Camel Ratio Analysis

A Comparative Study of 3 Banks

Saurabh Thadani Srikanth Konduri Tushar Gupta Vikram R

10FN-102 10FN-109 10FN-115 10FN-118

Vishwajeet Chopra 10FN-120 Nikhil Gupta 10FN-121

8/21/2011

Table of Contents
Introduction .................................................................................................................................................. 3 Axis Bank ....................................................................................................................................................... 3 HDFC Bank..................................................................................................................................................... 4 Punjab National Bank .................................................................................................................................... 5 Ratio Analysis ................................................................................................................................................ 6 Capital to Risk Weighted Assets Ratio ...................................................................................................... 6 Tier 1 Capital Ratio .................................................................................................................................... 6 Return on Assets ....................................................................................................................................... 7 Return on Equity ....................................................................................................................................... 8 Interest Income to Total Assets Ratio ....................................................................................................... 8 Net Interest Income to Total Assets Ratio ................................................................................................ 9 Interest Expense Ratio ............................................................................................................................ 10 Net NPAs to Net Advances ...................................................................................................................... 11 Liquid Assets to Total Assets ................................................................................................................... 11 Lending to Sensitive Sectors ................................................................................................................... 12 Business per Employee ........................................................................................................................... 13 Profit per Employee ................................................................................................................................ 14 Comparative Snapshot ................................................................................................................................ 14 Conclusion ................................................................................................................................................... 15

Introduction
The acronym "CAMELS" refers to the six components of a bank's condition that are assessed. 1. 2. 3. 4. 5. 6. Capital adequacy Asset quality Management Earnings Liquidity Sensitivity to market risk

Ratings are assigned for each component in addition to the overall rating of a bank's financial condition. The ratings are assigned on a scale from 1 to 5. Banks with ratings of 1 or 2 are considered to present few, if any, supervisory concerns, while banks with ratings of 3, 4, or 5 present moderate to extreme degrees of supervisory concern. The following three banks from the Indian banking industry were chosen for the Camels Ratio analysis. Axis Bank HDFC Bank Punjab National Bank

Axis Bank
Axis Bank was the first of the new private banks to have begun operations in 1994, after the Government of India allowed new private banks to be established. The Bank was promoted jointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI - I), Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC) and other four PSU insurance companies, i.e. National Insurance Company Ltd., The New India Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India Insurance Company Ltd. The Bank as on 30th June, 2011 is capitalized to the extent of Rs. 411.88 crore with the public holding (other than promoters and GDRs) at 52.87%. The Bank's Registered Office is at Ahmedabad and its Central Office is located at Mumbai. The Bank has a very wide network of more than 1281 branches (including 169 Service Branches/CPCs as on 31st March, 2011). The Bank has a network of over 6270 ATMs (as on 31st March, 2011) providing 24 hours a day banking convenience to its customers. This is one of the largest ATM networks in the country. The Bank has strengths in both retail and corporate banking and is committed to adopting the best industry practices internationally in order to achieve excellence.

AXIS BANKS VISION 2015:

To be the preferred financial solutions provider excelling in customer delivery through insight, empowered employees and smart use of technology

CORE VALUES:

Customer Centricity Ethics Transparency Teamwork Ownership

HDFC Bank
The Housing Development Finance Corporation Limited (HDFC) was amongst the first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as part of the RBI's liberalization of the Indian Banking Industry in 1994. The bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial Bank in January 1995. The Banks mission is to be a World Class Indian Bank, benchmarking itself against international standards and best practices in terms of product offerings, technology, service levels, risk management and audit and compliance. The objective is to continue building sound customer franchises across distinct businesses so as to be a preferred provider of banking services for its target retail and wholesale customer segments, and to achieve a healthy growth in profitability, consistent with the Banks risk appetite. HDFC Bank is committed to do this while ensuring the highest levels of ethical standards, professional integrity, corporate governance and regulatory compliance.

THE BANKS BUSINESS STRATEGY EMPHASIZES THE FOLLOWING: Develop innovative products and services that attract its targeted customers and address inefficiencies in the Indian financial sector; Increase its market share in Indias expanding banking and financial services industry by following a disciplined growth strategy focusing on balancing quality and volume growth while delivering high quality customer service; Leverage its technology platform and open scale-able systems to deliver more products to more customers and to control operating costs;

 Maintain high standards for asset quality through disciplined credit risk management; Continue to develop products and services that reduce its cost of funds; and Focus on healthy earnings growth with low volatility.

Punjab National Bank

The Bank opened for business on 12 April, 1895 in Lahore, Pakistan. The first branch outside Lahore was opened in Rawalpindi in 1900. The Bank made slow, but steady progress in the first decade of its existence. The five years from 1941 to 1946 were ones of unprecedented growth. From a modest base of 71, the number of branches increased to 278. Deposits grew from Rs. 10 crore to Rs. 62 crore. On March 31, 1947, the Bank officials decided to leave Lahore and transfer the registered office of the Bank to Delhi and permission for transfer was obtained from the Lahore High Court on June 20, 1947. In 1951, the Bank took over the assets and liabilities of Bharat Bank Ltd. and became the second largest bank in the private sector. In 1962, it amalgamated the Indo-Commercial Bank with it. From its dwindled deposits of Rs. 43 crore in 1949 it rose to cross the Rs. 355 crore mark by the July 1969. Its number of offices had increased to 569 and advances from Rs. 19 crore in 1949 to Rs. 243 crore by July 1969 when it was nationalized. Since its humble beginning in 1895 with the distinction of being the first Swadeshi Bank to have been started with Indian capital, PNB has achieved significant growth in business which at the end of March 2011 amounted to Rs 5,55,005 crore. PNB is ranked as the 2nd largest bank in the country after SBI in terms of branch network, business and many other parameters. With over 60 million satisfied customers and more than 5100 offices including 5 overseas branches, PNB has continued to retain its leadership position amongst the nationalized banks. The bank enjoys strong fundamentals, large franchise value and good brand image. VISION: "To be a Leading Global Bank with Pan India footprints and become a household brand in the IndoGangetic Plains providing entire range of financial products and services under one roof" MISSION: "Banking for the unbanked"

Ratio Analysis
Capital to Risk Weighted Assets Ratio
The ratio is defined by CRAR = Tier I Capital + Tier II Capital Risk Weighted Assets
X

100

Axis Bank Ratio Capital Adequacy Ratio 2010-11 12.65% 2009-10 15.80% 16.22%

HDFC 2010-11 2009-10 17.44% 2010-11 12.42%

PNB 2009-10 14.16%

Capital Adequacy Ratio

20.00% 15.00% 10.00% 5.00% 0.00% Axis HDFC PNB Capital Adequacy Ratio

The Banks have sufficient capital adequacy are well placed to handle any pressure on solvency in case of a financial downturn. Among the 3 banks, HDFC has a substantially higher ratio. It can be observed that the ratio has decreased for all the 3 banks in the current financial year. The drop is somewhat significant for Axis Bank.

Tier 1 Capital Ratio

CRAR gives the capital adequacy of a bank by taking into consideration both tier 1 capital and tier 2 capital. Tier 1 capital ratio gives the capital adequacy of a bank by only considering the tier 1 capital of a bank. Axis Bank 2010-11 2009-10 9.41% 11.18% HDFC 2010-11 2009-10 12.23% 13.26% PNB 2010-11 8.44% 2009-10 9.11%

Ratio Tier 1 Capital Ratio

Tier 1 Capital Ratio

15.00% 10.00% Tier 1 Capital Ratio 5.00% 0.00% Axis HDFC PNB

It can be observed that HDFC has a higher capital adequacy even in this case. PNB has the least Tier 1 CAR.

Return on Assets
Return on Assets is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. It is given by the formula

Ratio Return on Assets

Axis Bank 2010-11 2009-10 1.40% 1.39%

HDFC 2010-11 2009-10 1.42% 1.32%

PNB 2010-11 1.32% 2009-10 1.17%

Return on Assets
1.45% 1.40% 1.35% 1.30% 1.25% Axis HDFC PNB Return on Assets

All the 3 banks more or less utilize the assets to the same extent. Though PNB was lagging behind in asset utilization in 2010, now it is almost on par with the other 2 banks.

Return on Equity
The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. ROE is expressed as a percentage and calculated as: Return on Equity = Net Income/Shareholder's Equity

Ratio Return on Equity

Axis Bank 2010-11 2009-10 17.32% 17.61%

HDFC 2010-11 2009-10 17.01% 16.68%

PNB 2010-11 21.84% 2009-10 22.57%

Return on Equity
25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Axis HDFC PNB Return on Equity

PNB has generated the highest returns for the shareholders. The return on equity generated by PNB is substantially higher than the returns of other 2 banks.

Interest Income to Total Assets Ratio

This ratio depicts the asset utilization. The assets of the banks consist of the loans and advances and the investments portfolio. The interest income is the income which is earned on these assets.

Interest Income to Total Assets =

Interest Income Total Assets

Ratio Interest Income/TA

Axis Bank 2010-11 2009-10 6.24% 6.44%

HDFC 2010-11 2009-10 7.12% 7.07%

PNB 2010-11 7.13% 2009-10 7.22%

Interest Income/TA
7.50% 7.00% 6.50% 6.00% 5.50% Axis HDFC PNB Interest Income/TA

The ratios of all the 3 banks are in the same range. Axis Banks values are marginally lower compared to the other 2 banks

Net Interest Income to Total Assets Ratio

This ratio signifies the percentage of net interest income earned on total assets .This ratio is significant as net interest income is the largest source of income for the banks in India. Net Interest Income/TA = Interest income Interest Expense Total Assets Axis Bank 2010-11 2009-10 2.70% 2.77% HDFC 2010-11 2009-10 3.57% 3.73% PNB 2010-11 3.12% 2009-10 2.86%

Ratio NII/TA

NII/TA
4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Axis HDFC PNB

NII/TA

HDFC bank has a significantly higher ratio. Axis bank is not utilizing the assets to generate the net interest income as efficiently as the other two peers.

Interest Expense Ratio

The ratio of interest expense to income would reflect the efficiency of raising resources and their deployment. Interest Expense Ratio = Interest Expense Interest Income Axis Bank 2010-11 2009-10 56.69% 57% HDFC 2010-11 2009-10 47.54% 49.47% PNB 2010-11 56.25% 2009-10 50.42%

Ratio Interest Expense Ratio

Interest Expense Ratio

60.00% 55.00% 50.00% 45.00% 40.00% Axis HDFC PNB Interest Expense Ratio

Even this ratio suggests that HDFC is deploying the resources efficiently as it has the least Interest Expense Ratio.

Net NPAs to Net Advances

The level of NPAs is recognized as a critical indicator for assessing banks' credit risk, asset quality and efficiency in allocation of resources to productive sectors. Net NPAs to Net Advances = Net NPAs Net Advances

Ratio Net NPA/Net Advances

Axis Bank 2010-11 2009-10 0.29 0.40

HDFC 2010-11 2009-10 0.19 0.31

PNB 2010-11 0.85 2009-10 0.53

Net NPA/Net Advances

1 0.8 0.6 0.4 0.2 0 Axis HDFC PNB Net NPA/Net Advances

PNB has a high ratio of NPAs as compared to net advances. This undermines the credit risk of the bank. HDFC has the best ratio among the 3 banks.

Liquid Assets to Total Assets

This ratio gives tells us about the companys ability to meet short term liquidity requirements.

= Liquid Assets Total Assets

Ratio Liquid Assets/Total Assets

Axis Bank 2010-11 2009-10 8.82% 8.42%

HDFC 2010-11 2009-10 10.7% 13.46%

PNB 2010-11 7.85% 2009-10 7.91%

Liquid Assets/Total Assets

12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Axis HDFC PNB Liquid Assets/Total Assets

HDFC has a better liquidity position compared to its peers. However the liquidity position has seen a substantial downfall in the recent year.

Lending to Sensitive Sectors

The sectors considered as sensitive are Capital Market Sector, Real Estate Sector and Commodities Sector. The lesser the exposure to these sector the better it is for the banks. = Total Lending to the 3 Sectors Total Advances

Ratio Lending to Sensitive Sectors

Axis Bank 2010-11 30.15%

HDFC 2010-11 22.57%

PNB 2010-11 19.00%

Lending to Sensitive Sectors

35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Axis HDFC PNB Lending to Sensitive Sectors

Axis Bank has a huge exposure to sensitive sectors. HDFC and PNB are relatively much better compared to Axis. The exposure to sensitive sectors is under control for all three banks.

Business per Employee

This ratio signifies the employee productivity. BPE = Advances + Deposits Number of employees Axis Bank 2010-11 2009-10 13.66 11.11 HDFC 2010-11 2009-10 6.53 5.9 PNB 2010-11 10.18 2009-10 8.08

Ratio BPE In crores

Business Per Employee

15 10 Business Per Employee 5 0 Axis HDFC PNB

Employee productivity is the highest in Axis Bank. HDFC banks lags behind the other 2 banks substantially in this factor.

Profit per Employee

It is an indicator of the efficiency of employees of a bank .

PPE =

Net Income Number of Employees

Ratio PPE In Crores

Axis Bank 2010-11 2009-10 0.14 0.12

HDFC 2010-11 2009-10 0.07 0.06

PNB 2010-11 0.08 2009-10 0.07

Profit Per Employee

0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 Axis HDFC PNB Profit Per Employee

Efficiency of employees of HDFC and PNB is very similar. Axis bank has more efficient employees compared to its peers

Comparative Snapshot
The following table gives a relative snapshot of the three banks under consideration. A rank of 1 indicates the best value amongst the three and 3 indicates the worst. HDFC fares well across maximum number of factors.

Ratio Capital Adequacy Ratio Tier 1 Capital Ratio Return on Assets Return on Equity Interest Income/TA NII/TA Interest Expense Ratio Net NPAs/Net Advances Liquid Assets/TA Sensitive Sector Lending Business Per Employee Profit Per Employee

Axis 2 2 2 2 3 3 3 2 2 3 1 1

HDFC 1 1 1 3 2 1 1 1 1 2 3 3

PNB 3 3 3 1 1 2 2 3 3 1 2 2

Conclusion
The 3 banks considered for the analysis are financially sound and the risk associated with them is very minimal. HDFC bank has proved to be better compared to Axis Bank and Punjab National Bank on most of the parameters considered. But Axis Bank utilizes its employees in a far more efficient manner compared to HDFC.