MANAGEMENT OF BANKS CIA 1

FINANCIAL PERFORMANCE ANALYSIS OF

BANDHAN BANK AND FEDERAL BANK

By

JYOTHISH J B – 2027718
ROSE DAIZE – 2027745

Submitted To:

Prof. Soumik Bhusan

MBA PROGRAMME
SCHOOL OF BUSINESS AND MANAGEMENT CHRIST
(DEEMED TO BE UNIVERSITY), BANGALORE

FEBRUARY 2021
 COMPANY OVERVIEW

FEDERAL BANK

Federal Bank, founded on April 23 1931, is an Indian private sector bank headquartered in Aluva,
Kerala. The bank currently has a customer base of 10 million with 1.5 million NRI customers.
Federal Bank is one of India’s major commercial banks with 1284 branches and1569 ATMs in
different states of India. Services offered by the bank to its customers include internet banking,
mobile banking, online bill payment, online fee collection, depository services, cash management,
insurance, mutual funds etc.

BANDHAN BANK

Bandhan Bank was originally started as not-for-profit organization providing micro loans in 2001.
In 2015, the bank received universal banking license from the Reserve Bank of India. At present,
the bank has 2.25 crore customers, 5,257 outlets spread across 34 states and 487 accessible voice
enabled ATMs.

COMPARITIVE ANALYSIS

Dupont Analysis

1. Net Profit Margin (NPM)

When comparing 2020 to 2016 Federal bank has increased their net profit margin by almost 90%.
Increasing net profit margin is a good indicator that a bank is able to generate more profit from
revenue and this makes the organization to sustain in the business. Except for one-year i.e. 2018
where there was a decrease in net profit margin because of minimal growth in PAT. PAT of Federal
bank in 2018 has minimal growth of significant increase in Provision and contingencies expenses
involved.

From 2016 to 2019, Bandhan Bank has seen an increase in their NPM. Although, from 2019 to
2020 the NPM has fallen by 5.43%. NPM is an indicator of non-interest fees the bank generates.
This can be through ATM fees, service charges etc. From this we can see that the additional income
generated by Bank over the interest were high at a time and is falling currently. This can be seen
as the result of high operating expenses.

In comparison with Federal Bank we see that Bandhan Bank has a higher NPM ratio, indicating a
better financial performance. Even as the NPM is falling in 2020 for Bandhan Bank, it is still
higher than Federal Bank by 57.94%.

2. Return on Equity (ROE)

Return on Equity is an important measure for a company because it compares it against its peers.
A business that has a high return on equity is more likely to be one that is capable of generating
cash internally. Currently Federal bank (10.66) is in third position in terms of ROE when compared
with peers after HDFC and Kotak. Federal banks were able to increase their ROE by 1% except
for 2018 because of a shortfall in PAT.

ROE which is an indicator of the effective utilization of shareholder’s fund, shows an increasing
trend from 2018 to 2020. The highest ROE was achieved in the year 2017. In consideration with
peers – HDFC Bank, ICIC Bank, ROE for Bandhan Bank is higher.

ROE ratio for Bandhan Bank is higher than Federal Bank, indicating an effective utilization of
equity by Bandhan Bank to earn more return.

3. Return on Asset (ROA)

ROA indicates how firm is profitable in terms of total assets. This shows the efficiency of
managers to utilize the assets to generate earnings. In the Federal Bank, comparing the changes in
PAT and Total assets, there has been significant fluctuation in PAT while total assets changes over
the years have been decreasing. So the bank has to see whether they are able to utilize the current
assets they have efficiently because there are some significant problems visualized from their PAT
performance.
The ROA for Bandhan Bank has seen a fluctuating trend. The ROA has seen a huge increase from
2016 to 2017. From 2019 to 2020, the ROA has been falling. This could be because of huge
investment in assets. Although PAT has seen an increase by 35.46%, the increase in Total Asset
is more which is 38.46%.

ROA ratio for Bandhan Bank is higher than Federal Bank, indicating an effective utilization of
assets by Bandhan Bank to earn more return.

4. Equity Multiplier (EM)

This is a risk indicator which measures the portion of a company’s assets that is financed by
stockholder's equity rather than by debt. Over the last 5 years there has been a significant decrease
in total assets and minimal increase in shareholder equity except for 2018 where there has been a
huge increase in reserves. Currently equity multiplier for Federal Bank is 12.44 highest among last
three years indicates that a company is using a high amount of debt to finance assets.

The EM for Bandhan Bank has decreased from 2017 to 2018 and has been increasing since 2018.
This indicates that the bank uses more debt to fund for its assets. In 2020, the total assets have
been increased tremendously by 38.46% whereas the fund from shareholders increased by 25.90
%. The increase in equity indicates that the Bank uses more debt to finance its assets.

The EM for Federal Bank is more than Bandhan Bank. This indicates that Federal Bank rely more
on debts to finance their assets whereas for Bandhan Bank the reliance is low.

Growth Ratios

1. Growth in Net Interest Income

Comparing the growth of net interest income from 2020 to 2016 it has grown by 11.30% while
from 2019 it has decreased by 1.39% this was mainly due to lack of growth in interest income.
Federal bank interest income just increased by 8% from 2019 to 2020 compared to 55% increase
in 2019-2018 which affected its growth and this is an alarming situation for the bank. The reason
could be a deteriorating economy and job losses can cause borrowers to default on their loans and
lower the bank's net interest income as a result.

Under growth ratios we consider growth in NII to understand the growth of interest income
generated by Banks in comparison with the previous year. Bandhan Bank has seen a huge growth
in NII from March 2016 to 2017. The growth ratio has decreased from 2017 onwards and rise at a
low rate. From 2019 to 2020 the growth rate has fallen by 15.7%.

Although the overall growth percent is more in Bandhan Bank, the fall from 2019 to 2020 is very
low for Federal Bank which is by 8.15%. This shows that the NII growth is declining heavily for
Bandhan Bank making it riskier for investors.

2. Growth in Profit after Tax

So, for Federal Bank growth in PAT has been mixed. By analyzing the reports, we can see that
there has been a huge fluctuation in PAT. Fluctuation in PAT was mainly caused by on reason is
growth in Provision and contingencies involved for provisioning of bad loans. Year on year PAT
reduced from 42% to 24%. Banks should work or concentrate more on this Provision and
contingencies item has this is eating up a huge % of bank profit.

Growth in PAT shows the growth ratio of Profit after Tax in comparison with the previous year
PAT. The PAT has seen an increasing trend over the last 5 years. The growth from 2019 to 2020
has been the highest by 35.46%. The profit generation from both interest income has been higher
during this period.

In comparison, we can see that the PAT growth rate has been consistently high for Bandhan Bank.
This indicates that there is higher income generation from interest income and non-interest income
in Bandhan Bank compared to Federal Bank.
 Earnings Ratios

1. Net Interest Income (NII)

A rise in interest rate can make interest expenses rise more than interest income, Over the year
RBI has slashed interest rate to boost up the economy by increasing the cash flow in the market.
This reform will lead to increasing interest expenses where we can analyze that change in interest
expenses is more than change in interest income so the NII has been reducing over the time. NII
just increased by 4648.9 crore from 4176.34 crore in 18-19.

Net interest income is the difference between the total income and the income from interest. The
NII grew by 34.5% which indicates a strong operating performance by the bank. This growth is an
account of 30 bps rise in NIMs.

When we compare the banks, we see that the NII for Federal Bank has grown only by 10.16%
from 2019 to 2020. Whereas, in Bandhan Bank, NII has increased by 28.91%. This shows that
Bandhan Bank has a stronger operating performance with higher income generation from interest.

2. Net Interest Margin (NIM)

This metric helps prospective investors determine whether or not to invest in a given financial
services firm by providing visibility into the profitability of their interest income versus their
interest expenses. NIM of Federal bank has recorded the least in 2020 about 2.73% which makes
investors not to invest. Reason for the fall could be there has been an increase in demand for large
demand for savings accounts compared to loans, net interest margin decreases, as the bank is
required to pay out more interest than it receives.

NIM is an indicator of profitability and growth of the bank. NIM shows how much the bank earns
from interest on loans provided and how much it is paying out as interest for the deposits. The
average NIM set for Indian Banks is 2.5%. The NIM for Bandhan Bank is higher than the average
NIM. This indicates that the Bank has been highly profitable.
The NIM is higher for Bandhan Bank indicating that the bank has a higher profitability and growth
rate in comparison with the Federal Bank. This makes Bandhan Bank more attractive to investors
that would yield them more income.

3. Yield on Advances

The ratio gives the average lending rate of the portfolio. Over the past 5years yield on advances
has shown a decreasing trend from 14% in 2016 to 11% in 2020 which is positive for the bank.
Low yield on advances is an indication that the entity is into less financing riskier assets and
showcases better asset class quality.

From March 2016 to 2017 March, the yield on advances has seen a huge increase. Since 2017, the
yield on advances has seen a tremendous fall by 30%. From 2018 to 2019 the yield showed a slight
increase. But in the year 2020, the yield fell again. This is because the rise in amount given out as
advance in 2020 is more than the interest amount received from these advances.

Yield on advances in Federal Bank has remained stable from 2019 to 2020. This shows that the
increase in advances given out and the return earned from it in the form of interest is of the same
ratio. Whereas, in Bandhan bank there is a slight increase in the ratio. Showing that the interest
income is more than the advances.

4. Yield on Investment
Yield on investment is the income returned on an investment, such as the interest received from
holding a security. Federal Bank currently has the highest yield on investment about 7.78% even
though during tough periods. The bank has been increasing their yield on investment which means
more returns associated with more risky investments. But hopefully the bank would have
considered before making any decisions.

The yield on investment shows how much a financial institution earns from their assets such as
interest, dividend or other yield earning investments. The yield on investment was the highest for
the year 2017 after which it fell by 21% in 2018. The yield remained stable for the next year and
fell again in 2020. This fall in yield on investment can be considered as an impact of COVID 19.
 5. Cost of Deposits

Cost of deposit is an important indicator for banks performance. Lower cost of deposits showcases
that with cheaper funds, banks can lend at a profit. Federal Bank were also successful in reducing
the cost of deposits to 5.6%which is positive. Low-cost deposits can be the key for banks’
profitability in the long run, though its sustainability would depend on factors such as credit growth
and return on assets, which don’t seem very promising at the moment.

The cost of deposit is calculated by dividing the interest rate banks paid by the Deposits in the
banks made by customers. From 2019 to 2020, Bandhan Bank has seen an increase in cost of
deposit. This implies that the bank’s profitability is affected by giving out more interest. Bank
should focus on providing more low-cost deposits.

In comparison, we see that the cost of deposit for federal Bank was very high during 2016 whereas
it was very low for Bandhan Bank. By 2020, the cost of deposit of the Federal Bank came down
and that of Bandhan Bank has increased. At present the cost of deposit for both the banks are
similar. This shows that the Federal Bank has more low-cost deposit options which Bandhan Bank
should adopt. Low cost of deposit makes the Federal Bank less attractive from the point of view
of customers seeking for higher interest returns.

6. Cost of Borrowing
Cost of borrowing refers to the total amount a debtor pays to secure a loan and use funds, including
financing costs, account maintenance, loan origination, and other loan-related expenses. Cost of
borrowing for the Federal bank has been quite high which makes the lenders pay huge costs for
the borrowings. High-cost loans cause an immediate and permanent decline on the credit score,
and leads to more default and credit rationing by standard lenders in the future.

The cost of borrowing for Bandhan Bank was very high in 2016 which has fallen to as low as 0.66
in 2018. By 2020, the cost of borrowing has risen to 1.12%. An increase in cost of borrowing
makes it less attractive to customers as they have to pay higher interest on borrowings. A higher
interest rate would make the bank more profitable.
The cost of borrowing, in comparison, is lower for the Federal Bank. This makes Federal Bank
more preferable over Bandhan Bank to the customers in terms of lower interest on borrowings. In
terms of income, the income earned by Bandhan Bank will be higher.

7. Cost to Income
Cost to income for the Federal bank has been in a decreasing trend except for the year 2020 which
showed an increase of 1.30% due to significant up climb of operating expense by 611.34cr except
for this Federal bank has been performing well.

Cost to income is calculated by dividing expenses income by operating income. This is an

important measure in determining the profitability of the banks and shows a company’s cost in
relation to their income. The cost to income ratio for Bandhan Bank has been decreasing since
2016. Indicating that company’s operational efficiency is weak. The expenses on interest and
operating expense has been increased by 53% and 25 % respectively.

8. CASA Ratio
FY 2019,2018,2017 there has been a high CASA ratio, a higher portion of the deposits of the bank
has come from current and savings deposits, which is generally a cheaper source of fund. But in
2020 bank were able to reduce its level to that off 2016 indicating the bank relies heavily on costlier
wholesale funding, which can hurt its margins

CASA ratio is the ratio of current and savings account deposits to total deposits in the bank.
Bandhan Bank has been decreasing from 2019 to 2020, the highest rate being in 2019 for the last
5 years. A higher CASA ratio is an indication of lower cost of funds as the banks do not provide
interest on current deposits and the interest rate is very low in savings accounts. A decreasing
CASA ratio indicates that the Bank has more reliance on costly funding that affects the margin.

9. Credit to Deposit Ratio

The credit to deposit ratio of Federal banks has been increasing over the past 5 year which is a
positive sign. Where the bank is utilizing their resources and have enough liquidity to cover
unforeseen incidents. If the ratio is going to increase highly could be issued an overstretched
balance sheet, and may also hint at capital adequacy issues.
The credit to deposit ratio shows how much of the bank’s deposits are used for lending to
customers. From 2019 to 2020, Bandhan Bank has seen a huge increase in credit to deposit ratio
by 21.47%. This indicates that the bank uses more of their core funds or funds from deposits for
the purpose of lending to customers. This has also affected the capital adequacy of the bank.

NPA Ratios

1. Gross & Net NPA

NPA has been stable for the Federal Bank for the last 5 years without much fluctuation. Federal
Bank can try to reduce the NPA rather than be stable and can protect the asset quality of the bank
and doesn't fall into trap like other banks which failed recently.

NPA shows the amount defaulted by customers to pay back or it could be a partial payment of
interest made by customers to the banks resulting in huge non-performing assets with the bank. By
2020, Bandhan Bank has seen a fall in NPA indicating the default in payment by customers has
gone down

2. Capital Adequacy Ratio (CAR)

Ratio of a bank’s capital in relation to its risk weighted assets and current liabilities. The CAR of
Federal bank has been constant about 14% except for 2018 being 15% and 12% in 2017. These
figures are not interesting because compared with peers it has been the lowest HDFC topping the
list by 19%. High CAR means the bank can absorb losses without diluting capital.

The CAR shows the ability of banks to deal with losses. A higher CAR indicates a higher potential
to deal with losses. Since 2018, Bandhan Bank has seen a decreasing Capital Adequacy Ratio
indicating that the bank’s ability to absorb losses are falling. A higher credit to deposit ratio can
be one reason why the CAR has gone down.
 CONCLUSION

For this assignment we have taken Bandhan Bank and Federal Bank, two Indian private limited
banks. We have analyzed their annual reports for the last 5 years starting 2011 to 2020. In order to
analyze the banks’ financial performance, we have computed various ratios. From the ratios
calculated we have been able to compare the financial position the company holds in respect to
previous years and to compare the financial performance between the banks. Through this analysis
we have shed light on the performance strength and weakness that need to be improved. The
comparison was done from different perspectives such as through Dupont analysis, Profitability
and Liquidity position, NPA ratios and Capital Adequacy ratios.