How We Did It

BW-PwC presents the second edition of its analysis of 56 scheduled commercial banks in India, which includes 27 public sector banks (PSBs), 18 private sector banks and 11 foreign banks, to help understand the performance of the sector in detail and rank the better performing banks in three categories: large banks (balance sheet size more than Rs 1,00,000 crore), mid-size banks (balance sheet of Rs 30,000-1,00,000 crore) and small banks (balance sheet below Rs 30,000 crore).

 

The analysis has ranked the banks under four primary dimensions: growth, size, sustainability of operations and risk. The ranks are multiplied with the weight for each parameter, and the aggregate score for each bank is the total of the weighted ranks. The banks are stacked in the ascending order of scores within the respective peer group: large, mid-size and small. Different banks have their own share of challenges, ranging from sluggish credit growth, pressure on margins, constraint of capital, growing non-performing assets (NPA), and intense competition for customers. The dimensions of sustainability and risk become more important in the wake of the slowdown as defaults rise and banks restructure more advances.



The above approach sought to capture performance under various quantitative parameters as above. However, it was felt necessary to try and capture some important qualitative parameters, and temper the quantitative analysis by having an external jury review the analysis and bring in qualitative factors. The jury deliberations (see page 72) went through a structured process to finally identify the winners in each of the six award categories: fastest-growing bank in large, medium and small categories; best performing banks in large, medium and small categories.



The top 10 banks in each category — based on the scores derived from the quantitative analysis — were presented to the jury for final rankings. Apart from the analysis, several qualitative factors were considered by the jury, such as market perception, management and corporate governance, duration of operations and any publicly known recent events in the past two quarters, which may indicate some future areas of concern namely deteriorating asset quality, imbalance in growth and lack of a demonstrated sustainable operating strategy. Based on these discussions, the list of top 10 banks was whittled down to five.



Thus, Barclays Bank, ranked high under both fastest-growing and overall best bank, was dropped as it had not completed three years of commercial banking as on 31 March 2009. Also, the jury felt the growth was on a very small base and the bank has had some credit quality issues in the recent past. ING Vysya Bank was dropped from among the fastest-growing mid-size banks, as the growth did not seem to be balanced and it has been exhibiting few strategic ambiguities, which could impact sustainability going ahead.



From this list of five, the jury nominated three for the final round. It deliberated on issues such as pan-India growth, quality of growth, capital raising achieved or acquisitions made. Hence, Federal Bank was dropped as it had a ‘state-centric' growth. Similarly, Bank of India was dropped as its profitability waned substantially in the past quarter, and NPA levels have been rising, hinting the bank's growth in the past three years may not be sustainable. Finally, in each of the three categories, the three nominees were the ultimate winners selected from among them (see table on page 77).



Growth And Size

Growth, the first dimension, has been assigned an overall weightage of 25 per cent. The sub-parameters within growth seek to provide insights into what will help the banks sustain profitable, balanced growth. Last fiscal saw a slowdown in the credit growth in the wake of economic recession, while deposits grew rapidly in safer PSBs. Banks are also using aggressive strategies to raise demand deposits (Casa) to increase their low-cost fund base which helps them to maintain their margins and rein in increasing cost of resources.







Core fee income (commission, forex and brokerage) has become an important contributor to profitable growth. Other indicators considered are total deposits, loans and advances, operating profit, net worth and net interest income (NII), and weightages given according to their relative importance in sustainable growth.



Size, in terms of the balance sheet, loans and advances and deposits, particularly demand deposits are universal indicators of evaluating the banks' inherent strengths. We have introduced number of employees and branches as we believe it can help banks to get benefits of economies of scale and distribution reach.



Sustainability

Sustainability of operations has been assigned the highest weightage as it reflects the inherent capacity of a commercial bank to withstand the test of time. Efficiency, asset quality and productivity are the three parameters of sustainability.

As competition intensifies, banks have realised that efficiency and productivity will be the key driver to maintain the margins and asset quality is important to protect itself from any downside risks. The analysis has introduced new parameters around net interest margin as it demonstrates the bank's ability to raise funds efficiently and on lending them judiciously, in turn impacting increase in operating profits.



Asset quality has become the focal point in the wake of the slowdown in the economy. High growth rates have seen indiscreet lending in key business segments such as real estate and unsecured loans, the tremors of which is felt with rising NPAs and increased provisioning. Banks have been restructuring advances; however there is a fear that this is a way of deferring the NPAs.



Productivity is becoming important particularly for PSBs as they try to catch up with the private sector banks on this parameter. They have shown a great improvement in productivity in past few years as they get economies of scale with increasing size.



The Risk Factor

Banks in India are getting more serious about risk

The PwC team of analysts: Team Leader Robin Roy Associate Director Financial Services, Mumbai Sanjoy Majumder, Senior Consultant, Bangalore Sachin Joshi, Consultant, Mumbai Himanshu Jain, Senior Consultant, Delhi Rashi Agarwal, Senior Consultant, Delhi Sameer Shukla Consultant, Mumbai

management. While Basel II has been implemented for regulatory compliance, banks are gradually learning about the benefits of good risk management. Tools such as risk-based pricing have not been yet implemented in India, but banks are looking at enterprise-wide risk management initiatives to revamp their risk management practices.



The analysis shows capital efficiency and an all-pervasive risk-based culture will take centre-stage in the medium term. To distinguish the stronger banks, capital adequacy levels of capital under tier-1 and tier-2 have been considered as the parameters under risk.



A risk-based index is introduced which measures how much a bank's earnings can decline until book value becomes negative. BW-PwC has also carried out a risk-quotient survey to understand the banks' general state of preparedness for managing risks through its systems, processes and management culture, which has been separately analysed (see The Chance Arbitrage).



Finally, given the global market uncertainties, rising inflation and interest rates, banks in India need to take a holistic view of their business strategy, manage its operations effectively through enablers of better processes, technology and risk management systems, that would lead to a balanced, but profitable growth with a clearer focus on financial inclusion.