CREDIT ANALYSIS OF BANKS AND NBFC

Submitted by:

Nirvika Mohan

PGDM - Finance

Company Overview

• DBS Bank Ltd is a Singaporean Bank known as Development Bank of Singapore• Set up by Government of Singapore in June 1968.• It is the largest bank in South East Asia by assets and

among largest banks In Asia.• It has market dominant position in consumer banking,

treasury and markets, asset management etc.• Named safest bank in Asia by Global Finance for six

consecutive years from 2009 to 2014.

Background of the project• Credit analysis of large private sector banks namely

HDFC Bank, ICICI Bank and Axis Bank• Credit Analysis of Tata Capital• Ratio analysis

Credit Analysis of Banks• Credit analysis is done to understand the ability of the

bank to meet its liabilities.• Seeks to understand the level of default risk associated

with investing in that entity.• CAMELS- Capital Adequacy, Asset quality,

Management Quality, Earnings, Liquidity, Sensitivity to Market risk.

Methodology• Spreading of financial data from annual reports• Computation of relevant ratios• Preparing a camels analysis on the banks and nbfc.

Scope and Limitations• The scope of the project covered banks and nbfcs• The financial analysis was only limited to private

sector banks

Capitalization• Capitalization levels continued to remain strong with

CRAR and tier 1 ratio at 16.8% and 13.7 %• Total networth increased by 43% to USD 9.7B• Networth to weaker assets ratio remained better than

peers.• Overall we derive comfort from the bank’s strong

capitalization and ability to successfully raise equity capital from the market.

Asset Quality• Bank’s balance sheet total assets grew by 20% in FY

2015 to USD 92.7B• Asset portfolio comprises of loans and advances

(62%), investments (28%), cash and bank balances (5%) and others (5%)• HDFC Bank mainly focuses on retail loans which

account for 53% of the loan portfolio• Bank maintains strong credit quality as seen from their

low level of NPAs.

• Gross and Net Npa were stable at 0.93% and 0.26 % • Total investment portfolio increased by 37% to USD

26B primarily includes investments in G-secs (72.3%).• Non SLR portfolio of the bank stood at USD 7.2B and

primarily includes investments in bonds issued by Banks and FIs (45.9%)• It can be expected that the bank’s asset quality will

remain better than peers on account of underwriting standards and granular loan portfolio.

Management team• HDFC bank’s risk management is considered to be

good reflective of the bank’s financial position.• Chairman Mr. C.M Vasudev was replaced by Mrs.

Shymala Gopinath.• Senior management has shown consistency in

performance of the bank.• HDFC Bank has strong distribution network and retail

customer franchise .

Earnings profile• Total net operating income increased by 19% to USD

4.9B.• Net interest income increased by 21.2% to USD 3.5B • Operating profitability margin also increased

marginally to 1.8%• PAT increased by 20% to USD 1.6B • ROAA and ROAE in FY15 stood at 1.9% and 19.4%

respectively

Funding• Total Liabilities excluding networth increased by 18%

to USD 83B on account of deposits• CASA deposit ratio was at 44% in line with peer

average• Credit deposit ratio increased to 81.6% however was

lower than peer average• Based on ALM statement of the bank, there was no

negative funding gap.• Comfort can be derived from overall funding profile

Sensitivity to Market Risk• HDFC Bank is exposed to market risk arising from its

investment portfolio of USD 26B• A percent increase in interest rates could result in a

loss of USD 314.6 M on AFS and HFT portfolio.• Amounts to 3.2% of its networth• Total commitments and contingencies for HDFC bank

stood at USD 153B which accounts for 1.65 times of bank’s total assets and 15.7 times its networth.

Conclusion• The Bank can be evaluated well based on its strong

business position, capitalization levels, good asset quality, stable earnings and funding profile• Further it can be rated based its position as second

largest private sector bank in terms of total assets with market share of 5% of total advances and deposits.

Efx- Scoping and Strategy Evaluation• FX all leading independent electronic foreign

exchange platform of Thomson Reuters• Provides liquidity to active traders, asset managers,

corporate treasuries, market makers, broker dealers etc.• Offers liquidity upto one week tenor and 3 months

incase ISDA is signed with the bank

Objectives of the project

• Evaluating what should be extent of marketing efforts by DBS India Treasury sales team.• Onboard more bank clients on efx platform• To understand the FX All platform with respect to its

interface with clients.• To promote DBS as a liquidity provider on FX All• To understand the various issues and raise the same to

the head office

Scope of the project• Indian banks onshore branches• Offshore branches of the Indian banks where they are

currently not onboarded

Limitations of the project• Limited to banks only• Limited to promoting FX All platform

Methodology

• Primary Research which involved telephonic survey.•Meeting Traders to understand the FX All platform• For new onboardings, liaising between client’s back

office and DBS Singapore for settlement instructions.• Once the CLS settlement is in place, call vendor to get

client onboarded and transact a deal

Findings• Stale pricing•Wide bid ask quotes compared to other banks.• Rejection issues due to the minimum notional amount

or latency.• Clients want RFQ for swaps which DBS is not

providing at the moment.

Recommendations

• DBS should refresh their quotes on timely basis to avoid stale pricing.• Pricing issues should be raised to the head office as

this leads to removal from the ladder• DBS should quote for swaps on RFQ basis

Conclusion• DBS being a late entrant in the Efx space for Indian

clients needs to market itself more rigorously as a liquidity provider.• There are many competitors in the Efx domain

therefore DBS needs to offer the best quotes to attract more revenue.• It should try to expand clientele through other

platforms as well.