Module-5

Analyzing the Bank Performance

Financial health of bank
 Financial Statement of Bank

• Section 29 of Banking Regulations Act 1949

lays down the provisions regarding Accounts
and Balance Sheet of a banking company.

• The profit and loss account is shown in ‘Form

B’ of Schedule III of this Act.
 Bank Assets and Liabilities
• Assets
– Cash and Balance with RBI
– Balance with Bank
– Investment
– Loans and Advances
– Fixed Assets
– Other assets

• Liabilities
– Share Capital
– Reserve and Surplus
– Deposits
– Borrowings
– Other liabilities and Provisions

• Bank Assets = Bank Liabilities + Bank Capital

 Profit and Loss Account of Banks
• Schedule 13: Interest Earned
• Schedule 14: Other Incomes
• Schedule 15: Interest Expended
• Schedule 16: Operating Expenses
 Key Parameters
• Gross non-performing assets (NPAs)
• Net NPAs
• Provisioning coverage ratio (PCR) 
• Capital Adequacy Ratio (CAR)
• Current Account and Current Saving (CASA ratio)
• Credit-Deposit Ratio (CD Ratio)
• Net Interest Margin (NIM)
• ​Return on assets (ROA)
 3-Provisioning Coverage Ratio (PCR)
• Provisioning Coverage Ratio (PCR) is essentially the
ratio of provisioning to gross non-performing assets
and indicates the extent of funds a bank has kept
aside to cover loan losses.

• A high PCR ratio (ideally above 70%) means most

asset quality issues have been taken care of and the
bank is not vulnerable.

• For example, if the provisioning coverage ratio is 70%

for a particular category of bad loans, banks have to set
aside funds equivalent to 70% those bad assets out of
their profits.  
 4- Capital Adequacy Ratio
• The capital adequacy ratio (CAR) is a measurement
of a bank's available capital expressed as a percentage
of a bank's risk-weighted credit exposures. The
capital adequacy ratio, also known as capital-to-risk
weighted assets ratio (CRAR)
• It is used to protect depositors and promote the
stability and efficiency of financial systems around
the world. 

X 100
 5-CASA Ratio
• Current Account Saving Account
• CASA Ratio (%) = (CASA Deposits/Total
Deposits).
• It is the proportion of current account and savings
account deposits in the total deposits of the bank.
• If a large part of a bank’s deposits comes from
these funds, it means that the bank is getting those
funds at a relative lower cost.
• Banks with less Cost of liabilities are
preferable.
• Cost of liabilities- Interest on deposit like savings.
 Example
• Suppose a bank ABC has total deposits as Rs. 50,000
crore and savings account deposits is Rs. 15000 crores
and current account deposits is Rs. 8,000 crores.

• CASA Ratio (%) = (15000+8000)/50000 = 46%

which means 46% of total deposits are contributed by

low-cost CASA deposits.
• Higher CASA ratio leads to higher net interest income.
• CASA deposits are cheaper source of raising funds as
compared to certificate of deposits, term deposits
which relatively requires higher interest to be paid.
 6- Return on assets (ROA)
• It shows how profitable a bank’s assets are in
generating revenue.
• ROA of above 1.3% is considered good and
anything beyond 1.6% is excellent.
• Its important to look the quality of net profit
income.
• It indicates how well the assets of a bank are
utilized in generating net income.
 7-Net interest margin (NIM)
• This is the difference between interest earned by a bank on
loans and the interest it pays on deposits or certificate of
deposit (CD).

• NIM is one indicator of a bank's profitability and growth.

• This indicates as to how effectively the banks deploy their funds

to generate income from credit and investment operations.

• NIM will be high for banks when:- Low-cost deposits or high

lending rates.
• Low NIM and high NPA is a bad combination.
• In general NIM hovers between 2.75% to 4.25.
• Well managed banks generates a NIM of 4% and above.

• NIM = Net Interest Income (Interest Income- Interest Income)/

 8-Credit-deposit ratio
• Also know as LDR (Loan to Lending Ratio)
• This shows how much a bank lends out of its
deposits or how much of its core funds are used
for lending.
• Low CD Ratio indicates, banks are not making
full use of its resources.

• Formula:- Total Loan/Total deposit *100.

 Profitability of Banks
• Profitability means the ability to make profit from the business
activities of an organization. The amount of profit earned
measures the efficiency of a business.

Key Profitability Ratios of Banks

• Net Interest margin (NIM)
• Return on assets (ROA)
• Return on equity (ROE).
Merger & Acquisition
 CAMELS
CAMELS is a ratio-based model used to evaluate the performance of
banks with the help of different criteria such as

C - Capital Adequacy.
A - Assets Quality.
M-Management Efficiency.
E -Earning Quality.
L- Liquidity.
S- Sensitivity

CAMELS is a ratio-based model for evaluating the performance of

banks and it is a model for ranking/rating of the banks.
 CAMELS…cont.
CAMELS rating is a supervisory rating system
originally developed in the U.S. to classify
a bank's overall condition and used to classify
the nation’s 8,500 banks.

Reserve Bank of India have been provided

CAMELS framework for evaluating the
performance of banks in India.
 CAPITAL ADEQUACY
• Capital Adequacy is the capital expected to maintain along with banks. It is
important for a bank to maintain depositors’ confidence and preventing the
bank from going bankrupt.
• Capital Adequacy reflects the overall financial condition of the banks and
also the ability of management to meet the need for additional capital.
• It also indicates whether the bank has enough capital to absorb unexpected
losses.
• The ratios used to measure the capital adequacy performance are
 Capital Adequacy Ratio
 Debt Equity Ratio
 Advance to Assets Ratio
 Management efficiency

Management efficiency is the ability of board of directors and

management to generate the maximum revenue from available
assets and to control bank costs. Management efficiency can
be analyzed by using the following ratios .

 Total Advances to Total Deposits.

 Business per Employee.
 Profit per Employee.
 Return on Equity
 Earning quality
• Earning quality reflects quality of a bank’s profitability and
its ability to earn consistently. It basically determines the
profitability of the bank. It also explains the sustainability
and growth in earnings in the future. The ratios used to find
the earning quality of banks in this study are
• Interest Income to Total Income.
• Non-Interest Income to Total Income
• Net Interest Margin.
• Return on Assets
• Operating Profits to Average Working Funds.
 Liquidity
• Liquidity  measures the ability of banks in
converting assets to cash. liquidity is a crucial
aspect which represents its ability to meet its financial
obligations. Liquidity position of bank can be
assessed by analyzing the following ratios.
SLR
 Liquid Assets to Total Assets.
 Liquid Assets to Demand Deposits.
 Liquid Assets to Total Deposits.
 Sensitivity
• Sensitivity is the last category and measures
an institution’s sensitivity to market risks.
• For example, assessment can be made on
energy sector lending, medical lending, and
agricultural lending.
• Sensitivity reflects the degree to which
earnings are affected by interest rates,
exchange rates, and commodity prices.
• It can be expressed by Beta.
Beta Formula