Based on the income, expenditure, net interest income, NPAs and capital adequacy one can comment on the profitability and the long run sustenance of the bank. Further, a comparative study on the performance of various banks can be done using a ratio analysis of these parameters. There are a number of ratios that can be used to comment on the different aspects The chief ratios that can be used for assessing the banks' profitability and sustenance are

1. Profitability

   • Intermediation Costs/Total Assets

2. Assets

   • Net Interest Income/Total Assets

   • Other Income/Total Assets

3. Asset Quality

   • NPAs/Total Assets

   • NPAs/Advances

4. Staff Productivity

   • Net Profit/ Total Number of Employees

5. Sustenance

   • Capital/RWAs

The performance of the bank can be assessed from the rise or fall in the absolute figures, but there is a catch here. If the income of the bank rises with no corresponding growth in the assets, it indicates that the bank is able to earn better from the existing assets. However, along with a rise in the income, if there has also been a corresponding growth in the assets, then the growth in the Bank's income may not be the same as indicated by the growth in the absolute figures. For commenting on the Bank's performance, a comparison to the total assets of the bank will give a true picture.

The intermediation costs of a bank refer to the operating cost of the bank and include all the administration and operational costs incurred while offering its services. The ratio of the intermediation costs of the bank to the total assets should be kept low to ensure greater profitability. As mentioned earlier, a technology savvy bank will always be in a better position to reduce its operating costs. Consider the operating expenses of the various banking sectors and the industry average for the year 1999-2000. The costs for the entire SCBs rose by 9.1 percent. The maximum rise of 25.1 percent has been witnessed in the new private sector banks while the foreign banks experienced a decline in the operating costs by 3.3 percent. The ratio of the intermediation costs to the total assets indicates a decline. The maximum decline was in the case of new private sector banks and the foreign banks.

The ratio of the net interest income (Spread) to the total assets gives the net interest margin of the bank. This ratio is the actual measure of the bank's performance as an intermediary, as it examines the bank's ability in mobilizing lower cost funds and investing them at a reasonably higher interest. By borrowing short and lending long, banks can earn higher spreads nevertheless by doing so they will be exposed to greater risks. Hence banks need to be cautious and should not accept risks beyond their ability to control/manage them. Product innovation using the right technology is one approach, which can be followed by the banks to mobilize cheaper funds.

The asset quality of the banks can be examined by considering the NPAs. These NPAs should be considered against not just total assets but also against the advances, cause this is where the NPAs primarily arise. When NPAs arise, banks have to make provision for the same as per the regulatory prescriptions. When the provisions are adjusted against the Gross NPAs it gives rise to the net NPAs. Provisions reduce the risk exposure arising due to the NPAs to a reasonable extent as they ensure that the banks sustain the possible loss arising from these assets.

The one important parameter that essentially relates to the bank's ability to sustain the losses due to risk exposures is the bank's capital. The intermediation activity exposes the bank to a variety of risks. Cases of big banks collapsing due to their bank's inability to sustain the risk exposures are readily available. Considering this, it is highly essential to examine the capital vis-á-vis the risk weighted assets. This is the Capital to Risk Weighted Assets Ratio (CRAR) as given by the Basle Committee. The statutory prescription for CRAR is 9 percent, which has been well surpassed by most banks.

1. Profitability Ratios

   • Interest Expenses/Total Income

   • Non-Interest Expenses/Total Income

   • Non-Interest Income/ Non-Interest Expenses

   • Interest Income/ Total Assets

   • Interest Expenses/ Total Assets

   • Net Interest Margin (NIM) = NII/ Total Assets

   • Profit Margin = Net Profit/ Total Income

   • Asset Utilization = Total Income/Total Assets

   • Equity Multiplier = Total Assets/ Equity

   • Return on Assets = Net Profit/ Total Assets

   • Return on Equity = Net Profit/ Equity

2. Sustenance

   • Capital to Risk Weighted Assets (CRAR) = Total Capital/ (RWAs)

   • Core CRAR = Tier I Capital / RWAs

   • Adjusted CRAR = (Total Capital - Net NPAs)/(RWAs - Net NPAs)

3. Staff Productivity

   • Net Total Income/ Number of Employees

   • Profit per Employee = Net Profit/Number of Employees

   • Business per Employee = (Advances + Deposits)/Number of Employees

   • Break-even Volume of Incremental Cost per Employee = Cost per Employee/ NIM

4. Asset Quality

   • Gross NPAs/ Gross Advances

   • Gross NPAs/Total Assets

   • Net NPAs/ Net Advances

   • Net NPAs/ Total Assets

   • Provisions for loan losses/Gross Advances

   • Incremental RWAs/ Incremental Total Assets

5. Total Assets

   • Provisions for loans and investments/Total Assets

(RWA = Risk Weighted Assets)

On the basis of these parameters try to compile a comparative assessment as under:

1. All Commercial Banks (or the Banking system)

2. Public Sector Banks

3. Old Private Sector Banks

4. New Private Sector Banks

5. Foreign Banks, and finally

6. Your own Bank

This will indicate the comparative performance of your bank in relation to each group and the banking system as a whole. But if you prepare the comparative statistics for your bank for the last three years, it will also indicate the direction in which your bank is progressing.