change very fast so majority has continued with SBI. SBI enjoys the massive brand name and is governed by a different act so is more secure in terms of stability in the market. 3. As a customer which bank do you prefer? Like I said before people don't go for change very fast and I am one of those. I have been a customer of SBI for long and still continuing. But I would soon try HDFC provided its wide range of facility and good response to grievances and requests.

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4. Which bank is better in your opinion based on profitability ? o State Bank of India o Housing Development Finance Corporation Limited

5. Based on Financial Statements what are the trends in SBI profits? o o o o

Increasing Rapidly Increasing Decreasing Rapidly Decreasing

6. Based on Financial Statements what are the trends in HDFC profits? o o o o

Increasing Rapidly Increasing Decreasing Rapidly Decreasing

7. In near future what are your opinions regarding these bank's profitability? Presently HDFC is leading in front of SBI in certain aspects but still SBI has been in the market for a longer period of time and has a larger area coverage then HDFC. This aspect will definitely help SBI in near future. Provided rapidly increasing awareness among masses in Indian population regarding banking thanks to our new political leaders, these people would have easy access to SBI and its services due to its large area coverage. Therefore its simple business "More customers equals to more profits"

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BIBLIOGRAPHY  Reference Books and journals ICSI Module Cost and Management Accounting ICSI Journals and Bulletins Mukesh Baria:- "Analysis and Calculations of Ratios." Amrut Raj Bhore:- "How to understand financial statements." Times of India SBI Annual Reports HDFC Annual Reports

 Webliography www.sbi.co.in www.hdfcbank.com www.rbi.org.in www.moneycontrol.com www.icsi.edu Search Engine = www.google.com

 News articles http://www.livemint.com/Industry/jOR1n6dzBiIQalZhLM11GO/SBI-beats-HDFC-Bank-asthe-most-valued-bank.html http://www.firstpost.com/business/why-hdfc-bank-is-beating-the-hell-out-of-state-bank-ofindia-132499.html

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