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BW Businessworld

How We Ranked Them

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The fourth edition of India's Best Banks survey conducted by Businessworld and PricewaterhouseCoopers covered 57 scheduled commercial banks under three categories: large banks (balance sheet size is more than Rs 1 lakh crore as of 31 March 2011), mid-size banks (Rs 30,000 crore-1 lakh crore) and small banks (less than Rs 30,000 crore). The static analysis based on financials and supplemented by a Risk Survey was presented to an external jury, which picked the six winners under two categories — ‘overall best bank' and ‘consistent and fastest growing bank'.

The banks were stacked under four primary dimensions: growth, size, sustainability of operations, and risk. The ranks were then multiplied with the assigned weights for each parameter and the aggregate score for each bank was the sum total of the weighted ranks. The banks are then stacked in the ascending order of scores within their peer group. The weighted score for the banks in the growth dimension was used to stack them up in ascending order to determine the fastest-growing bank and best bank in the peer groups.

The top five banks in each category were presented to an external jury, which deliberated on the analysis of static data (for the period 2009-2011), validated the methodology, rankings and the list of final winners in the award categories. The jury factored several parameters, like the consistency of credit and deposit growth, credit-deposit ratios, market perception, management and corporate governance, base effect of growth in size to strike a balance between growth and risk and efficiency in use of capital by the banks.

The jury deliberated that the criteria for ‘fastest growing' bank should combine sustainability factors to look at whether the banks had consistent and sustained growth. The sustainability parameter was added to that of growth to come at the award for the fastest-growing bank.

Sustainability and risk issues were deliberated at length and the varied and cumulative experience of the jury in the banking/financial sectors brought to bear on the deliberations. The qualitative moderation by the jury mitigated many biases that creep into analysis of static data and the final winner from each category was chosen by the jury after carefully observing all facts presented to them, the scores from data analysis and insights from the Risk Survey. The four dimensions in the methodology are given below:

Growth, the first dimension, has a weightage of 25 per cent. Low-cost resources play a crucial role for profitable growth for banks. With the deregulation of savings bank deposits, the fight for Casa (current and savings account) is rising and few private sector banks have upped their rates.

Size, the second dimension, has a 20 per cent weightage. It plays an important role in expanding reach. The number of employees and branches are the sub-parameters, as they help in economies of scale and distribution reach.
Sustainability (of operations), the third dimension, continues to be assigned the highest weightage (30 per cent) as it reflects the inherent capacity of a bank to withstand the tests of time. Efficiency, asset quality and productivity are the sub-parameters of sustainability.

Efficiency has been assigned a 15 per cent weightage. Under this, cost-to-income has been taken as the primary measure of efficiency and given a higher weightage. Net interest margin is included as a sub-parameter as it tests banks' ability to raise, and lend, funds efficiently.

Asset quality is the focal point as banks are showing signs of rise in non-performing asset (NPA) levels. With the raging debate on ‘system generated' NPAs in public sector banks, the NPA level could rise. Banks have been restructuring advances to pre-empt bad loans. The sub-parameters captured in asset quality (10 per cent) are NPA growth, net NPA to net advances and NPA (provisioning) coverage. Productivity (5 per cent) is another parameter under the sustainability dimension and includes the sub-parameters: cost to average asset ratio, operating profit per branch and operating profit per employee.

Banks are getting proactive about risk management due to heightened governance and tighter regulations. With the migration to advanced approaches under Basel II and planning for Basel III, the risk survey reveals that banks are convinced that good risk management and regulatory compliance lead to significant benefits. BW-PwC carried out a ‘risk survey' to understand the banks' general state of preparedness for managing risks through systems, processes and management culture. The responses have been scored and the ‘risk questionnaire score' has been taken under the fourth dimension risk.

The analysis indicates that the efficiency of using capital and an-all pervasive, risk-based culture will help differentiate stronger banks from others. A risk-based index is also part of this dimension, which measures how much a bank's earnings can decline until book value becomes negative and is a measure of the earning volatility of banks. The banks that did not respond to the risk survey have been ranked last under the ‘risk questionnaire scores' parameter.

(This story was published in Businessworld Issue Dated 28-11-2011)

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