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Introduction
CAPITAL ADEQUACY RATIO (CAR)
CAR is a measure of the bank's capital expressed as a percentage of its risk weighted credit exposures. A minimum CAR ensures that the bank can absorb certain amount of losses before becoming insolvent. Thus minimum CAR ensures the stability and efficiency of the financial system. Minimum CAR also gives some protection to the depositors. In the event of a winding-up, depositors' funds rank in priority before capital, so depositors would only lose money if the bank makes a loss which exceeds the amount of capital it has. The higher the CAR, the higher is the level of protection available to depositors.
One of the most important principles of BIS formulated "Core principles of Effective Banking Supervision" is that the banks should never be allowed to fail and for that it is essential that corrective action should be taken while the bank still has a manageable cushion of capital. This can be effectively tracked through the CAR requirements for the banks. The timely corrective actions can be taken when a bank fails to achieve a min. CAR. In case of foreign countries the supervision framework focuses only on one ratio i.e. CAR whereas in India, along with CAR, Net NPA and ROA are also taken a trigger points. If a bank fails to meet CAR, corrective actions like recapitalization, limits on deposit raising, prohibitions on extension of new credit, acquisitions of new securities are taken according to the level of seriousness. The current norm set by RBI in India for CAR is %. Once BIS II gets implemented, this will be raised to 10%.
Three-tiered capital
The Basle Capital Accord I, 188 specifies three levels of capital to be taken for CAR calculation
1.Tier 1 This capital is permanently and freely available to absorb losses without the bank being obliged to cease trading. Tier-1 capital safeguards both the survival of the bank as well as the stability of the financial system.
.Tier This capital absorbs losses only in the event of a winding-up and so is a lower level of protection. Tier- capital absorbs losses only after Tier-1 capital has been exhausted. Upper Tier- capital has no fixed maturity, while lower tier- has a fixed maturity. Thus upper tier- capital is more effective in absorbing losses.
.Tier It consists of short term subordinated debt. It can be used as a buffer against market risks (losses on forex and interest rate contracts) if the upper tiers are not sufficient to do so. It is not mandatory to hold tier- capital.
Credit Exposures
Credit risk arises out of two factors, the counterparty risk and the market risk. Counterparty risk depends on the financial strength of the debtor while the market risk is the systematic factor in asset pricing.
While calculating credit exposure, it is kept in mind that more capital would be held against riskier assets. The degree of riskiness is defined by the central bank for each broad category of assets. However, Basle II emphasizes on asset risk evaluation on case by case basis. Though costlier and more tedious, this approach would make banks more financially viable.
Off balance sheet exposures are first converted to their "credit equivalent amounts" which are then assessed for their riskiness. CEA is obtained by evaluating the contingency and estimating the outcome.
Under CAD (International banking norms), banking operations are categorized as either trading book (broadly, marked-to-market activities) or banking book (all other activities) and risk-weighted assets are determined accordingly.
Banking book risk-weighted assets are measured by means of a hierarchy of risk weightings classified according to the nature of each asset and counter party, taking into account any eligible collateral or guarantees. Banking book off-balance sheet items giving rise to credit, foreign exchange or interest rate risk are assigned weights appropriate to the category of the counter party, taking into account any eligible collateral or guarantees.
Trading book risk-weighted assets are determined by taking into account market-related risks, such as foreign exchange, interest rate and equity position risks, as well as counter party risk.
This method seems to be a better method as it takes the various market risks into account. However, in India the banking book method is followed.
Limitations of CAR
Some of the limitations of CAR are
1.It does not consider operational risk at all.
.If provisions are inadequate, CAR overstates the bank's viability.
Thus for a reliable study of a bank's financial study, CAR should be used in conjunction with other indicators of the bank's financial health such as Net NPA and ROA.
The Key Financials
HSBC
18100000100
Dividend per share (US $)0.080.40.450.480.5
Dividend payout ratio (%)5751.554.476.6.7
Retained Earnings per Share (US $)0.0.0.60.150.
US$0.50 ordinary shares in issue (Mn)806784586855481
Retained Earnings (Mn $)1874.7708.07.41140.51184.44
Capital Ratios
Tier 1 capital .70%8.50%.00%.00%.00%
Tier capital.0%4.70%4.0%4.00%4.0%
Total Capital1.60%1.0%1.0%1.00%1.0%
Average CAR1.8%
(US $ Mn)
Share capital44404,644,6784,741
Shareholders' funds 7,404,4046,46,885,406
Undated subordinated loan capital ,47,5,546,47,540
Dated subordinated loan capital7,571,1881,6761,00114,81
% Equity4.10%1.5%.%.1%0.51%
% Borrowed Liabilities75.0%78.48%77.78%76.7%7.4%
Tier 1
(US $ Mn)00100(% Change)
Shareholders Funds 45754061.8%
Minority Interests51506-5.5%
Innovative tier 1 securities4676475.1%
Less Property revaluation reserves-71-154-1.6%
Goodwill capitalized and intangible assets-148-178551.1%
Owner Shares Held-68-601-4.0%
Total Qualifying Tier 1 Capital5078411.05%
Tier
(US $ Mn)00100(% Change)
Property Revaluation Reserves71154-1.6%
General provision01481.%
Perpetual Subordinated debt8546.11%
Term Subordianted Debt11875.8%
Minority and other interests677511.8%
Total Qualifying Tier Capital180514417.4%
Subordinated debt raised as Tier cap7.8%76.8%5.5%
Unconsolidated Investments-1781-15.7%
Investments in other banks-67-681.75%
Other deductions-116-1444.14%
Total Capital5085457401.%
Sources of capital00100(% Change)
Internal Funds (%)78.1%76.66%-.85%
External Funds (%)1.0%.4%10.66%
Assets
(US $ Mn)001%00%% Change
Loans and Advances to customers086444.0%54447.10%14.16%
Loans and Advances to banks10464115.0%5461.70%-8.74%
Debt Securities16057.40%17570.40%.44%
Treasury Bills and other eligible bills1771.60%18141.40%0.5%
Equity Shares80571.0%811.10%1.4%
Intangible Fixed Assets14564.10%1716.0%17.85%
Others714710.60%871411.00%1.08%
687608100.00%74801100.00%.04%
HK SAR Govt certificates of indebtedness867 445 .6%
Total Assets6645 7546 .05%
Total RWA147856.%4055156.71%.8%
RWA of Contingent liabilities and commitments
Contingent Liabilities7501 0785 11.4%
Commitments1758 100 1.8%
Total4506.47%517886.8%15.01%
00100(% Change)
Gross NPAs as a % of total loans.0%.00%-1.0%
Loan Loss Provision as a % of total loan.80%.70%-.57%
Loan restructured as a % of total loans0.70%1.10%57.14%
HSBC
The amount of qualifying tier capital cannot exceed that of tier 1 capital.
Term subordinated loan capital may not exceed 50 per cent of tier 1 capital.
1.HSBC has been trying to increase the DPS at a constant rate. However, EPS has been fluctuating. Due to EPS decline, Dividend payout ratio took a massive jump in 001 (40% Increase). As a result of this, retained earnings went down drastically, indicating that the bank's dependence on external sources of fund had increased. However, the situation improved in 00 with an increase in EPS, resulting in a relative decline in Dividend payout ratio, even though DPS increased.
.This is inline with the observation that the bank has improved its total retained earnings by 56% over the past year. Hence, the bank has strengthened its internal sources over the past year.
.Total asset base has risen by % as compared to FY 001. However, the RWA as a percentage of total assets have remained almost same. This has negated the increase in Tier 1 and Tier capital, and hence the CAR has increased only marginally in 00.
4. The average CAR is 1.8%. This shows a highly conservative nature of the bank. This also indicates that there is sufficient opportunity to expand the asset base for HSBC.
5.The bank seems to raise money through subordinated debt regularly. As seen from the financials, the subordinated debt as a % of Tier II capital is substantial (7%) and increasing further (76%). Moreover, the proportion of subordinated debt as a source of external funds compared to equity capital is high (about 80% as compared to 0%).
6.On the asset side there is an increase in advances (14%) and largest fall is in money at call and short notices (-8.74%) implying that the average maturity of the assets has improved.
7.The Tier 1 as well as Tier capital of HSBC has increased substantially because of a large increase in shareholder funds and subordinate debt respectively. This has led to an increase in total capital.
8.The asset composition figures show that the majority of the asset creation is on loans and advances and not on investments, and there is an increasing trend in this. In FY001 the bank had 7.% of total assets into investments and 44.% into loans and advances whereas in FY00 it changed to 6.% and 47.1% respectively. This shows that the bank is expanding its customer base.
.From the other indicators like NPA and restructured loans, it seems that bank is increasingly restructuring its bad loans resulting in a fall in Gross NPA as well as the provisions for NPA.
10.The off Balance sheet items (RWA of Contingent liabilities and commitments) for HSBC though increased doesn't show much increase in percentage terms. However, the current levels seem high compared to the industry average.
Citibank
18100000100
Dividend per share (US $)0.80.410.50.60.7
Dividend payout ratio (%)0.7418.1.1.51.41
Retained Earnings per Share (US $)1.071.8.17.1.
Common stockholders equity (Mns) 50.5148.685140.68
Retained Earnings (Mn $) 1088.1175.611177.16
Capital Ratios
Tier 1 capital 8.4%8.47%
Tier capital .50%.78%
Total Capital 10.%11.5%
Average CAR11.0%
(US $ Mn)
Share capital 156116558511746
Shareholders' funds 4876156564461778518
Subordinated Loan Capital 8,64810,88
% Equity 7.8%6.8%
% Borrowed Liabilities 7.11%7.11%
Tier 1
(US $ Mn)00100(% Change)
Shareholders Funds7785187.0%
Qualifying perpetual preferred stock140014000.00%
Qualifying mandatorily redeemable securities of subsidiary trusts675615-8.5%
Minority interest80165.%
Less Net unrealized gains on securities available for sale-85-1571.6%
Accumulated net gains on cash flow hedges, net of tax-168-146.%
Intangible Assets
Goodwill-861-661
Other Intangible Assets-444-4
50% investment in certain subsidiaries-7-7
Other-05-575
Total Qualifying Tier 1 Capital584485010.6%
Tier
(US $ Mn)00100(% Change)
Allowance for credit losses864887.06%
Subordinate Debt8648108818.6%
Unrealized marketable equity securities gains718017.85%
Less 50% investment in certain subsidiaries-7-6-50.00%
Total Qualifying Tier Capital17410511.7%
Subordinated debt raised as Tier cap4.85%5.%6.1%
Total Capital75777817.%
Sources of capital00100(% Change)
Internal Funds (%)88.5%86.86%-1.5%
External Funds (%)11.41%1.14%15.14%
Assets
(US $ Mn)001%00%% Change
Cash and due from banks185151.76%1761.58%-6.4%
Deposits at interest with banks1161.8%1681.4%-14.75%
Federal funds sold and securities borrowed or purchased under agreements to resell14801.8%1461.75%.81%
Brokerage receivables5155.4%558.1%-7.87%
Trading account assets144041.78%1550814.15%7.11%
Investments1617615.5%165115.45%5.04%
Total Loans81066.6%4604.77%14.4%
Goodwill861.7%661.46%1.%
Intangible Assets000.86%8500.78%-5.4%
Reinsurance recoverables171.18%4560.40%-64.7%
Separate and variable accounts556.4%118.0%-1.50%
Other Assets8568.1%7506.85%-11.0%
Total Assets1051450100.00%10710100.00%4.5%
Total RWA640566.01%666.47%0.%
RWA of Contingent liabilities and commitments10180.6%116681.06%15.0%
00100(% Change)
Gross NPAs as a % of total loans1.80%.10%16.67%
Loan Loss Provision as a % of total loan.60%.60%0.00%
Loan restructured as a % of total loans0.10%0.00%-100.00%
Citibank
1.Dividend payout ratio has increased slightly over the past two years. However, an increase in EPS has allowed the bank to show an increase in its retained earnings as well as DPS. The bank is showing a stable growth which augers well for the bank.
.Total asset base has risen by 4.5% as compared to FY 001. The RWA as a percentage of total assets have declined marginally resulting in a slight increase in the CAR.
.The banks risk bearing capacity as indicated by its CAR at 11.5% as of end of FY00, shows that there is scope for the bank to expand its asset base further.
4.From the sources of capital it is seen that the banks dependence on internal sources has come down from 8% to 87% whereas the external sources has increased from 11% to 1%. This highlights the need for the bank to go in for more external debt.
5.The bank seems to be raising less money through subordinated debt. The proportion of subordinated debt as a source of external funds compared to equity capital is low (about 7% as compared to 6%). However, the bank seems to have realized this and is improving its levels of subordinate debt. As seen from the financials, the subordinated debt as a % of Tier II capital has increased substantially in 00 with a growth rate of 1% over the past year.
6.On the asset side there is an increase in advances (14%) and fall in money at call and short notices (-10% app.) implying that the average maturity of the assets has improved.
7.Tier capital of Citibank has increased substantially because of a large increase in subordinate debt. This has led to an increase in total capital.
8.The asset composition figures show that the majority of the asset creation is on loans and advances and not on investments, and there is an increasing trend in this. In FY001 the bank had 15.5% of total assets into investments and 6.6% into loans and advances whereas in FY00 it changed to 15.45% and .77% respectively. This shows that the bank is expanding its customer base.
.From the other indicators like NPA and restructured loans, it seems that bank is not able to restructure its bad loans resulting in a increase in Gross NPA.
10.The off Balance sheet items (RWA of Contingent liabilities and commitments) for Citibank though increased doesn't show much increase in percentage terms. Moreover, the current levels seem fairly decent compared to the industry average.
Comparison of HSBC and Citibank
001 00
CitibankHSBCCitibankHSBC
CAR10.%1.00%11.5%1.0%
RWA as a % of total assets66.01%56.%6.47%56.71%
Tier1 Capital8.4%.00%8.47%.00%
Tier Capital.50%4.00%.78%4.0%
Dividend payout ratio (%)1.51%76.0%.41%6.70%
Internal Funds as % Total capital88.5%78.1%86.86%76.66%
External Funds as % Total capital11.41%1.0%1.14%.4%
Sub Debt as % of Tier capital4.85%7.8%5.%76.8%
Investments as % of Asset 15.5%7.0%15.45%6.0%
Advances as % of Asset6.6%44.0%.77%47.10%
Gross NPAs as a % of total loans1.80%.0%.10%.00%
•On the Capital Adequacy front, it seems that HSBC is more conservative as compared to Citibank as its CAR is higher. However, it also indicates that the depositors of HSBC are more protected and secured as compared to those of Citibank.
•It is also seen that HSBC has more proportion of Tier I capital i.e. permanent source of capital in total capital base as compared to Citibank's figures.
•Dividend Payout ratio is much higher for HSBC as compared to Citibank. This shows that HSBC relies less on internal capital as compared to Citibank.
•This is inline with HSBC's external funds and subordinate debt being substantially higher compared to Citibank.
•Both the banks have a larger loans and advances portfolio compared to investments. However, HSBC has got a larger share of assets in investments and advances as compared to Citibank. Citibank on the other hand has a higher percentage in Repo transactions and trading account, and hence is more liquid.
•HSBC is also successful at reducing its NPAs whereas Citibank is not.
•Overall it can be said that HSBC marginally scores over Citibank in capital adequacy ratio management though both the MNCs have their pros and cons.
Regulations for Indian Banks
1.Subordinate debt is limited to 50% of tier 1 capital.
.Revaluation reserves limit is 45% while calculating tier capital.
.Actual GPLR or 1.5 % of RWA is taken, whichever is lower.
HDFC
10000010000Change
Dividend per share1.1.6.50.00%
Dividend payout ratio4.71%.6%5.55%.68%4.7%4.%
Retained Earnings 16601167818.17%
Tier 1
0000Change
Share Capital8178050.4%
P/L balance10856187.06%
Statutory Reserves8044.48%
General Reserve5857566.15%
Amalgamation reserve1451450.00%
(Deferred Tax Assets)-07-174-5.76%
Total1646185017.%
Tier
0000Change
IFR400840080.00%
Debenture Redemption reserve740-100.00%
General loan loss reserves117411470-.5%
Subordinated debt000000000.00%
Total Capital487164147-.1%
Assets0000Change
Cash and balances with RBI11117081671.0%
Balances with banks and money at call and short notice47010876-51.61%
Investments100401880811.5%
Advances681711754867.5%
Fixed Assets711058584.44%
Other Assets1140515848.85%
Total assets7878044087.0%
RWA15651701771.64%
10000010000Change
Tier 1 cap ratio8.4%.56%8.6%10.81%.4%-1.1%
Tier cap ratio.5%.6%.40%.1%1.6%-47.76%Average CAR
Total cap ratio11.86%1.1%11.0%1.%11.1%-0.17%1.04%
Subordinated debt raised as Tier cap 5.6%6.05%.%
Sources of capital
Internal Funds (%) 5.0%48.0%6.45%
External Funds (%) 64.80%51.7%-1.80%
% Equity 70.57%71.0%0.74%
% Borrowed Liabilities .4%8.1%-1.77%
0000Change
Gross NPAs (Cr).8665.451.11%
NPA provisions (Cr)188.5.518.05%
Restructured Loans (Cr)010.81
Off Balance Sheet Items 4155850007500-51.0%
HDFC
1.Dividend payout ratio is decreasing over the years, so the bank is focusing on internal sources of capital.
.Total asset base has increased by 7.0%, while RWA increased by .64%. This implies that the bank has made riskier investments in recent future.
.The average CAR for last five years is 1.04%. This is well above the % CAR limit by RBI. This shows the conservative nature of the bank. However, over last two years, the bank has reduced its CAR marginally.
4.The bank has issued 6.7 lakh shares as ESOPs to source more capital.
5.Further, HDFC issued ADS in July 001. These two points show that the bank is channelising its efforts to improve Tier1 CAR. Thus the sources of capital have become more permanent in nature.
6.The general provisions policy of the bank is as follows
a.1-% for Retail and Middle market programs
b.0.4% for Corporate Standard Assets
This shows that bank is conservative in its operations.
7.Subordinated debt has not increased from last year. This shows the tendency of the bank to cap its exposure in this segment at the current level.
8.On the capital side (reserves), the largest increase happened in general reserve while the largest fall was in general loan loss reserves. This means that loan restructuring has paid off.
.On the assets side, the largest increase was in advances, while the largest fall was in money at call and short notice. This implies that the average maturity of the assets has improved.
UTI
10000010000Change
Dividend per share0.010.010.0180.0150.0.%
Dividend payout ratio10%1%15%0%%10.00%
Retained Earnings 107810014447004.00%
Tier 1
0000Change
Share Capital1181010.01%
P/L balance786414655.7%
Statutory Reserves7145444.4%
General Reserve0140
Amalgamation reserve00
(Deferred Tax Assets)00
Tier
0000Change
IFR70811817.44%
Debenture Redemption reserve1400-100.00%
General loan loss reserves00
Subordinated debt5504886065.5%
Total Capital487164147-.1%
Assets0000Change
Cash and balances with RBI11160004.44%
Balances with banks and money at call and short notice15800016684.66%
Investments56784784108.0%
Advances5507174.15%
Fixed Assets6047055117.%
Other Assets866717085.46%
0000Change
Tier 1 cap ratio6.4%6.44%0.1%
Tier cap ratio4.%4.46%5.44%Average CAR
Total cap ratio10.65%10.0%.5%10.78%
Sub. debt as %Tier cap77.64%7.1%.%
Sources of capital
Internal Funds (%)8.86%44.4%14.%
External Funds (%)61.14%55.57%-.10%
% Equity.6%.0%-18.64%
% Borrowed Liabilities60.64%67.8%1.10%
0000Change
Gross NPAs (Cr)8.168.-18.87%
NPA provisions (Cr)14.1610.46-46.71%
Restructured Loans (Cr).1475.68-.66%
Off Balance Sheet Items 8700141570061.75%
UTI
1.Dividend payout ratio is increasing over the years, so the bank is decreasing its dependence on internal sources of capital.
.CAR last year was 10.%. This is well above the % CAR limit by RBI. This shows the conservative nature of the bank. CAR had increased from the previous level of 10.65%.
.UTI issued additional PUC of Rs 86 lakhs in March 00. This shows that the bank is channelising its efforts to improve Tier1 CAR. Thus the sources of capital have become more permanent in nature.
4.Subordinated debt has increased by 65.5% from 00 value of Rs 550 lakhs to Rs 48860 lakhs in 00. This shows that probably bank was in need of funds to maintain internal prudent limits of CAR in 00.
5.On the capital side (reserves), the largest increase happened in Investment Fluctuation Reserve. Probably, the bank had seen adverse movements in its investments in recent history.
Comparison of HDFC and UTI bank
0000
HDFC UTIHDFC UTI
CAR1.%10.65%11.1%10.0%
Tier1 Capital10.81%6.4%.4%6.44%
Tier Capital.1%4.%1.6%4.46%
Dividend payout ratio (%).68%0.00%4.7%.00%
Internal Funds as % Total capital5.0%8.86%48.0%44.4%
External Funds as % Total capital64.80%61.14%51.7%55.57%
Sub Debt as % of Tier capital5.6%77.64%6.05%7.1%
Investments as % of Asset 50.46%.48%44.00%.8%
Advances as % of Asset8.64%7.%8.64%6.61%
Gross NPA (cr).868.1665.458.
•On the Capital Adequacy front, it seems that HDFC is more conservative as compared to UTI bank. However, HDFC is taking an aggressive approach by bringing the CAR down by almost % in one year's time.
•It is seen that HDFC has more proportion of Tier I capital i.e. permanent source of capital in total capital base as compared to UTI bank's figures. This means less risk for the stockholders of HDFC.
•Dividend Payout ratio is comparable for both the banks. However, DPS is much higher for HDFC shareholders. Moreover, HDFC has been decreasing this ratio over the years while UTI has been increasing it. This shows that HDFC is trying to use more of internal capital.
•This is inline with HDFC's internal funds growing at a fast rate. However, an anomaly is seen as UTI's internal funds are also showing an increase. On close examination it is found that even though Tier 1 and Tier capital have gone down and subordinate debt has gone up, the reason for the divergence is the low value of RWA of UTI bank. UTI bank has been able to manage it's RWA well and has been successful in bringing them down substantially.
•HDFC had a higher percentage of assets in investments vis-à-vis advances in 00. However, the percentages came closer to each other in 00. For UTI the percentages were evenly balanced (between 5-40% for both) and stayed similar in 00. With the reshuffling of portfolio by HDFC, the figures look similar for both the banks in 00 reflecting HDFC's efforts towards having a balanced portfolio.
•UTI is successful at reducing NPAs whereas HDFC is not. This could be a temporary phenomenon as HDFC is increasing its loan portfolio and hence the additional NPA's.
•Overall it can be said that HDFC scores over UTI bank in capital adequacy ratio management and is the more efficient bank. Moreover, it is moving aggressively towards improving current performance.
SBI
0000Change
Figures In Thousands
Dividend per share0.60.8541.67%
Dividend payout ratio1.00%14.40%10.77%
Retained Earnings1158806004.0%
Tier 1
0000Change
Share Capital5685680.00%
P/L balance6570.1%
Statutory Reserves681511067440610.1%
Capital/General Reserve11007115460.5%
Revenue and other reserve74561006-85.78%
Share Premium51057510570.00%
Tier
0000Change
IFR671158711588.40%
General loan loss reserves00
Subordinated debt45766146550.1%
Total Capital4884875876487.4%
Assets0000Change
Cash and balances with RBI1875471784684-41.76%
Balances with banks and money at call and short notice4057616445561-4.65%
Investments1451401717470718.74%
Advances108064651775845814.0%
Fixed Assets415788548-1.10%
Other Assets144577180056011.87%
0000Change
Tier 1 cap ratio.%8.81%-4.45%
Tier cap ratio4.1%4.6%1.56%Average CAR
Total cap ratio1.5%1.50%1.1%1.4%
Subordinated debt raised as Tier cap8.74%60.%-7.8%
Sources of capital
Internal Funds (%)75.11%6.76%-7.1%
External Funds (%)4.8%0.4%1.50%
% Equity1.1%1.1%-0.1%
% Borrowed Liabilities86.7%86.81%0.0%
0000Change
Gross NPAs (Cr)15485.851506.07-1.78%
NPA provisions (Cr)7118.74608.46-14.46%
Restructured Loans (Cr)117.107.085.0%
Off Balance Sheet Items 1185871167718061.15%
SBI
1.Dividend payout ratio has increased over the years for SBI indicating that the bank's dependence on external sources of fund has relatively increased.
.This is also in line with a simultaneous increase in subordinate debt. During last years, the Bank is issuing by way of private placement, unsecured, subordinated bonds to augment its Tier II capital.
.There is an increase of % in retained earnings indicating that the bank has strengthened its internal sources.
4.Total asset base has also risen by 8% as compared to FY 00. But this has also been accompanied by a large increase of about 5% in the investment fluctuation reserve. Due to this the CAR is maintained almost at the same level.
5. The average CAR is 1.4%. This is much above the % CAR limit set by RBI. This shows a highly conservative nature of the bank. This also indicates that there is sufficient opportunity to expand the asset base for SBI.
6.The bank seems to raise money through subordinated debt regularly. As seen from the financials, though the subordinated debt as a % of Tier II capital has decreased, the proportion of subordinated debt as compared to equity capital as a source of external funds is high (about 87% as compared to 1%).
7.On the asset side there is an increase in advances and largest fall is in money at call and short notices implying that the average maturity of the assets has improved.
8.The Tier 1 capital of SBI has fallen substantially (by 4.45%) because of a large fall in revenue and other reserves but this is offset by an increase in Tier capital (by 1.56%) mainly because of large increase in investment fluctuation reserve.
.From the sources of capital it is seen that the banks dependence on internal sources has come down from 75% to 6% whereas the external sources has increased from 5% to 1%.
10.The asset composition figures show that the majority of the asset creation is on investments and not on loans and advances and there is an increasing trend in this. In FY00 the bank had 41.68% of total assets into investments and 4.% into loans and advances whereas in FY00 it increased to 45.85% and 6.65% respectively. This is the current trend in banking industry.
11.From the other indicators like NPA and restructured loans, it seems that bank is increasingly restructuring its bad loans resulting in a fall in Gross NPA as well as the provisions for NPA. But still the level of NPA is very high at 1506 cr.
1.The off Balance sheet items for SBI though increased don't show much increase in percentage terms.
BoB
0000Change
Figures In Thousands
Dividend per share0.40.650.00%
Dividend payout ratio1.70%4.4%14.%
Retained Earnings4756551844.%
Tier 1
0000Change
Share Capital44440.00%
P/L balance1466111164.%
Statutory Reserves80746717464.0%
Capital/General Reserve4757047-0.8%
Revenue and Other reserve510575771.47%
Share Premium77487740.00%
(Deferred Tax Assets)-606000-078004.80%
Tier
0000Change
IFR5684456754410.7%
General loan loss reserves
Subordinated debt10418001006400-.66%
Total Capital7.1E+087.6E+087.77%
Assets0000Change
Cash and balances with RBI581067646584.8%
Balances with banks and money at call and short notice6664451767-47.6%
Investments814017816.6%
Advances6686754808165.01%
Fixed Assets6867180.71%
Other Assets77415775607-10.55%
0000Change
Tier 1 cap ratio7.56%8.10%7.14%
Tier cap ratio.76%4.55%1.01%Average CAR
Total cap ratio11.%1.65%11.75%11.%
Subordinated debt raised as Tier cap80.%6.88%-0.7%
Sources of capital
Internal Funds (%)66.87%64.80%-.10%
External Funds (%).1%5.0%6.6%
% Equity.0%.68%.4%
% Borrowed Liabilities77.7%77.%-0.8%
0000Change
Gross NPAs (Cr)4185.7448.7.5%
NPA provisions (Cr)05.81004.8-.4%
Restructured Loans (Cr)68.1150.41-77.8%
Off Balance Sheet Items 0.060.045564.60%
BoB
1.Dividend payout ratio has increased over the years for BoB indicating that the bank's dependence on external sources of fund has relatively increased.
.The banks risk bearing capacity as indicated by its CAR at 1.65% as of end of FY00, shows that there is enough space for the bank to expand its asset base.
.The bank is keeping the capital adequacy requirements much above the stipulated requirements showing the conservative nature of the bank. In fact the CAR has increased from 11.% to 1.65%. This is largely on account of a decrease in risk weighted assets.
4.Total asset base has also risen by 7.7% as compared to FY 00. But this has also been accompanied by a large increase of about 11% in the investment fluctuation reserve.
5.There is a jump of 40% in retained earnings indicating that the bank has strengthened its internal sources.
6.On capital side it is also seen that the tier I capital has increased but there is a small fall in the subordinated debt raised as a part of tier II capital.
7. On the asset side there is an increase in advances and largest fall is in money at call and short notices implying that the average maturity of the assets has improved.
8.There is a growth in Tier I as well as Tier II capital of the bank in FY 00 as compared to last year.
.From the sources of capital it is seen that the banks dependence on internal sources has come down from 66.8% to 64.8% whereas the external sources has increased from .% to 5.%.
10.The asset composition figures show that the majority of the asset creation by BoB is on loans and advances than investments. In FY00 the bank had 47.47% of total assets into loans and advances and .61% into investments whereas in FY00 it increased to 46.6% and .4% respectively.
11.From the other indicators like NPA and restructured loans, it seems that there is a fall in restructuring of bad loans and this is also accompanied by a 7% increase in Gross NPA as well as the provisions for NPA which is not a favorable indicator.
1.The off balance sheet items for BoB has increased substantially by 4%.
Comparison SBI and BoB
0000
SBI BoBSBI BoB
CAR1.5%11.%1.50%1.65%
Tier1 Capital.%7.56%8.81%8.10%
Tier Capital4.1%.76%4.6%4.55%
Dividend payout ratio (%)1.00%1.70%14.40%4.4%
Internal Funds as % Total capital75.11%66.87%6.76%64.80%
External Funds as % Total capital4.8%.1%0.4%5.0%
Sub Debt as % of Tier capital8.74%80.%60.%6.88%
Investments as % of Asset 41.68%.61%45.85%.4%
Advances as % of Asset4.6%47.47%6.65%46.6%
Gross NPA (cr)15485.854185.71506.07448.
Off Balance Sheet Items1,1,85,871,5,71,16,771,80686,468,445
•On the Capital Adequacy front, it seems that SBI is much more conservative as compared to Bank of Baroda as its CAR is much above the requirement of %. But that also indicates that the depositors of SBI are more protected and secured as compared to those of BoB.
•It is also seen that SBI has more proportion of Tier I capital i.e. permanent source of capital in total capital base as compared to BoB's figures.
•From the point of view of different sources of capital, SBI is more dependent upon the internal sources of fund as compared to Bank of Baroda.
•Both the banks are depending almost equally on the issuance of Subordinated debt as a source of Tier capital
•SBI is more into the investments than loans and advances for asset creation whereas Bank of Baroda has more loans and advances as compared to investments.
•SBI is also successful at reducing its NPAs whereas BoB is not.
•There is a large change in percentage terms of off balance sheet items for BoB as compared to SBI.
•Overall it can be said that SBI scores over BoB in capital adequacy ratio management though both the public sector banks are very conservative in the management of CAR.
Conclusion
•CAR figures are in the same range of 10-1% for all the six banks.
•8- % appears to be the average norm for tier 1 capital.
•-4 % appears to be the general average for tier capital.
•0-0% appears to be the general norm for Dividend payout ratio. However, HSBC is an exception. Hence, we can say that DPS determines dividend payout ratio and not the other way round.
•Internal funds represent the strength of the banks. HSBC, Citibank, SBI, and BoB have high internal fund ratio. However, private Indian banks, namely HDFC and UTI are clearly taking more risks to fuel growth.
•Subordinate debt as a percentage of tier capital is high for all banks except HDFC and Citibank, which shows that they should go for more leverage.
•Gross NPA's are high for Indian Public sector banks as compared to the other four, which reflects that these banks have still got a long way to go.
References
•Annual Reports of
oHSBC, Citibank
oSBI, BoB
oUTI, HDFC
•Prowess Database
•http//finance.yahoo.com
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