laxminarayan a

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Analysis of Branch profitability

Submitted by

K. Laxminarayana

University Reg No:112542246

BOB Reg No: BOB0024815

The goal of this project is to analyze the Balance Sheet and Profit & Loss account of Tilaknagar

Branch (Hyderabad, AP-1)--Analysis of the Profitability of the Branch.


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Certificate from the Mentor

This is to certify that this project titled Analysis of branch profitability is a

bonafied work carried out and developed by K.LAXMINARAYANA in partial

fulfillment for the 1 year training program ofPGDBF at Baroda Manipal School

of Banking. This is also to certify that this project is the result of

candidates own work and is of sufficiently high standard to warrant its

submission to the university for the award of the said degree. The

assistance and help rendered to him during the course of his project work in the form of

basic source material and information have been duly acknowledged.

Mentor

P S N Murthy

Chief Manager

Tilaknagar Branch

Bank of Baroda


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Acknowledgement

I present this project on Analysis of Branch Profitability that has a

significant impact on business of the branch in Bank of Baroda, with a sense of

great pleasure and satisfaction. I take this opportunity to express my gratitude to

the people who have been instrumental in the successful completion of this project.

I would like to show my greatest appreciation to Mr. P.S.N.Murthy (Chief

Manager) and the Staff members of Tilaknagar branch, Bank of Baroda. I cant say

thank you enough for his tremendous support and help. I feel motivated and

encouraged every time I attend his meeting. Without his encouragement and

guidance this project would not have materialized.

The guidance and support received from all the members who contributed to this

project, was vital for the successful completion of the project. I am grateful for

their constant support and help.

Date: 15-11-2012

K Laxminarayana


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Table of content

CERTIFICATE FROM THE MENTOR .................................................................................................................... 2

ACKNOWLEDGEMENT ..................................................................................................................................... 3

TABLE OF CONTENT ......................................................................................................................................... 4

EXECUTIVE SUMMARY ..................................................................................................................................... 5

INTRODUCTION / BACKGROUND ..................................................................................................................... 7

RELATED THEORY / LITERATURE....................................................................................................................... 8

STUDY / ANALYSIS OF TILAKNAGAR BRANCH .................................................................................................. 10

RECOMMENDATIONS .................................................................................................................................... 26

CONCLUSION ................................................................................................................................................ 28


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Executive summary

The term 'profit' is an accounting concept which shows the excess of income over

expenditure viewed during a specified period of time. Profit is the main reason for

the continued existence of every commercial organization. On the other hand, the

term profitability is a relative measure where profit is expressed as a ratio,

generally expressed as a percentage. Profitability depicts the relationship of the

absolute amount of profit with various other factors. Profitability is the most

important and reliable indicator as it gives a broad indicator of the ability of a bank

to raise its income level. Profitability of banks is affected by a number of factors.

Some of these are endogenous, some are exogenous.

Changes in policies made by RBI are exogenous to the system. These include

changes in monetary policy, changes in quantitative credit control like changes incash reserve ratio(CRR), statutory liquidity ratio(SLR), changes in bank rates,

qualitative credit controls like selective credit control measures, credit deposit

ratio, region-wise guidelines on lending to priority sector, changes in interest rates

on deposits and advances, levy of tax on interest income etc. Various other factors

like careful control of expenditure, timely recovery of loans are endogenous.

In practice executives define profits in banks as the difference between total

earnings from all earning assets and total expenditure on managing the entire asset

& liabilities portfolio. In case of banks, the main source of income is interest

earned and discount on bills discounted. Since banks accept various types of

deposits from people so interest paid to customer is an important expenditure of the

banks. The difference between interest earned and interest paid is known as spread


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and is a good indicator of bank's efficiency. Establishment expenses covering

salaries, provident fund, allowances, and bonus and so on, form another important

component of expenditure.

Profit is the very reason for the continued existence of any commercial

organization. The rate of profitability and volume of profits are therefore rightfully

considered as indicators of efficiency in the deployment of resources of banks.

This Project aims at Analysis of Tilaknagar Branch Profitability by reading the

Balance sheet and Profit & Loss Account for the financial year 2011-12(FY12) and

comparing the same with the previous Fiscal year 2010-11(FY11) to interpret the

trend.


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Introduction / Background

Concept of profitability

Profitability means ability to make profit from all the business activities of an

Organization, Company, Firm, or an Enterprise. It shows how efficiently the

management can make profit by using all the resources available in the market.

Profitability is the the ability of a given investment to earn a return from its use.

Profitability is an important yardstick for measuring the efficiency, the extent of

profitability cannot be taken as a final proof of efficiency. Sometimes satisfactory

profits can mark inefficiency and conversely, a proper degree of efficiency can be

accompanied by an absence of profit. The net profit figure simply reveals a

satisfactory balance between the values receive and value given. The change in

operational efficiency is merely one of the factors on which profitability of an

enterprise largely depends. Moreover, there are many other factors besides

efficiency, which affect the profitability.

Profit & Profitability

Sometimes, the terms Profit and Profitability are used interchangeably. But in

real sense, there is a difference between the two. Profit is an absolute term,

whereas, the profitability is a relative concept. However, they are closely related

and mutually interdependent, having distinct roles in business. Profit refers to thetotal income earned by the enterprise during the specified period of time, while

profitability refers to the operating efficiency of the enterprise. It is the ability of

the enterprise to make profit on sales. It is the ability of enterprise to get sufficient

return on the capital and employees used in the business operation.


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Related theory / literature

Profitability analysis is a component of enterprise resource planning (ERP) that

allows administrators to forecast the profitability of a proposal or optimize the

profitability of an existing project. Profitability analysis can anticipate sales and

profit potential specific to aspects of the market such as customer age groups,

geographic regions, or product types.

Profitability analysis can help key personnel in an enterprise to:

Identify the most and least profitable products or services. Discover which sources of information offer the most reliable facts. Optimize responses to changing customer needs. Evolve the product mix to maximize profits in the medium and long term. Isolate and remedy the causes of decreasing profit margins.

Profitability Ratio which helps in Statistical Analysis of Profitability

1. Credit Deposit Ratio

2. Return on Asset Ratio

3. Operating Profit to Total Asset Ratio

4. Spread to Total Asset Ratio

5. Interest Income to Total Income Ratio

6. Interest Expenditure to Total Expenditure Ratio

1. Credit Deposit Ratio: It is the ratio of how much a bank lends out of the

deposits it has mobilized. It indicates how much of a bank's core funds are being

used for lending, the main banking activity. A higher ratio indicates more reliance

on deposits for lending and vice-versa.

Credit Deposit Ratio = Net Loans / Total Deposits


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2. Return on Asset Ratio: This ratio indicates how profitable a company is

relative to its total assets. The return on assets (ROA) ratio illustrates how well

management is employing the company's total assets to make a profit. The higher

the return, the more efficient management is in utilizing its asset base. The ROA

ratio is calculated by comparing net income to average total assets, and is

expressed as a percentage.

Formula:

Return on Assets = Net Income / Average Total Assets

3. Operating profit to Total Asset Ratio: It is a measure of income that tells

investor how much of revenue will eventually become profit for a branch. The

higher the operating profit, the more profitable a branch business is.

Operating profit = Revenue Total expenditure

4. Spread to total asset Ratio: The difference between interest earned and interest

paid is known as spread and is a good indicator of bank's efficiency. Spread on Total

Assets is defined as the Net Interest Income Divided by Total Assets.

5. Interest income: Interest income is earned on Advances

6. Interest Expenditure: Interest paid on Deposits


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Study / Analysis of Tilaknagar Branch

Tilaknagar Branch, Hyderabad

Date of Opening:

25-12-1991

SOL ID: (Service Outlet ID)

2420. This normally indicates the serial number of branches opened.

Region: Andhra Pradesh Region-I

Zone: KARAP

Tilaknagar branch is situated in Metro City surrounded by well developed

Residential colonies. Good old branch having good loyal and high net worth

customer base. This branch is strengthened by the presence of Regional office,

RLF and SME-LF in the city which facilitated quick decision making in sanction

of Advances. This branch ranked 4th place in the region in terms of volume of total

business. Branch is under CBS with good infrastructure and having onsite ATM.

Tilaknagar branch has the large customer base of deposits and advances. The

number of deposit accounts is 15800 and advance accounts are 776. This branch is

offering all most all the major products of our bank and also the third party

products like BOB Gold Coins, Baroda Pioneer Mutual Funds, India First Life

Insurance products which helps in increasing the non-interest and fee-basedincome of the branch.


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Business Performance

The table below represents financial status and Business Performance of the branch

from FYs 2010 to 2012.

(Rs. in lacs)

MAR 10

ACTUALS

MAR11

ACTUALS

MAR 12

ACTUALS

SEPT12

ACTUALS

1. Total Deposits 12344.92 17811.38 20427.36 21488.48A Current 623.59 1100.62 848.48 622.59

B SB 3906.80 4981.17 4525.89 5102.24

Low cost

Deposits(CASA)

4530.39 6081.79 5374.34 5724.83

C Time 7814.53 11729.59 15053.02 15763.65

2. Total Advances 10566.12 12860.22 14553.09 14369.50Total Business

(Deposits + Advances)

22911.04 30671.6 34980.45 35857.98

3. NPA 14.95 1966.02 1447.344 Income 1158.22 1645.65 2004.52 777.43

5 Expenses 716.19 885.69 1364.83 836.66

6 Net Profit 721.76 989.94 1042.19 236.05

7 Cost of Deposits 5.47% 5.36% 6.99% 7.83%8. Yield on Advances 11.99% 12.42% 13.74% 10.05%

9 Business per employee 1909.25 2555.97 2915.04 3259.82


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Profitability Analysis

Deposits

MAR'10 MAR'11 MAR'12

Current 623.59 1100.62 848.48

SB 3906.8 4981.17 4525.89

Low cost 4530.3 6081.79 5374.34

Time 7814.53 11729.59 15053.02

From the above graph we can infer that there is a continuous growth in time

deposits, whereas current and SB deposits recorded growth in 2011 and a fall in

2012. However CASA i.e low cost deposits are more or less at the average level

for the years 2010, 2011 and 2012. The percentages of low cost deposits to total

deposits are 36.7%, 34.2 % and 26.37% for the fiscal years 2010, 2011 and 2012

respectively.

0

2000

4000

6000

8000

10000

12000

14000

16000

Current SB Low cost Time

MAR'10

MAR'11

MAR'12


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Total Advances:

(Amount in Lacs)

Retail Credit

Priority sec Advances

MSE Advances

Other Priority sec Advan

Total Advances

A consistent growth can

2011 to 2012, which is a

various types of offers/s

The branch has to concen

which appear to be on a l

0

2000

4000

6000

8000

10000

12000

14000

16000

Retail Credit Priori

Adv

2010 2011

5516 6200

3009 2532

747 590

es 1525 1735

10566.12 12860.22

be observed in Total advances from

hieved by creating awareness in the

hemes and quickly disposing off th

trate more on SME advances and Prio

wer side.

ty sec

nces

MSE

Advances

Other Priority

sec Advances

Total

Advances

13

012

5874

2653

492

1885

14553.09

2010 to 2011 and

ustomers about the

loan applications.

ity sector advances

2010

2011

2012


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Total NPA:

(Amounts in lacs)Sub Standered Asset

Doubtful

Loss

TOTAL NPA

Branch profitability dep

there is abnormal increa

major cause for high N

recovery steps situation i

the graph. Therefore, as s

must keep strict vigil ov

event of the account bei

costly for the bank.

0

500

1000

1500

2000

2500

Sub Standered

Asset

D

2010 2011 2012.73 4.12 4

8.58 7.42 1

3.86 3.41

15.17 14.95 19

nds upon the level of NPA also. Fro

e in branch NPA level from the ye

A is failure in projects of big cust

s improving and NPA level is comin

oon as an account is classified as subs

er the security during the next one

g classified as doubtful, the lack of

ubtful Loss TOTAL NPA

14

2 Sep-128.53 281.45

01.9 1146.36

15.52 19.53

6.02 1447.34

m the above graph

r 2010 to 2011. A

mers. With timely

down as shown in

tandard, the banker

ear because in the

security proves too

2010

2011

2012

Sep-12


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Total Income & Total Ex

(Amount in Lacs)

2010

2011

2012

If we compare expenditu

income is higher than th

profits of branch. Tot

commission exchange, R

sum of interest paid on

debt expenses account a

0

500

1000

1500

2000

2500

2010

enses:

otal income Total Expens

1158

1645

2004

re of the branch with the income for

expenditure. Expenditure can show

l income including interest earne

covery in bad debts and other income.

eposits; interest paid on Borrowings,

d other expenses

2011 2012

T

T

15

s

716

885

1364

the last three years

irect impact on net

on advances is

Total expenses are

staff expenses, Bad

tal income

tal Expences


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Total income

(Amount

in Lacs)

Interest earned

on Advances

2010 962.

2011 1441.

2012 1876.

Most of the customers us

in pre RTGS &NEFT p

Now the customers are u

and BCs. This is one of

Total advances are also i

on advances also increase

0

500

1000

1500

2000

2500

2010

Commission &

Exchange

other income T

8 179.12 16.12

2 188.08 16.55

2 112.34 15.98

ed Demand drafts and Bankers Chequ

riod. It fetches good exchange com

ing NEFT and RTGS for money trans

the reasons for reduction in commis

creased from the year 2010 to 2012 s

d.

2011 2012

Interest ear

Advances

Commision

other inco

Total incom

16

tal income

1158.22

1645.65

2004.52

e to transfer money

ission to the bank.

fers instead of DDs

ion based income.

the interest earned

ned on

& Exchange

e

e


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Avg. Return on advances

Formula: Interest receiveTotal ad

Interest received o

advances

Total advances

Avg.Return on advances

The Return on advances

Average return on advan

Total advances inc Increase in Rate of

10

10.5

11

11.5

12

12.5

13

on advancesances

Mar2011 Mar2012

1441.02 1876.20

12860.22 14553.09

11.20 12.89

re increased from FY 2011 to FY 201

es increased due to following reasons

eased for the FY 2012

interest( Changes in Base Rate)

Avg.Return on advances

17

2011

20112


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Total Expenses:

(Amount In Lacs )

Int paid on Deposits

Staff expenses

other Expenses

Bad debt written off

Total expenses

Deposits increased from

increased interest rates

Staff expenses also incre

to the staff.

0

200

400

600

800

1000

1200

1400

1600

Int paid on

Deposits

Staff ex

2010 2011 2012

636.04 772.6 1267.4

45.43 73.2 64.33

33.55 39.55 33.1

1.17 0.34 0

716.19 885.69 1364.8

he year Mar 2010 to Mar 2012. This

hich reflected in increase in interes

sed from Mar 2011 to Mar 2012 bec

pences other Expences Bad debt

written off

Total expe

18

can be attributed to

paid on deposits.

use of arrears paid

ces

2010

2011

2012


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Avg .Cost of Deposits

Formula:

Total interest: paid on d

Total d

Total interest paid on

depositsTotal Deposits

Avg Cost of Deposits

The cost of deposits are i

Cost of deposits increase

rate of interest. Changes

Also the composition of

deposits lead to pay mor

more on CASA deposits

0

1

2

3

4

5

6

7

Total int

posits

posits

ar2011 Mar2012

72.60 1267.40

7811.38 20427.36

.33 6.20

creased from FY 2011 to FY 2012

d from Mar 11 to Mar 12 because o

in Rate of interest showed impact

deposits with the branch has chang

interest on time deposits. So, branch

rest paid on deposits

2011

2012

19

fluctuations in the

n cost of deposits.

d. Increasing time

has to concentrate


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Business per employee:

year B

2010

2011

2012

Every year the business p

1. Customer Delight

2. Social Banking

3. Targeting HNI Custom

4. Target High Busines

5. Identifying our good b

0

500

1000

1500

2000

2500

3000

3500

siness per employee

1909

2555

2915

er employee is increasing. Because of

ers

s Shops

orrowers

Business per employee

21

ollowing reasons

2010

2011

2012


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Percentage of staff expe

Formula: staff expenseTotal expenses

staff expense

Total expenses

% of staff expense to th

total expenses

The Percentage of staff

FY 2012, because the artaken into P & L acco

expenses during Mar 11

0

1

2

3

4

5

6

7

8

9

% of staff

se to the total expenses

Mar2011 Mar2012

73.20 64.33

885.69 1364.83

8.26 4.71

xpense to the total expenses Decreas

ears paid to the staff during the yearnt for the year 10-11 hence there i

.Staff expenses came to normal in the

expense to the total expenses

22

d from FY 2011 to

10-11 .It has beens increase in staff

Y 2012.

2011

2012


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Percentage of staff expe

Formula: staff expense

Total Business

staff expense

Total business

% of staff expense to th

total business

The % Percentage of sta

FY 2012

0

0.05

0.1

0.15

0.2

0.25

% o

se to the total Business

(Deposits+Advances)

Mar2011 Mar2012

73.20 64.33

30671 34980

0.23 0.18

f expense to the total income decreas

fstaff expense to the total business

23

d from FY 2011 to

2011

2012


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Findings

Cost of deposits increased from Mar 11 to Mar 12 because of increase inROI over the time deposits.

Average return on advances increased, Because High yielding advancesincreased in the FY 12

The branch has to concentrate on non interesting income by promoting thirdparty products and non fund based products.

Operating expenses reduced from the FY 2011 to FY 2012 therefore branchhas good control over on operating expenses

Staff expenses Decreased from FY 2011 to FY 2012, because the arrearspaid to the staff during the year 10-11 .it has been taken into P & L account

for the year 10-11 hence there is increase in staff expenses .Staff expenses

normalized in the FY 2012.

Suggestions:

Since the branch is located in prime residential area there is scope for gettingmore CASA deposits .Branch needs to concentrate more on CASA, Current

Deposits in particular.

Branch can canvass for new savings, Current and Salary Accounts, therebyincreasing customer base which may turn into huge CASA deposit in future.

Increase yield on advances by increasing qualitative credit portfolio andreduction in NPA, arresting fresh slippage.

Maximize fee based income


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Concentrate on recovery in NPA accounts. Control slippage of loan accounts by regular monitoring. Periodical reviews

should be done.

Prevent the revenue expenses by reducing other expenses Increase the sales of Third party products by cross selling Motivate the customers towards usage of alternate delivery channels which

results in reduction in cost of transaction, thereby we can reduce back office

staff and deploy them in front office.

Minimizing the capital expenses and revenue In connection with compromise settlement, sacrifice amount should be least

possible.


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Recommendations

Targeting HNI Customers

The HNI customers / Top 50 Customers of the branch should be identified & we

can give advisory services to their financial management.

We can sell our Baroda Life Insurance plans, Baroda Pioneer Mutual Funds, Gold

coin sales, Acquiring more Fixed Deposits, Recurring Deposits from them.

Wealthier customers should be invited to the branch and high quality Financial

Advisory Services should be provided.

Target High Business Shops

In Tilaknagar, there is good scope for Retail lending as well as lending to small

Business Units like Branded Textile Showroom, Restaurants, Shopping malls etc.

are popping up gradually. If we can attract those high business shops to have

account (current) with us, then the business of the branch will be increased which

in turn increases the profitability.

Prudent Banker

Most important Strategy to improve the business of the branch.

Each and Every employee has to monitor the transactions very carefully as we

deal with our customers money. They should monitor each and every account

carefully & if they feel the account may slip to NPA category, from the initial

stage itself necessary preventive & recovery measures have to be taken.

Customer Delight

This can be achieved by providing excellent customer service & creating

innovative products for the benefit of the customers. Through customer

cooperation only we can achieve any target in our bank.


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Recognizing our good borrowers

Recognizing our good borrowers and rewarding their loyalty by offeringconcessional rates of interest, better operational flexibility in the operation of their

accounts.

Development Areas

As CASA deposit level is relatively low (32%) more focused efforts needed to be

put in to strengthen the CASA portfolio.

There is a need to inculcate competitive spirit in staff members to promote

business as a bank situated in most banked area where competition to canvass

business relatively on the higher side.

Customer referrals

Referral marketing should be done in the branch because it takes word of mouth

from the spontaneous situation to one where maximum referrals are generated

Segment Customers

We have to segment our customers into the mass market and more affluent or

wealthy individuals. Focus on providing efficient, streamlined services for the

mass market. Focus individual time on building relationships with affluent

customers. All the services of the bank should be clearly communicated to the

customers.

Good Location & Clean Environment

The Branch should give a pleasant and comfortable ambience to the customers and

they should feel the comfortable to visit and get their business done at our branch

again and again. This paves the way to build the Customer Relationship with our

bank and therefore whatever we want to achieve in terms of profit, we can achieve.


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Conclusion

The economic outlook for FY13 is quite mixed. The risks from weak global

outlook, volatile inflation and investment slowdown remain on the downside.

However, our Banks capital strength, adequate liquidity reserves and well

diversified balance sheet & sources of earnings has made it more stable and

stronger.

During FY13, our Bank will continue to expand its market share in both depositsand advances by exploiting its geographic & strategic advantages and capital

strength. As in the past, our Bank will focus on maintaining a high growth in

domestic CASA deposits. Our Bank will leave no stone unturned in maintaining its

asset quality in terms of low NPA ratios.

With reference to Tilaknagar branch, we can infer that the banks policies and

plans to increase business and profit are implemented at the branch level.

Today, the major differentiator amongst the banking service providers is thequality of customer service which the branch is maintaining at high standards at

all times. Tilaknagar branchs well sustained good performance has enabled it to

face the future with confidence and commitment. The varied interests and

expectations of customers have to be taken care of by further improving upon the

delivery of services which if most essential to retain and increase profits and

thereby profitability.

I would specially like to thank my mentor and all staff members of Tilaknagar

branch, as they provided me full support, encouragement and acted as a backbonefor this project.

laxminarayan a

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