An Analysis of Earnings Quality among Nationalised Commercial Banks Dr. Surinder Singh Kundu 1 and Mr. Deepak Kumar Sharma 2 Abstract Performance of the economy of any country is largely depends on the performance of its banking sector. The efficiency, productivity, profitability, stability and a shock-free economy is possible only when a country is having a sound and healthy banking sector. The present study attempts to analyse the earning quality of the selected nationalised commercial banks in India. The present study is used exploratory-cum-descriptive research design. The performance of ten nationalised banks i.e., Andra Bank (ANDRA), Bank of Baroda (BARODA), Bank of India (BOI), Canara Bank (CANRA), Corporation Bank (CORPN), Dena Bank (DENA), Indian Overseas Bank (IOB), Indian Bank (INDIAN), Union Bank (UNION), United Bank of India (UNITED) was considered as a sample. The data for the ten years period from the financial year 2004-05 to 2013-14 were used. The study was based on secondary data which were collected through Reserve Bank of India, Report on Trends and Progress on Banking in India, IBA s Bulletins, Journals and internet. It was found that income from interest to total income of Nationalised banks in which, Indian Overseas Bank got at 1st place and Bank of Baroda got at 10th place. On the flip side, Bank of Baroda was 1st rank place and Indian Overseas Bank was at 10th place in non interest income to total income of selected Nationalised banks. It was also found that there is no significance difference between the Interest Income to Total Income and Non Interest Income to Total income of selected Nationalised banks. Hence it may be suggested that nationalised commercial banks have to focus more on interest and non interest incomes to cope up with the economy by improving their operational efficiency. Keywords: Earning, Performance, Nationalised banks, Commercial Banks and Quality. I. INTRODUCTION Banking sector is one of the fastest growing as well as most complex sectors in India. It serves as the backbone of the Indian economy. Indian banking sector is one of the healthiest performers in the world banking industry seeing tremendous competitiveness, growth, efficiency, profitability and soundness, especially in the recent past. Every business entity is judged by its earnings because it is one of the parameters to measure the financial performance of any organizations. But, in the context of banks, quality of earning is also important. The quality of earnings being an important criterion determines the ability of a bank to earn consistently in future. It basically determines the quality of bank s profitability and its ability to maintain quality, sustainability and growth in earnings in the future. The parameter gains importance in the light of the argument that a large part of a bank s income is earned through non core activities like interest and dividend on investments, treasury operations, and corporate advisory services and so on. So, not only earnings, but the quality of earning is also to be seen in the context of sustainability, competitiveness, healthy growth, income from core activities etc. for the banking sector (Gadhia, 2015). II. REVIEW OF LITERATURE Gupta and Sikarwar (2005) examined the financial performance of Indian banks based on the CAMEL model variables and to find out whether the average performance of new private sector and public sector banks differ significantly across the two bank groups for the period of study, i.e. from 2003-04 to 2007-08. For the purpose of study, five private sector banks; ICICI Bank, HDFC Bank, Axis Bank, Kotak Mahindra Bank and Indusind Bank and five public sector banks; State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda, Canara bank and Bank of India have been taken as sample. They concluded that new private sector and public sector banks do not differ significantly in terms of capital adequacy and liquidity, however in terms of asset quality, management quality and earning quality new private sector banks have an 1 Associate Professor and Chairperson, Department of Commerce, Chaudhary Ranbir Singh University, Jind 2 Assistant Professor, Department of Commerce, M.M.P.G. College, Fatehabad 252 Dr. Surinder Singh Kundu and Mr. Deepak Kumar Sharma
edge over public sector banks. Lim, et al. (2009) found the relationship between legal, extra-legal and political institutional factors and earnings quality of banks across countries. Kumar (2012) analysed the performance through CAMEL rating system for measuring overall health and financial status of SBI and its associate banks. The scholar found that SBI and its associate banks succeeded in maintaining capital adequacy ratio at higher level than the prescribed level (more than 9 per cent). The study also revealed that there is a great scope for improvement in the asset quality position, succeed in maintaining higher level of management efficiency of SBI and its associate banks. The earning quality of associate banks has outperformed SBI. The liquidity ratio calculated through this study indicated better liquidity position of SBI and its associate banks during the study period. However, SBI has edge over associate banks, in term of these parameters. Trivedi (2013) evaluated the financial performance of Surat People Co-operative Bank in Surat city using a CAMEL model. The study was based on secondary data drawn from the annual reports of Surat Peoples Co-operative Bank. For the study, the data of 10 years were analyzed by calculating 28 ratios related to CAMEL Model. It was found that overall state of capital adequacy of Surat People Co-operative Bank was satisfactory. As far as loan portfolio is concerned, the overall state of assets quality was good. The management efficiency was also satisfactory. Overall earning capacity of the bank was not bad but the overall state of liquidity was not satisfactory. Khatik and Nag (2014) analyzed the performances through CAMEL model approach of five nationalized banks in India. They found that Bank of Baroda has been ranked at the top position, the Union Bank of India and Dena Bank got the 2nd position, the next was the State Bank of India which got the 4th position and 5 th and the last position was grabbed by the UCO Bank. Aljifri and Khandelwal (2014) presented a new approach to measure earnings quality of Islamic banks. The approach considered the values and principles of Islamic banks and extended the meaning of earning quality to cover not only absence of earnings management, reliability and relevance but also cover the question of meeting certain specific standards. Aloysius (2014) analysed to measure and compare the earnings quality of the top eight banks (six selected public sector banks and two new private sector banks) by considering three core areas viz., operational performance, profitability and sources of income. It was found that HDFC Bank Ltd and State Bank of Travancore ranked first and second, respectively in terms of overall earnings quality performance. The difference in the performance of new private sector banks and the public sector banks was highly significant. In terms of operational performance, Canara Bank was the best bank and HDFC Bank Ltd was the best bank in terms of profitability and source of earnings. Oluoch and Gichaiya (2015) examined the consistency of earnings among commercial banks in Kenya from 2001 to 2012. It was found that the earnings of commercial banks were not transitory over a period of time and not of a high quality. It also resulted that the large size commercial banks have higher persistence coefficients than the small size commercial banks. The study suggested that the investors in a Kenyan commercial bank can have access highly predictable earnings data given the high quality of financial reporting by the banks. III. OBJECTIVES AND METHODOLOGY The main objective of the study was to analyse the earning quality of the selected commercial nationalised banks in India. The sub objectives of study were as under: To analyse the Interest Income to Total Income of the selected nationalised banks. To examine the Non Interest Income to Total Income of the selected nationalised banks i) Hypotheses To validate the result of the study, hypotheses have been taken as Null Hypotheses, There is no significance difference in Interest Income to Total Income among the selected nationalised banks (H 01 ). There is no significance difference in Non Interest Income to Total Income among the selected nationalised banks (H 02 ). ii) Research Methodology and Sample Design The present study used exploratory and descriptive research designs. A sample of the 10 nationalised banks i.e., Andra Bank (ANDRA), Bank of Baroda (BARODA), Bank of India (BOI), Canara Bank (CANRA), 253 Dr. Surinder Singh Kundu and Mr. Deepak Kumar Sharma
Corporation Bank (CORPN), Dena Bank (DENA), Indian Overseas Bank (IOB), Indian Bank (INDIAN), Union Bank (UNION), United Bank of India (UNITED) was taken by using judgemental sampling. The period of study was 2004-05 to 2013-14. The study used secondary data which were collected through Report on Trends and Progress on Banking in India, IBA s Bulletins, Journals and internet. Mean, Coefficient of Variation (CV), Ranking the data and Analysis of Variance (ANOVA) techniques were used for analysing to present the results. IV. RESULTS AND DISCUSSIONS The section elaborates the results derived from secondary data through descriptive and inferential statistical techniques i) INTEREST INCOME TO TOTAL INCOME RATIO This ratio measures the income from lending activities as a percentage of the total income generated by the bank in a year. Interest income includes income from advances/bills, income on investments, interest on deposits with RBI and other banks and dividend income and Total income consists interest income and all non interest incomes. High ratio indicates better situation of the bank. It can be calculated as under: Interest Income to Total Income = Interest Income / Total Income ii) NON INTEREST INCOME TO TOTAL INCOME RATIO This ratio measures the income from operations other than lending as a percentage of total income. Non- Interest Income includes income earned by banks as commission, exchange & brokerage, profit on sale of land, building and other assets, profit/loss on exchange transaction and miscellaneous incomes and Total income consists interest income and all non interest incomes. Higher ratio indicates the increased proportion of fee based income. It can be calculated as under: Non-Interest Income to Total Income = Non Interest Income / Total Income Table 1 shows the Interest Income to Total Income of the selected banks. It reflects in 2004-05 of Andra Bank had the lowest ratio i.e. 75.18 percent and highest ratio i.e., 93.78 percent in 2006-07 of Indian Overseas Bank during the period of study. On an average, Interest Income to Total Income is highest in Indian Overseas Bank i.e., 89.70 percent and lowest in Bank of Baroda i.e., 86.43 percent. On the basis of ranking, Indian Overseas Bank got 1st rank and Bank of Baroda was at 10th rank. Coefficient of variation shows variability in Interest Income to Total Income ratio of selected banks which found highest in ANDRA i.e. 0.06 showing less consistency and lowest in Union Bank of India i.e. 0.02, which indicates more consistency during the period of study. ANOVA result showed that p value (0.701) was more than 0.05 and accepted the hypothesis that there is no significance difference between the Interest Income to Total Income of selected Nationalised banks at 0.05 level of significance. Table 2 depict that the Non-Interest Income to Total Income ratio of the selected banks, in which lowest ratio was 6.22 percent in 2006-07 of Indian Overseas Bank and highest ratio i.e. 18.65 percent in 2005-06 of Bank of Baroda during the period of study. On an average, Non-Interest Income to Total Income was highest in Bank of Baroda i.e. 13.57 percent and lowest in Indian Overseas Bank i.e. 10.30 percent. Bank of Baroda got 1st rank and Indian Overseas Bank was at 10th place in all. Coefficient of variation showed Non Interest Income to Total Income ratio of selected banks, in which highest ratio of Andra Bank was 0.42 percent showing less consistency and lowest ratio was in case of Union Bank of India i.e. 0.18 percent, this indicates more consistency. ANOVA result shows that p value (0.579) was more than 0.05. Therefore, there is no significance difference between the Non Interest Income to Total income of selected Nationalised banks by accepting the hypothesis H 02 at 0.05 significance level. V. CONCLUSIONS AND RECOMMENDATION The banks have entered into different areas and they can earn income from other sources than their core income. It may be concluded that the present study found that Interest Income to Total Income of Nationalised 254 Dr. Surinder Singh Kundu and Mr. Deepak Kumar Sharma
banks in which, Indian Overseas Bank got 1st rank and Bank of Baroda got 10th rank. On the other hand, Bank of Baroda achieved 1st rank and Indian Overseas Bank attained 10th rank in Non-Interest Income to Total income out of 10 selected Nationalised banks. It was also found that there is no significance difference between the Interest Income to Total Income and Non-Interest Income to Total income earned by these banks. In order to survive in the market, banks should improve their profitability and this can be done only through higher operational efficiency. REFERENCES: Aljifri, K., and Khandelwal, S.K. (2014). A New Approach of Measuring Earnings Quality in Islamic Banks. Journal of Account Marketing. 3(1), 1-2. Aloysius, O.C., (2014). Earnings Quality of Commercial Banks in the Post- liberalized Era: A Multivariate Analysis. International Research Journal for Business and Management. 8(9). Gadhia, N.M., (2015). A Study of Earning Quality of Selected Public & Private Sector Banks in India. Indian Journal of Applied Research. 5(7), 567-569. Gupta, R.K. and Sikarwar, E. (2005). Financial Performance of Indian New Private and Public sector banks. Accessed from http://www.bvimsr.com/documents/publication/2009 V1N2/07.pdf on October 22, 2015. https://en.wikipedia.org/wiki/earnings_quality on October 22, 2015. https://www.google.co.in/#q=earning+quality+wikipedia on October 22, 2015. Khatik, S.K., and Nag, A.K., (2014). Analyzing soundness of Nationalized Banks in India: A Camel Approach. Applied Studies in Agribusiness and Commerce, 8(1), 73-78. Kumar, A.V., (2012). Evaluating Performance of Banks through Camel Model- A Case Study of State Bank of India and Its Associates. International Interdisciplinary Research Journal, 2(4), November-December. Lim, C.Y.; Lobo, G.; and Kiridaran, K., (2009). Effects of International Institutional Factors on Earnings Quality of Banks. Northern Finance Association Conference. Research Collection School of Accountancy, Available at: http://ink.library.smu.edu.sg/soa_research/264 Oluoch, J. and Gichaiya, W.M. (2015). Earnings Quality of Public Banks in Kenya: Evidence From Persistence of Earnings. European Scientific Journal. 11(16), 74-89. Rajasekar, T. and Rameshkumar, S. (2015). Analysis of Financial Health of the New Private Sector Banks in India through CAMEL Rating System. International Journal of Business and Management Invention, 4(5), 48-51. Trivedi, K. R. (2013). A Camel Model Analysis of Scheduled Urban Co-operative Bank in Surat City A Case Study of Surat People s Co-operative bank. IOSR Journal of Business and Management. 48-54. Accessed from www.iosrjournals.org. on October 22, 2015. Table 1: Interest Income to Total Income Ratio of the Selected Banks (In Percent) Years ANDRA BOI BARODA CORPN CANRA DENA INDIAN IOB UNION UNITED 2004-05 75.18 83.84 82.71 79.94 81.10 84.72 83.36 86.06 85.04 83.52 2005-06 85.38 85.58 81.35 84.72 85.63 79.32 84.70 85.82 87.74 82.87 2006-07 88.12 85.45 86.26 85.84 88.26 84.40 83.86 93.78 85.81 88.15 2007-08 88.07 85.37 85.21 86.58 86.01 85.92 83.83 90.80 86.98 83.01 2008-09 87.53 84.27 84.55 84.57 87.57 88.91 86.84 85.80 88.91 89.78 2009-10 86.85 87.23 85.61 86.01 86.78 87.20 87.00 89.97 87.07 90.38 2010-11 90.24 89.17 88.62 87.34 89.51 90.41 88.79 90.81 88.97 90.87 2011-12 92.95 91.33 89.66 89.71 91.33 92.11 90.85 91.41 90.07 91.57 2012-13 92.50 89.44 90.65 90.51 91.53 93.14 91.52 91.29 90.78 89.66 2013-14 91.47 89.83 89.72 91.60 90.96 93.52 91.75 91.27 91.23 89.78 Average 87.83 87.15 86.43 86.68 87.87 87.97 87.25 89.70 88.26 87.96 Ranking 6 9 10 7 5 3 8 1 2 4 CV 0.06 0.03 0.04 0.04 0.04 0.05 0.04 0.03 0.02 0.04 ANOVA p-value=0.701 Source: Performance Highlights of Various Banks; Degree of freedom: 9, 90. 255 Dr. Surinder Singh Kundu and Mr. Deepak Kumar Sharma
* Significance at the 5% level of Significance. Table 2: Non Interest Income to Total Income Ratio of the Selected Banks (In Percent) Years ANDRA BOI BARODA CORPN CANRA DENA INDIAN IOB UNION UNITED 2004-05 24.82 16.16 17.29 20.06 18.90 15.28 16.64 13.94 14.96 8.47 2005-06 14.62 14.42 18.65 15.28 14.37 20.68 15.30 14.18 12.26 17.13 2006-07 11.88 14.55 13.74 14.16 11.74 15.60 16.13 6.22 14.19 11.85 2007-08 11.93 14.63 14.79 13.42 13.98 14.08 16.17 9.20 13.02 16.99 2008-09 12.47 15.73 15.45 15.43 12.43 11.09 13.16 14.20 11.09 10.22 2009-10 13.15 12.77 14.39 13.99 13.22 12.80 13.00 10.03 12.93 9.62 2010-11 9.76 10.83 11.38 12.66 10.49 9.59 11.21 9.19 11.03 9.13 2011-12 7.05 8.67 10.34 10.29 8.67 7.89 9.15 8.59 9.93 8.43 2012-13 7.50 10.56 9.35 9.49 8.47 6.86 8.48 8.71 9.22 10.34 2013-14 8.53 10.17 10.28 8.40 9.04 12.27 8.25 8.73 8.77 10.22 Average 12.17 12.85 13.57 13.32 12.31 12.61 12.75 10.30 11.74 11.24 Ranking 7 3 1 2 6 5 4 10 8 9 CV 0.42 0.20 0.23 0.25 0.27 0.32 0.26 0.27 0.18 0.29 ANOVA p-value=0.579 Source: Performance Highlights of Various Banks; Degree of freedom: 9, 90. *Significance at the 5% level of Significance. 256 Dr. Surinder Singh Kundu and Mr. Deepak Kumar Sharma