State owned banks - still the best

Government-owned banks continue to dominate the top 10 banks list.

So you thought that public sector banks were slow, stodgy, inefficient has-beens, out of place in today's competitive world, right? Wrong.

The BS Banking Annual has proved time and again that public sector banks are second to none. This year too, public sectors banks continue to fly high, bagging six of the top 10 slots in the banking survey for 2003-2004. That handsomely beats both private and foreign banks. Private banks account for three slots in the list of top 10. The list also includes a lone foreign bank.

The Bangalore-based Vijaya Bank has emerged as the best bank in the 2003-2004 survey. The bank was among the top five in three out of the five criteria used for the survey. It topped in profitability, was third in productivity, fifth in growth, 14th in safety and 20th in efficiency.

The really interesting thing, however, was the vast improvement in the bank's working, as a result of which it vaulted eleven places from its number 12 position in 2002-2003 to the number one slot in 2003-2004.

A report card

Productivity: Kotak Mahindra Bank tops the productivity charts followed by Allahabad Bank, Vijaya Bank, IDBI Bank and UCO Bank. Kotak Bank's deposit per employee rose from Rs 50 lakh in 2003 to Rs 4 crore in 2004.

Safety: Bank of America was the safest bank in 2004 followed by Corporation Bank, J&K Bank, United Bank of India and Karur Vysya Bank. Bank of America had the highest capital adequacy ratio of 22.92%. Besides, it was also a zero NPA bank.

Profitability: Vijaya Bank is at the top followed by Andhra Bank, State Bank of Mysore, Allahabad Bank and Catholic Syrian Bank.

Growth: Kotak Bank with the highest interest income growth and deposit growth tops the list followed by Allahabad Bank, HSBC, IDBI Bank and Vijaya Bank.

Efficency: HDFC Bank is the most efficient bank followed by Bank of Punjab, Standard Chartered Bank, Citibank and IDBI Bank.

Nor was the top 10 entirely made up of the well-known market favourites among the public sector banks. In fact, several of them that made it to the elite list are low profile banks that have been quietly doing a great job with a minimum of fuss. Three public sector banks "� Vijaya Bank, Allahabad Bank and Oriental Bank of Commerce "� were new entrants to the top 10 list, while one State Bank associate, State Bank of Hyderabad, Indian Overseas Bank along with Union Bank of India bowed out.

Overall Ranking
Rank	Rank	NAME	P	S	P1	G	E
2003	2004
12	1	Vijaya Bank	3	14	1	5	20
1	2	Andhra Bank	43	16	2	45	27
8	3	Deutsche Bank	12	8	6	11	56
43	4	Allahabad Bank	2	25	4	2	30
2	5	SB of Indore	36	22	7	38	21
10	6	SB of Mysore	16	44	3	24	45
3	7	J&K Bank	21	3	10	36	14
13	8	Oriental Bank of Comm.	15	11	12	19	10
25	9	City Union Bank	10	37	8	12	12
4	10	Catholic Syrian Bank	30	50	5	41	54
19	11	SB of Bikaner & Jaipur	13	20	9	15	36
7	12	Karur Vysya Bank	34	5	21	46	9
11	13	SB of Patiala	17	15	16	13	19
9	14	SB of Hyderabad	23	13	18	21	24
20	15	SB of Travancore	14	33	11	14	32
6	16	Indian Overseas Bank	18	27	14	29	29
38	17	SB of Saurashtra	9	9	22	9	23
14	18	Canara Bank	20	28	15	27	33
48	19	UCO Bank	5	45	13	8	40
30	20	IDBI Bank	4	47	17	4	5
21	21	UTI Bank	52	35	19	17	6
17	22	Corporation Bank	45	2	39	47	16
22	23	Bharat Overseas Bank	33	7	31	43	17
18	24	Bank of India	44	34	20	48	39
-	25	Punjab National Bank	22	19	27	23	28
28	26	Citibank	49	43	26	22	4
15	27	Bank of Maharashtra	19	30	24	26	31
5	28	Union Bank of India	31	32	23	40	22
27	29	Syndicate Bank	11	41	25	16	43
24	30	Kotak Mahindra Bank	1	6	48	1	7
31	31	HDFC Bank	37	26	37	18	1
45	32	Central Bank	7	38	30	7	37
-	33	Standard Chartered Bank	57	42	32	53	3
34	34	Lord Krishna Bank	50	10	40	34	44
32	35	Federal Bank	24	46	29	28	25
26	36	South Indian Bank	35	49	28	32	55
37	37	Bank of Baroda	26	17	38	33	34
16	38	Bank of Rajasthan	25	40	34	30	47
36	39	ABN Amro	42	18	42	20	8
29	40	Karnataka Bank	27	31	36	39	35
42	41	HSBC	53	12	45	3	18
33	42	State Bank of India	38	21	43	37	42
35	43	United Bank of India	48	4	46	50	51
-	44	ICICI Bank	51	51	35	31	11
40	45	Lakshmi Vilas Bank	29	29	41	42	41
23	46	Bank of America	55	1	52	57	15
44	47	Dena Bank	8	55	33	10	50
39	48	Bank of Punjab	54	39	47	44	2
-	49	Tamilnad Mercantile Bank	32	54	44	35	57
-	50	Sangli Bank	39	24	49	54	48
46	51	Dhanlakshmi Bank	46	36	50	52	38
52	52	Indian Bank	6	23	53	6	53
47	53	ING Vysya Bank	47	48	54	55	49
51	54	United Western Bank	40	56	51	49	52
50	55	Bank of Nova Scotia	41	52	55	51	13
53	56	Punjab & Sind Bank	28	53	57	25	46
49	57	Development Credit Bank	56	57	56	56	26
Legend: P - productivity, S - safety; P1 - profitability; G- growth; E- efficiency

Last year's winner Andhra Bank slipped a place to rank second this year while last year's runners up State Bank of Indore moved down to the 5th position. State Bank of Mysore moved up four notches to 6th from 10th. Remakable has been the Kolkata-based Allahabad Bank's leap from 43rd to fourth.

Guess who made it to the top 10 list from the private banks? Once again, it wasn't the high-flying banks that make the headlines. City Union Bank made an entry into the top 10 this year, while Karur Vysya Bank exited. Jammu & Kashmir Bank slipped four notches to the 7th position while Catholic Syrian Bank went down six places to the 10th position.

Deutsche Bank, the only foreign bank in the top 10 list, moved up five notches to 3rd from its 8th position last year.

The brightest spot in the Indian banking industry in 2003-2004 was the massive cleaning up of banks' balance sheets by reducing non-performing assets (NPAs). The net NPAs of 82 banks "� 27 public, 25 private and 30 foreign banks "� studied in the banking annual survery declined 25.8 per cent or by a whopping Rs 8,232 crore to Rs 23,640 crore in 2004.

Treasury income played a major role in reducing the net NPAs as banks liberally used treasury profit to clean up their books by making large doses of provisions. The NPAs of public sector banks declined by Rs 6,324 crore to Rs 18,141 crore. Private banks, with less red ink on their books, reduced their NPAs by Rs 1,919 crore to Rs 4,618 crore. Surprisingly, the NPAs of foreign banks rose by Rs 13 crore to Rs 882 crore during 2003-2004.

Most banks were able to take advantage of the fat profits from treasury operations, brought about by the lower interest rates, to make higher provisions for bad debts. As a result, four state-owned banks "� Oriental Bank of Commerce, State Bank of Indore, State Bank of Patiala and State Bank of Saurashtra "� became zero NPA banks by the end of 2003-2004. Four other public sector banks "� Andhra Bank, Punjab National Bank, State Bank of Hyderabad and Vijaya Bank "� were able to reduce their NPAs to below one per cent.

The rush to clean balance sheets by making high provisions for NPAs had its impact on bottomlines. The 82 banks covered in this survey, in percentage terms, had a lower net profit growth of 32.9 per cent (Rs 23,035 crore) in 2003-2004 than the 53 per cent (Rs 17,331 crore) in 2000-2003.

Private banks were the hardest hit. In 2003-2004, the net profit of private banks grew by 32 per cent to Rs 4,254 crore versus a rise of 83.9 per cent (Rs 3,220 crore) in 2002-2003. The bottomlines of state-owned banks grew 34.6 per cent (Rs 16,546 crore) in 2004 versus 48 per cent (Rs 12,295 crore) in the previous year. Foreign banks clocked a 23 per cent rise (Rs 2,235 crore) in net profits compared with 38 per cent (Rs 1,816 crore) in 2002-2003.

The lower growth in profit can also be attributed to the marginal rise in interest income. Interest income rose marginally by 2.5 per cent to Rs 1,43,437 crore in 2003-2004, compared with 12.5 per cent (Rs 1,39,931 crore) in 2002-2003. It is obvious that the fall in the cost of lending hit the growth in interest income. However, the net interest income of the banking industry rose sharply by 20 per cent. In 2002-2003, the rise in net interest income was 21.3 per cent.

Banks indeed made huge treasury profits. However, the bread-and-butter lending business was not entirely neglected. The total advances of 82 banks rose 17.1 per cent to Rs 8,60,741 crore, up from a rise of 15.3 per cent (Rs 7,35,041 crore) in 2002-2003.

How we ranked banks

Ranking banks is not a subjective exercise. It starts with the Business Standard Research Bureau collecting data on a number of variables from the annual reports of banks. Next, these data are collated under five heads - profitability, safety, productivity, efficiency and growth. Banks are ranked on the basis of these five indicators.

However, only banks that have a total asset base of at least Rs 500 crore and five branches are considered for ranking, even though all banks operating in the country are included in the survey. A threshold limit for assets is fixed to eliminate the bias in the growth parameters, resulting from too low a base.

This annual survey covers 82 banks. Global Trust Bank has been excluded as the bank was merged with Oriental Bank of Commerce before finalising the annual report for 2003-2004. Three foreign banks "� OCBC Bank, State Bank of Mauritius and Toronto Dominion Bank "� which were present in last year's survey are not there as we could not gather their annual reports for 2003-2004. Bank of Muscat is not there as it is merged with Centurion Bank.

For the ranking purpose, the study does not include IndusInd Bank. The non-banking finance arm of the Hinduja group "� Ashok Leyland Finance "� got merged with it and hence the bank's balance sheet is not strictly comparable with those of its peers.

Each indicator is essentially an index built from a set of variables. These need to be standardised if any meaningful comparisons are to be made. The normalisation or standardisation has been done in relation to the relevant aggregates. In general, normalisation has been done in relation to advances, deposits, assets and so on.

Having normalised them, the next step is to give an index number to these variables. The standardised variable has been converted into an index number by deflating with the aggregated sector value. In other words, indices of specific indicators have been worked out relative to the banking sector's average.

In arriving at an assessment of which the best bank is, the inherent bias in favour of smaller and private sector banks has to be neutralised. For instance, productivity in the case of public sector banks turns out to be low as their staff strength is huge even after the successful implementation of a voluntary retirement scheme.

On the other hand, private and foreign banks have a slender work force and naturally their employees are more productive. To neutralise the bias, the weightage given to productivity is low while arriving at which the best bank is.

The parameters to arrive at the most productive bank are profit, income, expenditure, deposit and advance per employee. Expenditure is deducted from the total score; marks are given in an inverse proportion. With profitability gaining precedence over the growth in advances and deposits, the former is given a higher weightage.

In the growth parameters, there is a bias in favour of newly set up private banks which post very high growth figures (in percentage terms) because of their small bases. To even out this bias, the growth parameter has also been allocated a low weightage.

To assess which bank is the safest, Business Standard looked at the capital risk-weighted adequacy ratio, the stock of non-performing assets and the liquid assets of various banks.

The other indicators for arriving at the best of the lot are efficiency and profitability. The parameters to arrive at the most efficient bank are the return on capital employed, the spread on assets, the yield on investments and the spread over establishment expenses.