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Key banking ratios-II: PSUs vs private - Views on News from Equitymaster
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  • Mar 18, 2010

    Key banking ratios-II: PSUs vs private

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

    • Credit to deposit ratio
    • Capital adequacy ratio
    • Non-performing asset ratio
    • Provision coverage ratio
    • Return on assets ratio

    We thought it would be an interesting idea to look and compare these numbers for the leading private (HDFC Bank, ICICI Bank and Axis Bank) and public sector (SBI, Punjab National Bank and Bank of Baroda) banks. In addition, we will also see how the same ratios have changed over the past few years.

    Credit to deposit ratio: This ratio indicates how much of the advances lent by banks is done through deposits. It is the proportion of loan-assets created by banks from the deposits received. The higher the ratio, the higher the loan-assets created from deposits. Deposits would be in the form of current and saving account as well as term deposits. The outcome of this ratio reflects the ability of the bank to make optimal use of the available resources.

    Source Data: Equitymaster research

    If we see the following chart, ICICI Bank distinctly stands out from its peers. A strong reason for the same would be its aggressive nature. Further, PSU banks and Axis Bank have seen their ratios increase gradually over the years. The credit to deposit ratio of HDFC Bank on the other hand, has been fairly stable.

    Click here to compare SBI and ICICI Bank on other parameters.

    Capital adequacy ratio: 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 9% 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.

    It must be noted that it would be difficult for an investor to calculate this ratio as banks do not disclose the details required for calculating the denominator (risk weighted average) of this ratio in detail. As such, banks provide their CAR from time to time.

    Considering that the Indian banking sector has been growing at a strong pace, all the leading banks, both private and public have been expanding operations at a strong pace. As such, their CAR ratios are well above the prescribed limit of 9%. Private banks such as HDFC Bank, Axis Bank and ICICI Bank have in fact increased their CAR over the past four to five years.

    Source Data: Equitymaster research

    As for the public banks, SBI and Punjab National Bank (PNB) have seen their CAR steadily expand over the past few years as well. However, this ratio for Bank of Baroda has been fairly stable.

    Non-performing asset ratio: The net NPA to loans (advances) ratio is used as a measure of the overall quality of the bank's loan book. An NPA are those assets for which interest is overdue for more than 90 days (or 3 months). Net NPAs are calculated by reducing cumulative balance of provisions outstanding at a period end from gross NPAs. Higher ratio reflects rising bad quality of loans.

    Source Data: Equitymaster research

    The NPA ratio is one of the most important ratios in the banking sector. It helps identify the quality of assets that a bank possesses. If we look at the chart below, we can clearly see a differentiation between India's largest banks. A bank such as ICICI Bank would garner one of the highest NPA ratio amongst private banks on the back of its aggressive nature. As the banks lends out strongly to customers, the chances of them defaulting also rises. Plus, considering that private banks charge higher interest costs would only make things more difficult for its customers. At the same time, the NPA ratio of a relatively much conservative bank such as HDFC Bank would remain low. It is clearly evident from the above chart. The marginal spurt in this ratio during FY09 is due to its acquisition of Centurion Bank of Punjab.

    Further, Axis Bank has done well in the recent past to bring down its NPA ratio. So is the case for Bank of Baroda (BoB). PNB has done well to keep its NPA levels low as well. As for India's largest bank SBI, its NPAs are relatively much higher than that of its PSU peers. This can also be attributed to its aggressive period over the past few years.

    Provision coverage ratio: The key relationship in analysing asset quality of the bank is between the cumulative provision balances of the bank as on a particular date to gross NPAs. It is a measure that indicates the extent to which the bank has provided against the troubled part of its loan portfolio. A high ratio suggests that additional provisions to be made by the bank in the coming years would be relatively low (if gross non-performing assets do not rise at a faster clip).

    Source Data: Equitymaster research

    On observing the above chart, we can notice that private banks such as HDFC Bank & ICICI Bank as also PNB and Bank of Baroda have been quite conservative when it comes to covering their NPAs. Axis Bank on the other hand has been extra conservative in the past few years. This explains the reason for the sharp improvement in the NPA ratio as well. The same can however, not be said about SBI, which is the only large bank which has seen its provision coverage ratio deteriorate over the past four years.

    Return on assets ratio: Returns on asset (ROA) ratio is the net income (profits) generated by the bank on its total assets (including fixed assets). The higher the proportion of average earnings assets, the better would be the resulting returns on total assets.

    Source Data: Equitymaster research

    While HDFC Bank has done well to maintain its ROAs over the past few years, that of ICIC Bank has been gradually on a decline. The other banks, has however done well to improve their return ratio over the past few years.


    Looking at the above mentioned parameters, it would be quite easy to differentiate the aggressive banks from the conservative ones. During good times and bad, banks such as HDFC Bank have managed to keep things under control. Relatively aggressive banks such as ICICI Bank and SBI have been facing some problems. Further, PNB, Axis Bank and Bank of Baroda have done well to improve their asset quality, return ratios over the past few years as well.

    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 various parameters related to financial statements of banks, 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-II: PSUs vs private". Click here!

    7 Responses to "Key banking ratios-II: PSUs vs private"


    Aug 14, 2014

    I am CA and wish to compliment tream equitymaster to come out with such a brilinat piece of work.It has even helped me brush aside my market assumptions over practicability.



    Jul 21, 2014

    Excellent Article!! and good tenets provided to understand the methodology to invest in banking sector.Kudos to Equity master Team.



    Jun 9, 2014

    As an Ex-banker(conservative of course) and now a conservative investor, I rate this as an excellent piece of work. As others have also remarked, more recent coverage and addition of more banks will improve its utility further. Trust RBI, bank officials,Govt officials read this and be an eye-opener. Pl give similar periodic reports in other sectors.


    v j mankodi

    Feb 17, 2012

    very good write up to explain the basic evaluation criteria for banks with graphical presentation helping it to make simple to understand. This works as nice food for a keen and conscious invester.It would be better to have an updated graph if possible which may help an invester to decide which bank to invest in when he is keen for a banking sector. If possible, graphs for few PSU and private banks can also be given. Thanks once again.

    Like (2)

    vivek tamhankar

    Sep 18, 2010

    This is great however if the actual data ( figures)could be provided in tabular format that could make the explaination easy

    Like (1)


    Sep 16, 2010

    pls tell me differences between psu and private banks from every aspect with example of two or three banks

    Like (1)


    Mar 24, 2010

    This is excellent. A similar comparative matrix of other sectors in the pvt and psu domain would be very helpful.

    Like (1)
    Equitymaster requests your view! Post a comment on "Key banking ratios-II: PSUs vs private". Click here!

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