Management Quality

Management of financial institution is generally evaluated in terms of capital

adequacy, asset quality, earnings and profitability, liquidity and risk sensitivity
ratings. In addition, performance evaluation includes compliance with set norms,
ability to plan and react to changing circumstances, technical competence,
leadership and administrative ability. In effect, management rating is just an
amalgam of performance in the above-mentioned areas.

Sound management is one of the most important factors behind financial

institutions’ performance. Indicators of quality of management, however, are
primarily applicable to individual institutions, and cannot be easily aggregated
across the sector.

Sound management is the key to bank performance but is difficult to measure. It is

primarily a qualitative factor applicable to individual institutions.

Several indicators, however, can jointly serve—as, for instance, efficiency

measures do—as an indicator of management soundness. The ratio of non-interest
expenditures to total assets (MGNT) can be one of the measures to assess the
working of the management. . This variable, which includes a variety of expenses,
such as payroll, workers compensation and training investment, reflects the
management policy stance. It signals the ability of the Board of Directors and
Senior Managers to identify, measure, monitor and control risks associated with
banking, this qualitative measure uses risk management policies and processes as
indicators of sound management.
 1: Profit per Branch

= Net profit/Total no. of branches

This ratio is helpful for evaluating the performance of two banks. Two banks
have same profit but one bank has less no. of branches as compare to the other
bank, so it equally important to see the profit per branch which shows the
management soundness for the bank. Higher ratio indicates a quality of the
bank’s management.

2010 2009 2008 2007

Net Profit 120633 76860 97474 75014
No. of 2287 2260 2155 2061
Branches
Profit per 52.75 34.01 45.23 36.40
Branch

Profit per Branch

60

52.75
50
45.23
40
36.4
34.01 Profit per Branch
30

20

10

0
2010 2009 2008 2007

Implications :
 2: Total Advances to Total Assets
= Total Advance / Total Assets

This ratio shows that how effectively bank is able to utilized deposits in to
advances. Higher ratios show that bank is lending more from available funds i.e.
deposits. It shows that either bank is aggressive or conservative.

2010 2009 2008 2007

Total Advances 72437.31 59443.4 50312.16 41914
Total Deposits 106055.75 84971.79 71616.38 59544
Total Advances 0.6830 0.6996 0.7025 0.7039
to Total
Deposits

Total Advances to Total Deposits

0.71

0.71
0.7
0.7
0.7 0.7

0.7
Total Advances to Total Deposits
0.69

0.69
0.68
0.68

0.68

0.67
2010 2009 2008 2007

Implications :
 3: Business per Employee
This ratio indicates that on an average how much business is generated by every
employee.

Business per employee = Total Deposits + Total Loans and Advances

No. of Employees

2010 2009 2008 2007

Total Business 178493.06 144415.19 121928.54 101458
Total no. of 20959 20457 20079 20379
Employees
Business per 8.5163 7.0595 6.0724 4.9786
Employee

Business per Employee

9
8.52
8

7 7.06

6 6.07

5 Business per Employee

4.98
4

0
2010 2009 2008 2007

Implications:
 4: Profit per Employee
This ratio indicates the profit contribution by each employee in the bank. Higher
ratio indicates the better performance of the employees in the bank.

= Net Profit / Total no. of Employees

2010 2009 2008 2007

Net Profit (Rs. 12063271 7685981 9747424 7501413
In Crores )
Total no. of 20959 20457 20079 20379
Employees
Profit per 585.738 375.714 485.45 368.10
Employee

Profit per Employee

700

600 585.74

500 485.45

400 Profit per Employee

375.71 368.1

300

200

100

0
2010 2009 2008 2007
 Earning Quality
Earnings and profitability, the prime source of increase in capital base, is examined
with regards to interest rate policies and adequacy of provisioning. In addition, it
also helps to support present and future operations of the institutions. The single
best indicator used to gauge earning is the Return on Assets (ROA), which is net
income after taxes to total asset ratio.

Strong earnings and profitability profile of banks reflects the ability to support
present and future operations. More specifically, this determines the capacity to
absorb losses, finance its expansion, pay dividends to its shareholders, and build up
an adequate level of capital. Being front line of defense against erosion of capital
base from losses, the need for high earnings and profitability can hardly be over
emphasized.

Although different indicators are used to serve the purpose, the best and most
widely used indicator is Return on Assets (ROA).

Compared with most other indicators, trends in profitability can be more difficult
to interpret—for instance, unusually high profitability can reflect excessive risk
taking.

ROA-Return on Assets

An indicator of how profitable a company is relative to its total assets. ROA gives
an idea as to how efficient management is at using its assets to generate earnings.
Calculated by dividing a company's annual earnings by its total assets, ROA is
displayed as a percentage. Sometimes this is referred to as ‘return on investment’.

ROA tells what earnings were generated from invested capital (assets). ROA for
public companies can vary substantially and will be highly dependent on the
industry. This is why when using ROA as a comparative measure, it is best to
compare it against a company's previous ROA numbers or the ROA of a similar
company.

The assets of the company are comprised of both debt and equity. Both of these
types of financing are used to fund the operations of the company. The ROA figure
gives investors an idea of how effectively the company is converting the money it
has to invest into net income. The higher the ROA number, the better, because the
company is earning more money on less investment.
Under Earnings, we calculate following ratios:

1. Operating Profits to Average Working Funds

2. Percentage Growth in Net Profits

3. Spread

4. Net Profit to Average Assets

5. Interest Income to Total Income

6. Non-Interest Income to Total Income

1: Operating Profit to Avg. Working Fund

= Operating Profit / Avg. Total Assets

2010 2009 2008 2007

Operating 2548.55 1901.15 1479.51 1099.91
Profit
Avg. Total
Assets

Implications:

2: Percentage Growth in Profit

=(Current year Profit – Previous year Profit ) * 100/ Previous year Profit

2010 2009 2008 2007 2006

Net Profit 1206.33 768.60 974.74 750.14 706.13
% Growth 56.95 % -21.15 % 29.94% 6.23% 30.33%

% Growth
70.00%
60.00% 56.95%
50.00%
40.00%
30.00% 29.94% % Growth
20.00%
10.00%
6.23%
0.00%
2010 2009 2008 2007
-10.00%
-20.00% -21.15%
-30.00%

Implications :
 3: Spread
= Interest Earned – Interest Paid

This ratio gives the direct picture of banks earning from the interest. Spread is the
difference between the interest received on loan and advances and interest paid
on deposits. Higher ratio shows that bank is effectively using its fund (deposits)
by giving loans and advances.

2010 2009 2008 2007

Interest Earned 8369.20 7364.73 6279.67 4883.62
Interest Paid 5718.72 5206.06 4498.88 3133.12
Spread 2650.48 2158.67 1780.79 1750.50

Spread
3000
2650.48
2500
2158.67
2000
1780.79 1750.5 Spread
1500

1000

500

0
2010 2009 2008 2007

4: Net Profit to Avg. Total Assets

= Net Profit / Avg. Total Assets

This ratio is also called as Return on Assets. This ratio tells that how effectively
bank is using its assets. Higher ratio indicates a better use of assets and vice-a-
versa.
 2010 2009 2008 2007
Net Profit 1206.33 768.60 974.74 750.14
Avg. Total
Assets
Net Profit to
Avg. Total
Assets

Implications :

5: Interest Income to Total Income

= Interest Income / Total Income

This ratio measures the income received from the operations as a percentage of
total income. How much a bank is earning from operation activity.

2010 2009 2008 2007

Interest 8369.20 7364.73 6279.67 4883.86
Income
Total Income 9885.10 8506.65 7135.97 5260.27
Interest 0.8466 0.8658 0.8800 0.9284
Income to
Total Income
 Interest Income to
0.94
0.93
0.92

0.9

0.88 0.88 Interest Income to

0.87
0.86
0.85
0.84

0.82

0.8
2010 2009 2008 2007

Implications :

6: Non Interest Income to Total Income

= Non Interest Income / Total Income

This ratio indicates that how much a bank is earning from its other activities in
the form of fees, commission etc.

2010 2009 2008 2007

Non Interest 1515.90 1141.92 964.76 376.40
Income
Total Income 9885.10 8506.65 7135.97 5260.27
Ratio 0.1534 0.1342 0.1352 0.0716
 Ratio
0.18
0.16
0.15
0.14 0.13 0.14
0.12
Ratio
0.1
0.08
0.07
0.06
0.04
0.02
0
2010 2009 2008 2007