Mirror, mirror on the wall, which were the best banks of them all in 2013-14?
The short answer: Axis Bank, Citibank, City Union Bank, ICICI Bank, Standard Chartered Bank, HSBC Bank, IndusInd Bank, Kotak Mahindra Bank, HDFC Bank and Tamilnad Mercantile Bank. These were the top 10 banks assessed in terms of performance across 31 parameters by Firstpost based on data released by the Reserve Bank of India (Statistical Tables Relating to Banks in India, 2013-14) on 29 December.Among the best. Reuters
Axis Bank, whose shares have been on fire for the last year, was the topper, but the top 10 list has few surprises barring one. While the mix of private and foreign banks comprises the usual suspects, the joker-in-the-pack is City Union Bank (CUB), which came in at No 3. It appears to have benefited from its low base for growth and strong performance on many of the 31 parameters analysed.
CUB was the topper on a key ratio – return on advances – and overall it came in the top 10 in 13 of the 31 parameters analysed. With a market value of Rs 5,700 crore (31 December 2014), CUB’s share is trading at 2.8 times book value – which shows that the market regards its performance as good. So its ranking was no fluke (Click here to see the summary of the overall rankings)
Citibank has always been among the top performers in most bank ranking studies, and so has been the case with ICICI Bank, HDFC Bank, Kotak Mahindra Bank, Standard Chartered and HSBC. IndusInd Bank, under the stewardship of Romesh Sobti, has gone from strength to strength, and has now achieved market-darling status, with a valuation of Rs 42,500 crore and a price-to-book ratio of a hefty 4.7 – ahead of Axis Bank’s 3.1. HDFC Bank, the bank which sets the pace for private banking, gets a book value multiple of 5.3 at current market prices.
A word on the methodology is important at this stage. How did we do this study? We first eliminated very small banks from the list, for which we adopted a minimum deposit base of Rs 10,000 crore as the cutoff. This brought the field down from 90 to 54 banks – Indian, both private and public sector, and foreign banks.
As in many other performance evaluation projects, we adopted a simple technique of ranking banks from No 1 to No 54 on each parameter. Banks with the best performance were ranked 1,2,3 etc, in their order of performance, with 54 being the worst performer.
Once each bank was ranked on all 31 parameters, the ranks of banks on all parameters were added up. This method gives us this conclusion: banks with the lowest composite score would be the best, since only banks with high ranks on many parameters will score low on the composite score.
A State Bank subsidiary, the State Bank of Bikaner and Jaipur, came in at a respectable 18, and among big banks, Bank of Baroda was No 20. The State Bank of India itself came in at No 30 – a rather indifferent performance given its size and scale.
Weak public and private sector banks made up the rear – with Central Bank of India, Vijaya Bank, Catholic Syrian Bank, Ratnakar Bank, Punjab & Sind Bank, and Dhanlaxmi Bank occupying ranks 48-54. Catholic Syrian Bank and Dhanlaxmi Bank are thus ripe candidates for takeover or merger at some point.
Another key aspect of the ranking methodology was the creation of two buckets for assessing performance. Parameters where a high score or ratio indicated good or positive performance were ranked in a descending order: that is, the banks with the best ratios were ranked from 1-54, with 1 being the best and 54 the worst.
But on parameters where the best or highest ratios indicated bad performance, the ranking was done in reverse order: those with high ratios were ranked 54, 53, 52, etc, and those with the lowest one being 1,2,3, etc.
Example: A bank with high demand deposits (current and savings accounts, or CASA ) obviously has a low and stable base of resources for lending. And so high CASA banks were ranked in descending order from 1 to 54. But it is not good for banks to have a high proportion of bad loans in the portfolio; thus banks with high NPA ratios were ranked in the reverse order – from 54 to 1, with 1 being the bank with the lowest bad loan ratios.
Broadly speaking, the parameters ranked in descending order (1 to 54) were the following: Credit-deposit ratio, investment-deposit ratio, ratio of demand deposits to total liabilities, ratio of priority sector advances to total advances, ratio of secured advances to total, ratio of interest income to total assets, ratio of net interest income to total assets, ratio of non-interest income to total assets, ratio of operating profits to total assets, return on assets, return on equity, return on advances, return on investments, return on advances adjusted to cost of funds, return on investments adjusted to cost of funds, business per employee, profits per employee, and all three capital adequacy ratios (total, tier-1 and tier-2).
The parameters ranked in a reverse order (54 to 1) were cash-deposit ratio, ratio of term loans to total advances, ratio of investments in non-approved securities to total investments, ratio of intermediation cost to total assets, ratio of wage bills to intermediation cost, ratio of wage bills to total expenses, ratio of wage bills to total income, cost of deposits, cost of borrowings, cost of funds, and net non-performing assets as a percentage of net advances.
Each parameter is as defined by the Reserve Bank of India, and so are the figures used for ranking. Our contribution is only the ranking methodology, which, however, is not unique to us. It is widely used in such ranking projects.
(Data generated from RBI numbers by Kishor Kadam; Ranking methodology as explained in story above. The full details of rankings on each parameter for all 54 banks can be viewed here)
