The banking sector saw large-scale CEO exits in 2018/19 because of governance and performance issues. Asset quality continued to play havoc with banks' profitability, capital and net worth. Business Today-KPMG kicked off the annual exercise to select the country's best banks and fintech players some six months ago.
The process started with knowledge partner KPMG analysing annual reports and reaching out to banks and fintech players for qualitative inputs. The qualitative awards are based on nominations and data provided by banks and fintech players.
The second step was putting the data and qualitative inputs before a jury. The choice of winners put before the jury was based on banks that nominated themselves. A few banks didn't participate.
The jury comprised professionals from the industry. A.K. Khandelwal, who headed Bank of Baroda and later went on to become a member of the Banks Board Bureau, brought banking insights. Industrialist Niraj Bajaj, Director, Bajaj Group, gave an outside view. Rajesh Mokashi, MD & CEO, CARE Ratings, contributed valuable inputs from the ratings perspective. At a time when banks are facing asset quality issues, Siby Antony, Chairman, Edelweiss ARC, came up with several insights. Chaitanya Kamat, Managing Director and CEO, Oracle Financial Services Software, gave inputs related to technology.
The jury was of the view that despite the dark clouds, banks, especially PSBs, have not given up and are fighting back by updating themselves digitally, driving recoveries and motivating employees. There was a lengthy discussion on the Best Overall Bank after which the jury decided to give a joint award to HDFC Bank and State Bank of India or SBI.
SBI was praised for smooth succession planning year after year, matching the industry in new technology and digitisation of processes and systems.
The Qualitative Awards
There were six qualitative awards.
Innovation and Financial Inclusion
For the 2018 BT-KPMG Survey, two 'Qualitative Awards' categories were considered to recognise initiatives and strategies in two broad areas - innovation and financial inclusion.
The information was collated based on self-nomination. Information was also sourced from banks' annual reports, websites and secondary research. Critical parameters such as area of innovation, adoption level, uniqueness of innovation and overall impact of innovation were considered. Similarly, for financial inclusion, parameters such as customer outreach, adoption of new technology, customers on-boarded for various financial inclusion initiatives and impact on financial literacy were considered. Banks with a successful model for innovation and financial inclusion on these parameters were evaluated and ranked based on the evaluation score received.
KPMG received responses from banks and analysed areas of fintech association, level of adoption, uniqueness and overall impact of fintech association. KPMG's long association with the fintech ecosystem and secondary research conducted by the team helped evaluate the performance of the banks on all parameters.
Lending, Payments, VAS
A total of 50 nominations were sourced across categories - payments, lending and value added services or VAS. The key parameters considered were financial health, funding maturity, differentiation-based business model, technology, focus on Tier II/III cities, level of adoption and business volumes.
Methodology - BT KPMG Best Bank Survey 2018
For rankings based on pure financial performance, data was taken from published annual reports of banks for the period from 2014/15 to 2017/18.
The survey covered 63 scheduled commercial banks that had put annual reports in the public domain or provided their annual reports at the time of conducting the survey prior to October 31, 2018.
Scheduled commercial banks which had a balance sheet of less than Rs 5,000 crore on March 31, 2018, were not considered. Further, scheduled commercial banks whose financial statements were not available to us or banks which had not completed four years of operations in India as on March 31, 2018, or which had merged with other banks, were not included in the survey.
The Ranking Process
Banks were divided between 'Indian Banks' (public and private sector banks) and 'Foreign Banks' (branches of foreign banks operating in India). The banks in each category were further classified on the basis of balance sheet size as on March 31, 2018.
Group I: Indian banks with balance sheet size of more than or equal to Rs 300,000 crore;
Group II: Indian banks with balance sheet size of more than Rs 1,00,000 crore and less than Rs 3,00,000 crore;
Group III: Indian banks with balance sheet size of less than or equal to Rs 1,00,000 crore;
Group IV: Foreign banks with balance sheet size of more than or equal to Rs 25,000 crore; and
Group V: Foreign banks with balance sheet size of less than Rs 25,000 crore and more than Rs 5,000 crore.
The three broad ranking parameters - Growth, Size and Strength - had 32 sub-parameters:
There are five sub-parameters in this category, including growth over 2016/17 in deposits, alongside three-year Compounded Annual Growth Rate, or CAGR, of total deposits; growth over 2016/17 in loans and advances, alongside three-year CAGR in loans and advances; growth over 2016/17 in fee income (commission, exchange, brokerage plus miscellaneous income), alongside three-year CAGR in fee income; growth over 2016/17 in operating profit, alongside three-year CAGR in operating profit; and absolute increase in market share of deposits and current account savings account balances.
There are three sub-parameters in this category - size of total deposits, size of operating profit and size of balance sheet for 2017/18.
There are four overarching sub-parameters in this category, each with further sub-divisions as set out below:
a. Quality of assets:
Total NPA growth ratio: Addition to NPAs during the year as percentage of average net advances; NPA coverage: provisioning for NPAs as percentage of gross NPA closing balance; net NPAs as ratio of net advances: gross NPAs net of provisioning expressed as percentage of net advances; divergence in gross NPAs (difference between gross NPAs as per the central bank and as reported by the bank as percentage of addition to NPAs during the year); divergence in provisioning for NPAs (difference in provisioning for NPAs as per the RBI and reported by the bank as percentage of net profit reported during the year); restructured assets as ratio of total average loans and advances; outstanding restructured assets as percentage of outstanding loans and advances.
For determining rankings based on the parameter of divergence in gross NPAs and divergence in provisioning for NPAs, banks having divergence of less than 15 per cent were assigned the highest rank in that parameter. Further, for determining the rankings based on the provision coverage ratio, banks having zero NPAs and banks having a provision coverage ratio of 100 per cent were assigned the highest rank in that parameter.
b. Productivity and efficiency:
Cost to income ratio: Operating expenditure as percentage of operating income; cost to average asset ratio: operating expenditure as percentage of average assets; absolute increase in return on assets: basis points increase in return on assets (net profit over total average assets) from 2016/17 to 2017/18; percentage increase in ratio of operating profit to total income from 2016/17 to 2017/18.
c. Quality of earnings:
Return on assets: Ratio of net profit to total assets for 2017/18; fee income as percentage of total income; return on capital employed: reported net profit divided by average net worth; net interest margin: total interest income minus total interest expenses as percentage of average interest earning assets; penalties imposed by the RBI during the year.
d. Capital adequacy and liquidity coverage:
Capital adequacy ratio: Capital-to-risk weighted assets ratio for 2017/18; Tier-I capital: total of equity capital and disclosed reserves; liquidity coverage ratio: ratio of high quality liquid assets to total net cash outflows over the following 30 calendar days.
Final Scoring / Rating
For a bank, a score is assigned for each of the 32 sub-parameters based on its rank on those parameters. The score under each parameter is then multiplied by the parameter's weight to arrive at the final score for a bank. The results are aggregated to arrive at the final rankings based on the total score.
Changes from Previous Year's Survey
Two new sub-parameters, that is, liquidity coverage ratio and penalties imposed by the RBI, have been added in the current year under the Strength parameter and, accordingly, the weights have been realigned within the same parameter.
Banks Not Considered
In total, nine banks were not considered for the survey in 2017/18 for reasons mentioned below.
Rabobank International, Abu Dhabi Commercial Bank, First Rand Bank, Bank of Bahrain & Kuwait BSC, United Overseas Bank: Balance sheet size less than Rs 5,000 crore.
Tamilnad Mercantile Bank, ICBC, State Bank of Mauritius and Bank of Nova Scotia: Non-availability of complete financials for 2017/18 in public domain.