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Analysis of Financial Performance of Private Indian Banks

Feb 3, 2022 8:28 AM 5 min read

You have more independent eyes scrutinizing the decision-making and financial statements of companies. - Steve Odland

The recent surge of financial literacy in India has pushed the BSE Sensex to touch a record high of 60,000 points in September 2021. With Nifty Bank representing the 12 most liquid and large capitalised stocks from the banking sector,  it provides investors and market intermediaries a benchmark that captures the capital market performance of the Indian banking sector

But, is it just a bubble waiting to burst? Or is it the right time to invest? 

In this article, we will be unveiling some of the parameters which can be used to predict the future of the banking sector in India.

Investment and Analysis

Financial performance is an intuitive measure of how well an organisation can use the assets from the primary mode of business to generate future income. Financial statements like balance sheets, income statements, and statements of cash flows are widely used to evaluate firms’ overall financial performance. These indicators are quantifiable metrics used to predict the future financial prospects of a company.

For investors, financial performance creates more certainty and confidence in making both short- and long-term decisions. A good financial performance benefits the shareholders for their investments in terms of rewards, which encourages additional investments and promotes economic growth.

This, in turn, leads to a healthier business and a faster growth rate. It also allows you to outperform and outmanoeuvre competitors who fail in this regard.

In countries where the banking sector significantly contributes to the GDP, 7.7% in the case of India, it becomes necessary to understand and analyse the financial performance in this sector.


The Transition to Privatisation 

Previously, the banking sector in India was dominated by Government banks like the State Bank of India and Punjab National Bank. However, due to the lack of efficiency and upgraded systems, private banks have smoothly taken over the market share of the Indian Banking Sector. 

The latest data shows that HDFC Bank has the highest market capitalisation of ₹7.71Lcr ($103.1bn), followed by ICICI Bank with ₹4.16Lcr ($55.6bn), Kotak Mahindra with ₹3.50Lcr ($46.8bn), Axis Bank with ₹2.19Lcr ($29.3bn) and IndusInd Bank with ₹72,039cr ($9.6bn), indicating an unparalleled hold of private banks on the Indian market.


What Drives the Financial Performance of Commercial Banks?

The financial performance of banks is dependent on more than a few driving forces. These can be broadly categorised into external and internal factors. 

External factors are the ones that cannot be controlled by the bank employees. These factors are either controlled by the Government or are regular windfall gains. These include interest rates set by the Central Bank, inflation and dynamic economic growth. 

Over time, inflation reduces the power of one’s savings due to the hike in the prices of commodities.  When this money is kept in the bank as investments, one earns interest at the rate set by the Government which balances out some of the effects of inflation. 

Higher inflation results in a higher interest rate. An increase in the number of customers of a bank instantly boosts its financial performance for the fiscal year, thus creating a complex relationship among the three parameters. 

With private and foreign banks operating in the Indian economy, it becomes very important for investors to analyse the internal factors of banks, concerning their Return of Assets, Return of Equity, NPAs, Net Interest Margin and Profit Per Employee.


Analysis of Financial Performances

Three of the most accurate and widely used methods to analyse the financial performance in terms of Indian banks are as follows:


Return of assets

The most common measure of a bank's performance is profitability. Profitability is measured using the formulae 

 Return on Assets (ROA) = net profit/total assets

 It shows the ability of the management to acquire deposits at a reasonable cost and invest them in profitable investments. ROA acts as an indicator of how well a company utilises its assets in terms of profitability. A higher rate of ROA indicates a rate of asset efficiency.

In the fiscal year 2019,  HDFC  Bank had the second-highest ROA of  1.69%,  followed by Kotak  Mahindra  Bank with  1.55%. Unsurprisingly, HDFC Bank also topped the list of best returns in Nifty Bank in the same fiscal year with a return of 30.17%.

Punjab National Bank has been facing unrecoverable losses at the moment. With a ROA of negative 1.28% in the year 2019, it is not a surprise that the bank is under tremendous debt.

The National Stock Exchange return of PNB has been down by 71.34% in the past five years. 


Return on Equity

Secondly, Return On Equity (ROE) measures a corporation’s profitability concerning its stockholder’s equity.

In the fiscal year 2021, Bandhan Bank had the highest Return on Equity at 22.9%. Additionally, HDFC Bank had a return of 16.5% followed by Kotak Mahindra Bank (13.7%). Punjab National Bank has been facing unrecoverable losses at the moment. With an ROE of negative 29.540%  in the fiscal year 2018, it recorded a decrease from the previous number of 3.300 % for 2017. Studying the previous data, it is not a surprise that the bank is under tremendous debt.

The National Stock Exchange return of PNB has been down by 71.34% in the past five years.  


Net Interest Margin (NIM)

The third one, NIM helps in the calculation of the profitability of banks and financial institutions. It is calculated by subtracting interest paid from net return on investment.

 A positive NIM indicates that the bank is efficiently investing, whereas a negative NIM implies inefficient investing.

 In the Fiscal year 2021, Bandhan Bank had the highest NIM of 8%, followed by Kotak Mahindra Bank (4.52%) and HDFC Bank (4.10%).


Are These Parameters Dependable?

Financial statements merely act as a lighthouse to show you a path. Even though it is important to do a thorough study of the internal as well as the external factors mentioned, one must realise that these factors cannot be trusted blindly.

Bandhan Bank, the top private bank in terms of all three, ROA, ROE, and Net Interest Margin couldn’t perform that well when it came to Sensex/ Nifty and customer returns in the same fiscal year. Lagging, this bank barely made it to the list of the top five customer-preferred banks.

With a market capitalisation of just ₹49,279cr ($6.5bn), this bank falls in the sixth place amongst the private banks in India.  


Future Hopes  

As India’s banking industry is experiencing major positive changes, it is also undergoing a significant transformation. With the banks investing heavily in digital technologies, they are expected to be at par with the leading global companies.

Recently, India has been witnessing a smooth transition from paper money to digital money transactions using UPI or a digital wallet payment system. Intending to digitise the entire economy, the Government brought in demonetisation in 2016 and introduced the Goods and Services Tax in 2017. With such bold initiatives, the Government of India has clearly expressed its intention to make the banking and financial services sector truly digital.

The Indian banking system is on the march to providing better returns and investment opportunities to the general public. With Nifty Bank maintaining a largely bullish run throughout the fiscal year 2021, it is fair to conclude that the role of banks has been important, but it is going to be even more important in the future.


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