Q3 performance: Bank of Baroda leads large banks

Nationalised banks form an important category in the banking space of India as they account for almost half of the total assets of the banking system.

Recently, the banks declared their third quarter (Q3) results. What do the results suggest about the performance of individual banks?

Quarterly performance can be studied across different performance indicators and different time dimensions. We have considered performance across five dimensions capturing business growth, asset quality, efficiency, pricing power and, above all, profitability.

While business growth captures the composite deposit and advances portfolio of the bank, the rest four dimensions are captured through gross NPA (non-performing asset) as a percentage of gross assets, cost-to-income ratio, net interest margin (NIM) and return on assets (RoA) respectively.

Also considered are the three possible time dimensions associated with quarterly data, namely, year-on-year (y-o-y) sequential, and year-to-date (y-t-d).

Depending on the evolution of performance in the successive quarters, the performance across the three dimensions may convey a different picture for different banks on various parameters.

Base effect

Hence, one way to judge performance on the growth dimension will be to rank the different banks giving equal weight to performance across all the three time dimensions. The ranking obtained from this method is labelled as ranking on the basis of ‘growth'.

However, growth by definition depends on the starting point or the base. For instance, a bank which to begin with had very low operating efficiency has much larger scope to improve than a bank which had relatively much higher operating efficiency.

Ignoring the base effect may lead to erroneous assessment of a bank's relative performance. Thus, a realistic assessment of performance must take the base effect into account.

Thus, a further refinement of the rankings can be made by not only considering the ranking based on ‘growth' but also the rankings based on ‘levels' of different performance indicators. We can compute an overall rank of a bank which is the average of rankings based on ‘growth' and rankings based on the ‘levels'.

This refined way of ranking can be labelled as rankings based on ‘growth and level'. It would be worthwhile to point out that the method of ranking suggested here is more holistic in approach as it not only considers growth performance across the three time dimensions but also the level effect.

We have reported ranking of banks on the basis of ‘growth' and ‘growth and level' to bring out the differences. Further, to make the rankings comparable across banks, we have performed the calculations for ranking separately for the large and small nationalised banks.

We have reported rankings taking into account the growth performance as well as ‘growth and level'. For elucidation, let's consider the ranking based on ‘growth' and ‘growth and level' for PNB in the large bank category.

If we consider ranking based on ‘growth' across the three time dimensions, PNB ranks second on the performance indicators business and NIM, third on RoA and cost-to-income, and fifth on the GNPA indicator. Like PNB, all the other five banks in the large category are ranked across the five performance indicators.

The ranking of the average of the ranks across the five indicators, lends PNB the third overall rank in the large bank category on the basis of ‘growth'.

However, if we rank the performance as on March 2011 on each of the indicators and include it along with the performance across the three time dimensions of the indicator concerned to derive the ranks, we get the ranking on the basis of ‘growth and level'.

Considering both the ‘growth and level', we find PNB ranks second on the business front, fourth on RoA, first on NIM and cost-to-income and third on the NPA front. The ranking of the average of the ranks across the five dimensions on ‘growth and level' leads to second overall rank for PNB on the basis of ‘growth and level'

What the ranks suggest

First, Bank of Baroda in the large banks category and Allahabad Bank within the small bank category turn out to be the best both on the basis of ‘growth' as well as combined ‘growth and level'.

Second, Central Bank of India in the large bank category and Punjab and Sind Bank in the small bank category occupy the bottom rank on both ‘growth' and ‘growth and level'.

Third, excluding the top and bottom ranked banks in each category, the ranks differ when seen on the ‘growth' dimension alone and when both ‘growth and level' dimensions are considered.

For instance, within the large banks, Bank of India occupies the second rank on the ‘growth' dimension but fourth rank when both ‘growth and level' effects are considered.

Similarly, United Bank of India in the small category gets the second rank on ‘growth' dimension but eighth when both ‘growth and level' effects are considered.

Stock market returns

Having ranked the banks in each category on the basis of growth and combined ‘growth and level', the next question arises whether banks that have performed better has also been rewarded relatively higher by the stock market?

This is gauged by examining the correlation of these banks' rankings on the basis of stock market returns between Decembers 2011 and December 2010 with their ranks on the basis of ‘growth' and ‘growth and level'. We find that the rank order correlation between ranking of stock market performance and ranking on the basis of ‘growth' and ranking after considering both ‘growth and level' is the same and very high for the large banks.

However, for the small banks the correlation between ranking based on ‘growth and level' and ranking of stock market performance is much higher than that between ranking on the basis of growth alone and the later.

The high correlation for large banks is possibly because in half of the banks the ranking on the basis of ‘growth' and ‘growth and level' is the same whereas in the case of small banks, only in one instance the ranks on the basis of ‘growth' and ‘growth and level' is same.

The ranks have brought out the relative strength and weakness of different banks across different performance indicators. These rankings can serve as guiding tool for banks in organising their activities.

(The author teaches Economics at the Xavier Institute of Management, Bhubaneswar. The views are personal.)