corp finance final

8/8/2019 Corp Finance FINAL

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Vishnu Sharma (45)Sohin Savla (26)Sunil Choudhary K (19)

Sumit Puri (56)Tamal Bhattacharya (47)Namit Manglani (46)


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The purpose of Basel II, is to create an internationalstandard that banking regulators can use when creatingregulations about how much capital banks need to putaside to guard against the types of financial andoperational risks banks face.

Basel II aims at

Ensuring that capital allocation is more risk sensitive. Separating operational risk from credit risk, and

quantifying both. Attempting to align economic and regulatory capital

more closely to reduce the scope for regulatoryarbitrage


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TIER 1 CAPITAL

A) Equity Capital

B) Disclosed Reserves

TIER 2 CAPITAL A) Undisclosed Reserves

B) General Loss reserves

C) Subordinate Term Debts


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It is based on the riskiness of a bank's assets

For example, loans that are secured by a letter of credit

would be weighted riskier than a mortgage loan that is

secured with collateral

Three major components of risk that a bank faces:

credit risk

operational risk

market risk.

Risk Weighted Assets


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The credit risk component can be calculated in threedifferent ways of varying degree of sophistication,

namely

Standardized approach,

Foundation IRB

Advanced IRB.

IRB stands for "Internal Rating-Based Approach".

Example: Cash & Balance with RBI

Inter bank Deposits

Investments

Advances ..

Credit Risk


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For operational risk, there are three different

approaches

Basic indicator approach or BIA

Standardized approach or TSA

The internal measurement approach (an advanced

form of which is the advanced measurement

approach or AMA)

Operational Risk


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For market risk the preferred approach is VaR (Valueat risk)

Example:

Interest Rate risk

Foreign exchange risk

Equity risk ..

Market Risk


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Example : A bank has assets totaling 100 units Cash : 10 units

Government bonds : 15 Units Mortgage Loans : 20 Units Other loans : 50 Units Other Assets : 05 Units

Cash 10 * 0% = 0

Government securities 15 * 0% = 0

Mortgage loans 20 * 50% = 10

Other loans 50 * 100% = 50

Other assets 5 * 100% = 5

Bank's risk-weighted assets are calculated as follows


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CoreCapital

TIER 1CAPITAL

EquityCapitalEquityCapital

DisclosedReserves

DisclosedReserves

TIER 2CAPITALTIER 2

CAPITAL

Undisclosed ReservesUndisclosed Reserves

GeneralLoss

reserves

GeneralLoss

reserves

SubordinateTerm DebtsSubordinateTerm Debts


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Includes instruments that can't be redeemed atthe option of the holder

Also means that the owner of the shares cannotdecide on his own that he wants to withdrawthe money he invested and so cannot leave the

bank without the risk coverage

EquityCapital

Reserves are held by the bank, and are thusmoney that no one but the bank can have aninfluence on

i lo eRe er e


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Accepted by some regulators where a bankhas made a profit but this has not appeared innormal retained profits or in general reservesof the bank

Un i lo eRe er e

A general provision is created when acompany is aware that a loss may haveoccurred but is not sure of the exact nature ofthat loss

GeneralPro i ion

Subordinated debt is debt which ranks afterother debts should a company fall intoreceivership or be closed

or inateDe t


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AXIS BANK

Axis Bank is well capitalized, with a capital adequacy ratio of

15.80% at the end of the year

The Tier I capital adequacy ratio was 11.18% against 9.26% a

year earlier, while the Tier II Capital Adequacy Ratio was

4.62% against 4.43% in FY 2009

These figures depict that the capital position of the Bank has

significantly strengthened, particularly core Tier I capital,

providing adequate support for its growth plans in future


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Non-Performing Asset: A classification used by

financial institutions that refer to loans that are in

jeopardy of default

Any commercial loans which are more than 90 days

overdue and any consumer loans which are more

than 180 days overdue

Net NPAs are calculated by reducing cumulative

balance of provisions outstanding at a period end

from gross NPAs.


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Net NPA = Gross NPA (Balance in Interest

Suspense account + DICGC/ECGC claims

received and held pending adjustment + Partpayment received and kept in suspense

account + Total provisions held).


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Non-performing asset ratio = (The net NPA / loans

(advances) )

It is used as a measure of the overall quality of the

banks loan book

Higher ratio reflects rising bad quality of loans

Axis PNB

Non-Performing asset ratio 0.4% 0.53%


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Advances

NPA


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Advances

A


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CATEGORY AGE OF DEFAULT

Standard 0-6 months (180 days)Sub Standard More than 6 months up

to 24 MonthsDoubtful-I More than 24 months

up to 36 monthsDoubtful-II More than 36 months

up to60

monthsDoubtful-III Above 60 monthsLoss No security available


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It represents the ratio of the income earned from

activities other than normal business operations to the

total income

It can comprise of income from activities such as

such as investment interest, foreign exchange gains,

rent income, and profit from the sale of non-inventory assets

Ratio value = Income from non business activities

Total income


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A higher other income component can camouflage

the real performance of the company by either

boosting profits or minimizing losses.

Axis PNB

Other income to

total income 0.2313 0.1424


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The proportion of loan-assets created by banks

from the deposits received

Ratio Bank's loans

value: amount of its deposits at any given

time

The higher the ratio, the higher the loan-assets

created from deposits.


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The outcome of this ratio reflects the ability of the

bank to make optimal use of the available resources.

High credit-deposit ratio could lead to a rise in

interest rates.

AXIS PNB

Credit to 0.73844 0.7484deposit ratio:


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Represents the difference between the interest income

generated by a financial institution and the amount of

interest paid out to their lenders, relative to the amount

of their assets.


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Examines how successful a firm's

investment decisions are compared to its debt

situations

A negative value denotes that the firm did not make an

optimal decision, because interest expenses were

greater than the amount of returns generated by

investments.

AXIS PNB

Net interest 0.0375 0.0357

income


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Operating expenses divided by operating

income

There is an inverse relationship between the

cost income ratio and the bank's profitability

A low figure is indicative of a more profitable

bank.


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Used for benchmarking by the bank when

reviewing its operational efficiency

Cost operating expenses

income Ratio = operating income

AXIS PNB

Cost to 0.4145 0.3939

income rate:


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What Does Return On Assets - ROA Mean?

ROA is an indicator of how profitable a company is relative to its total

assets. ROA gives an idea as to how efficient management is at using its

assets to generate earnings.

The formula for return on assets is:

Relevance - The ROA figure gives investors an idea of how effectively the

company is converting the money it has to invest into net income. The

higher the ROA number, the better, because the company is earning more

money on less investment.


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PNB - Return on Assets 2008-2009- 1.39 %

2009-2010-1.44 %

2009 2010

PNB Net Income 30908810 39053575

Total Assets 2469186173 2966327772

ROA in % 1.2517 1.319

Axis Bank Net Income 18153584 25145333

Total Assets 1477220487 1806478519

ROA in % 1.229 1.391


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THANK YOU

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