MANAGERIAL EFFICIENCY AND EARNINGS QUALITY OF BANKS

Transcription

1 Managerial Efficiency and Earnings Quality of anks MANAGERIAL EFFICIENCY AND EARNINGS QUALITY OF ANKS 6 Contents 6.1 Managerial Efficiency of anks 6.2 Earnings Quality of anks The second aspect considered under FHES Model is the efficiency of the operations of a bank. Efficiency means how well an organisation does its activities with the available resources in a favourable or an adverse situation. In a financial institution, success/failure depends mainly on the competence of the management to plan, organise, operate and control the activities. The earnings performance, profitability and the quality of customer service are the true reflections of the performance of management. Therefore, the three core aspects, namely, Managerial Efficiency, Earnings Quality and Customer Satisfaction were studied under a single head known as Efficiency. 1 Operational performance 2 Managerial Efficiency 3 Earnings Capacity 4 Quality of service to customers Higher Efficiency etter Profitability and Performance 187

2 Chapter 6 In this chapter, the productive as well as operating efficiency of the management and the quality of earnings/profitability are studied through the following CAMEL indicators. 1. Managerial Efficiency Sound management is the key to bank performance but is difficult to measure. It is primarily a qualitative factor applicable to individual institutions. Several indicators, however, can jointly serve as pointers to management soundness. Expenses ratios, Productivity ratios (employee as well as branch), Creditdeposit ratio, and Return on equity (ROE) are used as a proxy of the managerial efficiency. 2. Earnings Quality Earnings quality refers to the composition, level, trend, and stability of the bank s profits. When earnings quality is good, the bank has sufficient profits to support operations, provide for asset growth, and build capital. On the other hand, when earnings quality is poor, loan growth will be constrained. Also the bank may have to provide for losses, and raise further capital. Moreover, depositors may be at greater risk, and shareholder returns may be inadequate. Under earnings quality, three core areas are studied by using financial ratios, viz., operational performance, profitability and source of earnings. 6.1 Managerial Efficiency of anks The most important factor responsible for the efficient functioning of a bank is the efficiency of its management. It is not possible for a bank to run smoothly if its assets, liabilities, incomes and expenses are not properly planned and managed. To evaluate the efficiency of the management of banks 188

3 Managerial Efficiency and Earnings Quality of anks under study, eight ratios are being used. These eight ratios are arranged under four heads which are given below. Managerial Competency The competency of the management is studied through Credit Deposit Ratio and Return on Equity. The Credit Deposit Ratio shows the ability of the management to convert its deposits into credit, and Return on Equity reveals the extent to which the management functioning is effective to offer better and reasonable return to the shareholders of the bank. Employee productivity Employee productivity signifies how far the employees of the bank are capable of increasing the business and profits of the bank. Employees are persons who are in direct contact with the customers and, so, the ambassadors of the bank. Their productivity is studied through two indicators, namely, Profit per Employee (PPE) and usiness per Employee (PE). In addition, the branch level performance also has much impact on the profitability of the bank. ranch productivity The efficiency of the functioning of branches of banks is analysed through Profit per ranch (PP) and usiness per ranch (P). Another key area where the management s continuous care is required is cost reduction. Operating efficiency This is the ability of the management in controlling the expenses, both operating expenses and wage bills, through the ratio of Operating expenses to Total expenses, and Wage bills to Total expenses. Managerial efficiency ratios and the criteria of analysis are shown in Table

4 Chapter 6 Table Managerial Efficiency Ratios Criteria for Analysis Sl No Management Quality Ratios 1 Credit Deposit Ratio (CDR) 2 Return on Equity (ROE) 3 usiness per Employee (PE) 4 Profit per Employee (PPE) 5 Operating expenses to Total expenses (OE to TE) 6 Wage bills to Total expenses (W to TE) 7 Profit per ranch (PP) 8 usiness per ranch (P) Criteria of analysis Higher ratio is better Higher ratio is better Higher ratio is better Higher ratio is better Lower ratio is better Lower ratio is better Higher ratio is better Higher ratio is better Manageria l Competen cy Employee productivi ty Operating efficiency ranch productivi ty Analysis based on Average Ratios Table Means of Managerial efficiency ratios bankwise, bank groupwise and sectorwise Sl No. 1 SI ANK Means of Managerial efficiency ratios PPE PE W to PP CDR OE in in ROE TE in to TE Lakhs Lakhs Crores ST SG (AV.) PN O P in Crores

5 Managerial Efficiency and Earnings Quality of anks 5 OI C ON (AV.) PS (AV.) ICICI HDFC NGP(A V.) ankwise analysis Managerial competency a CreditDeposit Ratio (CD Ratio) A scrutiny of the means of creditdeposit ratios of banks individually for the period under study shows that the average ratio of ICICI ank Ltd., a new generation private sector bank, has the highest ratio (93.84 %), followed by ank of India, a public sector bank b Return on Equity (ROE) The return to the shareholders is studied on the basis of return on equity (ROE). It is seen from Table that ST has the highest ROE of 24.76, followed by Canara ank with The new generation private sector banks are far behind the public sector banks Employee Productivity 191

6 Chapter 6 The productivity of employees is studied by using two ratios, namely, Profit per Employee (PPE) and usiness per Employee (PE). Considering employee efficiency, ICICI ank Ltd. showed excellent performance in both the indicators, followed by HDFC ank Ltd. The PPE and PE of ICICI ank Ltd were lakh and lakh respectively and that of HDFC ank Ltd were 7.54 lakh and lakh respectively. The performance of public sector banks is far below compared to that of the new generation private sector banks Operational Efficiency Two indicators, namely, the ratio of operating expenses to total expenses and wage bills (payments to employees) to total expenses, were used to find out the efficiency of the management to control expenditures. Operating expenses include all expenses other than interest expenses. Wage bills include all payments made to the employees of the bank. An organisation should be able to control these expenses to achieve more profit, thereby enabling the management to offer better return to its shareholders. In terms of the operating expenses to total expenses ratio, there is little difference between banks. ST stands first with the ratio of 25%, followed by Canara ank and ICICI ank Ltd, with the ratio of 26%. When the ratio of wage bills to total expenses is considered, ICICI ank Ltd is seen to show outstanding performance with 6.42% followed by HDFC ank Ltd. Punjab National ank with the highest ratio of 23.11% comes last ranch Level Efficiency Nowadays all banks in India are trying to increase the number of branches to widen their business, financial inclusion and to face the competition effectively. In this connection, per branch efficiency is of 192

7 Managerial Efficiency and Earnings Quality of anks prime importance. Two efficiency indicators, such as business per branch (P) and profit per branch (PP), are used here. The new generation private sector banks showed better performance at the branch level, compared to their competitors (PS), who are having very good track record and government support. As both the indicators are considered, ICICI ank Ltd outscore all other banks with mean PP of 3.52crores and mean P of crore followed by HDFC ank Ltd. with mean PP of 1.74 crore and mean P of crore. The performance of public sector banks is far below compared with the new generation private sector banks. The PP and P of Canara ank, which occupies its position next to NGP, are 0.51crore and crore respectively ank groupwise analysis Table Performance of banks, ank groups and ank sectors under various Managerial efficiency ratios Sl No Details CDR PPE PE RO E OE to TE W to TE PP P 1 ankwise ICICI ICICI ICICI ST ST ICICI ICICI ICICI 2 ank groupwise 3 ank sectorwise NGP NGP NGP NGP NGP NGP SG SG NGP NGP PS PS NGP NGP NGP NGP ank groupwise performance in the managerial efficiency ratios reflects that new generation private sector banks are more efficient than State ank group and other nationalised banks. In terms of creditdeposit ratio (CDR), employee efficiency indicators such as business per employee (PE) and 193

8 Chapter 6 profit per employee (PPE), per branch efficiency indicators such as business per branch (P) and profit per branch (PP) and the ratio of wage bills to total expenses, the new generation private sector banks (NGP) shown better performance than the other two groups. SG stands second in CDR, PP, P and W to TE and ON in PPE, PE, ROE and OE to TE. In terms of ROE and the ratio of operating expenses to total expenses, SG has performed better than the other two groups, followed by ON ank sectorwise analysis The bank sectorwise analysis, i.e., between public sector banks and new generation private sector banks, shows that the new generation private sector banks stand first in terms of converting their deposits into advances (CDR), employee efficiency, per branch efficiency, and the percentage of wage bills to total expenses. As ROE and the mean ratio of operating expenses to total expenses are considered, public sector banks occupied the prime position ankwise analysis Managerial efficiency ratios and differences among banks after controlling for possible changes due to trend over time. Hypothesis I H0: There is no significant difference in the means of managerial efficiency ratios of banks after controlling for possible trends over time The results are interpreted in the following way. This is a multivariate analysis of covariance with time being considered as a covariate. This is done to eliminate possible changes which are natural to the concept being measured, i.e., managerial efficiency ratios among banks after controlling for possible changes due to trend over the period of study Difference in Managerial efficiency ratios of banks due to time 194

9 Managerial Efficiency and Earnings Quality of anks Table Managerial efficiency ratios Variations among banks due to time Effect Value F Time Pillai's Trace b Wilks' Lambda b Hotelling's Trace b Roy's Largest Root b Hypothes is df Error df Sig. Partial eta Squared a. The statistic is an upper bound on F that yields a lower bound on the significance level. b. Exact statistic c. Design: ank + Time While considering the means of eight managerial efficiency ratios after controlling for possible differences over time, the multivariate analysis of covariance (MANCOVA Table No.6.1.4) results show that there is significant difference in the managerial efficiency ratios due to time as Pillai s Trace F value is , which is highly significant at 5% level of significance, i.e., P value <0.05 and the associated Partial Eta Squared is which is very high, hence we may say that there is significant difference in the managerial efficiency ratios of banks over time and so the null hypothesis is rejected Managerial Efficiency: Ratiowise difference between banks due to time Table Managerial efficiency Ratiowise differences among banks due to time Sl. No. Ratios F value Significance value Partial Eta Squared 1 CDR PPE PE ROE OE to TE

10 Chapter 6 6 W to TE 7 PP P While individually considering the managerial efficiency ratios (Table 6.1.5), it may be seen that the differences in the ratios except ROE and OE to TE are significant with P value less than The difference is found insignificant in the ratios of ROE and OE to TE as the P Values are greater than When the degree of variation is studied, PE seems to vary more as the associated Partial Eta Squared is 0.502, which is higher than that of other ratios and the variation is little in the ratio of ROE. Further while looking at the associated Partial Eta Squared, the importance in terms of differences of ratios among banks can be seen, i.e., the higher the value of Partial Eta Squared, the greater the variation. The difference in ratios among banks is in the order of 1.usiness per employee (PE), 2.Creditdeposit ratio (CDR), 3.Profit per employee (PPE), 4.usiness per employee (P), 5.Profit per branch (PP), 6.Wage bills to total expenses (W to TE), 7.Return on equity (ROE) and 8.Operating expenses to total expenses (OE to TE) Difference in Managerial efficiency ratios of banks after controlling for possible variations due to trend over time Table Managerial efficiency ratios Variations among banks after controlling for time an k Effect Value F Hypothesi s df Error df Pillai's Trace Wilks' Lambda Sig. Partial Eta Squared

11 Managerial Efficiency and Earnings Quality of anks Hotelling's Trace Roy's Largest Root a a. The statistic is an upper bound on F that yields a lower bound on the significance level. b. Exact statistic c. Design: ank + Time The result of Multivariate analysis of covariance (MANCOVA, Table 6.1.6) reveals that Pillai s Trace F value is and the P value which is less than 0.05 and the associated Partial Eta Squared is The difference in the managerial efficiency ratios of banks after controlling for possible changes due to trend over time is highly significant. Hence the null hypothesis is rejected Ratiowise difference in Managerial efficiency ratios of banks after controlling for possible variations due to trend over time While taking each ratio separately among banks, it is seen from the multivariate tests that the difference in all ratios are significant as the P values (0.000) in all the indicators are less than Further, while looking at the associated Partial Eta Squared, the importance in terms of differences in the managerial efficiency ratios among banks is seen in the following order. The value of associated Partial Eta Squared is given in brackets. 1) CDR (0.979) 2) OE to TE (0.976) 3) W to TE (0.974) 4) ROE (0.953) 5) PPE (0.923) 6) PE (0.919) 7) P (0.907) 8) PP (0.882) ank groupwise analysismanagerial efficiency ratios and variations among banks after controlling for possible changes due to trend over time 197

12 Chapter 6 Hypothesis II H0: There is no significant difference in the means of Managerial efficiency of the three bank groups under study after controlling for possible trends over time Differences in Managerial efficiency ratios among the three bank groups SG, ON and NGP due to time Table Managerial efficiency ratios Differences between bank groups due to time Tim e Effect Value F Pillai's Trace b Wilks' Lambda b Hypothesis df Error df Sig. Partial Eta Squared Hotelling's Trace Roy's Largest Root b b a. The statistic is an upper bound on F that yields a lower bound on the significance level. b. exact statistic c. Design: G + Time The banks under study are classified into three groups comprising of SG, ON and NGP. Of the eight managerial efficiency ratios considered for possible differences due to time, the MANCOVA results (Table 6.1.7) show that there is significant difference in the ratios due to time as Pillai s Trace F value is and the P value < 0.05, which is significant at 5 % level of significance. The associated Partial Eta Squared is high, i.e., Ratiowise difference in Managerial efficiency ratios among bank groups due to time Table Differences in Managerial efficiency ratios among bank groups due to time 198

13 Managerial Efficiency and Earnings Quality of anks Sl No Ratios F value Significance value Partial Squared 1 CDR PPE PE ROE OE to TE 6 W to TE 7 PP P Eta While individually considering the ratios, it is seen that there is no significant difference in ROE and OE to TE as the P value is above 0.05, and that in other ratios the difference is found significant. Among the 8 ratios, PE seems to change more and the variation is less in ROE. The degree of variation is in the following order (Table 6.1.8). 1) PE 2) PPE 3) CDR 4) P 5) PP 6) W TO TE 7) OE to TE 8) ROE Differences in Managerial efficiency ratios of bank groups after controlling for possible variations due to trend over time Table Managerial efficiency ratios Differences between bank groups after controlling for time Effect Value F Hypothes is df Error df Sig. Partial Eta Squared Pillai's Trace G Wilks' Lambda Hotelling's Trace Roy's Largest Root a a. The statistic is an upper bound on F that yields a lower bound on the significance level. 199

14 Chapter 6 b. exact statistic c. Design: G + Time The result of the Multivariate analysis of covariance (MANCOVA Table 6.1.9) reveals that Pilli s Trace F value is which is significant as the P value is which is less than 0.05 and the associated Partial Eta Squared are Therefore, the difference in the managerial efficiency ratios of the three bank groups SG, OND and NGP, after controlling for possible trends over time is highly significant and hence, the null hypothesis is rejected Ratiowise differences in Managerial efficiency ratios of bank groups Taking each ratio separately among banks, it is seen from the Multivariate tests that the difference in all ratios is highly significant as the P values (0.000) in all the indicators are less than Further, while looking at the associated Partial Eta Squared, the importance in terms of the differences in the managerial efficiency ratios among bank groups is seen in the following order. The value of associated Partial Eta Squared is given in brackets. 1) CDR (0.962) 2) W to TE (0.961) 3) OE to TE (0.960) 4) ROE (0.932) 5) PPE (0.904) 6) PE (0.902) 7) P (0.817) 8) PP (0.795) Managerial efficiency ratios and ank intergroup comparison Difference in Managerial efficiency performance between bank groups Hypothesis IV H0: There is no significant difference in the means of managerial efficiency ratios between the three bank groups 200

15 Chapter 6 Table Managerial efficiency ratios and anks intergroup comparison Effect Value F Hypothesis df Error df Sig. Partial Eta Squared Pillai's trace Wilks' lambda Hotelling's trace Roy's largest root a. Exact statistic a b b. The statistic is an upper bound on F that yields a lower bound on the significance level. The multivariate test results (Table ) shown that the variation in the managerial efficiency ratios between different bank groups is highly significant with significance value at 5% level of significance. The Pillai s Trace F value is and the corresponding Partial Eta Squared is The null hypothesis is rejected and we can say that the difference in the ratios of the three bank groups is highly significant Ratiowise difference between bank groups It is seen from Table that there is significant difference in all the managerial efficiency ratios between SG and NGP, as the significance value in all the ratios is less than While ON is compared with NGP, managerial efficiency ratios of the two groups are seen to differ significantly in all the ratios except ROE and OE to TE. 202

16 Managerial Efficiency and Earnings Quality of anks SG vs. NGP ON vs. NGP Table Managerial efficiency ratios and Ratiowise comparison Group of anks Simple Contrast contrast Estimate Hypothesized Value Difference(Estim ate Hypothesized) CDR PPE PE ROE Dependent Variable OE2T E W2TE PP P Std. Error Sig % Confiden ce Interval for Differenc e Contrast Estimate Lower ound Upper ound Hypothesized Value Difference (Estimate Hypothesized) Std. Error Sig % Confiden ce Interval for Differenc e Lower ound Upper ound a. Reference category = 3 Source: Data anlaysis

17 Chapter ank sectorwise analysis Managerial efficiency ratios and variations among PS and NGP after controlling for possible changes due to trend over time Hypothesis IV H0: There is no difference in the means of managerial efficiency ratios of public sector banks and new generation private sector banks after controlling for possible changes due to trend over time Difference in Managerial efficiency ratios between PS and NGP due to time Table Difference in Managerial efficiency ratios of PS and NGP due to time Effect Valu e F Hypothes is df Error df Sig. Partial Eta Squared Time Pillai's Trace a Wilk s Lambda a Hotelling's Trace Roy's Largest Root a a a. Exact statistic b. The statistic is an upper bound on F that yields a lower bound on the significance level Design: GC + Time Differences in the eight managerial efficiency ratios of both PS and NGP due to time are analysed and the results of the MANCOVA tests (Table ) show that the difference is highly significant at 5% level of significance, as Pillai s Trace F Value is with significance value i.e. P <0.05. The associated Partial Eta Squared is

18 Managerial Efficiency and Earnings Quality of anks Ratiowise difference in Managerial efficiency ratios between PS and NGP due to time While individually considering the managerial efficiency ratios of PS and NGP, it is seen that the variation is significant in the ratios, namely, CDR, PPE, PE, and W to TE, PP and P, as the P value in all cases is less than The difference is not insignificant in the other two ratios, namely, ROE and OE to TE. Among them, PE seems to vary more as the Partial Eta Squared of PE which is higher than the same in other ratios. 205

19 Chapter 6 Table Ratiowise difference in the Managerial efficiency ratios of PS and NGP due to time Sl.No. Ratio F value Significance value Partial Eta Squared 1 CDR PPE PE ROE OE to TE 6 W to TE 7 PP P While looking at the value of associated Partial Eta Squared, the importance in terms of the difference in ratios due to time is in the order of 1.PE, 2.PPE, 3.CDR, 4.P, 5.PP, 6.W to TE, 7.ROE and 8. OE to TE Difference in Managerial efficiency ratios between PS and NGP after controlling for possible changes due to trend over time Table Difference in Managerial efficiency ratios between PS and NGP after controlling for time G C Effect Value F Hypothes is df Error df Sig. Partial Eta Squared Pillai's Trace Wilks' Lambda a Hotelling's Trace Roy's Largest Root b a. Exact statistic b. The statistic is an upper bound on F that yields a lower bound on the significance level Design: GC + Time 206

20 Managerial Efficiency and Earnings Quality of anks The result of Multivariate analysis of covariance (MANCOVA, Table ) reveals that Pillai s Trace is which is significant as the P value (0.000) is less than 0.05 and the associated Partial Eta Squared is Therefore the difference in the managerial efficiency ratios of banks after controlling for possible trends over time is significant. Hence the research hypothesis is accepted Ratiowise difference in Managerial efficiency ratios between PS and NGP after controlling for possible changes due to trend over time While taking each ratio separately among banks, it is seen from the multivariate tests that the difference in all ratios between PS and NGP is significant as the P values (0.000) in all the ratios are less than Further, while looking at the associated Partial Eta Squared, the importance in terms of the difference in managerial efficiency ratios among the two sectors of banks is seen in the following order. The value of associated Partial Eta Squared is given in brackets. 1) CDR (0.962) 2) W to TE (0.960) 3) OE to TE (0.959) 4) ROE (0.930) 5) PPE (0.902) 6) PE (0.898) 7) P (0.817) 8) PP ( Managerial Efficiency Ratios and ank s InterSector Comparison Hypothesis V H0: There is no significant difference in the managerial efficiency ratios of public sector banks and new generation private sector banks over the period of study Table Difference in Managerial efficiency ratios of PS and NGP Effect Valu e F Hypothesi s df Error df Sig. Partial Eta Squared 207

21 Chapter 6 Pillai's Trace a Wilk s Lambda a Hotelling's Trace Roy's Largest Root a. Exact statistic a a While looking at the MANCOVA results (Table ), variations in the managerial efficiency ratios of public sector banks and new generation banks are seen to differ from each other as the concerned Pillai s Trace F value is which is highly significant at 5% significance level, as the P value is which is less than 0.05 and the related Partial Eta Squared is Hence the null hypothesis is rejected and the difference is highly significant Ratiowise difference between PS and NGP Table Difference in Managerial efficiency ratios anks intersector comparison Category of anks Simple Contrast PS vs. NGP Contrast Estimate Hypothesized Value Difference (Estimate Hypothesized) CDR PPE PE ROE Dependent Variable OE2T E W2T E PP P Std. Error Sig

22 Managerial Efficiency and Earnings Quality of anks 95% Confidenc e Interval for Difference Lowe r oun d Uppe r oun d a. exact statistic Considering explanations regarding differences among public sector banks and new generation private sector banks, it is evident from custom hypothesis tests contrast results (K matrix) Table that there is significant variation in all the eight managerial efficiency ratios between public sector banks and new generation private sector banks as the P value of all ratios is less than 0.05 at 5% significance level Overall Managerial Efficiency Performance of anks Sl. No ank Table Ranks of banks based on Managerial efficiency CD R PP E PE RO E RANKS OE to TE W to TE PP P Tot al Av. Ran k Positio n of banks 1 SI VII 2 ST IV 3 PN VII 4 O VI 5 OI V 6 C II 7 ICICI I 8 HDF C III 209

23 Chapter 6 Managerial efficiency of banks is measured by taking averages of the ranks of all ratios used. On the basis of overall managerial efficiency, ICICI ank Ltd ranks first, followed by C. PN and SI are placed in the last position. Sl No ank Table Managerial efficiency Performance of banks in core areas Managerial competency (Av. of ranks in CDR+ROE) Employee productivity (Av. of ranks in PPE+PE) ranch level productivity (Av. of ranks in PP+P) Operational Efficiency (Av. of ranks in OE to TE+W to TE) 1 SI 6.00 VI 8.00 VII 4.00 IV 6.00 VI 2 ST 2.00 I 6.50 VI 5.50 VI 2.50 II 3 PN 4.00 IV 6.00 V 7.00 VII 7.00 VII 4 O 7.00 VII 3.50 III 5.50 VI 5.00 V 5 OI 3.50 III 5.50 IV 5.00 V 4.00 III 6 C 3.00 II 3.50 III 3.00 III 2.50 II 7 ICICI 4.50 V 1.00 I 1.00 I 1.50 I 8 HDF C 6.00 VI 2.00 II 2.00 II 4.50 IV It is evident from Table that ST is the best bank, followed by Canara ank in terms of managerial competency. Regarding branchlevel productivity as well as employee productivity, ICICI ank Ltd ranks first, followed by HDFC ank Ltd. In terms of operating efficiency, ICICI ank Ltd ranks first followed by ST. 6.2 Earnings Quality of anks Earnings quality and profitability reflect the sustainability and efficiency of a bank, and earning capacity of assets ensures the continuity of the profit making process. If the assets or investments made by the bank are not yielding adequate return, they do not have a satisfactory earning capacity. Earnings quality ratios throw light on the profitability of the bank from the viewpoint of 210

24 Managerial Efficiency and Earnings Quality of anks owners and its operating efficiency. Although there are various measures used to calculate the earning performance of a bank, the following measures are considered under this study. a. Operational performance 1) Ratio of Operating profit to Working fund (OP to WF) and 2. urden to Interest income ( to II) ratio indicate the operational effectiveness of a bank. 2) Operating expenses to Total income (OE to TI) reveals the efficiency of a bank to control its operating expenses and increase its revenue. b. Profitability The ratio of Percentage growth in net profit (GINP), Net profit to average assets (ROA), Net interest margin (spread) to Total assets (NIM) were used to study the profitability of the bank. c. Source of earnings The ratio of Interest income to Working fund (II to WF) and Non interest income to Total income (NII to TI) reflects the capacity of the bank to raise income from both the traditional source and the newer source. The earnings quality ratios used in the study and the criteria of analysis are shown Table Table Earnings Quality Ratios: Criteria for analysis Sl Criteria of Earnings Quality Ratios No analysis 1 Operating profit to working fund (OP to WF) Higher ratio is better 2 Operating expenses to total income (OE Lower ratio is to TI) better 3 urden to interest income ( Lower ratio is Operatio nal performa nce 211

25 Chapter 6 to II) 4 Percentage growth in net profit (GINP) 5 Net profit to average assets (ROA) 6 Net interest margin (spread) to Total assets (NIM) 7 Interest income to working fund (II to WF) 8 Non interest income to total income (NII to TI) better Higher ratio is better Higher ratio is better Higher ratio is better Higher ratio is better Higher ratio is better Profitabili ty Source of earnings 6.2.1Analysis based on Average Ratios Table Average Earnings quality ratios of banks, bank groups and bank sectors Sl. No ANKS O.P to WF EARNINGS QUALITY RATIOS OE to TI to II GINP NIM NP to AA (ROA) II to WF NII to T.I 1 SI ST SG(AV ) PN O OI C ON(A V) PS (AV.) ICICI HDFC NGP (AV)

26 Managerial Efficiency and Earnings Quality of anks Source: Compiled and calculated from the Annual Reports of banks ankwise analysis Profitability Only with reasonable profit can a bank survive and do its business smoothly. So, profitability ratios are a clear indication of strength and efficiency. Three ratios are used, namely, percentage growth in net profit, net profit to average assets (ROA), net interest margin or spread to total assets (NIM). In terms of net profit to average assets (ROA), the most important profitability measure which reflects the profitability position, HDFC ank Ltd ranks first, followed by O. In terms of percentage growth in net profit, ICICI ank Ltd shows the highest growth rate (63.39%), followed by ank of India (41.99%). Further in terms of net interest margin (spread), i.e., the difference between interest earnings and interest payments as a percentage to total assets, HDFC ank Ltd has the highest margin (3.92), followed by PN (3.42) Source of earnings The source of earning income is very much important for a bank as its main aim is to lend money to the needy people. A bank has two sources of income, viz., traditional (interest income) as well as newer source (feebased income). In terms of II to WF, ST has the highest ratio, followed by PN. In the mean ratio of Noninterest income to total income, ICICI ank Ltd. has the highest rank, followed by HDFC ank Ltd Operational performance Three indicators, namely, operating profit to working fund (OP to WF), operating expenses to total income (OE to TI), and burden to interest income ( to II), were used to find out the operational effectiveness of a bank. Operating profit to working fund ratio reflects the operational efficiency of a bank. A bank should 213

27 Chapter 6 control its operating expenses to increase its revenue; otherwise it will cause burden on its earnings. Operating expenses include all expenses other than interest expenses. urden means the difference between operating expenses and non interest income. There is only slight change in all the ratios between the banks. In terms of OP to WF, HDFC ank Ltd. stands first, followed by PN. Regarding OE to TI, ST has the lower ratio followed by C. In the ratio of to II, ICICI ank Ltd and C stand first and second respectively ank groupwise analysis Table Performance of banks, bank groups and bank sectors under various earnings quality ratios Sl. N o Details 1 ankwise HDF C 2 ank groupwise 3 ank sectorwise Earnings Quality Ratios Operational Profitability performance O.P OE NP to to to to GINP NIM AA II WF TI (ROA) NGP NGP ST ICICI ICICI ON NGP PS NGP NGP NGP HDF C NGP NGP Source of earnings II to WF HDFC ST NII to TI ICICI NGP SG NGP NGP PS NGP On the basis of operational performance, the new generation private secretor banks performed well in the ratios of OP to WF and to II, whereas ON showed better performance in the ratio of operating expenses to total income. On the profitability side, the new generation private sector banks stand first in all the ratios, namely, net profit to average assets (ROA), percentage growth in net profit, and net interest margin. Regarding the capacity of the bank to raise income from various sources, i.e., in the ratios of interest income 214

28 Managerial Efficiency and Earnings Quality of anks to working fund, SG shows outstanding performance and in the case of non interest income to total income, NGP performed well ank sectorwise analysis ank sectorwise analysis clearly shows that the performance of NGP is better, compared to their rivals. On the profitability side, i.e., in all the ratios, the new generation private sector banks come first, whereas on the capacity of the bank to raise income from various sources, i.e., in the ratio of interest income to working fund, public sector banks show outstanding performance. Again on operational effectiveness, OP to WF and to II and noninterest income to total income, NGP again come first and in the ratio of OE to TI, public sector banks stand first ankwise analysis Earnings Quality Ratios and Variations among banks after controlling for possible trend over time Hypothesis 1 H0: There is no significant difference in the earnings quality ratios of banks after controlling for possible changes due to trend over time Difference in Earnings Quality ratios of banks due to time Table Earnings quality ratios variations among banks due to time Effect Value F Hypothesis df Error df Sig. Partial Eta Squared Time Pillai's Trace b Wilk s Lambda b Hotelling's Trace b

29 Chapter 6 Roy's Largest Root b a. The statistic is an upper bound on F that yields a lower bound on the significance level. b. Exact statistic c. Design: ank + Time Considering the differences in the means of eight earnings quality ratios due to trend over time, the multivariate analysis of covariance (MANCOVA) results Table show that there is difference in the earnings quality ratios as Pillai's Trace F value 8.109, which is significant at 5% level of significance, i.e., the P value <0.05 and the associated Partial Eta Squared is Hence we may say that there is significant difference among the earnings quality ratios of banks due to time and the null hypothesis is rejected Ratiowise difference in Earnings Quality of banks due to time While individually considering the earnings quality ratios of banks, it may be seen that the difference is found significant in three ratios only, namely, net profit to average assets (ROA), interest income to working fund (II to WF) and burden to interest income ( to II), as the P Value < 0.05.The difference is found insignificant in the ratios of OP to WF, PGINNP, NIM, OE to TI and NII to TI, because the significance value at 5% level of significance is >0.05. Table Variations in Earnings quality ratios among banks due to time Sl. No. Ratios F value Significance value 1 OP to WF Partial Eta Squared PGINNP NIM NP to AA

30 Managerial Efficiency and Earnings Quality of anks 5 II to WF OE to TI NII to TI to II The degree of variation is studied on the basis of Partial Eat Squared and it is seen that II to WF seems to vary more as the associated Partial Eta Squared is 0.130, which is higher than that of all other ratios and the variation is little in the ratio of operating profit to working fund (Partial Eta Squared is 0.011) Difference in Earnings quality ratios of banks after controlling for possible variations due to trend over time Table Earnings quality ratios variations among banks after controlling for time Partial Hypothe Error Effect Value F Sig. Eta sis df df Squared an k Pillai's Trace Wilk s Lambda Hotelling's Trace Roy's Largest Root a a. The statistic is an upper bound on F that yields a lower bound on the significance level. b. Exact statistic c. Design: ank + Time The result of Multivariate analysis of covariance (MANCOVA Table 6.2.6) reveals that Pillai s Trace F value is 3.989, which is significant as the P value which is less than 0.05 and the associated Partial Eta Squared is Therefore the difference in the earnings quality performance of banks after controlling for 217

31 Chapter 6 possible changes due to trend over time is highly significant. Hence the null hypothesis is rejected Ratiowise difference in Earnings quality ratios of banks after controlling for possible variations due to trend over time While taking each ratio separately among banks, it is seen from the multivariate tests that the difference in all ratios is highly significant as the P values (0.000) in all the indicators are less than While looking at the associated Partial Eta Squared, the importance of the differences in the earnings quality performance among banks is seen in the following order. The value of associated Partial Eta Squared is given in brackets. 1) II to WF (0.988) 2) NIM (0.985) 3) OE to TI (0.969) 4) OP to WF (0.967) 5) NP to AA (0.931) 6) to II (0.803) 7) NII to TI (0.758) 8) PGINNP (0.347) ank groupwise analysis Earnings quality ratios and variations among banks after controlling for possible changes due to trend over time Hypothesis II H0: There is no significant difference in the means of earnings quality ratios of the three bank groups, SG, ON and NGP, after controlling for possible changes due to trend over time Differences in Earnings quality ratios among the three bank groups, SG, ON and NGP, due to time Table Difference in Earnings quality ratios due to time Effect Value F Hypothesis df Error df Sig. Partial Eta Squared Time Pillai's Trace b Wilk s Lambda b

32 Managerial Efficiency and Earnings Quality of anks Hotelling's Trace Roy's Largest Root b b a. The statistic is an upper bound on F that yields a lower bound on the significance level. b. Exact statistic c. Design: G + Time The banks under study are classified into three groups SG, ON and NGP. As eight earnings quality ratios are considered for possible differences over time, the MANCOVA results show that there is significant difference in the ratios of bank groups due to trend over time as Pillai s Trace F value is and significance value.000 which is highly significant at 5 % level of significance as P<0.05. The associated Partial Eta Squared is and the null hypothesis is rejected Ratiowise difference in Earnings quality ratios among bank groups due to time Table Ratiowise difference among bank groups due to time Sl.N o Ratios F value Significance value Partial Squared 1 OP to WF PGINNP NIM NP2AA II to WF OE to TI NII to TI to II While individually considering the variation in earnings quality ratios over time (Table 6.2.8), it is seen that the difference in three ratios, viz., ROA, II to WF and to II, are significant with P value <0.05. From different Eta 219

33 Chapter 6 earnings quality ratios, II to WF seems to change more among the bank groups and the variation is less in the ratio of OP to WF Differences in Earnings quality ratios of bank groups after controlling for possible variations due to trend over time Table Variations in Earnings quality ratios between bank groups after controlling for time Effect Value F Hypothesi s df Error df Sig. Partial Eta Squared G Pillai's Trace Wilk s Lambda Hotelling's Trace Roy's Largest Root a a. The statistic is an upper bound on F that yields a lower bound on the significance level. b. Exact statistic c. Design: G + Time The result of Multivariate analysis of covariance (MANCOVA Table 6.2.9) reveals that Pillai s Trace F value is which is significant as the P value is which is less than 0.05 and the associated Partial Eta Squared is Therefore the difference in the earnings quality performance of bank groups after controlling for possible trends over time is highly significant. Hence the null hypothesis is rejected Ratiowise differences in Earnings quality ratios of bank groups While taking each ratio separately among banks, it is seen from the Multivariate tests that the difference in all ratios is highly significant as the P values (0.000) in all the indicators are less than While looking at the associated Partial eta Squared, the importance in terms of differences in the earnings quality performance among banks is seen in the following order. The value of associated Partial Eta Squared is given in brackets. 220

34 Managerial Efficiency and Earnings Quality of anks 1) II to WF (0.986) 2) OE to TI (0.961) 3) OP to WF (0.953) 4) NIM (0.951) 5) NP to AA (0.922) 6) to II (0.728) 7) NII to TI (0.637) 8) PGINNP (0.326) Earnings quality ratios and anks intergroup comparison Hypothesis III H0: There is no significant difference in the means of earnings quality ratios of the three bank groups under study Difference in Earnings quality performance between bank groups Table Earnings quality ratios and banks intergroup comparison Effect Valu e Pillai's Trace F Hypothesi s df Error df Sig. Partial Eta Squared Wilk s Lambda a Hotelling's Trace Roy's Largest Root 1 b a. Exact statistic b. The +statistic is an upper bound on F that yields a lower bound on the significance level. The Multivariate test results (Table ) showed that the variation in the earnings quality ratios between different bank groups SG and ON with NGP are highly significant with significance value at 5% level of significance. The Pillai s Trace F value is and the corresponding partial eta squared is Hence the null hypothesis is rejected and it is inferred that banks inter group difference is highly significant Ratiowise difference between bank groups Table Ratiowise comparison between bank groups 221

35 Chapter 6 SG Vs NGP ON Vs NGP Group of anks Simple Contrast OP2W F PGIN NP Contrast Estimate Hypothesized Value Difference (Estimate Hypothesized) Dependent Variable NIM.063 NP2A A II2W F OE2T I NII2TI 2II Std. Error Sig %Confide nce Interval for Difference Lowe r oun d Uppe r oun d Contrast Estimate Hypothesized Value Difference (Estimate Hypothesized) Std. Error Sig %Confiden ce Interval for Difference Low er oun d Upp er oun d a. Reference category =

36 Managerial Efficiency and Earnings Quality of anks The differences in earnings quality ratios of bank groups under public sector banks, viz., SG and ON, were compared with those of NGP. While comparing the difference in the ratios among bank groups SG and NGP by considering the ratios individually, it is found from Table that the significance value at 5% significance level is less than 0.05 in all ratios except PGINNP, NIM, II to WF. Therefore the difference in the ratios of OP to WF, NP to AA, OE to TI, and NII to TI and burden to interest income, is highly significant, and that the difference in the ratios of PGINNP, NIM and II to WF is not significant. etween ON and NGP (i.e. level 2 vs. level 3), the difference is found significant in OP to WF, NP to AA, OE to TI, NII to TI and burden to interest income as the P value is less than 0.05 and not significant in the ratios of PGINNP, NIM and II to WF as the P value is greater than ank sectorwise analysis Earnings quality ratios and variations among PS and NGP after controlling for possible changes due to trend over time Hypothesis IV H0: There is no significant difference in the means of earnings quality ratios of PS and NGP after controlling for possible changes due to trend over the period of study Difference in Earnings quality ratios between PS and NGP due to time Table Difference in Earnings quality ratios between PS and NGP due to time Effect Value F Hypothesi s df Error df Sig. Partial EtaSquare d Time Pillai's Trace a Wilks' Lambda a Hotelling's Trace a Roy's Largest Root a