Important ratios for banks
Sumit Puri (56)
Tamal Bhattacharya (47)
Namit Manglani (46)
Vishnu Sharma (45)
Sohin Savla (26)
Sunil Choudhary K (19)
BASEL II
• The purpose of Basel II, is to create an international standard that
banking regulators can use when creating regulations about how
much capital banks need to put aside to guard against the types of
financial and operational risks banks face.
• Basel II aims at
• Ensuring that capital allocation is more risk sensitive.
• Separating operational risk from credit risk, and quantifying
both.
• Attempting to align economic and regulatory capital more
closely to reduce the scope for regulatory arbitrage
Capital adequacy ratio (CAR), also
called Capital to Risk (Weighted) Assets
Ratio (CRAR)
• TIER 1 CAPITAL –
A) Equity Capital
B) Disclosed Reserves
• TIER 2 CAPITAL –
A) Undisclosed Reserves
B) General Loss reserves
C) Subordinate Term Debts
Risk Weighted Assets
• It is based on the riskiness of a bank's assets
• For example, loans that are secured by a letter of credit
would be weighted riskier than a mortgage loan that is
secured with collateral
• Three major components of risk that a bank faces:
• credit risk
• operational risk
• market risk.
Credit Risk
• The credit risk component can be calculated in three
different ways of varying degree of sophistication,
namely
• Standardized approach,
• Foundation IRB
• Advanced IRB.
• IRB stands for "Internal Rating-Based Approach".
• Example:
• Cash & Balance with RBI
• Inter bank Deposits
• Investments
• Advances ..
Operational Risk
• For operational risk, there are three different
approaches
• Basic indicator approach or BIA
• Standardized approach or TSA
• The internal measurement approach (an advanced
form of which is the advanced measurement
approach or AMA)
Market Risk
For market risk the preferred approach is VaR (Value at risk)
Example:
Interest Rate risk
Foreign exchange risk
Equity risk ..
Example : A bank has assets totaling 100 units
• Cash : 10 units
• Government bonds : 15 Units
• Mortgage Loans : 20 Units
• Other loans : 50 Units
• Other Assets : 05 Units
Bank's risk-weighted assets are calculated as follows
Cash 10 * 0% = 0
Government securities 15 * 0% = 0
Mortgage loans 20 * 50% = 10
Other loans 50 * 100% = 50
Other assets 5 * 100% = 5
BANK'S CORE CAPITAL
Core
Capital
TIER 1 TIER 2
CAPITA CAPITA
L L
Equity Disclosed Undisclose General Subordinate
Capital Reserves d Reserves Loss Term Debts
reserves
Tier 1 Capital
• Includes instruments that can't be redeemed at
the option of the holder
Equity • Also means that the owner of the shares cannot
Capital decide on his own that he wants to withdraw
the money he invested and so cannot leave the
bank without the risk coverage
Disclose • Reserves are held by the bank, and are thus
d
money that no one but the bank can have an
Reserve
influence on
s
Axis Bank Tier 1 & Tier 2 Capital
Tier 2 Capital
• Accepted by some regulators where a bank
Undisclose has made a profit but this has not appeared in
d Reserves normal retained profits or in general reserves
of the bank
• A general provision is created when a
General company is aware that a loss may have
Provisions occurred but is not sure of the exact nature of
that loss
• Subordinated debt is debt which ranks after
Subordinate
other debts should a company fall into
d Debt receivership or be closed
PNB Tier 1 & Tier 2 Capital
Comparison of CRAR-PNB and
Axis bank
PNB
The Bank migrated to New Capital Adequacy
Framework (NCAF), popularly known as
Basel II w.e.f March 2008
Bank’s Tier I capital comprises of Equity
Shares, Reserves
Bank has issued Innovative Perpetual Bonds
(Tier 1 capital)
CRAR is 14.16%.
Contd…
AXIS BANK
Axis Bank is well capitalized, with a capital adequacy ratio of
15.80% at the end of the year
The Tier I capital adequacy ratio was 11.18% against 9.26% a
year earlier, while the Tier II Capital Adequacy Ratio was
4.62% against 4.43% in FY 2009
These figures depict that the capital position of the Bank has
significantly strengthened, particularly core Tier I capital,
providing adequate support for its growth plans in future
Non-performing asset
Non-Performing Asset: A classification used by
financial institutions that refer to loans that are in
jeopardy of default
Any commercial loans which are more than 90 days
overdue and any consumer loans which are more
than 180 days overdue
Net NPAs are calculated by reducing cumulative
balance of provisions outstanding at a period end
from gross NPAs.
Net Non-performing asset
Net NPA = Gross NPA – (Balance in Interest
Suspense account + DICGC/ECGC claims
received and held pending adjustment + Part
payment received and kept in suspense
account + Total provisions held).
Non-performing asset ratio
Non-performing asset ratio = (The net NPA / loans
(advances) )
It is used as a measure of the overall quality of the
bank’s loan book
Higher ratio reflects rising bad quality of loans
Axis PNB
Non-Performing asset ratio 0.4% 0.53%
Axis NPA and Advances
Advances
NPA
PNB NPA and Advances
Advances
NPA
Categories of NPA
CATEGORY AGE OF DEFAULT
Standard 0-6 months (180 days)
Sub Standard More than 6 months
up to 24 Months
Doubtful-I More than 24 months
up to 36 months
Doubtful-II More than 36 months
up to 60 months
Doubtful-III Above 60 months
Loss No security available
Other Income to Total Income
Ratio
It represents the ratio of the income earned from
activities other than normal business operations to
the total income
It can comprise of income from activities such as
such as investment interest, foreign exchange gains,
rent income, and profit from the sale of non-
inventory assets
Ratio value = Income from non business activities
Total income
Contd…
A higher “other income’ component can camouflage
the real performance of the company by either
boosting profits or minimizing losses.
Axis PNB
Other income to
total income 0.2313 0.1424
Consolidated income…
Axis bank other income…
PNB other income
Credit to Deposit Ratio
Theproportion of loan-assets created by banks
from the deposits received
Ratio Bank's loans
value: amount of its deposits at any given
time
The higher the ratio, the higher the loan-assets
created from deposits.
Contd..
The outcome of this ratio reflects the ability of the
bank to make optimal use of the available resources.
High credit-deposit ratio could lead to a rise in
interest rates.
AXIS PNB
Credit to 0.73844 0.7484
deposit ratio:
Axis credit and deposit
Pnb credit and deposit
Net Interest Margin (NIR)
Represents the difference between the interest income
generated by a financial institution and the amount of
interest paid out to their lenders, relative to the amount
of their assets.
Contd…
Examines how successful a firm's
investment decisions are compared to its debt
situations
A negative value denotes that the firm did not make an
optimal decision, because interest expenses were
greater than the amount of returns generated by
investments.
AXIS PNB
Net interest 0.0375 0.0357
income
AXIS interest
Cost to Income Ratio (CIR)
Operating expenses divided by operating
income
There is an inverse relationship between the
cost income ratio and the bank's profitability
A low figure is indicative of a more profitable
bank.
Contd..
Used for benchmarking by the bank when
reviewing its operational efficiency
Cost operating expenses
income Ratio = operating income
AXIS PNB
Cost to 0.4145 0.3939
income rate:
Axis Bank – Operating Expense and
Operating Income
PNB cost to deposit ratio
Return on Assets- ROA
What Does Return On Assets - ROA Mean?
ROA is an indicator of how profitable a company is relative to its total
assets. ROA gives an idea as to how efficient management is at using its
assets to generate earnings.
The formula for return on assets is:
Relevance - The ROA figure gives investors an idea of how effectively
the company is converting the money it has to invest into net income. The
higher the ROA number, the better, because the company is earning more
money on less investment.
Axis Bank – Net Income & Assets
Return on Assets- ROA
PNB - Return on Assets 2008-2009 - 1.39 %
2009-2010 -1.44 %
2009 2010
PNB Net Income 30908810 39053575
Total Assets 2469186173 2966327772
ROA in % 1.2517 1.319
Axis Bank Net Income 18153584 25145333
Total Assets 1477220487 1806478519
ROA in % 1.229 1.391
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