Project on UCO Bank Final

Banking Project

on

UCO-Bank Analysis Submitted to-

Dr. Puneet Dublish

Submitted by-

Anish Bhattachayya [FT-09-]

Anurag Kumar Mishra [FT-09-729]

Durgesh Tiwari [FT -09-748]

Jagat Singh Nagar [FT -09-754]

Sourav Mukherjee [FT- 09-887]

Shwetank Kumar [FT -09-856]

Acknowledgement We take this opportunity to convey our sincere thanks and gratitude to all those who have

directly or indirectly helped and contributed towards the completion of this project.

First and foremost, we would like to thank Dr. Puneet Dublish for his constant guidance and

support throughout this project. During the project, we realized that the degree of

relevance of the learning being imparted in the class is very high. The learning enabled us to

get a better understanding of the nitty-gritty of the subject which we studied.

We would also like to thank our batch mates for the discussions that we had with them. All

these have resulted in the enrichment of our knowledge and their inputs have helped us to

incorporate relevant issues into our project.

TABLE OF CONTENTS

Sl. No.

Topic

1 Introduction 2 Camels Framework 3 Need, Scope & Objective Of Study 4 Methodology 5 Data Analysis And Interpretations 6 Conclusion & Recommendations 7 References

Executive Summary The banking sector has been undergoing a complex, but comprehensive phase of

restructuring since 1991, with a view to make it sound, efficient, and at the same time

forging its links firmly with the real sector for promotion of savings, investment and growth.

Although a complete turnaround in banking sector performance is not expected till the

completion of reforms, signs of improvement are visible in some indicators under the

CAMEL framework. Under this bank is required to enhance capital adequacy, strengthen

asset quality, improve management, increase earnings and reduce sensitivity to various

financial risks. The almost simultaneous nature of these developments makes it difficult to

disentangle the positive impact of reform measures. Keeping this in mind, signs of

improvements and deteriorations are discussed for the three groups of scheduled banks in

the following sections.

The whole banking scenario has changed in the very recent past on the recommendations of

Narasimham Committee. Further BASELL II Norms were introduced to internationally

standardize processes and make the banking industry more adaptive to the sensitive market

risks. The fact that banks work under the most volatile conditions and the banking industry

as such in the booming phase makes it an interesting subject of study. Amongst these

reforms and restructuring the CAMELS Framework has its own contribution to the way

modern banking is looked up on now. The attempt here is to see how various ratios have

been used and interpreted to reveal a banks performance and how this particular model

encompasses a wide range of parameters making it a widely used and accepted model in

today’s scenario.

Introduction

UCO Bank, previously known as United Commercial Bank, is a leading commercial bank in

India. Founded in Kolkata in 1943, UCO Bank is one of the oldest Indian banks as well. It was

the eminent Indian industrialist Ghanshyam Das Birla who, during the Quit India Movement

of 1942, thought of establishing a commercial bank with Indian capital and management.

United Commercial Bank was the outcome of that idea. It, along with 13 others, was

nationalized on July 19, 1969. In the year 1985, its name was changed to UCO Bank.

Currently, UCO Bank has around 2000 Service Unites spread all across the nation. It also has

two overseas branches in Hong Kong and Singapore.

UCO Bank has its presence in all segments of the economy including Industry, Agriculture,

Infrastructure Sector, Service Sector and Trade & Commerce. It works towards becoming

one of the most trusted and admired financial institution as well as the most sought-after

destination for the customers and investors.

UCO Bank has a large number of Service Units (around 2000) located across the nation and

overseas. These also include specialized and computerized branches. It also has its

Correspondents / Agency arrangements all across the world. UCO Bank also carries out

Foreign Exchange Business in more than 50 centers across the nation with 4 Foreign

Exchange Dealing Operations centers.

Deposit Schemes

Following deposit schemes are offered by UCO Bank:

• No-frills Savings Bank Account

• Money Back Recurring Deposits

• Friend-in-Need Scheme

• Two-way Deposit Scheme

• Lakshmi Yojana

• Kuber Yojana

• Flexible Fixed Deposit Scheme

• Special Deposit Scheme for Senior Citizens

• Current Account in Foreign Currency at Indian Branches

• Fixed Deposits in Foreign Currency at Overseas Branches

• Revised Minimum Balance Schedule

• UCO Tax Saver deposit Scheme - 2006

• UCO Premium Plus

Loan Schemes

Following loan schemes are offered:

• UCO Shelter

• UCO Car

• UCO Trader

• Education Loan

• UCO Cash

• UCO Rent

• UCO Mortgage

• UCO Securities

• UCO Real Estate

• UCO Nari Shakti

• UCO Shopper

• UCO Pensioner

• UCO Emd Loan

• UCO Swabhiman - Reverse Mortgage Loan Scheme for Senior Citizen

• Interest Subsidy Scheme for Housing the Urban Poor (ISHUP)

NRI Corner UCO Bank offers a range of services for the NRIs. Following are the services that NRIs can

choose from:

• Deposit Schemes

• Foreign Currency Non Resident (FCNR-B) Deposits

• Resident Foreign Currency (RFC) Deposits

• Non Resident External (NRE) Deposits

• Non Resident Ordinary (NRO) Deposits

• Remittance to India

• Loans to NRIs

• Against Deposits

• NRI Home Loans

International Banking

Following international banking services are offered;

• Products & Services

o NRI Banking

o Foreign Currency Loans

o Finance/Services to Exporters

o Finance/Services to Importers

o Remittances

o Forex & Treasury Services

o Resident Foreign Currency (Domestic) Deposits

o Correspondent Banking Services

o General Banking Services

• Foreign Currency Loans

• Finance/Services to Exporters

• Finance/Services to Importer

• Remittances

• Forex & Treasury Services

o Forex Inter Bank Placements/Borrowings

o Sale & Purchase of currency on behalf of customers

o Forward Cover Bookings

o Cross Currency Swaps

o Interest Rate Swaps (IRS)

o Forward Rate Arrangements (FRAs)

o Forex Money Market Operations

• Resident Foreign Currency (Domestic) A/Cs

• Correspondent Banking Services

CAMELS Framework Supervisory framework, consistent with international norms, covers risk-monitoring factors

for evaluating the performance of banks. This framework involves the analyses of six groups

of indicators reflecting the health of financial institutions. The indicators are as follows:

CAPITAL ADEQUACY

ASSET QUALITY

MANAGEMENT SOUNDNESS

EARNINGS & PROFITABILITY

LIQUIDITY

SENSITIVITY TO MARKET RISK

Objectives of Study

To do an in-depth analysis of the UCO bank

To analyze UCO banks to get the desired results by using CAMELS, ROA, ROE and other

analysis as a tool of measuring performance.

Research Proposal The Bank after the implementation of the balanced scorecard in 2002 has under gone a

drastic change. Both its peoples and process perspectives have changed visibly and the

employees have full faith in the new strategy to produce quick results and keep them ahead

in the industry. The balanced scorecard approach has brought about more role clarity in the

job profile and has improved processes. In short it focuses not only on short term goals but

is very clear about its way to achieve the long term goal.

Scope of the Research “To study the strength of using CAMELS framework as a tool of performance evaluation for

banking institutions.”

Type of research: Descriptive

Methodology

Data source:

Primary Data: Primary data was collected from the company balance sheets and company

profit and loss statements.

Secondary Data: Secondary data on the subject was collected from ICFAI journals, company

prospectus, company annual reports and IMF websites.

Plan of analysis:

The data analysis of the information got from the balance sheets was done and ratios were

used. Graph and charts were used to illustrate trends..

Limitations of the study The study was limited to UCO banks of 3-4 years.

2) Time and resource constrains.

3) The method discussed pertains only to banks though it can be used for performance evaluation

of other financial institutions.

4) The study was completely done on the basis of ratios calculated from the balance sheets.

Analysis and Interpretation Now each parameter will be taken separately & discussed in detail.

Capital adequacy:

Capital adequacy ratio is defined as

, Where Risk can either be weighted assets ( ) or the respective

national regulator's minimum total capital requirement. If using risk weighted assets,

≥ 8%.

The percent threshold (8% in this case, a common requirement for regulators conforming to

the Basel Accords) is set by the national banking regulator.

Two types of capital are measured: tier one capital, which can absorb losses without a bank

being required to cease trading, and tier two capital, which can absorb losses in the event of

a winding-up and so provides a lesser degree of protection to depositors.

Capital Adequacy Ratio

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10 11.12 11.56 10.09 11.93 13.21

Interpretation:

Capital adequacy ratio (CAR) is a ratio of a bank's capital to its risk. National regulators track

a bank's CAR to ensure that it can absorb a reasonable amount of loss and are complying

with their statutory Capital requirements. The formula for Capital Adequacy Ratio is, (Tier 1

Capital + Tier 2 Capital)/Risk Weighted Assets. Capital adequacy ratio is the ratio which

determines the capacity of the bank in terms of meeting the time liabilities and other risks

such as credit risk, operational risk, etc. In the simplest formulation, a bank's capital is the

"cushion" for potential losses, which protects the bank's depositors or other lenders. Here,

incase of UCO Bank we can see that its CAR showed a sudden dip in the year 2008 but after

that it has shown a steady rise for the next 2 years which is a good sign for its depositors and

investors.

0

2

4

6

8

10

12

14

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

Debt-Equity Ratio

Mar '06

Mar '07

Mar '08

Mar '09 Mar '10

69.93 84.22 102.11 186.19 234.24

Interpretation:

The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of

shareholders' equity and debt used to finance a company's assets. Here, in case of UCO Bank

we can see that the Debt-Equity ratio has increased over the years. This is because its equity

capital showed no growth from the year 2006 to 2008 and it decreased by around Rs250

crore in 2009 and remained the same for the year 2010. But its debt capital has shown a

steady increase over the past 5 years. From this we can infer that since UCO Bank is a public

sector undertaking it depends much more on debt capital ruther than equity capital.

0.00

50.00

100.00

150.00

200.00

250.00

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

Advances to Assets

Mar '06

Mar '07

Mar '08

Mar '09 Mar '10

0.60 0.63 0.61 0.62 0.60

Interpretation:

“Advances to Asset” is also a good indicator of a firm’s Capital Adequacy. A high ratio of

Advances to Assets would mean that the chances of Non Performing Assets formation are

also high, which is not a good scenario for a bank. This would mean the credibility of its

assets would go down. In case of UCO Bank we can see that it is able to maintain a pretty

steady ratio of its Advances to Assets which means the credibility of its assets is good.

0.59

0.59

0.60

0.60

0.61

0.61

0.62

0.62

0.63

0.63

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

Government Securities to Total Investments

Mar '06

Mar '07

Mar '08

Mar '09

Mar '10

0.81 0.83 0.83 0.86 0.86

Interpretation:

The ratio of Government Securities to Total investments shows how safe are the company’s

investments. Here, in case of UCO Bank we can see that its ratio of investments in

Government Securities to Total Investments is very high and it has remained quite steady

over the years with minimal fluctuations. The high ratio tells that UCO Banks investment

policy is conservative and their investments are safe.

0.79

0.80

0.81

0.82

0.83

0.84

0.85

0.86

0.87

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

Assets Quality 1- Gross NPA to net Advances-

1652/51129=0.0323

1540/64020=0.024

1640/77560=0.021

The gross NPA was 1652, 1540 and 1640 in 2008,09 and 2010 respectively. The

analysis shows that the gross nonperforming assets were 3.2% 0f the net advances

means the bank was not able to receive the repayment of 3.2% of the total load and

advances.

In 2009 it was 2.4% of the total net advances means that the bank is improving its

capability to get return its loans and advances in comparison to 2008 that is it was

lesser than the gross npa of 2008.Same in the 2010 it was continue decreasing .

00.0050.01

0.0150.02

0.0250.03

0.035

NPA IN 2008NPA IN2009

NPA IN2010

Gro

ss N

PA to

Net

Adv

ance

s in

%

NPA IN 2008 NPA IN2009 NPA IN2010

Series1 0.032 0.024 0.021

Gross NPA to Net Advances

Overall interpretation is the UCO bank is focusing towards the NPA the company

doesn’t want to increase the NPA because it will affect the performance of the bank

as due to increase in NPA the capital adequacy, of the bank will decrease.

1. NPA to net Advance-

1092/51129=0.021

813/64020=0.012

900/77560=0.011

In this section it can be seen from the above that the bank is able to decrease to its

NPA and due to this the bank is able to increase its capital adequacy and also the

profitability of bank is increasing continuously. The gross profit of the bank is Rs 5020

crore in 2008, Rs 6476 crore in 2009, and Rs 7202 crore in 2010.

If we see the analysis it can be seen that the net NPA of the bank was more in 2010 in

comparison to 2009 but still the profit was more in 2009 than 2008 the reason os

that this time bank is able to reduce its cost of fund.

in 2008 in 2009 in 2010

Series1 0.021 0.012 0.011

0

0.005

0.01

0.015

0.02

0.025

Net

NPA

to N

et A

dvan

ces i

n %

Net NPA to Net Advances

2. Total investment to total assets- 23135/83815=0.27 28110/104291=0.26 42358/129504=0.32

The bank invested 27%, 26% and 32%, in 208. 09 and 2010 respectively of its total assets

means bank invested more than one fourth of its total assets that shows that the

bank is moving towards the safe side. It can be seen that the bank is increasing its

investment with the increase in the total assets.

The policy of the bank is to be safe.

3. Percentage change in net NPA-

813-1093/1093=-0.25

900-813/813=0.10

The bank was able to reduce its net NPA in 2009 over 2008 means that was able to

get receive its fund. But in 2010 the net NPA was more than 2009. Meaning is that the

bank was not able to control its NPA i.e. bank did not get return on its loans and

advances. But still the profit of the bank is more than 2009 because the total assets

of the bank are increased and also the bank was able to reduce its cost of fund.

In 2008 In2009 In 2010

Series1 0.27 0.26 0.32

00.05

0.10.15

0.20.25

0.30.35

Tota

l inv

estm

ent t

o To

tal

Asse

ts in

%

Total Investment to Total Assets

4. Net NPA to total Assets-

1092/83815=0.013

813/104291=0.007

900/129504=0.006

When the Net NPA is compared with the total assets in is continuously increasing and the

percentage of net NPA is decreasing over the total assets. Due to decrease in the Net NPA

the bank’s capital adequacy is increasing and the bank is able to pay more loans.

In 2008 In 2009 In 2010

Series1 0.013 0.007 0.006

0

0.002

0.004

0.006

0.008

0.01

0.012

0.014

Net

NPA

to T

otal

Ass

ets i

n %

NET NPA TO TOTAL ASSETS

Management Management of financial institution is generally evaluated in terms of capital adequacy,

asset quality, earnings and profitability, liquidity and risk sensitivity ratings. In addition,

performance evaluation includes compliance with set norms, ability to plan and react to

changing circumstances, technical competence, leadership and administrative ability. Sound

management is one of the most important factors behind financial institutions’

performance. Indicators of quality of management, however, are primarily applicable to

individual institutions, and cannot be easily aggregated across the sector. Furthermore,

given the qualitative nature of management, it is difficult to judge its soundness just by

looking at financial accounts of the banks. Nevertheless, total advance to total deposit,

business per employee and profit per employee helps in gauging the management quality of

the banking institutions.

Several indicators, however, can jointly serve—as, for instance, efficiency measures do—as

an indicator of management soundness. The ratios used to evaluate management efficiency

are described as under:

Profit per branch: (Rs. in crores)

Year Mar-10 Mar-09 Mar-08 Mar-07 Mar-06 Net Profit 1012.19 557.72 412.16 316.10 196.65 No. of Branches 2152 2069 1961 1849 1744 Net Profit /No. of Branches 0.470334 0.269560 0.210178 0.170957 0.112758

Interpretation:

Profit per branch shows the increasing trend. As number of branches of UCO bank are

increasing and percentage of profit per branch also is increasing. It shows the effective

management of UCO bank. It not only focuses on increasing branches but also profit per

branches. UCO bank has increased no. of branches from 1744 branches to 2152 branches also

ratio of profit per branch is four times.

0.470334

0.26956

0.2101780.170957

0.112758

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

2010 2009 2008 2007 2006

Profit per branch

Profir per branch

Total Advance to Total Deposit Ratio:

This ratio measures the efficiency and ability of the banks management in converting the

deposits available with the banks (excluding other funds like equity capital, etc.) into high

earning advances. Total deposits include demand deposits, saving deposits, term deposit

and deposit of other bank. Total advances also include the receivables. Total Advance to

Total Deposit Ratio =Total Advance/ Total Deposit

(Rs. in Crores) Particulars Mar-10 Mar-09 Mar-08 Mar-07 Mar-06 Deposits 122,415.55 100,221.57 79,908.94 64,860.01 54,543.7 Advances 82,504.54 68,803.86 55,081.89 46,988.91 37,377.58 Total advances/Total Deposits

0.6739 0.6865 0.6893 0.7244 0.6852

Interpretation:

This ratio measures the efficiency and ability of the banks management in converting

deposits available with the banks (excluding other funds like equity capital, etc.) into high

0.64

0.65

0.66

0.67

0.68

0.69

0.7

0.71

0.72

0.73

2010 2009 2008 2007 2006

Total advance to total deposits Ratio

Total advance to total deposits Ratio

earning advances. Total deposits include demand deposits, saving deposits, Term deposit

and deposit of other bank. Total advances also include the receivables.

In year 2008, ratio of total advance to total deposits showed decline trend mainly due to

Recession. Due to sub-prime crisis, all over the world mainly financial institution’s failure in

US market; Bank across the world started preferring liquid assets. Even gold were been sold

in exchange of currency. This can be one of the main reason for giving less advance as bank

were short of liquidity.

But, after that bank managed it well, in 2010 ratio increased due effective management.

Business per Employee:

Revenue per employee is a measure of how efficiently a particular bank is utilizing its

employees. Ideally, a bank wants the highest business per employee possible, as it denotes

higher productivity. In general, rising revenue per employee is a positive sign that suggests

the bank is finding ways to squeeze more sales/revenues out of each of its employee.

Business per Employee =Total Income/ No. of Employees

(In Rs. crores)

Jun 10 Jun 09 Jun 08 Business per Employee 8.88 7.36 5.82

(Sources: http://www.ucobank.com/Performance-Board-June10.pdf)

Interpretation

Revenue per employee is a measure of how efficiently a particular bank is utilizing its

employees. Ideally, a bank wants the highest business per employee possible, as it denotes

higher productivity. In general, rising revenue per employee is a positive sign that suggests

the bank is finding ways to squeeze more sales/revenues out of each of its employee. UCO

bank is doing well; it has increased from 5.82 to 8.82 crores.

0123456789

10

2010 2009 2008

Profit per Employee

Profir per employee

Earnings Quality

Percentage Growth in Net Profits

2007 0.61 2008 0.30 2009 0.35 2010 0.81

As per the analysis it can be seen that the net profit of the bank is going continuously from

the year 2008 onwards. In the year 2007 -08 the net profit was decreased because of the

subprime crises in USA. And again it was increased in 2008-09 as RBI did not stopped money

flow in the market.

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

2007 2008 2009 2010

% Growth in net profit

Net Profit to total Assets

2006 0.0031 2007 0.0042 2008 0.0049 2009 0.0053 2010 0.0078

Net profit to total assets is continue increasing from 2006 onwards .It means the bank is

able to utilize its assets.

0

0.001

0.002

0.003

0.004

0.005

0.006

0.007

0.008

0.009

2006 2007 2008 2009 2010

Net profit to total assets

Interest Income to Total Income

2006 7.61 2007 7.86 2008 8.39 2009 8.76 2010 8.06

7

7.2

7.4

7.6

7.8

8

8.2

8.4

8.6

8.8

9

2006 2007 2008 2009 2010

Interest income to total income

interest incometo total income

Non-Interest Income to Total Income

2006 0.30 2007 0.32 2008 0.36 2009 0.35 2010 0.32

0.27

0.28

0.29

0.3

0.31

0.32

0.33

0.34

0.35

0.36

0.37

2006 2007 2008 2009 2010

Non interest income to total funds

Non interest income to total funds

Liquidity An adequate liquidity position refers to a situation, where institution can obtain sufficient

funds, either by increasing liabilities or by converting its assets quickly at a reasonable cost.

It is, therefore, generally assessed in terms of overall assets and liability management, as

mismatching gives rise to liquidity risk. Efficient fund management refers to a situation

where a spread between rate sensitive assets (RSA) and rate sensitive liabilities (RSL) is

maintained. The most commonly used tool to evaluate interest rate exposure is the Gap

between RSA and RSL, while liquidity is gauged by liquid to total asset ratio. Initially solvent

financial institutions may be driven toward closure by poor management of short-term

liquidity. Indicators should cover funding sources and capture large maturity mismatches.

The term liquidity is used in various ways, all relating to availability of, access to, or

convertibility into cash.

• An institution is said to have liquidity if it can easily meet its needs for cash either

because it has cash on hand or can otherwise raise or borrow cash.

A market is said to be liquid if the instruments it trades can easily be bought or sold in

quantity with little impact on market prices.

An asset is said to be liquid if the market for that asset is liquid.

The common theme in all three contexts is cash. A corporation is liquid if it has ready access

to cash. A market is liquid if participants can easily convert positions into cash— or

conversely. An asset is liquid if it can easily be converted to cash.

The liquidity of an institution depends on:

The institution's short-term need for cash;

-Cash on hand;

-Available lines of credit;

-The liquidity of the institution's assets;

-The institution's reputation in the marketplace—how willing will

counterparty is to transact trades with or lend to the institution.

The liquidity of a market is often measured as the size of its bid-ask spread, but this is an

imperfect metric at best. More generally, Kyle (1985) identifies three components of market

liquidity:

-Tightness is the bid-ask spread;

-Depth is the volume of transactions necessary to move prices;

-Resiliency is the speed with which prices return to equilibrium following a large trade.

Examples of assets that tend to be liquid include foreign exchange; stocks traded in the

Stock Exchange or recently issued Treasury bonds. Assets that are often illiquid include

limited partnerships, thinly traded bonds or real estate.

Cash maintained by the banks and balances with central bank, to total asset ratio (LQD) is an

indicator of bank's liquidity. In general, banks with a larger volume of liquid assets are

perceived safe, since these assets would allow banks to meet unexpected withdrawals.

Credit deposit ratio is a tool used to study the liquidity position of the bank. It is calculated

by dividing the cash held in different forms by total deposit. A high ratio shows that there is

more amounts of liquid cash with the bank to met its clients cash withdrawals.

The ratios suggested to measure liquidity under CAMELS Model are as follows:

Liquidity Asset to Total Asset:

Liquidity for a bank means the ability to meet its financial obligations as they come due.

Bank lending finances investments in relatively illiquid assets, but it fund its loans with

mostly short term liabilities. Thus one of the main challenges to a bank is ensuring its own

liquidity under all reasonable conditions. Liquid assets include cash in hand, balance with the

RBI, balance with other banks (both in India and abroad), and money at call and short notice.

Total asset include the revaluations of all the assets. The proportion of liquid asset to total

asset indicates the overall liquidity position of the bank.

Liquidity Asset to Total Asset

Financial year 07

3794.27+2420.26+46988.91/74863.89

= 0.710669

Financial year 08

5702.72+2400.80+55081.89/89794.93

= 0.70366

Financial year 09

6588.85+4264.59+68803.86/111664.16

= 0.713365

Financial year 10

7242.73+861.60+82504.53/137319.47

= 0.65984

Government Securities to Total Asset

Government Securities are the most liquid and safe investments. This ratio measures the

government securities as a proportion of total assets. Banks invest in government securities

primarily to meet their SLR requirements, which are around 25% of net demand and time

liabilities. This ratio measures the risk involved in the assets hand by a bank.

Total Asset

Government Securities

Approved Securities to Total Asset

Approved securities include securities other than government securities. This ratio measures

the Approved Securities as a proportion of Total Assets. Banks invest in approved securities

primarily after meeting their SLR requirements, which are around 25% of net demand and

time liabilities. This ratio measures the risk involved in the assets hand by a bank.

Total Asset

Approved Securities

Liquidity Asset to Demand Deposit

This ratio measures the ability of a bank to meet the demand from deposits in a particular

year. Demand deposits offer high liquidity to the depositor and hence banks have to invest

these assets in a highly liquid form.

Demand Deposit

Liquidity Asset

Financial year 08

5702.72+2400.8+55081.89/99410

=0.63561

Financial year 09

6588.85+4264.59+68803.86/-1179

=67.56344

Liquidity Asset to Total Deposit

This ratio measures the liquidity available to the deposits of a bank. Total deposits include

demand deposits, savings deposits, term deposits and deposits of other financial

institutions.

Liquid assets include cash in hand, balance with the RBI, and balance with other banks (both

in India and abroad), and money at call and short notice.

Total Deposit

Liquidity Asset

Financial year 07

3794.27+2420.26+46988.91/64860.01

=0.8202

Financial year 08

5702.72+2400.80+55081.89/79908.94

=0.790718

Financial year 09

6588.85+4263.59+68803.86/100221.57

=0.7948

Financial year 10

7242.73+861.60+82504.53/122415.55

=0.74017

Return on Equity (ROE)

Return on Equity (ROE) and Return on Assets (ROA) Analysis

Mar '06

Mar '07

Mar '08

Mar '09

Mar '10

0.25 0.40 0.52 1.02 1.84

Interpretation:

Return on equity (ROE) measures the rate of return on the ownership interest

(shareholders' equity) of the common stock owners. It measures a firm's efficiency at

generating profits from every unit of shareholders' equity (also known as net assets or

assets minus liabilities). ROE shows how well a company uses investment funds to generate

earnings growth. The formula for ROE is Net Income/ Average Total Equity. UCO Bank’s

ROE has always shown a growth over the past 5 years and it has grown at a very fast rate

from the year 2008 to 2009 and from the year 2009 to 2010. This is because in the last 5

years its equity share capital has never increased; rather it decreased from Rs799.36crore to

Rs549.36crore from the year 2008 to 2009. On the other hand its Net Income has always

increased over the past 5 years and the jump from 2009 to 2010 was very high. The high

growth in ROE from 2008 to 2009 is not only because its Net Income increased but also

because its Equity Share Capital decreased but the high growth from 2009 to 2010 is due to

the fact that it’s Net Income almost doubled in this period.

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

Return on Assets (ROA)

Mar '06

Mar '07

Mar '08

Mar ' 09

Mar ' 10

0.0032 0.0042 0.0046 0.0050 0.0074

Interpretation:

The formula for Return on Assets (ROA) is Net Income/ Average Total Assets. It shows how

profitable a company’s assets are in generating revenue.The number tells you what the

company can do with what it has, i.e. how many rupees of earnings it derives from each

rupee of assetsit controls. In case of UCO Bank we can see that its ROA has increased over

the years, especially from the year 2009 to 2010. This is because though its Total Assets has

increased over the years, its Net Income has also increased accordingly and at a faster rate.

The cause for the big jump in the ROA from the year 2009 to 2010 is due the fact that its Net

Income almost doubled in this time from Rs557.72crore to Rs1,012.19crore the change in its

Total Assets during this period was Rs111,664.16crore to Rs137,319.47crore. With the

increase in ROA we can conclude that UCO Bank is utilizing its assets well for generating

revenue.

0.0000

0.0010

0.0020

0.0030

0.0040

0.0050

0.0060

0.0070

0.0080

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

Equity Multiplier

Mar '06

Mar '07

Mar '08

Mar '09

Mar '10

77.36 93.65 112.33 203.26 249.96

Interpretation:

The formula for Equity Multiplier is Total Assets/Total Equity. It is a measure of the bank’s

financial leverage. A higher leverage works in the bank’s favour when the by boosting the

ROE when the earnings are positive. But it is a double-edged sword because when the bank

records negative earnings the fall in ROE is greater. Here, in case of UCO Bank we can see

that its Equity Multiplier has shown a steady growth from the year 2006 to 2010. If we

observe more closely we can also see that the jump from 2008 to 2009 is very high. So, it can

be concluded that the risk in UCO Bank’s equity has gradually increased over the years as the

chances of fluctuations in its ROE has increased.

0.00

50.00

100.00

150.00

200.00

250.00

300.00

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

Sensitivity to market risk Some key issues under this are as follows:

Internal Control Systems

Like the central banks in developed supervisory regimes, RBI also has started placing an

increasing reliance on professional accountants in the assessment of internal control

systems of the banks and non-bank financial institutions. Over the period, the

responsibilities of auditors have been delineated not only to make the audit more detailed

but also to make them accountable. The methodology and processes used to generate

available data as certified by audit profession would improve the reliability of financial

statements as regards their conformity with national accounting and disclosure standards.

Another area of crucial importance is strengthening of internal control systems in banks. The

Reserve Bank has, over the years, emphasised the need for having an effective internal

control system in banks. Banks have also been advised to introduce the system of

Concurrent Audit in major and specialized branches. As a result, all commercial banks have

introduced concurrent audit since 1993 by using external auditors as a major resource. The

banks are now required to set up Audit Committees to follow up on the reports of the

statutory auditors and inspection by RBI. Similarly, immediate action is warranted on

reconciliation of inter branch accounts which if left unreconciled, is fraught with grave risks.

Substantial progress has been made by banks in reconciliation of the outstanding entries,

and BFS reviews the progress in this area at quarterly intervals.

Technology is the key

The decade of 90s has witnessed a sea change in the way banking is done in India.

Technology has made tremendous impact in banking. Anywhere banking and anytime

banking has become a reality. This has thrown new challenges in the banking sector and

new issues have started cropping up which is going to pose certain problems in the near

future. The new entrants in the banking are with computer background. However, over a

period of time they would acquire banking experience. Whereas the middle and senior level

people have rich banking experience but their computer literacy is at a low level. Therefore,

they feel the handicap in this regard since technology has become an indispensable tool in

banking.

Foreign banks and the new private sector banks have embraced technology right from the

inception of their operations and therefore, they have adapted themselves to the changes in

the technology easily. Whereas the Public Sector Banks (PSBs) and the old private sector

banks (barring a very few of them) have not been able to keep pace with these

developments. In this regard, one can cite historical, political and other factors like work

culture and working relations (which are mainly governed by bipartite settlements between

the managements and the staff members) as the main constraints. Added to these woes,

the PSBs were also saddled with some nonviable and loss making branches, thanks to the

social banking concept thrust upon them by the regulatory authorities in 1960s.

The DuPont Analysis The DuPont formula, also known as the strategic profit model, is a common way to break

down ROE into three important components. Essentially, ROE will equal the net

margin multiplied by asset turnover multiplied by financial leverage. Splitting return on

equity into three parts makes it easier to understand changes in ROE over time. For

example, if the net margin increases, every sale brings in more money, resulting in a higher

overall ROE. Similarly, if the asset turnover increases, the firm generates more sales for

every unit of assets owned, again resulting in a higher overall ROE. Finally, increasing

financial leverage means that the firm uses more debt financing relative to equity financing.

Interest payments to creditors are tax deductible, but dividend payments to shareholders

are not. Thus, a higher proportion of debt in the firm's capital structure leads to higher ROE.

Financial leverage benefits diminish as the risk of defaulting on interest payments increases.

So if the firm takes on too much debt, the cost of debt rises as creditors demand a higher

risk premium, and ROE decreases. Increased debt will make a positive contribution to a

firm's ROE only if the matching Return on assets (ROA) of that debt exceeds the interest

rate on the debt.

The DuPont formula is:

The DuPont Analysis of UCO Bank is as follows:

Year Net Income/Revenue i.e. Asset Utilization A

Revenue/Total Assets i.e. Margin B

Total Assets/Average Shareholder Equity i.e. Equity Multiplier C

AxBxCi.e.Return on Equity(ROE)

2006 .041 .078 77.36 .25

2007 .054 .078 93.65 .40 2008 .057 .081 112.33 .52 2009 .061 .082 203.26 1.02 2010 .096 .076 249.96 1.84

In case of UCO Bank we can see that its Asset Utilization has shown a steady increase over

the 5 years, especially in the last year i.e. 2010 there was a big jump due to the fact that its

Net Income almost doubled in this year. So, we can infer that the Asset Utilization of UCO

Bank is on the right track over the past % years. The Revenue to Total Assets ratio i.e. the

margin grew steadily from 2006 to 2009, but in the year 2010 it dropped by .006 which is a

bad sign for the bank. The Equity multiplier grew steadily from 2006 to 2008, then there was

a huge jump as the Equity Capital of UCO Bank decreased by Rs250 crore and its Total Assets

also increased by around Rs21869.23 crore. It aslo grew in the year 2010. In 2010, while

calculating ROE, though the margin for the bank decreased it was more than compensated

by the increase in the Asset Utilization by the bank. So, we can see that the ROE of UCO

Bank has always increased over the years for the last 5 years though its margin dropped in

the year 2010.

Findings Capital adequacy:

The capital adequacy ratio of all the three banks is above the minimum requirements and

above the industry average.

Assets:

UCO Bank has maintained a standard for the NPA’s in the period of 2006-2010. UCO bank has

shown remarkable decrease in NPA’s in the same period.

Management:

Professional approach that has been adopted by the banks in the recent past is in right

direction & also it is the right decision.

Earnings:

UCO has shown a good growth record for its ROA.

Liquidity:

Banks should maintain quality securities with good liquidity to meet contingencies.

Sensitivity to Market Risks:

UCO banks have ventured into many financial areas and are in the league of Universal

Banking and also it has overseas presence. They have also become sensitive to customer

needs.

Conclusion & Recommendations 1. UCO banks should adapt themselves quickly to the changing norms.

2. The system is getting internationally standardized with the coming of BASELL II accords so

the UCO bank and Indian banks should strengthen internal processes so as to cope with

the standards.

3. UCO bank should maintain a 0% NPA by always lending and investing or creating quality

assets which earn returns by way of interest and profits.

4. UCO bank should find more avenues to hedge risks as the market is very sensitive to risk of

any type.

5. Have good appraisal skills, system, and proper follow up to ensure that UCO bank is above

the risk.

References

http://www.allbankingsolutions.com/camels.htm

http://www.shkfd.com.hk/glossary/eng/RA.htm

"http://www.wikinvest.com/wiki/CAPITAL_ADEQUACY_RATIO"

http://www.stock-picks-focus.com/hdfc-bank.html

http://www.stock-picks-focus.com/-bank.html

http://www.ucobank.com

www.financialexpress.com/ucobank

www.thehindu.com/ucobank

http://www.indiainfoline.com/Markets/Company/Fundamentals/Cash-Flow/UCO-Bank/532505