Common-size analysis (banks): Formula and Definition

Common-size analysis (banks)

Line items per ₹100 of interest income

Common-size analysis restates every line of a bank's profit and loss as a percentage of interest income, and every funding source as a share of the balance sheet, so banks of any size can be compared line by line.

Formula

Common-size P&L line

Line Item (%) = Line Item ÷ Interest Income × 100

Common-size funding share

Funding Source (%) = Source ÷ Total Funding × 100

Benchmark: Provisions and interest expense per ₹100 of interest income are the lines that separate banks

Reading the number

On the profit and loss side, ask what happens to every ₹100 of interest a bank earns: how much goes back to depositors, how much to running branches, how much is set aside for loans it doubts, and how much survives as profit. Operating expenses tend to look similar across banks, because rent and salaries are comparable. Interest expense and provisions are where banks differ.

On the balance sheet side, ask where the bank gets its money. There are four sources: share capital, reserves, deposits, and borrowings from the RBI or other banks. Deposits are the best source because they are the cheapest; current accounts pay nothing and savings 2.5 to 3.5 percent. Maximising the share of funding that comes from depositors is a huge advantage for any bank. The P&L explains the balance sheet: a bank paying more on savings to win depositors shows a high interest expense line, and that is exactly what lifts its deposit share over time.

Common-size analysis works for every sector, not just banking. Each sector's statements simply look different.

Indian example

HDFC Bank, per ₹100 of interest income: about ₹51 paid to depositors (₹58,000 crore paid on ₹1,44,000 crore earned), other income of about 20 percent, operating expenses about ₹26, provisions about ₹10, profit before tax about ₹31, tax about ₹9, net profit about 22 to 23 percent, improved from 20.4 percent earlier. Deposits fund about 75 percent of its balance sheet.

Axis Bank: other income about 25 percent, so it is better at fees, insurance and mutual fund commissions, and locker charges. But interest expense is about ₹60, it must pay more to attract deposits, and provisions are about 30 percent against HDFC Bank's 10. That is the single biggest difference: its lending habits are not as good. Net profit about 2.5 percent. Deposits fund about 70 percent. Verdict: HDFC Bank is better at core banking, Axis at non-core banking.

IDFC First Bank, a new bank: fee income only about 10 percent, because it lacks its own mutual fund, insurance, and credit card products to cross-sell. Interest expense about ₹65, previously as high as ₹76 to ₹80, because it pays 6 percent on savings where others pay 3. Operating expenses are higher, partly forgivable for a bank still building branches. Provisions are below Axis but far above HDFC Bank. The combined effect left the bank in losses. Deposits fund only about 43 percent, though that share has climbed from 9 percent through 35, 38, and 42.

Common-size analysis (banks)

Formula

Reading the number

Indian example

Related ratios

Glossary terms

Go deeper

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