X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Key banking ratios: PSUs versus private - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Key banking ratios: PSUs versus private
Jan 8, 2010

In one of our recent articles, we discussed about some of the key ratios relating to a bank's profit and loss statement. Just to brush up our readers, some of the ratios that were discussed included:

  • Net interest margin (NIM)
  • Cost to income ratio
  • Other income to total income ratio
We thought it would be an interesting idea to look and compare these numbers for the leading private and public sector banks. In addition, we will also see how the same ratios have changed over the past few years.

Net interest margins (NIMs): The difference between interest income and interest expense is known as net interest income. It is the income, which the bank earns from its core business of lending. As such, NIM is the net margin earned by the bank on its average earning assets. These assets comprises of advances, investments, balance with the RBI and money at call.

The proportion of low costs deposits (on which the bank pays interest) has a lot to do with this ratio. Particularly because banks that have been able to sustain or improve the proportion of low costs deposits would be able to garner higher NIMs. Low costs deposits are deposits in the form of current accounts and savings accounts (CASA).

Net interest margins over the past 5
Source Data: Equitymaster research

From the above chart we can see that the NIMs of leading public sector banks, namely State Bank of India (SBI), Punjab National Bank (PNB) and Bank of Baroda (BoB), have been historically higher than two of the leading private sector banks- ICICI Bank (ICICI) and Axis Bank (Axis). However, the NIMs of HDFC Bank (HDFC) are relatively much higher as compared to its peer group. This is due to the fact that HDFC Bank has sustained one of the highest proportions of CASA deposits in India.

Click here to compare PNB and Axis Bank on other parameters.

Another trend we can notice is that the NIMs of private sector banks have been either improving or were quite stable. However, the story is not the same for the public sector banks. NIMs of the three leading banks have been either on a decline year after another or have been quite volatile. One of the possible reasons for the same would be of customers shifting to private banks for banking services.

Cost to income ratio: This ratio is calculated by dividing the operating expenses by the total income generated i.e.net interest income plus the other income. The lower the ratio, the better it is for a bank as it would help prop up its profit and return ratios.

From the following chart we can see that the public sector banks have done well to reduce their costs (as a percentage of total income) over the past three to four years. However, the same cannot be said about all the private sector banks. While ICICI and Axis Bank have managed to bring down their expenses in recent times, HDFC Bank's costs have risen due to the higher expense ratio of Centurion Bank of Punjab that HDFC Bank acquired in FY08.

Cost to income ratio over the past 5
Source Data: Equitymaster research

Further, for private sector banks, salaries have incrementally formed a larger part of operating expenses. If we compare similar data for a PSU bank such as SBI, the situation is different. Salary expenses stood at an average of 65% of operating costs during this period. This is no doubt a high number. But as we are comparing cost to income ratio, the same has improved on account of lower salary costs as a percentage of total operating costs. During FY05, salary costs formed about 68% of costs. This same stood at about 62% during FY09.

Other income to total income ratio: Other income largely constitutes of fee income such as commission, exchanges and brokerage fees. Banks in developed countries derive nearly 50% of revenues from this stream. For Indian banks, such fees contribute only about 15% -25% of the overall revenues.

Other income also includes profit on exchange transactions, profit from sale of investments, and other miscellaneous income, amongst others.

Other income to total income over the past 5
Source Data: Equitymaster research

ICICI Bank clearly takes the cake in this one amongst private sector entities. On the other hand, public sector banks have done well to improve their other income to total income ratios in recent times.

However, it must be noted that fee income (and not total other income) of the public sector banks are relatively quite low. For instance, fee income for the three public sector banks stood at an average of about 15% (as a percentage of total income) during FY09. The same ratio for these three private banks stood at about 32% during FY09.

Conclusion
Looking at the above mentioned parameters, it does get a bit difficult to conclude whether public sector or private sector banks have performed better on an overall basis. In selected parameters –such as other income to total income ratio - private sectors are the clear winners. As for the cost to income ratios, the large public banks have done well to bring down expenses (as a percentage of total income) over the past few years. The same is not the case for all the private banks.

It is recommended that you must not be prejudiced towards investing in stocks of only public or only private sector banks. It is important to study these parameters, compare them to the peer group and also make sure that the stocks you pick meet your valuation criteria.

Equitymaster requests your view! Post a comment on "Key banking ratios: PSUs versus private". Click here!

2 Responses to "Key banking ratios: PSUs versus private"

vishal

Jan 21, 2010

good analysis.....

i feel, NPA % should also be evaluated, as default ratio could hamper the profitability of any of the financial institution......

Like 

Vinod

Jan 17, 2010

Hi

Quite informative, however need more information like a) CASA growth year on year of leading pvt and public sectors banks.
b)Top 100 deposit locations (disctricts/city) wise number of branches of pvt sector banks and growth year on year.
c) Employee profitability year on year.

regards

vinod chawla

Like 
  
Equitymaster requests your view! Post a comment on "Key banking ratios: PSUs versus private". Click here!

More Views on News

Bandhan Bank IPO: A Microlender Turned Profitable Bank (IPO)

Mar 12, 2018

Is the IPO of one of India's newest private sector bank, Bandhan Bank, worth applying for?

SBI: Pushed in Red on Increased Slippages and Higher Credit Costs (Quarterly Results Update - Detailed)

Feb 21, 2018

SBI posts loss on elevated bad loans and higher provisioning requirements.

IDFC Bank: One-Off Trading Loss, Expansion Pull Down Profits (Quarterly Results Update - Detailed)

Feb 8, 2018

IDFC Bank's profits hit by trading loss and higher investments to build network.

Axis Bank: Lower Slippages Save Bottomline Performance (Quarterly Results Update - Detailed)

Feb 6, 2018

Lower provisioning leads to the net profits growing by 25% during the quarter. However, asset quality remains a concern and would be the key thing to watch out for in the coming quarters results.

HDFC Bank: Loan Growth Camouflages Bad Loan Risks (Quarterly Results Update - Detailed)

Jan 22, 2018

The bank delivers a consistent performance with net profits growing by 20%. However, bad loans have risen considerably and would be the key things to watch out for going forward.

More Views on News

Most Popular

The Real Truth About India's FDI, Beyond WhatsApp(Vivek Kaul's Diary)

Jul 4, 2018

The FDI numbers do not look very impressive once we adjust for repatriations as well as the overall growth in the economy.

How to Avoid a 90% Loss Suffered by This Super Investor(The 5 Minute Wrapup)

Jul 12, 2018

Blindly following super investors is a dangerous game to play. Here's how you can avoid such mistakes.

The Answer to Your Wealth Worries: Small Caps (Especially Now)(Profit Hunter)

Jul 10, 2018

If you're worried about the markets - you are on the wrong track. This is opportunity - put your wealth-building hat on, instead - Richa shows you how...

New Fund Offer - ICICI Prudential Pharma Healthcare and Diagnostics Fund - Should You Invest?(Outside View)

Jul 6, 2018

ICICI AMC launches an open -ended equity fund following Pharma, Healthcare, Diagnostic and allied theme.

When Disappointment Panda is Around. Buy Quality Stock like This!(Chart Of The Day)

Jul 6, 2018

Buy Companies that can fight all kinds of Pandas and Bears in the long run.

More

Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE BANKEX


Jul 17, 2018 (Close)

MARKET STATS