Monday, June 11, 2012

A Comparative Evaluation of SBI and ICICI Bank

Banking is one of the most prominent sectors for any economy. The all sectors of economy are directly dependent on the banking sectors; in fact the direction of the economy of the country is exceedingly correlated to banking system of that country. Banking is the only sector that operates under highly sophisticated rules and regulations. Indian banking history, Imperial bank of India (now renamed as State Bank of India) had played crucial role in Indian economy since inception. The Government of India had nationalized banks in 1969 and 1980 to increase regulation and control over the supplies of money and its benefits to public. The opening of economy in 1991 induced many private players. ICICI was one among the subsidiary of development bank was leader for private banks. Many private players and MNC banks has started operation in India. But still now, SBI and its associates holds nearly one fifth of the market share.
This project is titled as “A Comparative Evaluation of SBI and ICICI Bank” has been carried out to make comparison of Public sector banks and Private sector banks, by taking SBI as representative for PSU and ICICI bank for the Private sector banks. In the quest for quality contrast, few tools have been employed. Horizontal analysis elucidates how much progression has happened as to the base year. Vertical analysis demonstrates the critical alteration in the pattern of sources of fund, uses of fund and components of income statement. Some major parameters that are commonly used to rank banking are also applied in this study. The indices of both banks, Bankex and Sensex are analyzed to corroborate the risk attached to securities, yields that generates and interrelationship with Bankex and Sensex.
This project will attempt to evaluate short terms profitability and financial strength in long term for SBI, and seek to explore the core competencies of SBI bank. SBI bank is examined with ICICI in various parameters, such as growth aspects, size of bank, performance and efficiency, and indices from BSE.
SBI has outstanding control over its prime cost (Interest expenditure). ICICI has profound control over its operating expenditure. Deposits and loans/advances have grown tremendously of SBI, portrayed as reliable and safest bank to bank upon. ICICI bank’s scrip was relatively consistent than SBI for last 5 years. Both banks are highly positive correlated with Bankex (Sector Index) and Sensex also. SBI and Bankex is extremely correlated i.e. 0.95 and ICICI is well correlated with Sensex indices. Even Bankex and Sensex share exceedingly positive relation (0.94).
State Bank of India should have better controls on its operating expenditures. The employee cost has increased drastically in the year of 2010 (Rs 3000 Crore) and 2011 (Rs 1700 Crore) respectively. Especially, SBI selling and administrative expenses have Rs 4300 Crore in the year 2011, where as there were only 10000 Crore hike in interest income. All other cost other than interest cost is has grown excessively.
SBI has been catalyst on managing fund at the cheapest cost, but not having grip on other cost. SBI is also advised to work on Current asset management.
State Bank of India is mammoth in size, numbers of branches and ATMs, best in managing sources of capital; balance sheet depicts the better future ahead. SBI should practice cost benefits analysis for operating expenses.

Title of the Study
 “A Comparative Evaluation of State Bank of India and ICICI Bank”
Statement of the Problem
State Bank of India and ICICI are two leading banks in terms of various parameter and represents PSU and Private sector banking respectively. SBI has standing history of 200 plus years, all time leader in customers’ number or size of the business and also most reliable banker. ICICI Bank, the consequence of opening of economy is has marked with innovation, customer friendly, technological leader and efficient.
SBI total business (12 Lakh Crore) is three times larger than ICICI bank (4 Lakh Crore), but when comes to bottom line it’s not more than 1.8 times (on average of 5 years). When profitability and efficiency comes to evaluation, SBI lacks distant behind. Is it just because of form of organization or financial decisions?
Objectives of the Study
1.       To overlook banking industry in Indian scenario.
2.       To understand the two banking giant SBI and ICICI and their core competencies.
3.       To evaluate the profitability and the financial strength of the SBI and ICICI Bank.
4.       To examine a comparative analysis of the performance of SBI and ICICI Bank.
5.       To examine SBI and ICICI with various parameters.
6.       To seek to establish relationship between SBI indices, ICICI indices with Bankex and Sensex.

Research design:
The descriptive form of research method is adopted for study. The major purpose of descriptive research is description of state of affairs of the institution as it exists at present. The nature and characteristics of the financial statements of State Bank of India have been described in this study and compared with ICICI bank whenever required.
Nature of data:
The data required for the study has been collected from secondary source .The relevant information were taken from annual reports, journals, text books and web pages.

Methods of data collection:
This study is based on the annual report of State Bank of India and ICICI bank. Hence the information related to, profitability, short term and long term solvency and turnover were very much required for attaining the objectives of the present study. Bankex, SBI index and ICICI index has taken from BSE.
Tools applied:
To have a meaningful analysis and interpretation of various data collected, the following tools were made for this study.
  1. Common-size statement (Vertical Analysis)
Vertical analysis is applied only for Balance sheet of SBI and ICICI bank. Firstly, both banks balance sheet has studied separately. While studying individual balance sheet, each items has studied over a period of time.
Secondly, both banks weight age of all vital component taken together to get meaningful comparisons. A single comparative table has been constructed. Then, both banks are compared year wise. All decisive items have given due focused in comparison process.
  1. Trend analysis (Horizontal Analysis)
Horizontal analysis is study of some phenomenon in depth. In this study, five years (2007-2011) financial statements are taken into consideration. Both income statements and balance sheet are analyzed separately.
Initially, all financial statements are rearranged in requisite pattern. Income statements of both banks are studied separately. Base year is taken as 2007 and given weight age of 100. Other years are indexed with the base year.
After, study of individual income statement, a comparative single table is constructed by keeping indexed figure on year- horizontal and components/items in vertical table. Comparison are made year wise with due considerations of all essential items.
The same procedure is followed for balance sheet analysis.

  1. Comparative Table
Comparative table are constructed using vertical and horizontal analysis. The weight age of vertical analysis and index of horizontal analysis are put into comparative table. These tables are thoroughly studied year wise.

  1. Some Critical parameters
The basic requirement of the study is to comparing between two banks. In this work, eleven parameters have been used to contrast SBI, the largest bank of India and ICICI bank, one of the top private and innovative banks. The followings are these parameters;
a)      Growth in deposits:
b)      Growth in loans and advances:
c)      Growth in other income:
d)     Total business:
e)      Size of the balance sheet:
f)       Interest expended over interest earned (Net Interest Margin):
g)      Other income to Total income:
h)      Net Profit Margin:
i)        Return on Stockholder Funds or Net Worth:
j)        Current Ratio (Working capital management):
k)      BSE indices (SBI, ICICI and Bankex over 5 years):

Assumptions made for the study:
1.      The income statement and balance sheet has been rearranged to satiate requirements.
2.      Both banks five years (2007-2011) financial statements are collected from for study purpose.
3.      Year 2007 is considered base year for the study and Horizontal analysis, and in case of other parameter growth are computed on last year not base year to arrive growth.
4.      Compounded growth refers to the growth between current and starting point at compound rate.
5.      Others liabilities are considered as current liabilities.
6.      Current assets include other assets, cash & balance with RBI and Balance with Banks, Money at Call.
7.      Capital work in progress is part of total fixed assets.
8.      Total business in the bank means deposits and loans/advances disbursed by bank.

Limitations of the Study
1.      The analysis was made with the help of the secondary data collected from the company. It is only a study of interim reports of two banks.
2.      Financial analysis is based upon only monetary information and non-monetary factors are ignored. 
3.      This project has relied on historical data of last five years. The history may not replicate as it is future.
  1. The project carries all the limitations of its tools (Ratio Analysis, Common-Size Statement, Comparative Table and Trend Analysis).

A.    The following are the finding of the Study;
1.      The private sector banks have more control over their operating expenses rather than Public sector banks. They vary according to income (interest income and other income). ICICI has unable to enhance their income in year 2010 and 2011; they have drastically trimmed their operating expenses. Whereas SBI operating expenses are growing up every year, and sometimes operating expenses growth rate is higher than growth rate of income. (Table No. 1, 2 and 3)
2.      SBI is more reliable and consistent than ICICI. The deposits has grown more than double in case of SBI and ICICI deposits has reduced over period of times. In 2009, 2010 and 2011 the deposits made are even lesser than the deposits made in year 2007 and 2008. This may be due to recession, global meltdown and collapse of financial institutions in the west. ICICI has more exposures to international market than SBI. Eventually, the deposits pattern will more and less depicts reliability, confidence on bank and customer preference. (Table No. 4,5 and 6)
3.      The deposits and borrowing pattern is complementary in nature, and bear inversely relationship. When there is no or less growth on deposits, ICICI borrowings starts towering. Both of them constitute together 80-85% sources of fund. When one decreased, another must increased to have smooth running of bank.
4.      The loans/advances and investments also behaves complementary and somewhat negative relationship. When there are fewer demands of loans and advances, banks have to go for investment on other opportunities.
5.      The investments on fixed assets are meager. SBI average investments over five year is 0.41% and ICICI average investments on fixed assets is 1.04%.
6.      SBI major sources of fund is deposits (average 76.19%), current liabilities as second major sources (9.97%) and borrowing as minor source (average 7.86%). Whereas ICICI major sources of fund is deposits (average 59.34%), borrowings as second vital sources (average 20.39%), Equity as third (11.96%) and current liabilities as fourth one (just 8.31%).
From the above sources of fund, we can see that SBI is leveraging zero cost funds (current liabilities) as major sources. Deposits, generally are low costlier than the borrowings. SBI major costs are far cheaper than ICICI. Thus carry capacity to absorb other costs.
7.       The State Bank of India major uses of funds is loans and advances (average 59.08%), second is investments (average 26.50%) and current assets (average 13.99%). Same to ICICI, which uses the money for loans and advances (average 54.79%), investments (average 29.59%) and current assets (average 14.57%).
Again, the investment in current assets gives no or negligible yields. The investments in advances and loans are less risky and stable returns than investing on investments. Both banks having almost equal current assets, but SBI is better on loans and advances than ICICI.
8.      The growth of total business of SBI is miles ahead than growth of ICICI bank. The compounded growth rate of SBI is 21.61% and ICICI is mere 0.90%. SBI has Rs 772857.58 Crore total business in 2007 and reached Rs 1690652.26 Crore, whereas ICICI total business is stagnated around Rs 4.5 Lakh Crore.
9.      SBI has competitive advantage over Net Interest Margin or Interest expended over Interest earned over all 5 years. The obvious reasons are sources of fund’s composition and uses of fund’s composition.
10.  When it comes to Net profit, ICICI has relatively ahead of better results. This is quite contrast, ICICI is lacking far behind on total business growth, and bear higher costlier funds than SBI, but still managed relative well profit than SBI. ICICI has muscular control over its operating expenses is one prime reason for it. ICICI has reduced provisions and contingences (less Non Performing Assets).
11.  SBI core competencies are its huge network of branches, ATM outlets and reliability and trust instilled to Indian customers. The kinds of growth of deposits and advances in recession period solely specify its image to the public.
12.  ICICI seems better controller of controllable. Even though, there growth on deposits and advances was stagnated. ICICI has controlled all controllable aspects such as employee cost, miscellaneous expenditures, selling and administrative expenditures etc and managed no impairment on profit.
13.  After studying five years indices of both banks, it is ascertained that the investments on ICICI has relative stability than of SBI scrip.
14.  Both banks are highly positive correlated with Bankex (Sector Index) and Sensex also. SBI and Bankex is extremely correlated i.e. 0.95 and ICICI is well correlated with Sensex indices. Even Bankex and Sensex shares exceedingly positive relation (0.94).

B.     The following are some suggestions for State Bank of India;
1.      State Bank of India should have better controls on its operating expenditures. The employee cost has increased drastically in the year of 2010 (Rs 3000 Crore) and 2011 (Rs 1700 Crore) respectively. Especially, SBI selling and administrative expenses have Rs 4300 Crore in the year 2011, where as there were only 10000 Crore hike in interest income. All other cost other than interest cost is has grown excessively.
SBI has been catalyst on managing fund at the cheapest cost, but not having grip on other cost. 
2.      SBI others income has not performing with par to other parameters. There is trivial plunge in 2010. Though there was some expand in investment but yields are diminishing. SBI require to oversee over its sources of others income like fees charged, fine imposed and interest or yields it generates from investment.
3.      SBI seemed successful on managing and crafting current liabilities as major sources of capital all the years. No doubts that current liabilities are non cost or negligible cost for fund. But when it comes to current assets, SBI lacks in minimizing the non income generating assets. SBI should manage its current assets with par to the industry.
4.      SBI has on an average 0.41% fixed assets on total asset. ICICI having more than one percent. SBI should enhance physical evidences to provide better services.
5.      SBI should practice cost benefits analysis for various component of operating expenditure and miscellaneous expenses. Are these costs or expenses generating or adding business (generating demand for loans and advances or motivating customers for excess deposits or new customer acquisitions) or not. SBI should examine carefully and budget the expenditure appropriately.

Banking is crucial one of the most prominent and critical sector of the economy. Despite of stiff regulations and control from the central government, banking has been growing excessively than overall economy. Banking sector has always contributed well to stretch upward growth of economy.
State Bank of India is leading Public sector bank with outstanding history. It has always played central role of Indian banking system now and then. After opening up economy (liberalization, privatization and globalization) in 1991, the government of India allowed private and foreign players to participation in banking sector with limited control. The formation of new private banks and entering of foreign banks has marked improvement on customer focus, technology orientation, customized banking, increased numbers of products and services and more competition. ICICI has been always top one or two in private sector banks and initiated many innovations and improvement in banking scenario in India.
State Bank of India has mammoth size and enormous growth story in recent five years. Whereas ICICI seemed stagnated and negligible growth, may be due to adverse impact of global financial crisis in late 2000s’. SBI has outstanding competitive edge on cost of fund, and ICICI has solid control over controllable expenses such as operating expenses. The archive indices from BSE shown there is significant positive correlation between banks indices, with both Bankex indices and Sensex indices.
There is huge cry on falling rupee (US$ 1 = Rs 57), slow or adverse FII, the unpredictable moves of government (amendment of tax laws to increase tax collection), the fuel price hike, corruption and black money issues, fear of breaking political alliances (in both UPA and NDA). All these uncertainties have significant bearing in economy and to banking sector indirectly. Banks has witnesses illustrious good and worst happening in past and has to witness in future also.

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