Page 32 - Banking Finance March 2019

ARTICLE

(i) Return on Equity-ROE (%) = (Net Profit /  Control the Controllable Costs / overheads.
Capital + Reserves & Surplus) * 100  Rationalization of Branches and Administrative Offices
to decrease the overheads and Capital Expenditure.
Name of the Bank 2018 Rank
Bank of Baroda -5.60 2  Re-deployment of staff to needy branches from surplus
branches to improve the productivity.
Vijaya Bank 6.84 1
Dena Bank -20.90 3  Control NPAs including probable NPAs to increase
bottom-line and to earn good rating in the industry.
ANALYSIS:  Focus to increase Non-Interest Income etc. to cover the
Non-Interest expenditure.
Return on Equity or ROE denotes to Bank Stockholders how
effectually their money is being utilized or reinvested. It is
a useful ratio while analyzing bank profitability or the (ii) Equity Multiplier-EM (Number of Times) =
Total Assets / Total Equity^
management effectiveness with the given capital invested
by the shareholders. ROE shows how efficiently a bank Name of the Bank 2018 Rank
utilizes its equity for loans and advances, investments to Bank of Baroda 16.59 2
generate income.
Vijaya Bank 16.72 3
Earlier in most of the public and private sectors banks, the Dena Bank 13.13 1
Return on Equity (ROE) is in the range of 10% and 20% and
these are considered desirable to provide dividends to ^Total Equity = Equity + Reserves and Surplus
owners and have adequate funds for future growth of the
bank. Investors should be very careful while using ROE as ANALYSIS:
the only efficiency indicator because of ROE can be high if a The equity multiplier is calculated by dividing a bank's total
bank is heavily leveraged.
assets by its shareholders' equity. This ratio measures the
total assets a bank owns per rupee of its stockholders' equity.
Vijaya Bank is a profit earned bank for the financial year The equity multiplier of a bank should only be used in
ending 31.03.2018 and ROE is 6.84%. Whereas Dena Bank comparison to the industry standard or with other banks in
and Bank of Baroda ROE is negative and high negative ROE the banking industry.
is in Dena Bank. Low rate of ROE is a barrier to mobilize
additional share capital through IPOs, less growth rate in For example, suppose ABC Bank has total assets of Rs.10
Market Value of the Share and also low market million and stockholders' equity of Rs.2 million. Its equity
capitalization in stock exchanges etc. After merger, the new multiplier is 5 (Rs.10 million ÷ Rs.2 million), which means that
entity should focus on these areas to improve the ROE: Bank ABC uses equity to finance 20% of its assets and the
 Mobilize Low Cost Deposits.
remaining 80% is financed by Deposits / Debt.
On the other hand, DEF Bank, which is in the same industry
as Bank ABC, has total assets of Rs.20 million and
stockholders' equity of Rs.10 million. Its equity multiplier is
2 (Rs.20 million ÷ Rs.10 million), which means that Bank DEF
uses equity to finance 50% of its assets and the remaining
half is financed by Deposits / Debt.

Bank ABC has a higher equity multiplier than company DEF,
indicating that ABC is using more Deposit / Debt to finance
its asset (Loans and Advances). A lower equity multiplier is
preferred because it indicates that the bank is taking on less
Deposits / Debt to Loans and Advances. In this case, Bank

32 | 2019 | MARCH | BANKING FINANCE