A STUDY ON CAPITAL STRUCTURE OF

FEDERAL BANK ALUVA

PROJECT REPORT
Submitted by

PAUL JOSE
REG. NO.098001155027

In partial fulfilment for the award of the degree

Of

Master of Business Administration

In
Department of Management

SRI VENKATESWARA COLLEGE OF COMPUTER

APPLICATIONS AND MANAGEMENT
(AFFILIATED TO ANNA UNIVERSITY OF TECHNOLOGYCOIMBATORE)
JUNE 2011

BONAFIDE

BONAFIDE CERTIFICATE
SRI VENKATESWARA COLLEGE OF COMPUTER APPLICATIONS AND
MANAGEMENT
DEPARTMENT OF MANAGEMENT
PROJECT WORK
JUNE 2011
This is to certify that the project entitled
A STUDY ON CAPITAL STRUCTURE OF FEDERAL BANK, ALUVA
is the bonafide record of project work done by
PAUL JOSE
Register No: 098001155027
of MBA during the year 2009-2011.

___________________

___________________

Project Guide

Head of the Department

Submitted for the Viva-Voce examination held on____________________

________________
(Internal Examiner)

________________
(External Examiner

DECLARATION

DECLARATION
I affirm that the internship training report titled A STUDY ON CAPITAL
STRUCTURE OF FEDERAL BANK -ALUVA being submitted in partial
fulfillment for the award of MASTER OF BUSINESS ADMINISTRATION
is the original work carried out by me. It has not formed the part of any other
project work submitted for award of any degree or diploma, either in this or any
other university.

(Signature of the candidate)

PAUL JOSE
REG.NO: 098001155027

I certify that the declaration made above by the candidate is true.

(Signature of the guide)

Prof. A Paramasivan

ACKNOLEDGEMENT

ACKNOWLEDGMENT

I would like to express my gratitude to CHAIRMAN COMMANDER K.VELU

and MRS. MEGALA VELU of SRI VENKATESWARA group of institutions for giving me
an opportunity and facility to complete this internship training.
I wish to place my deep sense of gratitude to Dr.R. GANESAN MBA, M.Com,
M.Phil, and PhD, PGDCA Principal of Sri Venkateswara College of Computer Applications
and Management, Ettimadai, Coimbatore.
4I owe my boundless thanks and gratitude towards my faculty guide
Prof.PARAMASIVAN, BE, MBA (Assistant Professor) Department of Management Of SRI
VENKATESWARA

COLLEGE

OF

COMPUTER

APPLICATIONS

AND

MANAGEMENT, ETTIMADAI, COIMBATORE, for his guidance and help to undergo my

internship training successfully. I also express my gratitude to all the other faculty members
of the department.
I express my sincere thanks to Mr. SURESH R (senior manager Accounts
Department) guide in the organization and the staff member for that support and cooperation in completing my internship training in timely.
I express my sincere thanks to my parents and all mighty for the fulfillment of this
work.

PAUL JOSE

ABSTRACT

ABSTRACT

The project was done at FEDERAL BANK LIMITED.It is a leading private sector bank in
India. Provide financial service to the public at conveniently .
The project A STUDY ON NCAPITAL STRUCTURE OF FEDERAL BANK. The main
purpose of doing this project is to find out the strength of capital structure of federal bank. I have
done the project in Federal Bank Limited Aluva
The research done through the 5 years of annual report of the company and using the internet
and books.
The recommendations were purely based on what was derived from the study . The study
will help the company to know about the financial position as well as myself. The recommendations
are noted by the company

CONTENTS

CONTENTS
CHAPTER
NO

DESCRIPTION

PAGE NO

ABSTRACT

LIST OF TABLES

II

LIST OF CHARTS

III

INTRODUCTION

1.1. INTRODUCTON

1.2. OBJECTIVE OF FINANCIAL ANALYSIS

1.3. STATEMENT OF PROBLEM

1.4 NEED FOR THE STUDY

1.5. SCOPE OF THE STUDY

1.6 OBJECTIVE OF STUDY

1.7 LIMITATION OF STUDY

1.8 RESEARCH METHODOLOGY

INDUSTRY PROFILE

COMPANY PROFILE

25

REVIEW LITERATURE

33

FINDINGS AND SUGGESTION

76

CONCLUSION AND BIBLIOGRAPHY

78

LIST OF TABLES

LIST OF TABLES

TABLE NO

PARTICULERS

PAGE NO

3.1

GROWTH OF FEDERAL BANK

31

4.1

BALANCE SHEET TREND ANALYSIS

40

4.2

PROFITABILITY RATIOS

54

4.3

OPERATING PERFORMANCE RATIOS

55

4.4

RATIOS SPECIFIC TO BANKING SECTOR

55

4.5

OTHER RATIOS

56

4.6

NET PROFIT RATIO

57

4.7

RETURN ON TOTAL ASSET

58

4.8

RETURN ON EQUITY

59

4.9

EARNINGS POWER RATIO

60

4.10

OPERATING RATIO

61

4.11

EARNING POWER RATIO

62

4.12

OPERATING PROFIT MARGIN

63

4.13

COST TO INCOME

64

4.14

CREDIT TODEPOSIT RATIO

65

4.15

CAPITAL ADEQUACY RATIO

66

4.16

CAPITALIZATION RATIO

67

4.17

DEBT EQUITY RATIO

68

4.18

PAT TO EBT RATIO

69

4.19

FINANCIAL LEVERAGE RATIO

70

4.20

PAYOUT RATIO

71

4.21

BOOK VALUE

72

4.22

PROPRIETORY RATIO

73

4.23

PRICE EARNING RATIO

74

LIST OF CHARTS

LIST OF CHARTS
CHART NO

PARTICULERS

PAGE NO

4.1

TREND ANALYSIS BALANCE SHEET

42

4.2

NET PROFIT RATIO

57

4.3

RETURN ON TOTAL ASSET

58

4.4

RETURN ON EQUITY

59

4.5

EARNINGS POWER RATIO

60

4.6

OPERATING RATIO

61

4.7

EARNING POWER RATIO

62

4.8

OPERATING PROFIT MARGIN

63

4.9

COST TO INCOME

64

4.10

CREDIT TODEPOSIT RATIO

66

4.11

CAPITAL ADEQUACY RATIO

66

4.12

CAPITALIZATION RATIO

68

4.13

DEBT EQUITY RATIO

69

4.14

PAT TO EBT RATIO

70

4.15

FINANCIAL LEVERAGE RATIO

71

4.16

PAYOUT RATIO

72

4.17

BOOK VALUE

73

4.18

PROPRIETORY RATIO

74

4.19

PRICE EARNING RATIO

75

CHAPTER 1
INTRODUCTION

CHAPTER 1
1.1

INTRODUCTION
A firm communicates financial information to the users through

financial statement and reports. The financial statements contain summarized information
of the firms financial affairs .The amount of information contained in a co-operative
financial statement is voluminous spanning the co-operatives internal operations, its
relationship with the outside world and its relationship with its members. To be useful,
this information must be organized into an understandable, coherent and sufficiently
limited set of data.Analysis and Interpretation of Financial Statements can be beneficial
in this respect because it highlights a firms strengths and weakness. Financial statements
provide certain basic information that focus on the entity as a whole and meet the
common needs of external users. Three main financial statements are required from
businesses:

Financial statement analysis is a common technique that allows small

business owners to review their companys operational performance. Small business
owners will need to create financial statements from their companys business
transactions before conducting a financial statement analysis. Financial statements
represent an aggregate total of the company's business information during a certain time
period. It is a process of evaluating the relationship between component parts of a
financial statement, to obtain a better understanding of a firms position and performance

1.2 OBJECTIVES OF FINANCIAL ANALYSIS

Analysis of financial statements is an attempt to assess the efficiency and
performance of an enterprise. Thus, the analysis and interpretation of financial statements
is very essential to measure the efficiency, profitability, financial soundness and future
prospects of the business units. Financial analysis serves the following purposes:

Measuring the profitability

Indicating the trend of Achievements

Assessing the growth potential of the business

Comparative position in relation to other firms

Assess overall financial strength

Assess solvency of the firm

1.3. STATEMENT OF PROBLEM

Ratio analysis is one of the important tools of analyzing the Capital Structure
Ratio analysis may be defined as the process of computing and interpreting the
relationship between items of financial statement for arriving at conclusion about
financial position and performance of an enterprise Therefore I have selected the title of
the project as capital structure of federal bank

1.4. NEED FOR THE STUDY

Ratio analysis is a tool for financial statement analysis which helps the management to
measure the financial position and capital structure of the company

1.5. SCOPE OF THE STUDY

The study provides a reliable indication of a company's financial

position, operating results, and changes in financial position. The study helps in measuring
the financial performance of the company. The study helps in analyzing the trend of various
ratios.
1.6. OBJECTIVE OF THE STUDY

To analyze the capital structure of THE FEDERAL BANK LTD.

To calculate ratios and to perform trend analysis.

To measure the efficiency of the operation.

1.7. LIMITATION OF THE STUDY

The study is based on secondary data that is published annual report

1.8. RESEARCH METHODOLOGY

Research is defined as the process which comprises
of defining and redefining problems, formulating hypothesis, or suggested solutions,
collecting, organizing, and evaluating data, making deductions and reaching conclusions
and at last carefully testing the conclusions to determine they fit the formulating
hypothesis. The project

which is being implemented in the name of CAPITAL

STRUCTURE OF FEDERAL BANK is a study conducted to analyze various ratios of

FEDERAL BANK.

1.9

DATA COLLECTION

Secondary data sources:

Company records,
Annual report (2003-08)
Profit & loss account (2003-08)
Internet

1.10 LIMITATION OF THE STUDY

The data collected only for a period of 5years and this is not enough for making a
detailed analysis.

The study is based on secondary data that is published annual report.

CHAPTER 2
INDUSTRY PROFILE

2.1. BANKING IN INDIA

Banking in India originated in the last decades of the 18th century.
The first banks were The General Bank of India, which started in 1786, and Bank of
Hindustan, which started in 1790; both are now defunct. The oldest bank in existence in
India is the State Bank of India, which originated in the Bank of Calcutta in June 1806,
which almost immediately became the Bank of Bengal. This was one of the three
presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all
three of which were established under charters from the British East India Company. For
many years the Presidency banks acted as quasi-central banks, as did their successors.
The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's
independence, became the State Bank of India.

History

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in
1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank,
established in 1865 and still functioning today, is the oldest Joint Stock bank in India; it
was not the first though, that honor belongs to the Bank of Upper India, which was
established in 1863, and which survived until 1913, when it failed, with some of its assets
and liabilities being transferred to the Alliance Bank of Simla.

When the American Civil War stopped the supply of cotton to Lancashire from
the Confederate States, promoters opened banks to finance trading in Indian cotton. With
large exposure to speculative ventures, most of the banks opened in India during that
period failed. The depositors lost money and lost interest in keeping deposits with banks.

Subsequently, banking in India remained the exclusive domain of Europeans for next
several decades until the beginning of the 20th century.

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The
Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and another in
Bombay in 1862; branches in Madras and Puducherry, then a French colony, followed.
HSBC Established itself in Bengal in 1869. Calcutta was the most active trading port in
India, mainly due to the trade of the British Empire, and so became a banking centre.

The first entirely Indian joint stock bank was the Oudh Commercial Bank,
established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National
Bank, established in Lahore in 1895, which has survived to the present and is now one of
the largest banks in India.

Around the turn of the 20th Century, the Indian economy was passing through a
relative period of stability. Around five decades had elapsed since the Indian Mutiny, and
the social, industrial and other infrastructure had improved. Indians had established small
banks, most of which served particular ethnic and religious communities.

The presidency banks dominated banking in India but there were also some
exchange banks and a number of Indian joint stock banks. All these banks operated in
different segments of the economy. The exchange banks, mostly owned by Europeans,
concentrated on financing foreign trade. Indian joint stock banks were generally
undercapitalized and lacked the experience and maturity to compete with the presidency
and exchange banks. This segmentation let Lord Curzon to observe, "In respect of
banking it seems we are behind the times. We are like some old fashioned sailing ship,

The period between 1906 and 1911, saw the establishment of banks inspired by
the Swadeshi movement. The Swadeshi movement inspired local businessmen and
political figures to found banks of and for the Indian community. A number of banks
established then have survived to the present such as Bank of India, Corporation Bank,
Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.

The fervour of Swadeshi movement lead to establishing of many private banks

in Dakshina Kannada and Udupi district which were unified earlier and known by the
name South Canara ( South Kanara ) district. Four nationalized banks started in this
district and also a leading private sector bank. Hence undivided Dakshina Kannada
district is known as "Cradle of Indian Banking".

During the First World War (1914-1918) through the end of the Second World
War (1939-1945), and two years thereafter until the independence of India were
challenging for Indian banking. The years of the First World War were turbulent, and it
took its toll with banks simply collapsing despite the Indian economy gaining indirect
boost due to war-related economic activities. At least 94 banks in India failed between
1913 and 1918 as indicated in the following table:

Post-Independence

The partition of India in 1947 adversely impacted the economies of Punjab

and West Bengal, paralyzing banking activities for months. India's independence marked
the end of a regime of the Laissez-faire for the Indian banking. The Government of India
initiated measures to play an active role in the economic life of the nation, and the
Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed

economy. This resulted into greater involvement of the state in different segments of the
economy including banking and finance. The major steps to regulate banking included:

The Reserve Bank of India, India's central banking authority, was nationalized on
January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public
Ownership) Act, 1948 (RBI, 2005b).[Reference www.rbi.org.in]

In 1949, the Banking Regulation Act was enacted which empowered the Reserve
Bank of India (RBI) "to regulate, control, and inspect the banks in India."

The Banking Regulation Act also provided that no new bank or branch of an
existing bank could be opened without a license from the RBI, and no two banks
could have common directors.

Nationalization

Despite the provisions, control and regulations of Reserve Bank of India,

banks in India except the State Bank of India or SBI, continued to be owned and operated
by private persons. By the 1960s, the Indian banking industry had become an important
tool to facilitate the development of the Indian economy. At the same time, it had
emerged as a large employer, and a debate had ensued about the nationalization of the
banking industry. India Gandhi, then Prime Minister of India, expressed the intention of
the Government of India in the annual conference of the All India Congress Meeting in a
paper entitled "Stray thoughts on Bank Nationalization." The meeting received the paper
with enthusiasm.

Thereafter, her move was swift and sudden. The Government of India issued
an ordinance and nationalized the 14 largest commercial banks with effect from the
midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the

step as a "masterstroke of political sagacity." Within two weeks of the issue of the
ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of
Undertaking) Bill, and it received the presidential approval on 9 August 1969.

A second dose of nationalization of 6 more commercial banks followed in

1980. The stated reason for the nationalization was to give the government more control
of credit delivery. With the second dose of nationalization, the Government of India
controlled around 91% of the banking business of India. Later on, in the year 1993, the
government merged New Bank of India with Punjab National Bank. It was the only
merger between nationalized banks and resulted in the reduction of the number of
nationalized banks from 20 to 19. After this, until the 1990s, the nationalized banks grew
at a pace of around 4%, closer to the average growth rate of the Indian economy.

Liberalization

In the early 1990s, the then Narasimha Rao government embarked on a

policy of liberalization, licensing a small number of private banks. These came to be
known as New Generation tech-savvy banks, and included Global Trust Bank (the first of
such new generation banks to be set up), which later amalgamated with Oriental Bank of
Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move,
along with the rapid growth in the economy of India, revitalized the banking sector in
India, which has seen rapid growth with strong contribution from all the three sectors of
banks, namely, government banks, private banks and foreign banks.

The next stage for the Indian banking has been set up with the proposed
relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in

banks may be given voting rights which could exceed the present cap of 10%,at present it
has gone up to 74% with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till
this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of
functioning. The new wave ushered in a modern outlook and tech-savvy methods of
working for traditional banks. All this led to the retail boom in India. People not just
demanded more from their banks but also received more.

Currently (2007), banking in India is generally fairly mature in terms of

supply, product range and reach-even though reach in rural India still remains a challenge
for the private sector and foreign banks. In terms of quality of assets and capital
adequacy, Indian banks are considered to have clean, strong and transparent balance
sheets relative to other banks in comparable economies in its region. The Reserve Bank of
India is an autonomous body, with minimal pressure from the government. The stated
policy of the Bank on the Indian Rupee is to manage volatility but without any fixed
exchange rate-and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some
time-especially in its services sector-the demand for banking services, especially retail
banking, mortgages and investment services are expected to be strong. One may also
expect M&As, takeovers, and asset sales.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to

increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first
time an investor has been allowed to hold more than 5% in a private sector bank since the

RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks
would need to be vetted by them.

In recent years critics have charged that the non-government owned banks
are too aggressive in their loan recovery efforts in connection with housing, vehicle and
personal loans. There are press reports that the banks' loan recovery efforts have driven
defaulting borrowers to suicide.

2.2. FUNCTIONS OF COMMERCIAL BANKS

1. PRIMARY FUNCTIONS OF COMMERCIAL BANKS

Primary or principal functions of a commercial bank Are three types
A) Acceptance of Deposit:
An important function of commercial banks is to attract deposit from the
public. Those people who have cash account and want their safety; they deposit that
amount of banks. Commercial banks accept deposits every class and source and tak e
responsibility to repay the deposit in the same currency whenever they are demanded by
depositors

B) Lending:
Another function of commercial banks is to make loans and advance out of the deposit
receive in various forms. Bank Apply the accumulated public deposits to productive uses
by way of loans and advances, overdraft and cash credits against approved securiti es.
C) Investment:
Now a days commercial banks are also involved in Investment. Generally investment
means long term and medium term investments.

2. Secondary or Ancillary function:

Secondary or Ancillary functions of Commercial Banks Are two types:
A. Agency Services
1) Collection and Payment of Cheques
2) Standing Instruction
3) Acting as correspondence
4) Collecting of bills- electricity, gas, WASA, telephone etc.
5) Purchase and Sales of stocks/ share-act as a banker to issue
B. Miscellaneous or General Services:
1) Safe Custody
2) Lockers-trustee
3) Remittance facilities DD, TT, MT and PO
4) Advisory services
5) Providing Credit reports
6) Opening L/C
7) Demand in ForEx/ Travers Cheque only Authorized Dealer branches
8) Complete service in Foreign Trade
9) Other Services: Debit Card, Credit Card, On-line banking SMS banking
10) Creation of Credit: a multiplier effect, Deposit creates credit and credit creates
deposits derivative deposit.
2.3. FEATURES OF COMMERCIAL BANK
The following are the characteristics of the banks.

It is a commercial institution

It deals with money and credit

It accepts and advance loan

It has the ability to create credit. Its aim is to make profit.

It is a unique financial institution]

2.4. CHANNELS OF BANKING

Branches

ATMs

Easy Deposits

Call Centers.

Internet Banking

Mobile Banking

2.5. QUALITATIVE GROWTH

The growth of banking in the coming years is likely to be more qualitative than
quantitative, according to the report. Based on the projections made in the "India Vision
2020" prepared by the Planning Commission and the Draft 10th Plan, the report forecast s
that the pace of expansion in the balance-sheets of banks is likely to decelerate.
The total assets of all scheduled commercial banks by end-March 2010 is estimated at Rs
40, 90,000 crore. That will form about 65 per cent of GDP at current market prices as
compared to 67 per cent in 2002-03.
Banks assets are expected to grow at an annual composite rate of growth of 13.4 per cent
during the rest of the decade against 16.7 per cent between 1994-95 and 2002-03.

On the liability side, there is likely to be large additions to capital base and reserves. As
the reliance on borrowed funds increases, the pace of deposit growth may slow down.
On the asset side, the pace of growth in both advances and investments is forecast to
weaken.
Consolidation
On the growing influence of globalisation on the Indian banking industry, the
report is of the opinion that the financial sector would be opened up for greater
international competition under WTO. Opening up of the financial sector from 2005,
under WTO, would see a number of global banks taking large stakes and control over
banking entities in the country.
They are expected to bring with them capital, technology, and management skills
which would increase the competitive spirit in the system leading to greater efficiency.
Government policy to allow greater FDI in banking and the move to amend Banking
regulations Act to remove the existing 10 per cent cap on voting rights of shareholders are
pointer to these developments, says the report.
The pressure on banks to gear up to meet stringent prudential capital adequacy
norms under Basel II and the various Free Trade Agreements that India is entering into
with other countries, such as Singapore, will also impact on globaliz ation of Indian
banking.
However, according to the report, the flow need not be one way. Some of the
Indian banks may also emerge global players. As globalisation opens up opportunities for
Indian corporate entities to expand their business overseas, banks in India wanting to

increase their international presence could naturally be expected to follow these corporate
entities and other trade flows out of India.
Alongside, the growing pressure on capital structure of banks is expected to trigger
a phase of consolidation in the banking industry. In the past mergers were initiated by
regulators to protect the interest of depositors of weak banks. In recent years, there have
been a number of market-led mergers between private banks.
This process is expected to gain momentum in the coming years, says the report.
Mergers between public sector banks or public sector banks and private banks could be
the next logical development, the report adds. Consolidation could also take place th rough
strategic alliances or partnerships covering specific areas of business such as credit cards,
insurance etc.
Risk and reward

The ability to gauge the risks and take appropriate position will be the key to
successful banking in the emerging scenario. Risk-takers will survive, effective
risk managers will prosper and risk-averse are likely to perish, the report asserts.

In this context, the report makes a very pertinent recommendation that risk
management has to trickle down from the corporate office to branches.

As audit and supervision shifts to a risk-based approach rather than transaction

oriented, the risk awareness levels of line functionaries also will have to increase.

The report also talks of the need for banks to deal with issues relating to
`reputational risk' to maintain a high degree of public confidence for raising
capital and other resources.

Technology
Technological developments would render flow of information and data faster
leading to faster appraisal and decision-making. This would enable banks to make credit
management more effective, besides leading to an appreciable reduction in transaction
cost.
To reduce investment costs in technology, banks are likely to resort more and
more to sharing facilities such as ATM networks, the report says. Banks and financial
institutions will join together to share facilities in the areas of payment and settlement,
back-office processing, date warehousing, and so on.
The advent of new technologies could see the emergence of new players doing
financial intermediation. For example, according to the report, we could see utility service
providers offering, say, bill payment services or supermarkets or retailers doing basic
lending operations. The conventional definition of banking might undergo changes.
Social banking
All these developments need not mean banks will give the go-by to social banking. Rather
than being seen as directed lending such lending would be business driven, the report
predicts. Rural market comprises 74 per cent of the population, 41 per cent of the middle class, and 58 per cent of disposable income.
Consumer growth is taking place at a fast pace in 17,000-odd villages with a population
of more than 5,000. Of these, more than 50 per cent are concentrated in just seven states.
Small-scale industries would remain important for banks.
However, instead of the narrow definition of SSI based on the investment in fixed assets,
the focus may shift to small and medium enterprises (SMEs) as a group. Changes could

be expected in the delivery channel for small borrowers, agriculturists and unorganized
sectors also.
2.6. CHALLENGES WITH IN BANKING INDUSTRY
Regulation
The expected integration of various intermediaries in the financial system would
require a strong regulatory framework, the report states. It would also require a number of
legislative changes to enable the banking system to remain contemporary and
competitive. Underscoring that there would be an increased need for self-regulation, the
report states that development of best practices could evolve better through self regulation rather than based on regulatory prescriptions.
For instance, to enlist the confidence of the global investors and international
market players, the banks will have to adopt the best global practices of financial
accounting and reporting. It is expected that banks would migrate to global accounting
standards smoothly, although it would mean greater disclosure and tighter norms, the
report adds.
Notwithstanding the limited time ahead, the expectations, suggestions and
recommendations of the Banking Industry Vision report are well within the realm of
realisation in part or whole. The first phase of banking reforms was born out of panic.
The second phase can be implemented from a position of strength and confidence in a
compressed time-frame.
Deregulation: This continuous deregulation has made the Banking market extremely
competitive with greater autonomy, operational flexibility and decontrolled interest rate
and liberalized norms for foreign exchange. The deregulation of the industry coupled with

decontrol in interest rates has led to entry of a number of players in the banking industry.
At the same time reduced corporate credit off take thanks to sluggish economy has
resulted in large number of competitors batting for the same pie.
New rules: As a result, the market place has been redefined with new rules of the game.
Banks are transforming to universal banking, adding new channels with lucrative pricing
and freebees to offer. Natural fall out of this has led to a series of innovative product
offerings catering to various customer segments, specifically retail credit
.
Efficiency: This in turn has made it necessary to look for efficiencies in the business.
Banks need to access low cost funds and simultaneously improve the efficiency. Thebans
are facing pricing pressure, squeeze on spread and have to give thrust on retail assets.

Diffused Customer loyalty: This will definitely impact Customer preferences, as they
are bound to react to the value added offerings. Customers have become demanding and
the loyalties are diffused. There are multiple choices, the wallet share is reduced per bank
with demand on flexibility and customization. Given the relatively low switching
delivery.

Misaligned mindset: These changes are creating challenges, as employees are made to
adapt to changing conditions. There is resistance to change from employees and the Seller
market mindset is yet to be changed coupled with Fear of uncertainty and Control
orientation. Acceptance of technology is slowly creeping in but the utilization is not
maximized.

Competency Gap: Placing the right skill at the right place will determine success. The
competency gap needs to be addressed simultaneously otherwise there will be missed
opportunities. The focus of people will be on doing work but not providing solutions, on
escalating problems rather than solving them and on disposing customers instead of using
the opportunity to cross sell.

2.7. BANKING SYSTEM IN INDIA

Without a sound and effective banking system in India it cannot
have a healthy economy. The banking system of India should not only be hassle free but
it should be able to meet new challenges posed by the technology and any other ex ternal
and internal factors.
For the past three decades India's banking system has several outstanding
achievements to its credit. The most striking is its extensive reach. It is no longer
confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system
has reached even to the remote corners of the country. This is one of the main reasons of
India's growth process.
The government's regular policy for Indian bank since 1969 has paid rich
dividends with the nationalisation of 14 major private banks of India.
Not long ago, an account holder had to wait for hours at the bank
counters for getting a draft or for withdrawing his own money. Today, he has a choice.
Gone are days when the most efficient bank transferred money from one branch to other
in two days. Now it is simple as instant messaging or dial a pizza. Money have become
the order of the day.

The first bank in India, though conservative, was established in 1786. From
1786 till today, the journey of Indian Banking System can be segregated into three
distinct phases. They are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks

Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector

Reforms.

New phase of Indian Banking System with the advent of Indian Financial &
Banking Sector Reforms after 1991.

To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and
PhaseIII.

Phase1
The General Bank of India was set up in the year 1786. Next came Bank of
Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809),
Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it
Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of
India was established which started as private shareholders banks, mostly Europeans
shareholders.
In 1865 Allahabad Bank was established and first time exclusively by
Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore.
Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canada
Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in
1935.

During the first phase the growth was very slow and banks also
experienced periodic failures between 1913 and 1948. There were approximately 1100
banks, mostly small. To streamline the functioning and activities of commercial banks,
the Government of India came up with The Banking Companies Act, 1949 which was
later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23
of 1965). Reserve Bank of India was vested with extensive powers for the supervision of
banking in india as the Central Banking Authority
.During those days public has lesser confidence in the banks. As an
aftermath deposit mobilization was slow. Abreast of it the savings bank facili ty provided
by the Postal department was comparatively safer. Moreover, funds were largely given to
traders
PhaseII
Government took major steps in this Indian Banking Sector Reform after
independence. In 1955, it nationalised Imperial Bank of India with extensive banking
facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of
India to act as the principal agent of RBI and to handle banking transactions of the Union
and State Governments all over the country.
Seven banks forming subsidiary of State Bank of India was nationalised in 1960
on 19th July, 1969, major process of nationalisation was carried out. It was the effort of
the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the
country was nationalised.

Second

phase

of

nationalisation

Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step
brought 80% of the banking segment in India under Governmen ownership.
The following are the steps taken by the Government of India to Regulate
Banking Institutions in the Country:

1949: Enactment of Banking Regulation Act.

1955: Nationalization of State Bank of India.

1959: Nationalization of SBI subsidiaries.

1961: Insurance cover extended to deposits.

1969: Nationalization of 14 major banks.

1971: Creation of credit guarantee corporation.

1975: Creation of regional rural banks.

1980: Nationalization of seven banks with deposits over 200 core.

After the nationalization of banks, the branches of the public

sector bank India rose to approximately 800% in deposits and advances took a huge jump
by 11,000%.Banking in the sunshine of Government ownership gave the public implicit
faith and immense confidence about the sustainability of these institutions.
PhaseIII
This phase has introduced many more products and facilities in the
banking sector in its reforms measure. In 1991, under the chairmanship of M
Narasimham, a committee was set up by his name which worked for the liberalization of
banking practices.

The country is flooded with foreign banks and their ATM

stations. Efforts are being put to give a satisfactory service to customers. Phone banking
and net banking is introduced. The entire system became more convenient and swift.
Time is given more importance than money
.The financial system of India has shown a great deal of
resilience. It is sheltered from any crisis triggered by any external macroeconomics shock
as other East Asian Countries suffered. This is all due to a flexible exchange rate regime,
the foreign reserves are high, the capital account is not yet fully convertible, and banks
and their customers have limited foreign exchange exposure.
2.8. BANKING IN KERALA

Process of development and growth of the country is finance. The

economy of a country becomes crippled without the flow of finance and the economic
growth is stunted. Monitory resources can be channelised only with the help of a proper
financial infrastructure. An effective financial system in the form of banks and financial
institutions

offer

economical

lending

and

borrowing.

Kerala boasts of a well-developed banking infrastructure. With progressing time

Kerala banking system has attained a high benchmark. Commercial, Nationalized a large
number of Grameen banks have sprung up within the state. In fact there was a surge of
Banks

in

the

state

following

the

nationalisation

of

the

banks

in

1969.

The State Bank of India (S.B.I.), Canara Bank and Syndicate Bank are the principal
nationalized banks. The State Bank of India offers around 228 branches and the Syndicate
Bank

has

115

branches

in

the

fourteen

districts

of

Kerala.

Apart from these commercial banks like Vijaya Bank, Dhanlakshmi Bank and the Federal

Bank also offer commendable finance and banking facilities. Dhanalakshmi Bank offers
112 branches in the state. The Grameen Banks like SMGB and NMGB provide loans at
low interest rates, special, subsidized lands and relief facilities to the lo cal farmers and
plays

great

role

in

enhancing

the

agrarian

productivity

of

the

state.

According to a survey conducted in the year 2001, there were

44 PCARDBs

2 Regional Rural banks (RRBs)

49 Commercial Banks

14 District Co-operative Banks

1StateCooperativeBank
All these banks altogether had 3813 branches in the rural as well as the urban

areas and among them 2956 branches belonged to the Commercial Banks. Besides, there
are also 1593 Primary Agriculture Credits Co-operatives in Kerala. The commercial
banks of Kerala have also witnessed an increased flow of non-resident deposits toward
the end of 2005. Kerala is done experiencing better growth of economy in the banking
sector. Besides the banks, the other financial institutions which give a boost to the
economy of Kerala are

Government Institutions

Kerala Financial Corporation (KFC)

Kerala State Financial Enterprises (KSFE)

Kerala Transport Development Finance Corporation (KTDFC)

Reserve Bank of India

HDFC(Housing Development Finance Corporation Limited)

CHAPTER 3
COMPANY PROFILE

CHAPTER-3
3.1. COMPANY PROFILE
History:

The history of Federal Bank dates back to the pre-independence era. Though initially it
was known as the Travancore Federal Bank, it gradually transformed into a full -fledged
bank under the able leadership of its Founder, Mr. K P Hormis. The name Federal Bank
Limited was officially announced in the year 1947 with its headquarters nestled on the
banks on the river Periyar. Since then there has been no looking back and the bank has
become one of the strongest and most stable banks in the country
The Federal Bank Limited (FBL) (the erstwhile
Travancore Federal Bank Limited) was incorporated with an authorised capital of rupees
five thousand at Nedumpuram, a place near Tiruvalla in Central Travancore in 28th April
of the year 1931 under the Travancore Company's Act. Shri K.P.Hormis founded the
Bank. It started business of auction -chitty and other banking transactions connected with
agriculture and industry. The bank though successful in the earlier periods, suffered
setbacks and was on the verge of liquidation. As a largest traditional private sector bank
in the country, FBL nurtured for more than seven decades, gaining the reputation of being
an agile, technology savvy and customer friendly bank and mostly built wide network of
branches, reaching out to cover all the major cities of the country.
In 18th May of the year 1945, the registered office of the Bank was shifted to
Aluva and the Bank commenced business by opening of its first branch at Aluva. The
Bank opened its second branch at Angamally during the year 1946. As of 24th March of

the year 1947, it was resolved to change the name of the Bank as 'The Federal Bank
Limited' and in the same year the third branch of the Bank was opened at Perumbavoor in
the moth of April. The Bank was licensed under Sec.22 of the Banking Companies Act,
1949 in 11th of July of the year 1959. FBL had floated several kuries one after another.
It also introduced several new deposit schemes
during the same period. The Bank embarked for a massive takeover bids during the year
1964, which accelerated its growth horizontally and vertically. In that process it took over
the assets and liabilities of the Chalakudy Public Bank Ltd, The Cochin Union Bank Ltd
and The Alleppey Bank Ltd. The St.George Union Bank Ltd was merged with the Bank in
the year 1965 and in the year 1968, The Marthandom Commercial Bank Ltd was
amalgamated with the FBL. During the year 1970, The Bank became a Scheduled
Commercial Bank, which also coincided with the Silver Jubilee Year, since the Bank
commenced its operation in Aluva. Witnessed expansion beyond the home state during
the year 1972. The Bank became an Authorised Dealer in Foreign Exchange and the
International Banking Department of the bank was started functioning from Mumbai in
the year 1973. The sustainable growth of the bank was survived during the year 1975 and
1976. In 1975, the Bank opened 53 branches and in 1976 it opened 42 branches.
The International Banking Department of the bank was
shifted to Cochin in the year 1982 as part of consolidation and centralisation of activities.
As part of the organisation redesigning recommended by National Institute of Bank
Management (NIBM) in November of the year 1984, the Agricultural Finance
Department was set up in Head Office. After a year, in 1985, in tune with the NIBM
recommendation, Personnel and Industrial Relations Department was set up in July and in
the same year the first Advanced Ledger Posting Machine (ALPM-a Wipro banker) was
installed at Br.Aluva-Bank Junction branch. The administrative building complex of the

bank was inaugurated in the year 1987. During the year 1989, Federal Bank entered into
the Merchant Banking Operations. Tapped the Capital Market with a public issue in
March of the year 1994. The Bank's first ATM was inaugurated at Eranakulam North in
27th February of the year 1997.
During the year 2000, FBL had started its Any Where Banking (ABB) at
Bangalore connecting all branches located in the Bangalore metro, launched Depository
Services in association with NSDL and also the Bank commenced Internet Banking under
the name of 'Fed Net' during April of the same year 2000 with software support from
Infosys Technologies Ltd. Also E-commerce business, The Bank had entered into
marketing pacts with some commercial agencies for its E-commerce business in the same
year. In the year 2001, the bank made a tie up with Escotel Communications to launch
mobile banking services using SMS technology and in the identical year FBL had
launched a new deposit scheme christened as Suraksha' for senior citizens. The bank
became a member of INFINET, the financial network supported by RBI. Full-fledged
systems for the RBI's Negotiated Dealing Systems (NDS) were set up at the Funds &
Investment Branch in Mumbai, enabling online trading in securities from February of the
year 2002. FBL had unveiled the Anywhere Banking in the year 2003 provides the
convenience of doing transactions from 300-plus interconnected branches. The Bank had
obtained the level of 100% interconnectivity among all its branches during the year 2004
and also in the same year FBL had launched an Equity Subscription Scheme, a new retail
product for financing the IPOs and public issue applications of its own customers.
In the identical year of 2004, Federal Bank joined
hands with ICICI Prudential Life Insurance Company Ltd for premium collection through
its branches and introduced new Fed e-Pay services. JRG Securities Ltd had forged
alliance with the Bank in the year 2005 for providing loans for subscribing to initial

public offers (IPOs). The bank has emerged as the first bank in India to offer Real Time
Gross Settlement (RTGS) across all of its branches. The 32 branches of erstwhile Ganesh
Bank of Kurundwad Ltd were successfully integrated to bank's network. Ganesh Bank
was amalgamated with effect from 2nd September of the year 2006. During the period of
2006-07, the bank entered into a joint venture agreement with IDBI Ltd & Fortis
Insurance International N V for incorporating a Life Insurance Company under the name
of IDBI Fortis Life Insurance Company Ltd. During the year 2007-08, FBL had opened
its Representative office at Abu Dhabi, Capital of U.A.E. for the gateway of the bank to
the whole of Middle East and also as an interface between its existing customers of GCC
countries and its Branches /Offices in India. FBL won the Best Core Banking Project
Award 2007' at the Asian Banker IT Implementation Awards 2008. The bank's Joint
Venture life insurance company, in association with IDBI Bank Limited and Fortis
Insurance International N.V. namely IDBI Fortis Life Insurance Company Limited
commenced its operation in March of the years 2008. As of May 2008, the bank has 606
branches, 544 ATMs, 10 extension counters and one satellite office.

3.2 VISION

Become the dominant numero uno bank in Kerala and a leading player in target
markets.

Be the trusted partner of choice for target (SME, Retail, NRI) customers.

Be a customer-centric organisation setting the benchmarks for service.

Offer innovative yet simple products supported by the state-of-the art technology.

Have a dynamic and energised workforce with a strong sense of belonging.

Deliver top tier financial performance and superior value to stakeholders.

Be a role model for corporate governance and social responsibility.

3.3. MISSION:

Shareholders: Achieve a consistent annual post-tax return of at least 20% on net

worth.

Employees: Develop in every employee a high degree of pride and loyalty in

serving the Bank.

Customers: Meet and even exceed expectations of target customers by delivering

appropriate products and services, employing, as far as feasible, the singlewindow and 24-hour-seven-day-week concepts, leveraging strengthened branch
infrastructure, ATMs, and other alternative distribution channels, cross-selling a
range of products and services to meet customer needs varying over time, and
ensuring the highest standards of services at all times
The Bank has also the distinction of being one of the first banks in the country

to deploy most of these technology enabled services at the smaller branches including rural
and semi-urban areas.
3.4. ABOUT OUR FOUNDER
Kulangara Paulo Hormis, educated as a lawyer, began his
career as an Advocate in the Courts of Perumbavoor. But the path breaker soon gravitated
to commercial banking and soon took up the reins of Federal Bank in 1945 as its Chief
Executive. Fired by a passion for institution building Shri Hormis built out of a OneBranch-Small-Time Bank, a nationwide institution of 285 branches in the 34 years that he
remained at the helm. The quintessential banker that he was, a structure for extending
finance to agriculture and the weaker sections of society was laid by him much before
these areas came into national focus.

3.5. DEPARTMEBTS OF HEAD OFFICE

Accounts departments

ALM department

Asset Recovery department

Credit control department

Corporate finance department

Federal staff colleagues

SME agricultural department

Retail banking department

Integrated risk management department

Inter banking department

Inter branch reconciliation department

Inspection department

Legal

Personnel and industrial relation department

Premises and other asset relation department

Printing and stationery department

Planning department

department

NRI division
MIS division

Staff administration department

Treasury department

Vigilance department

3.6. GROWTH OF FEDERAL BANK

Rs in Crores

Year

No. Of Branches

Deposits

Advances

Capital

1945

0.01

0.10

0.01

1955

0.20

0.15

0.01

1965

16

1.33

0.84

0.05

1975

188

38.12

24.12

0.25

1985

324

356.51

186.16

1.40

1995

355

2790.96

1631.51

14.81

2004

440

13124.34

7700.53

21.76

2005

456

15192.88

8822.59

65.60

2006

506

17878.74

11736.47

85.60

2007

536

21584.44

14899.10

85.60

2008

612

25913.35

18904.66

171.03

2009

669

32192.31

22391.87

171.03

2010

729

36057.95

26950.11

171.03

3.7. FINANCIAL SUPER MARKETS

The Bank has now emerged into a financial supermarket giving the customers a range of
products and services. Apart from the entire slew of Banking products and delivery
channels the bank also provide the following facilities:

Depository Services

Credit Cards

Life Insurance Products in association with IDBI Fortis

General Insurance Products in association with United India Insurance

Export Credit Insurance Products in association with ECGC

Express Remittance Facility from Abroad - FEDFAST

Cash -On- Line Express Cash Remittance

Lock Box Service for NRI's in the US

Cash Management Services

Merchant Banking Services

E-shopping Payment gateway

BSNL Bill Payment

Online LIC Insurance Payment

Easy Pay- On-line fee payment system

Online Railway Reservation System

Online Kiosks for customers

3.8. TAG LINE OF FEDERAL BANK

Your Perfect Banking Partner
3. 9. LOCATIONS
The Corporate head office of the bank is at Aluva. The Bank has more than 600 branches all
over India
3.10. SOME OTHER INFORMATIONS
The Bank had the distinction of introducing Anywhere Banking in all its branches,
including rural locations. Federal bank was the first among the traditional banks to launch
Internet banking an e-commerce
The Fed Soft software developed in-house for branch
automation is based on state-of-the-art technology and is based on workflow automation
concepts. This unique software runs on Sybase RDBMS and has a graphical user interface
(GUI), making it elegant and user-friendly.
The Bank has entered into agreements with National Securities Depository Ltd. (NSDL) from 1998 onwards, and Central Depository Services Ltd. (CDSL) - from 1999 onwards, for
having the Bank's shares traded in electronic (demat) form.
3.11. SHARE HOLDER INFORMATION
Listing on Stock Exchanges
The shares of the Bank are listed in, National Stock Exchange Ltd (NSE), Bombay Stock
Exchange Ltd (BSE) and the Cochin Stock Exchange Ltd.

CHAPTER 4
REVIEW LITERATURE

REVIEW LITERATURE
4.1. MEANING CAPITAL STRUCTURE
A mix of a company's long-term debt, specific short-term
debt, common equity and preferred equity. The capital structure is how a firm finances its
overall operations and growth by using different sources of funds.
CLARIFYING CAPITAL STRUCTURE AND RELATED TERMINOLOGY
The equity part of the debt-equity relationship is the easiest to
define. In a company's capital structure, equity consists of a company's common and
preferred stock plus retained earnings, which are summed up in the shareholders' equity
account on a balance sheet. This invested capital and debt, generally of the long-term
variety, comprises a company's capitalization, i.e. a permanent type of funding to support
a company's growth and related assets
A discussion of debt is less straightforward. Investment literature
often equates a company's debt with its liabilities. Investors should understand that there
is a difference between operational and debt liabilities - it is the latter that forms the debt
component of a company's capitalization - but that's not the end of the debt story.
Among financial analysts and investment research services, there
is no universal agreement as to what constitutes a debt liability. For many analysts, the
debt component in a company's capitalization is simply a balance sheet's long-term debt.
This definition is too simplistic. Investors should stick to a stricter interpretation of debt
where the debt component of a company's capitalization should consist of the following:

short-term borrowings (notes payable), the current portion of long-term debt, long-term
debt, two-thirds (rule of thumb) of the principal amount of operating leases and
redeemable preferred stock. Using a comprehensive total debt figure is a prudent
analytical tool for stock investors
It's worth noting here that both international and U.S. financial
accounting standards boards are proposing rule changes that would treat operating leases
and pension "projected-benefits" as balance sheet liabilities. The new proposed rules
certainly alert investors to the true nature of these off-balance sheet obligations that have
all the earmarks of debt.,
Financial terms, debt is a good example of the proverbial two-edged
sword. Astute use of leverage (debt) increases the amount of financial resources available
to a company for growth and expansion. The assumption is that management can earn
more on borrowed funds than it pays in interest expense and fees on these funds.
However, as successful as this formula may seem, it does require that a company
maintain a solid record complying with its borrowing committee
4.2. OBJECTIVES OF CAPITAL STRUCTUE ANALYSIS

To determine if the proportion of debt to equity enables an entity to create wealth

without unduly jeopardizing the firm

Evaluate the key structural features of a companys existing and new financial
obligations and their potential effect on the companys financial flexibility, cash flows and credit quality/rating

Understand how to assess various types of debt instruments in terms of advantages

and disadvantages to the issuer and the investor, when the instrument should be

used and when it may be inappropriate, focusing on bank debt, hybrids,

bonds/notes and asset securitization

Identify the key drivers of company and sector performance and the potential
impact on profitability, cash-flow, access to capital, etc. in order to assess a
companys ability to meet its existing obligations and determine the appropriate
funding structure

Consider the degree to which the level of indebtedness might affect liquidity and
the potential impact on business strategy and ability to finance future growth.

Describe the advantages and disadvantages of financial leverage

Compute the financial leverage index, debt to capital ratio, debt to equity ratio, and
other techniques for analyzing capital structure. Relate capital structure
composition to owner and creditor investment objectives.

Capital structure composition Consists of long-term liabilities, preferred stock,

common stock, and retained earnings. Sufficient equity must exist to provide
financial stability

Debt can be used as leverage to increase returns to shareholders,

but it can also reduce returns on shareholders investments

4.3. Theories of Capital Structure

Trade-off Theory
Trade-off theory allows the bankruptcy cost to exist. It states that
there is an advantage to financing with debt and that there is a cost of financing with
debt (the bankruptcy costs and the financial distress costs of debt). The marginal benefit
of further increases in debt declines as debt increases, while the marginal cost increases,

so that a firm that is optimizing its overall value will focus on this trade-off when
choosing how much debt and equity to use for financing. Empirically, this theory may
explain differences in D/E ratios between industries, but it doesn't explain differences
within the same industry.
Pecking order theory

Pecking Order theory tries to capture the costs of asymmetric information. It states
that companies prioritize their sources of financing (from internal financing to equity)
according to the law of least effort, or of least resistance, preferring to raise equity as a
financing means of last resort. Hence: internal financing is used first; when that is
depleted, then debt is issued; and when it is no longer sensible to issue any more debt,
equity is issued. This theory maintains that businesses adhere to a hierarchy of financing
sources and prefer internal financing when available, and debt is preferred over equity if
external financing is required (equity would mean issuing shares which meant 'bringing
external ownership' into the company. Thus, the form of debt a firm chooses can act as a
signal of its need for external finance. The pecking order theory is popularized by Myers
(1984) when he argues that equity is a less preferred means to raise capital because when
managers (who are assumed to know better about true condition of the firm than
investors) issue new equity, investors believe that managers think that the firm is
overvalued and managers are taking advantage of this over-valuation. As a result,
investors will place a lower value to the new equity issuance

4.4. METHODS OF ANALYSING CAPITAL STRUCTURE

1. Trend Percentage Analysis
2. Ratio Analysis

3. Cash Flow statement

4. Income statement
4.5. TREND PERCENTAGE ANALYSIS
An aspect of technical analysis that tries to predict
the future movement of a stock based on past data. Trend analysis is based on the idea
that what has happened in the past gives traders an idea of what will happen in the
future.

Trend ratios show the nature and rate of movements in various financial

factors. They provide a horizontal analysis of comparative statements and reflect the
behavior of various items with the passage of time. Trend ratios can be graphically
presented for a better understanding by the management. They are very useful in
predicting the behavior of the various financial factors in future. However, it should be
noted that conclusions should not be drawn on the basis of a single trend. Trends of
related items should be carefully studied, before any meaningful conclusion is arrived
at. Since trends are sometimes significantly affected by externalities, i.e. reasons
extraneous to the organizations, the analyst must give due weightage to such extraneous
factors like government policies, economic conditions, changes in income and its
distribution, etc.
4.6.1. COMPUTATION OF TREND PERCENTAGES:
For calculation of the trend of data shown in the financial
statements, it is necessary to have statements for a number of years, and then proceed
as under:
1) The accounting principles and practices must be followed constantly over the
period for which the analysis is made. This is necessary to maintain consistency
and comparability.
2) Take one of the statements as the base with reference to which all other
statements are to be studied. In selection of the best statement, it should be noted
that it belongs to a normal' year of business activities. Statement relating to an
'abnormal' year should not be selected as base, otherwise the trend calculated will
be meaningless.

3) Every item in the base statement is stated as 100.

4) Trend percentage of each item in other statement is calculated with reference to
same
item
in
Absolute Value of item (say cash) in other statements
------------------------------------------------------------------- x 100

the
base

Absolute Value of item (cash) in the base statement

statement by using the following formula:

4.6.2. LIMITATIONS OF TREND RATIOS
It should be noted that trend ratios are not calculated
for all items. They are calculated only for logically connected items enabling meaningful
analysis. For example, trend ratios of sales become more revealing when compared with the
trend ratios of fixed assets, cost of goods sold and operating expenses. Trend ratios have the
following limitations:
(a) If the accounting practices have not been consistently followed year after year, these
ratios become incomparable and thus misleading.
(b) Trend ratios do not take into consideration the price level charges. An increasing
trend in sales might not be the result of larger sales volume, but may be because of
increased sales price due to inflation. In order to avoid this limitation, figures of the
current year should be first adjusted for price level changes from the base year and
then the trend ratios be calculated.
(c) Trend ratios must be always read with absolute data on which they are based,
otherwise the conclusions drawn may be misleading. It may be that a 100% change in
trend ratio may represent an absolute change of Rs.1,000 only in one item, while a
20% change in another item may mean an absolute change of Rs. 1,00,000.
(d) The trend ratios have to be interpreted in the light of certain non-financial factors like
economic conditions, government policies, management policies etc

4.6.3 FEATURES AND LIMITATIONS OF TREND ANALYSIS

Input Data

TREND requires a continuous time series as input data.

Various time series data formats are supported within the TIME environment.

After downloading TREND to the default directory, sample data file can be found
in c:\Program Files\Toolkit\TREND\Data.

TREND performs the statistical tests on annual time series data. TREND will
convert daily and monthly time series data into an annual time series before
carrying out the statistical testing on the annual time series (see the TREND User
Guide on how you can modify the data file to use TREND for non-annual time
series data). Input data files must be continuous and complete (daily and monthl y
data files must have complete years of records)

Output Data

TREND displays as an output (for all the statistical tests selected by the user):

Value of the test statistic

Critical values of the test statistic for a = 0.01, a = 0.05 and a = 0.1 significance
levels (from statistical table)

Critical values of the test statistic for a = 0.01, a = 0.05 and a = 0.1 significance
levels (from resampling analysis)

Simple statement of test result

TREND also provides a graphical display of the time series data.

TREND also allows easy retrieval of the test results.

BALANCE SHEET TREND ANALYSIS TAKING 2005 AS BASE YEAR

Table 4.1

(Base as 100)
As at
st

As at
st

As at
st

As at
st

As at
st

31 Mar

31 Mar

31 Mar

31 Mar

31 Mar

2005

2006

2007

2008

2009

As at
31

st

Mar

2010

CAPITAL &
LIABILITIES

Capital

Reserves

260.71
100

130.49

130.49

260.71

260.71

100

177.03

215.37

570.84

631.68

142.07

170.56

211.93

687.11

&Surplus

Deposits

100

117.68

Borrowings

100

328.40

414.31

426.00

402.87

Other &

100

125.76

171.54

260.90

219.50

100

122.64

149.16

193.25

230.97

100

176.20

178.67

341.77

100

75.92

124.81

44.98

100

108.15

121.27

238.34

832.04

192.04

provisions
TOTAL

259.65

ASSETS

Cash & balance

Reserve Bank
Of India

336.42
321.27

Balances with
banks & money

46.68
141.09

at cal and short

notice

Investments

172.90

208.98

225.11

Advances

100

133.03

168.87

214.28

Fixed assets

100

93.75

100.36

Other assets

100

128.35

143.91

130.35

135.88

TOTAL

100

122.72

149.16

193.25

230.97

Contingent

100

135.56

106.19

109.10

62.17

100

135.70

163.27

254.07

245.43

125.56

242.87

151.41

305.47

156.26

143.64

259.64

78.95

liabilities

Bills for

264.27

collection

INTERPRETATION:
There is a continuous increase in the capitals and liabilities of the bank and also some
assets are increased but some assets are decreased. Trend analysis of the balance sheet is
also helpful to know the increase or decrease of the balance sheet items in the year 2005 to
2010

Graph 4.1

900

800

700

600

500
2005
400

2006
2007

300

2008
2009
2010

200

100

4.7.1. RATIO ANALYSIS

Ratio analysis is one of the techniques of financial analysis to evaluate
the financial condition and performance of a business concern. Simply, ratio means the
comparison of one figure to other relevant figure or figures. Accounting ratios are very
useful as they briefly summarize the result of detailed and complicated computations.
Absolute figures are useful but they do not convey much meaning. In terms of accounting
ratios, comparison of these related figures makes them meaningful. For example, profit
shown by two-business concern is Rs. 50,000 and Rs. 1, 00,000. It is difficult to say
which business concern is more efficient unless figures of capital investment or sales are
also available.
Advantages of Ratios Analysis:

Ratio analysis is an important and age-old technique of financial analysis. The following
are some of the advantages / Benefits of ratio analysis:

1. Simplifies financial statements: It simplifies the comprehension of financial

statements. Ratios tell the whole story of changes in the financial condition of the
business
2. Facilitates inter-firm comparison: It provides data for inter-firm comparison.
Ratios highlight the factors associated with with successful and unsuccessful firm.
They also reveal strong firms and weak firms, overvalued and undervalued firms.
3. Helps in planning: It helps in planning and forecasting. Ratios can assist
management, in its basic functions of forecasting. Planning, co-ordination, control
and communications.

4. Makes inter-firm comparison possible: Ratios analysis also makes possible

comparison of the performance of different divisions of the firm. The ratios are
helpful in deciding about their efficiency or otherwise in the past and likely
performance in the future.
5. Help in investment decisions: It helps in investment decisions in the case of
investors and lending decisions in the case of bankers etc. Bottom of Form

LIMITATIONS OF RATIO ANALYSIS

1. Limitations of financial statements: Ratios are based only on the information

which has been recorded in the financial statements. Financial statements
themselves are subject to several limitations. Thus ratios derived, there from, are
also subject to those limitations. For example, non-financial changes though
important for the business are not relevant by the financial statements. Financial
statements are affected to a very great extent by accounting conventions and
concepts. Personal judgment plays a great part in determining the figures for
financial statements.
2. Comparative study required: Ratios are useful in judging the efficiency of the
business only when they are compared with past results of the business. However,
such a comparison only provide glimpse of the past performance and forecasts for
future may not prove correct since several other factors like market conditions,
management policies, etc. may affect the future operations.
3. Ratios alone are not adequate: Ratios are only indicators, they cannot be taken as
final regarding good or bad financial position of the business. Other things have
also to be seen.

4. Problems of price level changes: A change in price level can affect the validity
of ratios calculated for different time periods. In such a case the ratio analysis may
not clearly indicate the trend in solvency and profitability of the company.

CATEGORIES OF RATIOS

Profitability ratios

Operating ratios

Ratios specific to banking sector

1 PROFITABILITY RATIOS
The purpose of study and analysis of profitability ratio are to assess the adequacy
of profiles earned by the company and also to discover whether profitability is increasing or
decreasing. The profitability of the firm is the net result of a large number o f policies and
decisions. The major profitability are as follows:
Earnings per share
The objective of financial management is wealth or value maximization of
a corporate entity. The value is maximized when market price of equity shares is
maximized. The use of objectives of wealth maximization or net present value
maximization has been advocated as an appropriate and operationally feasible criterion
to choose among the alternative financial actions. In practice, the performance of a
corporation is better judged in terms of its earnings per share.
The EPS is one of the important measures of economic performance of a
corporate entity. The flow of capital to the companies under the present imperfect capital
market conditions would be made on the evaluation of EPS.
A higher EPS means better capital productivity. EPS is one of the most
important ratios which measure the net profit earned per share. EPS is one of the major
factors affecting the dividend policy of the firm and the market prices of the company. A
steady growth in EPS year after year indicates a good track of profitability. EPS is

computed by dividing the net profit after tax and dividend to preference share holders. This
avoids confusion and indicates the profit available to the ordinary shareholders on a "per
share basis". This is computed as follows:
Net Profit
-------------------------No. of equity shares

Net profit ratio

This ratio reflects the net profit margin on the total sales after deducting all expenses
but before deducting interest and taxation. This ratio measures the efficiency of
operation of the company. The net profit is arrived from gross profit aftr deducting
administration, selling and distribution expenses. The non operating incomes and
expenses are ignored in computation of net profit before tax, depreciation and
interest.
The following formula is used for calculating net profit ratio:
Net profit
-------------------------- *100
Net profit ratio =

Sales

Return on Shareholders Funds or Return on Net Worth or Return on Equity

(ROE)
This ratio expresses the net profit in terms of the equity shareholders funds. This ratio is an
important yardstick of performance for equity shareholders since it indicates the return on

the funds employed by them. However, this measure is based on the historical net worth
and will be high for old plants and low for new plants.
Net Profit
---------------- x 100
Net worth

Net worth = Equity capital + Reserves and Surplus

The ratio indicates: measure of profitability, the efficiency in use of assets in achieving
sales, measure of leverage.
Earnings Power Ratio
Earnings before tax (EBT)
-------------------------------- x 100
Total assets

Operating Ratio or Operating Cost Ratio

Operating ratio expresses the relationship of operating expenses to net income. It may be
expressed as follows:
Operating cost
-------------------- x 100
Net Income

The ratio of all operating expenses administration and selling expenses to sales is the
operating ratio. A comparison f the operating ratio would indicate whether the cost content

is high or low in the figures of sales. It is therefore the management as to concentrate to

know as to which element of cost has been gone up.
Return on total asset ratio
This ratio is calculated to measure the profit after tax against the amount invested in total
asset to ascertain whether assets are being utilized properly or not . it Is calculated as under:

Net profit after tax

Return on total asset=

-------------------------------- x 100
Total asset

2. OPERATING RATIOS
Includes the following ratios:
1. Operating Profit Margin
2. Cost To Income Ratio

Operating Profit Margin

Banks operating profit is calculated after deducting administrative expenses, which mainly
include salary cost and network expansion cost. Operating margins are profits earned by
the bank on its total interest income. For some private sector banks the ratio is negative on
account of their large IT and network expansion spending.
Net interest income Operating expenses
----------------------------------------------------------- x100
Total interest income

Cost To Income Ratio

Controlling overheads are critical for enhancing the banks return on equity. Branch
rationalization and technology up gradation account for a major part of operating expenses
for new generation banks. Even though, these expenses result in higher cost to income
ratio, in long term they help the bank in improving its return on equity. The ratio is
calculated as a proportion of operating profit including non-interest income (fee based
income).

Operating expenses
------------------------------------------------------------ x100
3.

Net interest income + Non interest income

RATIOS SPECIFIC TO BANKING SECTOR

It includes the following ratios:
1. Credit To Deposit Ratio (CD Ratio)
2. Capital Adequacy Ratio (CAR)
Credit To Deposit Ratio (CD Ratio)
The ratio is indicative of the percentage of funds lent by the bank out of the total amount
raised through deposits. Higher ratio reflects ability of the bank to make optimal use of the
available resources. The point to note here is that loans given by bank would also include
its investments in debentures, bonds and commercial papers of the companies (these are
generally included as part of investments in the balance sheet). A decrease in the CD ratio
shows the decrease in the rate of lending
Advances
---------------- x100
Deposits

 Capital Adequacy Ratio (CAR)

A bank's capital ratio is the ratio of qualifying capital to risk adjusted (or weighted)
assets. The RBI has set the minimum capital adequacy ratio at 10% as on March 2002 for
all banks. A ratio below the minimum indicates that the bank is not adequately capitalized
to expand its operations. The ratio ensures that the bank do not expand their business
without having adequate capital.

Tier I capital + Tier II capital

---------------------------------------- x100
Risk weighted capital

OTHER RATIOS
1. PAT EBT Ratio
2. Financial Leverage Ratio
3. Debt Equity Ratio
4. Payout Ratio
5. Book Value Ratio
6. Proprietary Ratio
7. Price Earnings Ratio

PAT EBT Ratio

Here the relationship between Profit after Taxes and Earnings

Before Tax. These two ratios we can take from the profit. PAT we can determine from
profit with Taxes and EBT we can determine from EBIT

PAT

PAT EBT Ratio=

-------------------------------EBT

Financial Leverage Ratio

This ratio determines how much of a companys assets are supported by its
equity base. Many of the meltdowns in the banking sector occurred because companies
had high financial leverage ratios. When the asset base is high, it only takes a minimal
decline in value to eliminate the equity base and push a company toward ban

Financial Leverage Ratio=

TOTAL ASSET
-------------------------------TOTAL EQUITY

Debt Equity Ratio

This ratio summarizes the capital structure of a business. Companies with high
debt levels will often see high returns on equity, but the risk exists that the high amount
of debt could topple the firm. The ratio will vary by industry so it is difficult to establish
one guideline for an acceptable debt level. Instead, watch the direction and trend of the
ratio. Over time, mature companies will balance sheet as earnings predictability allows
them to manage the fixed charge. However, this transition should be gradual. A company
for which this ratio increases sharply over a short period may be having trouble finding
alternate methods to finance its business

DEBT Equity Ratio=

NETWORTH
-------------------------------TOTAL DEBT

Payout Ratio
The size of the payout ratio is often dependent on the growth stage the company
is in. For a young, rapidly growing company, the payout ratio is going to be small (or zero) as
the company keeps most or all of its earnings to reinvest in growing the business. As the
company matures and begins to pay a dividend, the payout ratio increases.
Payout Ratio=

DIVIDEND PER SHARE

-------------------------------EARNINGS PER SHARE

Book Value Ratio

A company book value, as an asset held by a separate economic entity, is the
company shareholders' equity the acquisition cost of the shares, or the market value of the
shares owned by the separate economic entity. A company book value is used in fundamental
financial analysis to help determine whether the market value of company shares is above or
below the book value of company shares. Neither market value nor book value is an unbiased
estimate of a company's value.
NETWORTH
Book Value Ratio =

-------------------------------NUMBER OF SHARES

Proprietary Ratio
Proprietary ratio refers to a ratio which helps the creditors of the
company in seeing that their capital or loans which the creditors have given to the
company are safe. Proprietary funds includes equity and preference share capital of the
company and reserves and surplus of the company, while total assets of company includes
both fixed assets and current assets of the company

PROPRIETORS FUND
Proprietary Ratio =
-------------------------------TOTAL ASSET

Price Earnings Ratio

A valuation ratio of a company's current share price compared to its pershare earnings. A high P/E suggests that investors are expecting higher earnings growth in
the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us
the whole story by itself. It's usually more useful to compare the P/E ratios of one company
to other companies in the same industry, to the market in general or against the company's
own historical P/E. It would not be useful for investors using the P/E ratio as a basis for
their investment to compare the P/E of a technology company (high P/E) to a utility
company (low P/E) as each industry has much different growth prospects

CURRENT MARKET PRICE

. Price Earnings Ratio =

-------------------------------ANNUAL EARNINGS PER SHARE

Profitability Ratios
4.2 Table

Ratios
1. Net Profit
Ratio

Equation

2005

2006

2007

2008

2009

(Net profit /

6.42

13.62

13.61

12.65

0.54

1.09

1.17

1.11

1.29

12.44

18.02

9.38

11.60

0.69

1.36

1.59

1.54

5.81

5.94

6.51

13.06

2010
11.05

Total
income)
100

2. Return on

(Net profit /

Total Assets

Total

Ratio

assets) 100

3. Return on

(Net profit /

Equity

Net worth)

19.49

1.05

9.90

100
4. Earnings
Power Ratio

(Profit

2.04

1.99

before tax /
Total
assets) 100

5. Operating

(Operating

Ratio

cost / Total

5.96

6.61

6.72

29.26

27.16

income)
100

1. Earnings per
share (EPS)

Net profit /
No. Of
equity
shares

13.73

32.71

34.20

32.42

OPERATING PERFORMANCE RATIOS

4.3 Table
Ratio
1. Operating

Equation

2005

2006

2007

2008

2009

2010

Operating profit /

28.54

27.35

29.13

27.29

32.88

30.09

43.94

44.64

39.85

38.54

31.24

34.86

Performance

Total Interest

Margin

Income) 100

2. Cost to Income
Ratio

(Operating
Expenses / Net
Interest Income +
Non Interest
Income) 10

RATIOS SPECIFIC TO BANKING SECTOR

4.4 Table

Ratio
1. Credit to
Deposit

Equation

2005

2006

2007

2008

2009

(Advances /

58.07

65.64

69.03

72.95

69.54

11.27

13.75

13.43

22.46

20.14

2010
74.74

Deposits) 100

Ratio ( C/D
Ratio)
2. Capital

(Teir1

adequacy

Capital+Teir2

Ratio

Capital / Risk

(CAR)

Weighted
Capital) 100

17.27

OTHER RATIOS
4.5 Table

Ratio
PAT to EBT

Equation
PAT/EBT

2005

2006

2007

2008

2009

2010

0.77

0.80

0.74

0.74

0.63

0.54

27.97

23.35

26.68

8.24

8.24

10.91

23.25

16.51

16.70

8.28

8.98

9.31

0.04

0.06

0.06

0.14

0.13

0.12

0.18

0.13

0.1

0.19

0.17

0.18

110.26

181.53

175.49

345.76

273.24

0.06

0.06

0.12

0.11

0.11

6.14

6.75

6.66

4..71

9.83

ratio
Capitalizati

Long

term

on Ratio

Debt/Long term
Debt+owners
equity

Financial
leverage
Ratio

Total Asset/
Total Equity

Debt Equity

Net worth/total

Ratio

Debt

Payout

Dividend per

Ratio

share/Earning
per share

Book Value

Book Value/

Ratio

Number of
shares

Proprietary

Proprietors

Ratio

fund/Total Asset

Price

Current Market

Earnings

Price/Annual

Ratio

Earnings per
Share

0.04

RATIO ANALYSIS
Profitability Ratios
Net profit ratio for the period of 2005-2010
Table 4.6

in thousands

Year

Net Profit

Total Income

Net Profit Ratio

2005

900859

14030056

6.42

2006

2252057

16534772

13.62

2007

2927328

21040417

13.61

2008

3680538

29101627

12.65

2009

5004936

38311515

13.06

2010

4645451

42041439

11.05

Graph 4.2

Net Profit Ratio

15
10
Net Profit Ratio

5
0
2005

2006

2007

2008

2009

2010

INTERPRETATION:
This ratio helps in determining the efficiency with which the affairs of the
business are being managed. An increase in the ratio from 6.42 to 11.05 indicates
improvement in the operational efficiency of the bank. The ratio is an effective measure to
check the profitability.

Return on total asset ratio for the period of 2005-20110

Table 4.7

in thousands

Year

Net Profit

Total Asset

Return on Total asset Ratio

2005

900859

168209623

0.54

2006

2252057

206429063

1.09

2007

2927328

250899325

1.17

2008

3680538

325064570

1.11

2009

5004936

388508646

1.29

2010

4645451

436756051

1.05

Graph 4.3

Return on Total Asset Ratio

1.5
1
0.5
0

Return on Total Asset Ratio

2005 2006 2007 2008 2009 2010

INTERPRETATION:
The graph shows the upward trend of Return on total assets. The return on total asset was
increasing from 0.54 in the year 2005 to 1.05 in the year 2010

Return on equity ratio for the period of 2005-2010

Table 4.8

in thousands

year

Net Profit

Net Worth

Return on equity Ratio

2005

900859

7233484

12.45

2006

2252057

12499873

18.02

2007

2927328

15022078

19.49

2008

3680538

39256972

9.38

2009

5004936

43258758

11.60

2010

4645451

46904485

9.90

Graph 4.4

Return on Equity Ratio

20
15
10

Return on Equity Ratio

0
2005

2006

2007

2008

2009

2010

INTERPRETATION:
The graph shows the upward trend of return on equity. ROE was decreasing from 12.45 in the
year 2005 to 9.90 in the year 2010. Return on equity is the indicate profitability from the
point of view of equity share holders
Earning power ratio for the period of 2005-2010
Table 4.9

in thousands

year

EBT

Total Asset

Earning power Ratio

2005

1160727

168209623

0.69

2006

2807661

206429063

1.36

2007

3982274

250899325

1.59

2008

5001549

325064570

1.54

2009

7930095

388508646

2.04

2010

8595420

436756051

1.99

Graph 4.5

Earnings Power Ratio

2.5
2
1.5
1
0.5
0

Earnings Power Ratio

2005

2006

2007

2008

2009

2010

INTERPRETATION:
The graph shows the upward trend of earning power ratio. Earning power ratio was
increasing from 0.69 in the year 2005 to 1.99 in the year 2010
Operating Ratio for the period of 2005-2010
Table 4.10

in thousands
Operating cost(Interest

year

Total Income

Operating Ratio

expepended+Operating expenses)
2005

10026138

14030056

71.45

2006

12012981

16534772

72.65

2007

14910589

21040417

70.86

2008

21160435

29101627

72.71

2009

25713795

38311515

67.11

2010

29392967

42041439

69.91

Graph 4.6

Operating Ratio
74

72
70
Operating Ratio

68
66
64
2005

2006

2007

2008

2009

2010

INTERPRETATION:
The operating ratio indicates the operational efficiency of the bank. The lowest operating
ratio was in the year 2006 and highest ratio was in the year 2010The graph shows that there
is a decrease in the operating ratio from 5.96 in the year 2005 to 6.72in the year 2010.
Earnings per share (EPS) for the period of 2005-2010
Table 4.11

year

in thousands

Net Profit

Number of equity share

Earnings per share (EPS

2005

900859

65602

13.73

2006

2252057

68857

32.71

2007

2927328

85603

34.20

2008

3680538

113539

32.42

2009

5004936

171033

29.26

2010

4645451

171033

27.16

Graph 4.7

Earnings Per Share

35
30
25
20
Earnings Per Share

15
10

5
0
2005

2006

2007

2008

2009

2010

INTERPRETATION:
This helps in determining the market price of equity shares of the company and in
estimating the companys capacity to pay dividend to its equity share holders. EPS was
increased 34.19 in the year 2007 and it declined to 21.52 in the year 2008
OPERATING PERFORMANCE RATIOS
OPERATING PROFIT MARGIN FOR THE PERIOD OF 2005-2010
Table 4.12

in thousands

year

Operating profit

Total Income

Operating profit Margin

2005

4003918

14030056

28.54

2006

4521791

16534772

27.35

2007

6129828

21040417

29.13

2008

7941192

29101627

27.29

2009

12597720

38311515

32.88

2010

12648472

42041439

30.09

Graph 4.8

Operating Profit Margin

40
30
20

Operating Margin

10
0
2005

2006

2007

2008

2009

2010

INTERPRETATION:
Operating profit margin was increasing from (2005) to (2007).But in the next year
decreased, the next year the result was a shocking one, then it maintained It shows the bank
was able to maintain a healthy operating margin and will be able to pay for its fixed cost.
Cost to Income Ratio for the period of 2005-2010
Table 4.13

in thousands
Operating

Net Interest income

Cost

Expenses

+Non interest income

Ratio

2005

3138624

7142548

43.94

2006

3645693

8167483

44.64

2007

4061006

10190770

39.85

2008

4866186

12627285

38.54

2009

5714557

18312353

31.24

2010

6768937

19417376

34.86

year

to

Income

Graph.4.9

Cost to Income Ratio

60
40
Cost to Income Ratio

20
0
2005

2006

2007

2008

2009

2010

INTERPRETATION:
The cost to income ration indicates the changes in the cost/asset
ratio and in interest margin. It is useful to measure how costs are changing compared to
income - for example, if a bank's interest income is rising but costs are rising at a higher
rate looking at changes in this ratio will highlight the fact. The highest cost to income
ratio was in the year 2006 and the lowest cost to income ratio was in the year 2009
indicating a downward trend of cost to income ratio In 2010 it gone up at minimum
Specially for banking sector Ratios
Credit to Deposit Ratio for the period of 2005-2010
Table 4.14

in thousands

Year

Credit

to

Deposit Ratio

Advance

Deposit

2005

88225905

151928796 58.07

2006

117364667 178787372 65.64

2007

148991002 215844402 69.03

2008

189046616 259133558 72.95

2009

223918752 321981915 69.54

2010

269501113 360579508 74.74

Graph.4.10

Credi to Deposi Ratio

80
70
60
50
40

Credi to Deposi Ratio

30
20
10
0
2005

2006

2007

INTERPRETATION:

2008

2009

2010

This ratio indicates the proportion of loan-assets created by

banks from the deposits received..The ratio indicates that the proportion of loan assets
created by banks from the deposits received had an increasing trend in the all the financial
year under consideration.
Capital adequacy Ratio (CAR) Ratio for the period of 2005-2010
Table.4.15
year

Capital adequacy Ratio

2005

11.27

2006

13.75

2007

13.43

2008

22.46

2009

20.14

2010

17.27

Graph 4.11

Capital Adeqacy Ratio

40
20

Capital Adeqacy Ratio

0
2005

2006

2007

2008

2009

2010

INTERPRETATION:A bank's capital ratio is the ratio of qualifying capital to risk adjusted
(or weighted) assets. It is expressed as a percentage of a bank's risk weighted credit
exposures. This ratio is also known as capital to risk weighted assets ratio. The ratio was
increasing from 2005 to 2008. The next years bank gone through some trouble situations, but
in 2011 records we can see the developments it indicates that the bank will be able to absorb
a reasonable amount of losses in the event of operating losses and winding up.
Other Ratios
Capitalization Ratio for the period of 2005-2010
Table.4.16

year

in thousands

Long term Debt

Long term Debt +owners

Capitalization Ratio

Equity
2005

2809400

10042884

27.97

2006

3809900

16309773

23.35

2007

5467400

20489478

26.68

2008

3527900

42784872

8.24

2009

3889300

47148058

8..24

2010

5744700

52649185

10.91

Graph .4.12

Capitalization Ratio
30
20
Capitalization Ratio

10
0
2005

2006

2007

2008

2009

2010

Interpretation
Provides information about the companys ability to absorb asset reductions
arising from losses without jeopardizing the interest of creditors. Here the capitalization ratio
we can see the changes directly
Debt Equity Ratio for the period of 2005-2010
Table.4.17

in thousands

year

Net worth

Debt

Debt Equity Ratio

2005

7233484

153787800

0.04

2006

12499873

184892319

0.06

2007

15022078

223546479

0.06

2008

39256972

267053077

0.14

2009

43258758

329471266

0.13

2010

46904485

376047072

0.12

Graph.4.13

Debt Equity Ratio

0.15
0.1
Debt Equity Ratio

0.05
0
2005

2006

2007

2008

2009

2010

Interpretation
This ratio summarizes the capital structure of a business. Companies with high
debt levels will often see high returns on equity, but the risk exists that the high amount of
debt could topple the firm. The ratio will vary by industry so it is difficult to establish one
guideline for an acceptable debt level
PAT to EBT Ratio for the period of 2005-2010
Table 4.18
year

in thousands
PAT

EBT

PAT to EBT
Ratio

2005

900859

1160727

0.77

2006

2252057

2807661

0.80

2007

2927328

3982274

0.74

2008

3680538

5001549

0.74

2009

5004936

7930095

0.63

2010

4645451

8595420

0.54

Table 4.14

PAT to EBT Ratio

0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

PAT to EBT Ratio

2005

2006

2007

2008

2009

2010

Interpretation
Profit after Tax to Earnings before Tax, this ratio gives the information
about the earnings of the firm. The continuous improvements give the positive sign to the
company
Financial Leverage Ratio for the period of 2005-2010
Table 4.19

in thousands

year

Total Asset

Total Equity

Financial Leverage Ratio

2005

168209623

7233484

23.25

2006

206429063

12499873

16.51

2007

250899325

15022078

16.70

2008

325064570

39256972

8.28

2009

388508646

43258758

8.98

2010

436756051

46904485

9.31

Graph 4.15

Financial Leverage Ratio

25
20
15
Financial Leverage Ratio

10
5
0
2005

2006

2007

2008

2009

2010

Interpretation
Provides information about the companys ability to absorb asset reductions arising from
losses without jeopardizing the interest of creditors.

Pay Out Ratio For the Period of 2005-2010

Table 4.20
Year

in rupees
Dividends Earnings per share

Pay Out Ratio

per share
2005

2.50

13.73

0.18

2006

4.35

32.71

0.13

2007

3.40

34.20

0.10

2008

6.03

32.41

0.19

2009

5.0

29.26

0.17

2010

5.0

27.16

0.18

Graph 4.16

Pay Out Ratio

0.2
0.15
0.1

Pay Out Ratio

0.05
0
2005

2006

2007

2008

2009

2010

Interpretation: The ratio is also dependent on the industry in which the company operates.
Utilities, for instance, don't grow very fast and have relatively large payout ratios. Computer
hardware companies, on the other hand, always need money for research & development and
are reinvesting in themselves, so the payout ratio is quite small.
Book Value Ratio For the Period of 2005-2010
Table 4.21
Year

in thousands
NETWORTH Number of

Book Value Ratio

Shares
2005

7233484

65602

110.26

2006

12499873

68857

181.53

2007

15022078

85603

175.49

2008

39256972

113539

345.76

2009

43258758

171033

252.93

2010

46904485

171033

273.24

Graph 4.17

Book Value Ratio

400
300
200
100
0

Book Value Ratio

2005

2006

2007

2008

2009

2010

Interpretation: Well BV is considered to be the accounting value of each share, drastically

different than what the market is valuing the stock at. Market value is what the investment
community's expectations are and book value is based on costs and retained earnings.

Proprietary Ratio for the Period of 2005-2010

Table 4.22

in thousands

Year

Proprietors fund Total Asset

Proprietary Ratio

2005

7233484

168209623

0.04

2006

12499873

206429063

0.06

2007

15022078

250899325

0.06

2008

39256972

325064570

0.12

2009

43258758

388508646

0.11

2010

46904485

436756051

0.11

Graph 4.18

Proprietory Ratio
0.12
0.1
0.08
0.06

Proprieory Ratio

0.04
0.02
0
2005

2006

2007

2008

2009

2010

Interpretation: It is also known as equity ratio. This ratio establishes the relationship
between shareholders funds to total assets of the firm. The shareholders fund is the sum of
equity share capital, preference share capital, reserves and surpluses. Out of this amount,
accumulated losses should be deducted

Price Earnings Ratio for the Period of 2005-2010

Table 4.23
Year

in rupees
Current Market

Annual Earnings

Price Earnings Ratio

Price

per share

2006

201

32.71

6.14

2007

230

34.20

6.75

2008

216

32.41

6.66

2009

138

29.26

4.71

2010

267

27.16

9.83

Graph 4.19

Price Earnings Ratio

10
8
6
Price Earnings Ratio

4
2
0
2006

2007

2008

2009

2010

Interpretation: The price-to-earnings ratio of a stock is a measure of the price paid for a
share relative to the annual net income or profit earned by the firm per share. The P/E ratio
can therefore alternatively be calculated by dividing the company's market capitalization by
its total annual earnings. Here 2010 the ratio increased, it gives appositive sign to the
company as well as share holders

CHAPTER 5
FINDINGS AND SUGGESTIONS

5.1. FINDINGS

CRAR is above the regulatory minimum of 9%.

Various promotion techniques using by the Federal Bank to attract the customers
(Indian Premier League)
Federal Bank is the principal sponsor of Cochin Tuskers Kerala
Federal Bank expanding the network, increasing through the ATM and Branches,
these increased the past year 60 and 115 respectively. Presently the total number of
ATM is 732 and the Branches are 672
Federal Bank credit rating doing by CRISIL , CARE and FITCH
The expenditure increased in the last financial year and the Net Profit decreased
A drastic change we can see in Price to Earnings Ratio
The profit percentage proves the strength of Bank
Through the analysis I understood the Capital Structure of Federal Bank is more
stronger

5.2. SUGGESTIONS
Complaints from the customers should be considered and steps should be taken to
improve the satisfaction of customers
Management should take steps for the timely collection of debtors. Cash discount
should offer to those debtors who make payment in time..
Concerned authority should spend the time to hear the suggestions of their
employees and consider their innovative ideas.
Diversification is the another important tool for success of business (IDBI FEDERAL
Life insurance)

CHAPTER 6
CONCLUSION AND
BIBLIOGRAPHY

6.1. CONCLUSION
The study was conducted at FEDERAL BANK Aluva
(Accounts Department, Federal Towers, and Marine Drive Cochin). The project work
titled Capital Structure of Federal Bank was an attempt to study about capital structure
and to make some recommendations and suggestions for the improvement and
development and smooth functioning of the organization. From the analysis, it is
concluded that Federal Bank limited, has a satisfactory financial performance So that
forecast may be made for future earnings ability to pay interest and debt maturities and
profitability of sound dividend policy.

6.2. BIBLIOGRAPHY
BOOKS
Financial Management-IM Pandey
Management accounting-principles and practice; R.K. Sharma & Shashi K.Gupta
Cost and management accounting; S.P. Jain & K.L.Narang.
Management accounting; J. Made GOWDA
JOURNAL
Annual reports of the bank in the year 2004 to 2009
WEBSITE
www.federalbank.co.in

APPENDIX

BALANCE SHEET
In Crores

Schedule
No.

As at
31st Mar
2004

As at
31st Mar
2005

As at
31st Mar
2006

As at
31st Mar
2007

As at
31st Mar
2008

As at
31st Mar
2009

171.03

CAPITAL&
LIABILITIES

capital
1

21.76

65.60

85.60

85.60

171.0
3

Reserves
&Surplus

627.08

657.75

1164.38

1416.6
0

3754.66

Deposits

13476.68

15192.88

17878.74

21584.44

25913.3
6

Borrowings

126.72

185.90

610.50

770.21

791.9
5

Other &
provisions

862.03

718.83

903.69

1233.08

1875.45

15114.2
7

16820.96

20642.91

25089.93

32506.4
5

4154.84
32198.1
9
748.93
1577.86
38850.8
TOTAL

ASSETS

2214.39
Cash &
balance
Reserve
Bank Of
India

725.89

689.27

1214.58

1231.54

2355.6
9

1222.69
Balances
with banks
& money at
cal and
short notice

565.71

866.62

657.91

1081.60

389.7
9

5521.0
3

5799.16

6272.38

7032.66

10026.6
0

12118.9
Investments

22391.8
Advances

7700.53

8822.59

11736.47

14899.10 18904.66

Fixed assets

10

175.72

185.44

173.87

186.10

232.8
4

Other assets

11

425.39

457.88

587.70

658.93

596.8
7

15114.27

16820.96

20642.91

25089.93

32506.4
5

8519.54

12204.53

16543.57

12960.69

13315.9
3

372.52

321.39

436.12

524.75

816.5
7

7
280.77
622.14

TOTAL

38850.8

Contingent
liabilities

6
7588.28

12

788.81
Bills for
collection

PROFIT & LOSS A/C

In Crores

Sched
ule

No.

For the
year
ended
31st Mar
2004

For the
year
ended
31st Mar
2005

For the
Year
ended
31st Mar
2006

For the
year
ended
31sr Mar
2007

For the year For the

ended year ended
31st Mar
31st Mar
2008
2009

1.Income

Interest
earned

13

1192.06

1191.07

1436.52

1817.35

2515.44

3315.37

Other
incomes
TOTAL
2.Expend
iture

14

298.22

211.97

216.94

286.68

394.99

516.73

1490.29

1403.04

1653.48

2104.04

2910.43

3831.39

Interest
expended

15

770.23

688.69

836.66

1084.88

1646.82

1999.24

Operatin
g
expenses

16

282.93

313.90

364.64

406.13

470.51

572.29

300.80

310.29

226.97

320.26

426.08

759.32

6.93

28.51
3359.38

Provision
s and
continge
ncies
Share of
loss
associate

TOTAL
3.PROFI
T /LOSS

1353.97

1312.89

1428.29

1811.28

2550.36

Net profit
for the
year
Add
profit b/f
from
previous
year

136.31

90.15

225.18

292.75

360.06

472.01

-relating to
holding
company

-relating
to
subsidiary
company

2.31

49.19

2.30

13.46

14.45

7.68

21.77

22.71

29.26

27.21

29.27

75.46

138.83

90.8

227.78

306.49

374.81

478.93

4.APPRO
PIATION

Transfer
to
revenue
reserve
Transfer
to
statutory
reserve
Transfer
to capital
reserve
Transfer
to
investme
nt
fluctuatio
n reserve

nil

20.83

100.57

130.21

131.74

34.08

22.53

56.31

73.19

92.02

125.12

13.22

14.17

5.00

15.64

27.68

29.75

64.64

14.64

18.41

Transfer
to
contingen
cies
reserve

Transfer
to special
reserve
Provision
for
proposed
dividend
Provision
for
divided
tax
Balance
carried
over to
balance

sheet

197.25

30.00

9.00

12.00

18.00

18.00

18.00

11.00

15.22

16.44

29.96

34.24

68.41

85.52

1.95

2.30

4.20

5.82

11.63

14.54

71.90

2.59

13.73

14.74

6.92

-14.24

Total
Earnings
per share
Principal
accounti
ng
policies
Notes on
accounts

17
18

19

138.8
3
20.89

90.87

227.78

306.49

374.81

478.93

13.74

32.70

34.20

31.73

27.60