Study on financial performance analysis of the south indian bank LTD
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Date
2017
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College of Co-operation Banking and Management, Vellanikkara
Abstract
The present chapter deals with analysis of data and interpretation of the results obtained for the following objectives
1. To study the financial performance of the South Indian Bank Ltd.
2. To analyze the financial changes over a period of five years.
5.1 Financial performance of the South Indian Bank Ltd.
Financial performance of the SIB has been measured through mainly three important ratios
1. Efficiency in mobilization of funds
2. Efficiency in deployment of funds
3. Efficiency in operations of the bank
5.1.1 Efficiency in mobilization of funds of the SIB Ltd
1. The table 4.1 had showed an increase in the owned fund to working capital ratio from 2012-2013 to 2016-2017(from 6.19% to 6.65%). The increase in the owned fund in the working capital was good for the bank. Since the bank‟s owned funds are risk free assets. But still the owned fund occupied only below 10% of the working capital.
2. The ratio of borrowed fund to working capital showed a decreasing trend. The ratio fall from 93.94% in the year 2012-2013 to 93.51% in 2016-2017. As per the table, bank‟s borrowings constitute over 90% of the working capital. This clearly showed that the bank fully depends on the external funds for performing its lending function. But the fall in the ratio in the recent year showed that the bank was trying to minimize the borrowings in the working capital so that expenses can be avoided.
3. Deposit to working capital ratio indicated that the bank uses over 90% of its deposits in the working capital. It means the bank was efficient in channelizing the funds. But since the major portion of the working fund was constituted by the deposits in the bank the bank has to expend interest upon such deposits. This might affect the profitability of the bank.
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4. Deposits to borrowed fund ratio constitute over 90% indicating that the SIB was mainly depends upon its deposits for lending purposes. It can be assured that the bank mobilized its funds through deposits and enjoys freedom from the lending agencies.
5. Type of deposits to total deposits ratio has revealed that the term deposits occupied the major portion of the total deposits (over 75%). This also indicated that the bank has to spend interest on such term deposits. Saving deposit to total deposits showed an increasing trend. The ratio of savings deposit to total deposits increased from 15.10% in 2012-2013 to 19.65% in the year 2016-2017. Current deposit constitutes only a small portion of the total deposits (below 5%).
5.1.2 Efficiency in deployment of funds
1. The credit to deposit ratio revealed that the bank was able to convert more than 70 percentages of its deposits into credit during the five years. The year 2013-2014 showed the highest ratio (76.28%) and 2016-2017 showed the lowest ratio (70.16%) among the five years. A declining trend in the credit deposit ratio was not a good sign.
2. Credit to working capital ratio has shown a decreasing trend (67.69 % in 2013-2014 and 63.72 % in 2016-2017). If the deployment of the credit was low it will affect the interest earning capacity of the bank which will in turn affect the profit. This revealed that the bank has to increase the amount of loan disbursed to increase the interest income.
3. The credit to owned fund ratio was showing a fluctuating trend over the years. The ratio was very low (957.37 %) in the year 2016-2017 and high (1075.69 %) in the year 2013-2014. The credit to owned fund ratio measured the capacity of the bank to convert the owned fund to credit. The credit to owned fund showed a fluctuating trend may be because of the fact that the credit was generated out of the deposits of the bank majorly.
4. Credit to borrowed fund ratio revealed that the bank has never used 100% of its borrowed fund to make credit during the study period. Around 70% of borrowed fund were disbursed as credit. The highest ratio recorded during the year 2013-2014 (72.13%). The table also signified that the bank should try to make full utilization of the borrowed funds by enhancing its loans and advances and by creating new areas of credit.
5. Investment to working capital ratio revealed that the investment to working capital ratio was increasing from 2012-2013 to 2014-2015. It indicated that the bank was using its
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fund to invest in securities and other type of investment. From 2014-2015 to 2015-2016 showed decrease in the investment to working capital ratio. This showed that the bank was withdrawing its investment in securities and deploying more loans and advances. This means the bank utilized the money more in the working capital.
6. Type of loans to total loans ratio clearly identified that the short term loans constitute major portion of the total loans put forth by the bank. The long term loans to total loan ratio showed a steady increase over the years. The increase in the long term loans was good for the bank. Interest can be earned upon the long term loans. Which in turn will results in the increase in the profitability of the bank.
5.1.3 Efficiency in operation of the bank
1. Interest paid to interest received ratio showed that the year 2014-2015 the bank‟s profitability position might have been weak due to increase in the interest expended on the deposits. From 2014-2015 to 2016-2017 there was a steady decline in the ratio. During the first half of the study period the bank might not have achieved a favorable position with regard to interest income. The second half of the study period showed a decreasing trend which was good for the bank.
2. Interest paid to borrowed fund ratio showed that the highest ratio was recorded on 2014-2015 (7.23%). It means that the bank had to spend quite some amount on the borrowed fund. The banks interest expended for that period was high. From 2014-2015 to 2016-2017 the interest spend on borrowed fund was showings a steady decrease. The year 2016-2017 has recorded the lowest interest to borrowed fund ratio (6.12%). This indicated that the bank‟s profitability was increasing since the amount spends as interest was decreasing. A high ratio will affect the profitability of the bank adversely.
3. The net profit to working capital ratio indicated that the highest ratio was recorded in the year 2012-2013 (1.03%). From 2014-2015 onwards there was only a slight change in the profitability of the bank. The lowest ratio was recorded in the year 2014-2015(0.53%). The low ratio was not a sign of healthy banking operation.
4. The spread ratio kept on decreasing from 2012-2013 to 2014-2015(1.65 % to 1.49%). The low interest ratio was due to low level net interest income obtained by the bank. The decrease in spread ratio was unfavorable as far as the profitability was concerned. So the
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bank has to take appropriate measures to increase the net interest income in order to raise the spread level.
5. The burden ratio was falling from 2012-2013 to 2016-2017 (0.55% to 0.40 %). The sudden fall in the ratio in the year 2016-2017 was good for the bank. The decrease in the burden ratio was favorable for the bank in profitability aspect. In order to improve the profitability of the bank, it should control the non-interest expenditure and at the same time should try to increase income from services such as commission and brokerage.
6. The profitability ratio was lower for the two years (2014-2015 to 2015-2016). The highest ratio recorded in the year 2012-2013. The higher spread ratio resulted in the higher profitability ratio. The bank should try to maximize its spread ratio over burden ratio in order to raise the profitability position.
5.2 To analyze the financial changes over a period of five years
1. From the 2011-2012 to 2012-2013 comparative balance sheet it was clearly seen that the deposits has increased by 776177 lakhs (21.26%). The capital has been increased by 2048 lakhs pointing out the increase in the owners fund in the working capital of the bank. The reserves and surplus has increased by 39.70 % compared to the previous year. The total liability of the bank and total assets of the bank had increased by 942498 (23.34%). The investment has been increased by 33.23% compared to the previous year.
2. The comparative balance sheet from the period 2012-2013 to 2013-2014 clearly indicated that the capital has increased by only 54 lakhs (0.40%). It showed that only a negligible amount had been invested by the owners of the bank during the year. The employee stock option outstanding had decreased by 31 lakhs (11.87%). This was a good sign for the bank; it indicated that the inflow of fund had happened that year. The borrowings of the bank increased to 112.58% (144623 lakhs). This was not a good sign for the performance of the bank. Fixed assets have increased by 4.05 % (1608 lakhs) and investment has increased by 14.59% (182831 lakhs).
3. The period of 2013-2014 to 2014-2015 the borrowing has decreased by 49831 lakhs (18.24%). The decrease in the borrowings was a good sign for the bank. The fixed assets had increased by 16.21%. The investment had decreased by 23564 lakhs. This was not good for the bank. Since commission can be received on such investments. The other
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liabilities and provisions have been decreased by 1418 lakhs (1.10%). Only 7.51 % of total liability has increased during the years compared to the previous period 2012-2013 to 2013-2014 (10.42 %).
4. From the table 4.21, the period from 2014-2015 to 2015-2016 it has been identified that only 1 lakh has been contributed as capital. The owners fund was really low during that year. The Employee stock option outstanding has increased by 53.36 % which showed a bad sign for the bank. This was the highest among the five years. The borrowings and deposits have increased to 17.13 % and 7.33% respectively. The other liabilities and provision has decreased by 8596 lakhs (6.23%). The decrease in the liability means more funds might have been flowed into the bank. This indicated a good financial position for the bank.
5. In the period 2015-2016 to 2016-2017 the capital of the bank had increased by 4525 lakhs (33.51%). It indicated that the more fund were available to the bank as working capital. The employee stock option outstanding has decreased by 17.26 %( 63 lakhs). The borrowings had decreased by 65720 lakhs. It means that the bank were capable of depending on its own resources for operations of the bank during that period. The total liability had increased by 17.07 % (1083727 lakhs), while in the previous period it was only 7.37 %.
6. The trend analysis showed that other assets of the bank had continuously increased. It recorded more than 450% for the period 2015-2016 to 2016-2017. This reflected poor cash management.
7. The balances with the banks showed a fluctuating trend through trend analysis. This means that the facility of money at call and short notice was limited for the bank. So in case any emergency rised the bank may not be able to generate enough cash in order to overcome the situation.
8. The deposits were showing an increasing trend in the trend analysis indicating that the bank‟s membership was increasing and more funds were made available for effective channelization. It also indicated that the bank focused mainly on the deposits rather than its own fund.
9. The common size balance sheet for the year 2012-2013 showed that deposits constituted major part of the total liability (88.88%). During the year the advances stand at 63.89% of
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the total assets. And investment contributed about 25% of the total assets. The bank has to channelize deposits more into as advances. So that expenses can be reduced.
10. During the year 2013-2014 the common size balance sheet showed that deposits constituted 86.36% of the total liabilities. The reserves and surplus and borrowings constituted 5.88% and 4.96% respectively of the total assets. The advances had increased to 65.88% compared to the 63.89% in the previous year. The fixed assets constituted only 0.74% indicating that the bank was channelizing the funds into more productive resources.
11. During the year 2014-2015 The deposits had constituted 87.81% of the total assets against 86.36% of total assets in the previous year (2013-2014). The cash and balances with the RBI had constituted 4.13% of the total assets compared to the 4% in the previous year. It indicated that the bank‟s cash reserves were increasing. The investment of the bank has decreased to 23.82% of the total assets compared to the previous year which constituted 26.10%.
12. The year 2015-2016 the borrowings had increased to 4.11% compared to the 3.77% in the previous year. This indicated that the bank had to depend on external fund in order to carry forward the banking operations in that year.
13. The capital and reserves of the bank constituted 0.24% and 6.27% of the total liabilities in the year 2016-2017. Both of these items had increased compared to the previous year‟s contribution. The borrowings of the bank constituted 2.63% against the 4.11% in the previous year. And the other liabilities constituted 1.86% against the 2.03% in the previous year. The decrease in the lower contribution of borrowings in the total liabilities was a good sign for the bank.
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