EXECUTIVE
SUMMARY
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.
Methodology
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.
- 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.
- 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.
- 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.
- 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 moneycontrol.com 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.
- 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.
Conclusion:
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.
