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Portfolio Management With Respect To Banking Industry
RESEARCH METODOLOGY 1.1 Problem Definition The main aim of this project is to find out the best banking stock listed on BSE. There are basically two main reasons behind choosing this project. First, the banking industry is a very important part of Indian financial system and this project gives us the opportunity to analyze the banking industry in detail and to get the knowledge of different aspects of the banking industry. Secondly taking investment decisions is a crucial characteristic of a financial manager. Investment decisions also include investment in the stock market. Learning how to invest in the stock market helps not only the financial manager but the individual investors also. In addition to the above-mentioned opportunity, this project also provides us an opportunity to learn the different aspects of investment decisions related to stock market. 1.2 Sources of Data The data collected in this project is all secondary data. The data has been collected from various sites. The data relating to the historical balance sheet and Profit and Loss Account pertains to the Annual Reports of the respective banks. The data of the monthly share prices of the banks and sensex has been taken from the BSE website. 1.3 Objectives of the Project To analyze Indian economy and to find out its impact on banking industry. To study banking industry with respect to different parameters such as structure of banking industry, government regulations, emerging patterns etc.
on BSE.
To scrutinize fundamentally strong banks listed
To carry out qualitative and quantitative analysis of selected banks. To apply the stock valuation models such as CAPM, MV/BV approach, Discounted and Cash flow technique to find out the best banks stock to invest. 1.4 Scope of the Study In this study twenty-four Indian banks are taken which were listed as on January 1, 2003 on the Stock Exchange, Mumbai. The P&L, balance sheets and cash flows have been projected for the year 2002-03 and 2003-04. This project gives us the investment opportunities for the next one year. The projections are based on the information available in the annual reports of the banks and through market information. While projecting the financials of the bank some basic assumptions have been made. Due to time constraints and resource constraints we were not able to include some banks, which were good on the basis of selection criteria. Limitations This study is based on the secondary data only. The data for some banks was not available so we can not say the banks that we scrutinized are only fundamentally strong banks. The projections for different banks are based on historical data only and we did not have the complete information about the companys future plans. Time constraint. We have selected the banks on the basis of some limited criteria only.
INTRODUCTION TO BANKING INDUSTRY Performance of banking industry is taken as barometer of economy as a whole, due to banks wide spectrum of exposure across industries. Unfortunately for India, the banking sector has historically remained under the impact of non-competitiveness, poor technology integration, high NPAs and grossly under productive manpower. In last few years, intense competition, opening of economy, new entrants, new regulation and standards has changed the macro-economic environment for banks. In ancient times, the Indian banking system existed in the form of money lending. It was just over a century ago that the country saw the evolution of proper banking. During the British Raj, some agency house carried on banking business. But, they were closed down between 1929-32. Following serious financial trouble, three presidency banks were merged into the imperial bank of India in 1919, which later became State Bank of India.
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The first bank of limited liability merged by Indians was Oudh Commercial founded in 1881. Subsequently, Punjab National Bank was established in 1894. Also, the swadeshi movement, which began in 1906, emerged the formation of a number of commercial banks. In promoting the banks and spreading the habit among savers leading merchant communities in different parts of India have played a major role. It helped them to promote trade with neighboring countries like Burma, Malaysia and Sri Lanka, besides their trading operations in India. The banking system can be broadly classified as organized and unorganized banking system. The unorganized banking system comprises of moneylenders, indigenous bankers, lending pawnbrokers, landlords, traders, etc. Whereas the organized banking system comprises of Scheduled Banks and Non-Scheduled Banks that are permitted by RBI to undertake banking business. Scheduled banks are those banks that are included in the second schedule of the RBI Act 1934, subject to fulfilling certain conditions. The scheduled banks comprising of Scheduled Commercial Banks and Scheduled Co-operative Banks enjoy certain privileges like approaching the RBI for financial assistance, refinance etc and correspondingly, they have certain obligations like maintaining certain cash reserves, submission of returns as prescribed by the RBI etc. As of March 2002, there are about 294 Scheduled Commercial Banks and 67 Schedule Co-operative Banks. Of the 294 Scheduled Commercial Banks, 196 are regional rural banks. These 294 Scheduled Commercial Banks have an extensive branch network of 66,276 offices across the country, of which over 49% are in rural areas, 22% in semi-urban areas, 16% in urban areas and about 13% in metropolitan cities.
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Non-Scheduled Banks are those joint stock banks, which are not included in the second Schedule of the RBI Act 134, on account of the failure to comply with the minimum requirements for being scheduled. There were 16 Non-Scheduled Commercial Banks in June 1969. As on March 2002, there are 5 Non-Scheduled Commercial Banks, which are local area banks. However there are more then 2000 Non-Scheduled Co-operative Banks, which are concentrated in few states like Maharashtra, Gujarat, Karnataka, Andhra Pradesh and Tamil Nadu. Further based on ownership, the Scheduled Commercial Banks can further be classified as Public Sector Banks, Private Sector Banks, Foreign Banks and Regional Rural Banks. Public Sector Banks are subclassified into the State Bank of India (erstwhile Imperial Bank of India nationalized by central enactment in 1955) and its 7 associates nationalized in 1959 and other Nationalized Banks which were nationalized in two phases; 14 banks were nationalized on July 19, 1969 and 6 others on April 15, 1980. Also the Private Sector Banks can be classified as old private sector banks and new private sector banks, wherein the latter enjoy superior discounting in the bourses. After RBI reopened the banking sector to private players, about eight private sector banks were licensed in 1995, which brought with them latest technology, customer-oriented service, innovative products and aggressive marketing. Despite increasing competition, public sector banks continue to dominate. This category currently accounts for more than 81% of all deposits and over 79% of all advances in the domestic banking industry. This scale of operations bestows upon them a higher bargaining power enabling them to play a dominant role in the liquidity and
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interest rate levels in the system. However, the scenario in the future may undergo a change with the growth of the new private sector banks. These banks are in a more advantageous position because of their superior technology-based operations, lower manpower and a lower non-performing assets (NPA) level. 2.1 Reforms in Banking Sector The financial sector reforms were undertaken early in the reform cycle. The reforms in the financial sector were initiated in a well structured, sequenced and phased manner with cautious and proper sequencing; mutually reinforcing measures; complimentarily between reforms in banking sector and changes in fiscal external and monetary policies; developing financial infrastructure; and developing financial markets. The recommendations of the Narasimham Committee-I in 1991 provided the blue print for the first generation of reform of the financial sector. The period 1992-97 witnessed the laying of the foundations for reforms in banking system. This period saw the implementation of prudential norms pertaining to capital adequacy, income recognition, asset classification and provisioning, exposure norms, etc. The difficult task of ushering in some of the structural changes accomplished during this period provided the foundation for further reforms. In fact, that India withstood the contagion in 1997 justify the stability of the banking system. While these reforms were under way, cataclysmic changes were taking place in the world economy, coinciding with the movement towards global integration of financial services. Against such backdrop, the report of Narasimham Committee-II in 1998 provided the roadmap for the second generation reform process.
Some noteworthy developments in the banking sector are as follows: a) Interest rates have been deregulated, allowing banks the freedom to determine deposit in lending rates. Currently, on the deposit side, the interest rate on saving deposit is administered; whereas, on the lending side, while sub-PLR lending has been permitted, the maximum spread in restricted to 4% over the PLR of each bank and there is ceiling of PLR on small loans up to Rs.2, 00,000. b) The State Bank of India and other nationalized banks enabled to access the capital market for debt and equity. c) Prudential norms for income recognition, classification of assets and provisioning of bad debts for commercial banks, including RRBs and FIs introduced. They are required to adopt uniform and sound accounting practices in respect of these matters, and the valuation of investments. Banks are required to mark to market the securities held by them. d) The Performance Obligations and Commitments obtained by RBI from each bank; they provide for essential quantifiable performance parameters which lay emphasis on increased but low cost deposits, quality lending, generation of more income and profits, compliance with priority sectors and export lending requirements, improvement in the quality of investments, reduction in expenditure, and stepping up of staff productivity. The PO&C are meant to ensure a high level of portfolio quality so that problems such as heavy losses, low profits, and erosion of equity do not recur. e) Banks required to make their balance sheet fully transparent and make full disclosures in keeping with international accounts standard committee.
f) Banks given greater freedom to open, shift, and swap branches as also to open extension counters. g) The perceived constraints on banks such as prior credit authorization. Inventory and receivable norms, obligatory consortium lending and curbs in respect of project finance relaxed. h) The budgetary support extended for recapitalisation of weak public sector banks. i) Banks set free to fix their own foreign exchange open position limit subject to RBI approval. j) Steps have been initiated to strengthen PSBs through increasing their autonomy. Several banks capital base has been written off and some have returned capital to the government. It was recognized that restoration of health of banking system required both a stock solution (i.e. restoration of net worth) and a flow solution (i.e. an improvement in future profitability). Restoration of net worth was achieved through capital infusions from the budget. Competition has been infused by allowing new private sector banks and more liberal entry of foreign banks. k) A set of micro-prudential measure have been stipulated to impart greater strength to the banking system and also, ensure their safety and soundness with the stated objective of moving towards international best practices. l) Measures have also been taken to broaden the ownership base of PSBs; consequently, the private shareholding in PSBs has gone up, ranging from 23 % ( Bank of India) to 43.7 %(State Bank of India). m) The banking system has also witnessed greater levels of transparency and standards of disclosure. n) As the banking system has liberalized and became increasingly market oriented, the financial markets have been concurrently developed, while the conduct
of monetary policy has been tailored to take into account the realities of the changing environment (switch to indirect instruments). This set of measures, coupled with many others, did have their positive impact on the system. There has been considerable improvement in the profitability of the banking system measured in terms of operating and net profits. What is equally important is the fact the intermediation process has improved. The profile of asset portfolio and also the extent of the net non-performing loans as percentage of total assets have shown improvement. During this period, the supervisory strategy has undergone a change, moving from opacity to transparency. 2.2 Main Elements of Emerging Banking in India A quiet revolution has been brewing on the banking front in the country. The entry of private players has set the market buzzing with activity. At the center of all this frenzy is the customer who is being wooed with a blitz of attractive schemes, home & phone banking and plenty of other innovative products. a) Trendy Moves One of the most prominent factors to come to the fore in Indian banking is that a large number of banks are gravitating towards the retail customer. There are several reasons for this. The first being that overall credit off take has been quite low. And second, banks found that there were not enough profitable and creditworthy corporate customers for their funds. As far as the benefits to the bottom-line are concerned, it will take some time to become significantly visible. According to bankers high initial infrastructure cost
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would lead to a longer break-even period but once this is through then the benefits would be high. b) Earnings Pattern It is important to consider the changing face of bank profit and loss accounts. Traditionally, the main earnings of banks have come from the core activity of lending. This is reflected in the break-up of income wherein interest/discount on advances/bills represents a large part of income. With the normal credit off-take of the bank on slower ground, many banks have pumped an increasing amount into government securities. Due to this, income on investments has gone up significantly which is reflected in the increasing investment deposit ratio. This has given banks the required boost in tough times faced by the economy. The prevailing situation in the economy has led to an increasing investor preference for bank deposits. The fall in the equity markets resulted in investors looking for low risk avenues to park their funds. With a general fall in interest rates across the economy, the rates on bank deposits too have fallen but the element of safety associated with these deposits is proving to be a comfort factor for lots of investors. At the same time, the crisis faced by the cooperative sector following the collapse of the Madhavpura Co-operative Bank has led to a large number of depositors, especially in the western states of the country, pulling out their deposits from the cooperative banks and shifting to commercial banks. c) Mergers
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In todays scenario lot of mergers are taking place in banking sector and the banks are moving towards universal banking. The examples of mergers are the merger between HDFC and times bank, PNB and New Bank of India, ICICI and ICICI bank etc. among these the merger between ICICI and ICICI bank has resulted into the second largest bank in the country after SBI. It is one of the biggest events in recent financial history and a prime example of the concept of universal banking. d) Banks Entry into Insurance Different banks are given permission to set up life insurance subsidiary or to enter into joint venture with insurance company or for strategic investment or to act as insurance agents. For example, SBI has been permitted to set up a life insurance subsidiary on risk participation basis with 74 % equity holding. J&K bank ltd., and Vysya Bank Ltd., have been accorded approval to contribute 25% and 45% respectively to the equity of insurance joint ventures on risk participation basis. PNB and Vijya bank were permitted to make strategic investment to the extent of 15% and 8%, respectively, in the life and non-life insurance joint venture. Citibank, American Express, Standard Chartered Bank, HSBC, ABN-Amro, HDFC Bank and Deutsche bank have been given permission to act as corporate agents of insurance companies fro distribution of insurance products of fee basis. e) Lead Bank Schemes Under this scheme, a given bank is entrusted with the responsibility of locating growth centers, assessing deposit potential, identifying functional and territorial credit gaps, and evolving co-coordinated programmes
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of credit deployment is each district assigned to it, with the help of other banks and credit agencies. The RBI has allotted the districts, to nationalized banks and each of these banks has been designated a lead bank for the districts allotted to it. As at end of March 31, 2001, Lead Bank Scheme covered 576 districts in the country. f) Use of Information Technology Economic integration within and across countries, deregulation, advances in telecommunications, and the growth of the internet and wireless communication technologies are dramatically changing the structure and nature of financial services. The use of IT is much more in private sector banks than in public sector banks. The state-of-the-art call centers and internet banking has helped them to reach customers even at far-flung locations. An important initiative currently being witnessed is that public sector banks are concentrating on information technology initiatives in order to combat their private sector counterparts who have made substantial gains on this front. The public sectors banks are now increasing their IT spend to make up for the loss of the first mover advantage. SBI, for example, has committed Rs. 500 crore for its IT initiative over the next few years to implement anytime, anywhere banking. g) Priority Sector Lending Priority sector lending is the lending to agriculture, small-scale industries, transport operators, etc. the priority lending has been increased by all the three types of banks that is by private sector, public sector or foreign banks. In March 2001, the priority sector advances of PSBs were 43% of the net bank credit, that
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of private sector banks was 38.2% of NBC and of foreign banks was 32% of NBC. h) Food Credit On the credit off take front, the only area, which has been witnessing a rapid rise, is the food credit sector. With procurement going up and the country go downs overflowing with stocks; credit on this front has shown a sharp increase. The total outstanding food credit figure has jumped 40% over the past one year and stood at Rs. 52,276 crore at the end of December 2001. i) Interest Rate Deregulation Interest rates have been deregulated, allowing banks the freedom to determine deposit and lending rate. Currently, on the deposit side, the interest rate on saving deposits is administered; whereas pm the lending side, while sub-PLR lending has been permitted, the maximum spread is restricted at 4% over the PLR of each bank and there is a ceiling of PLR on small loans up to Rs.2 lakh. In the area of interest on deposits/savings, there does not appear any systematic architecture of the interest rate structure. To substantiate, no defined time path or defined preconditions have been identified in the area of deregulation of saving bank rates. It is apparent that banks, especially public sector banks are not ready for this reform since there is a potential for instability in the form of shifts in saving bank deposits between banks, depending on the interest rates that emerge. Thus, this is essentially a structural issue and conditional on improvements in operational efficiency of the public sector banks rather than an overall interest rate issue in the macroeconomic sense. On the
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overall interest rate structure in the financial system, with different authorities setting different interest rate, it might impinge upon the signaling mechanism of the Bank Rate. j) Non-Performing Assets Non-performing assets of the banks include substandard assets, doubtful assets, and loss assets as per the classification used by banks. Although the NPAs have declined over the years, they were and are still at a worrisome level. The route problem is that there is a sizable overhang component arising from the weak debt recovery processes, inadequate legal structure, weakness in underlying security, inadequate risk management techniques, etc. the non-performing loans can be categorized as loans to agricultural sector, directed lending, loans to small enterprises and loans to corporate sector. Many of the directed loans are subsistence loans, where default rates are high and recovery prospects not bright. As regards loan to agricultural borrowers, legal impediments often prove to be a challenging proposition for banks to recover their dues. Loans to small enterprise become difficult to recover due to inordinate judicial delays. Even if court decrees can be obtained towards recovery, by the time the charge of the assets is taken, its realizable value is significantly diminished because of several reasons including depreciation of the asset, lack of borrowers cooperation, limited market value of the asset, with the concomitant effect that such decrees are not executed. As regards corporate loans, suits pending/referred to BIFR leave little headroom for banks to affect recovery. Inadequate corporate governance practices coupled with problems of fixation of accountability leaves little maneuverability for banks
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towards an all-out recovery drive. With the environmental changes that are taking place, it seems that the credit portfolio of banks is becoming vulnerable and the issue of NPAs as a bane to the system and one should be bold enough to bring out the true position/tackle it ruthlessly. k) Participation Certificates and Inter-Bank Participations The participation certificate is an instrument where a bank can sell to third party a part or all of a loan made by the bank to a client (the borrower). After 1979, the RBI advised to banks to achieve a significant and lasting reduction in their recourse to PCs. As a result, the use of PCs went down drastically after 1980. The PCs scheme was replaced by two types of InterBank Participations, one on risk-sharing basis and the other without it. l) Credit Cards The credit card is a convenient medium of exchange which enables its holder to buy goods and services from member-establishments without using money. The credit cards are issued to people having a certain minimum income. The cardholder is required to pay neither an interest to the bank nor a higher price for goods purchased, he pays only a fee to the bank for the facility. The cost of arrangement is met from the increase sales, which result from the use of credit cards. The care-issuing bank pays to the seller as soon as goods are sold but charges the buyer after 30 to 45 days, the bank also beats the risk that the cardholder might default. For all this, the bank gets commission from the seller which is about 2.5 to 5 percent of the value of goods sold, the gain of the bank is the extent
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of commission from the seller minus the risk and interest factor, and administrative and advertising expenses,. In addition banks earn by way of initial, annual, add-on, and reissue fees from the prospective cardholders. The volume of credit cards as a % of population is 0.4 in India. The latest generation cards available in India at present include ATM cards, Change cards, Phone cards, Pre-paid Mobile SIM cards, and Smart cards. m) Consortium Approach This approach requires that more than one bank would finance a single borrower requiring large credit limit. It (a) enables banks to spread risk of lending, (b) break the monopoly of big banks to have large accounts, (c) enables banks to share experience and expertise, (d) introduce uniformity in approaches to lending, (e) enables banks to pool their resources, and (f) checked multiple financing of the same account.
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PORTFOLIO MANAGEMENT 3.1 Introduction In view of peculiar nature of stock exchange operations most of the investors feel insecure in managing their investment on the stock market because it is difficult for an individual to identify companies that have growth prospects conducive for investment. This is further complicated by the volatile nature of the markets, which demands constant reshuffling of portfolios to capitalize on the growth opportunities. Even if the investor is able to identify growth oriented companies and their securities, the trading practices are complicated, making it a difficult task for investors to trade in all the exchanges and follow up post trading formalities. That is why professional investment advice through portfolio management services can help the investor to make an intelligent and informed choice between alternative investments opportunities without the worry of post trading hassles. 3.2 Meaning of Portfolio Management Portfolio management in common parlance refers to the selection of securities and their continuous shifting in the portfolio to optimize returns to suit the objectives of an investor. This, however, requires financial expertise in selecting the right mix of securities in changing g market conditions to get the best out of the stock market. In India, as well as in a number of Western countries, portfolio management service has assumed the role of a specialized service now a days and a high number of professional merchant bankers compete aggressively to provide the best to high net worth clients, who have little
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time to manage their investments. The idea is catching on with the boom in the capital market and an increasing number of people are inclined to make profits out of their hard-earned savings. Portfolio management service is one of the merchant banking activities recognized by Securities and Exchange Board of India (SEBI). The portfolio management service can be rendered either by the SEBI authorized categories I & II merchant bankers or portfolio mangers or discretionary portfolio manger as defined in clauses (e) and (f) of Rule 2 of Securities and Exchange Board of India Rules, 1993. According to the definitions as contained in the above clauses, a portfolio manger means any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the client, as the case may be. A merchant banker acting as a portfolio manager shall also be bound by the rules and regulations as applicable to a portfolio manager. Realizing the importance of portfolio management services, the Securities and Exchange Board of India has laid down certain guidelines for the proper and professional conduct of portfolio management services. As per guidelines, only recognized merchant bankers registered with SEBI are authorized to offer the services. Portfolio means the total holdings of securities belonging to any person. 3.3 Objectives of Portfolio Management Security/safety of Principal: Security not only involves keeping the principal sum intact but also keeping intact its purchasing power.
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Stability of income so as to facilitate planning more accurately and systematically the reinvestment or consumption of income. Capital growth that can be attained by reinvesting in growth securities or through purchase of growth securities. Marketability i.e. the case with which a security can be bought or sold. This is essential for providing flexibility to investment portfolio. Liquidity i.e. nearness to money. It is desirable for the investor so as to take advantage of attractive opportunities upcoming in the mkt. Diversification: The basic objective of building a portfolio is to reduce the risk of loss of capital and/or income by investing in various types of securities and over a wide range of industries. Favorable tax status: The effective yield an investor gets from his investment depends on tax to which it is subject. By minimizing the tax burden, yield can be effectively improved.
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ECONOMIC ANALYSIS It involves analyzing the major factors that affects the national economy. These major factors are GDP, inflation, interest rates, forex reserves, monitory policy, fiscal policy, monsoon etc. it is important to predict the course of national economy because economic activity affects the corporate profits, investors attitudes and expectations and ultimately stock prices. An outlook of sagging economic growth can lead to lower corporate profits, a prospect that can engender investors pessimism and lower security prices. Some industries might be expected to hold up better, and stock prices of companies in these industries may not decline as much as in general. The key point is that overall economic activity manifests itself in the behavior of stock in general. We have adopted two approaches for analyzing the economy. First is the
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indicator approach and another is using the major factors of economy as mentioned above. 4.1 Indicator Approach In this approach we have used two indexes named DSEECRI Indian leading index and DSE-ECRI Indian coincident index. The DSE-ECRI Indian leading index, a precursor of Indian economic recession and recoveries, rose to 181.1 in October 2002 from 172.3 in September 2002. Its growth rate also jumped to 20.1% in Oct. from 11.5% a month ago. This suggests that economic recovery is likely to continue, at least for the near term. The leading index has grown in double digits since May 2002 and has been on the rise since the last quarter of 2001, which indicates pick-up in economic activities. Growth of economy can also be judged by the DSEECRI Indian coincident index. It rose 6.5% in August, 2.8% in September and 4.6% in October 2002. This confirms the 5.7% GDP growth recorded in the July-September quarter of fiscal year 2002-03.
4.2 Analyzing Economy using Different Parameters Monsoon The dependence of Indian economy on agriculture and monsoon is very high due to lack of infrastructure facilities like irrigation network. It has lead to high dependence on monsoon rains. Nearly 60% of countrys gross cropped area under cultivation is dependent on rains. Therefore poor monsoons are
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bound to affect the overall economy. The lack of monsoon hits the small farmers harder as they do not have any irrigation facilities. Lack of income in the hand of small farmers hits consumption in the rural area. The industries that may be hit in such scenarios will be consumer non-durables, consumer durables, cement and automobiles, particularly two wheelers. Over the past several years, monsoons have been uniformly good leading to high consumption of some goods in rural areas. One of the biggest beneficiaries of better rural income was the automobile industry, which saw an unprecedented jump in sales year after year. In the current financial year the monsoon was bad and there was drought in 14 states. According to the CSO data, the overall agriculture growth for April-September in 2002-03 has slipped to 2.5% in comparison to the 3.3% in the similar period in 2001-02. In particular, the second quarter June-September, has shown zero growth. There are estimates that the output of various kharif crops would be significantly lower than the previous year. Rice production is estimated to fall by 16%, that of coarse cereals by 27.5% and pulses by 16.9%. Even the production of commercial crops such as cotton and sugarcane is due to decline significantly. At the same time, the CSO has calculated that not withstanding this dip, the overall agriculture sector would register a zero growth, and particularly as part of counter measures against drought, the government was able to affect a higher output of horticulture and livestock products. Historically, a severe drought caused a major economic crisis. When rainfall become below normal, by say 15% or more, growth rate of both GDP from agriculture and aggregate GDP declined and in extreme cases both become negative. The incidence of
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unemployment and underemployment increase, essentially in the rural areas. Inflation rate shot up to double-digits. The food imports necessitated by the fall in domestic production led to foreign exchange crisis. Finally, the burden of drought relief, borne mainly by the government of India, increases the fiscal deficit. The drought, therefore, became the most important factor behind the economic crisis in 1965-66, 1966-67, 1972-73, 1974-75 and 1979-80. Even in this year also the rainfall was well below the normal. But at this time we had 60 million tones of food grains and above 60 billion $ of foreign exchange which have saved us from the severe drought impact. GDP National Income Accounts measures the value of production in an economy, and how that produce is disposed off by all the agents of that economy. Though there are several components and categories in which this output is measured are the GDP at market price, and GDP at factor cost. There is the broadest maser of output in the economy what the GDP measure is value added. There are two ways in which GDP measured. One way is to do so by measuring it at the production stage and the other is to measure it as the sum total of consumptions. Both should yield the some result. In India, central statistical organization measures output from the production side, broadly dividing it into three sectors: agriculture, industry and services. On 31st December 2002 the Central Statistic Organization released latest data of actual economic performance. This data covers the period April to September, constituting the first half of 2002-03. According to this, the overall economic growth, in terms of GDP has shown 5.9% growth for the period. In
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the first quarter, for the period April- Jun the GDP showed 6% growth. More significant, in the 2 nd quarter, July September, despite drought in many part of the country, it slipped only marginally to 5.8. The first half of the previous fiscal year 2001-2002 had witnessed 4.4 % growth. The July-September period of 2001-2002 had witnessed 5.3% growth. The data for agricultural growth is given in the previous topic. On the other hand, the service sector has shown 7.5% growth in the first half of 2002-03. This sector had shown 5.5% growth in the first half of the previous financial year.
PARTICULARS
A Agriculture Sector B Service Sector a ) Financing, insurance, Real estate & busi. Services b Trade, hotels, ) communication C Industrial Sector a ) Capital Goods b ) Basic Engineering Goods c ) Non-durable goods d Consumer Durables
AprilSeptember 2002200103 02 2.5 3.3 7.5 5.5 8.9 7.6
8 5.1 8.9 4.8 14.8 -6.5
2.4 2.1 6.8 2.1 2.8
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) The industrial growth for the April-September period in the current fiscal was 5.1%. The same period for the previous financial year, 2001-02 witnessed industrial growth at just 2.1%. The industrial sector has demonstrated a fairly broad based recovery this year. Thus the lower agriculture growth has been offset by higher industrial production. Thus the overall economic performance is very attractive for the first half of the current financial year. Therefore we can say that the country has acquired the capability to consistently witness much higher growth rate. The higher GDP indicates that the economy is on a strong footing and the 8% growth premise for the tenth plan period (200207) is very much achievable. Even the import of capital good has increased which itself give an indication about the expansion of manufacturing industry. If we see growth of consumer non-durable goods for this period, it is even more striking. It is 14.8% while it was 2.8% in the AprilSeptember period last year. According to experts, this indicates a massive pick-up in consumer spending and demand. Growth rates for various sectors have given below. GDP At Constant Factor Cost 1990-91 5.60% 1991-92 1.30% 1998-99 6.50% 1999-00 6.10% 2000-01 4% 2001-02 5.40%
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In 2001-02 gross and net domestic savings at current prices grew by 11.8% and 13.3% respectively to increase their share in GDP at market prices. Gross (net) domestic savings, as a proportion of GDP (NNP) at market prices, improved to 24(16) % in 2001-02, from 23.4% (15.4) in 2000-01. The household sector was the best performer with the increase in its gross savings exceeding the total savings in its gross domestic savings. Households increased the share of financial savings in their total savings from 48% in 2000-01 to 49.8% in 2001-02. Private corporate savings increased roughly at half the rate of increase of household savings. This shows better prospects for retail banking. The higher industrial growth indicates that it will be beneficial for the bank industry, as the corporates loans demand will shoot up. During the last year the agricultural growth was almost nil. Due to the priority sector lending norms this may affect the NPA levels of banking sector. Interest Rates Interest rates have different meanings for different people. For the man on the street it could mean the rate of interest he earns on his deposits or the rate he pays on his housing loans. For corporate it could mean the rate of interest it pays for borrowing money from banks and for bank traders it would mean the yields on gilts. During 2002-03, financial market in India have been generally stable, liquidity has been adequate and the interest rate environment favorable to promote investments. Accordingly, there has been a
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fall in interest rates all across the financial system and maturity tenors. Banks have reduced their deposits and lending rates. The maximum interest on banks fixed deposits which used to be a high as 13-14% before 4-5 years ago has been consistently reduced to 6-6.5%. Similarly, the lending rates of banks (PLR) reduced from as high as 18-19% to 11-12% as of now. The interest rate on government security has also fallen significantly. The yield on 10-year benchmark government paper reduced from 14% in March 1996 to 10.36% in March 2001. In 2001-02 it dropped by whopping 300 basis points to 7.36% as on March 31, 2002. In the current financial year, the same has fallen by around 100 basis points so far to 6.38% as of now. Even large corporate could access market directly and rise funds cheaply. The major drivers to the softening of interest rate during the current year is comfortable liquidity propelled by strong forex flows & CRR cuts by 75 basis points, appreciating rupees, slow credit off take, low inflation and falling global interest rates. The RBI announced a cut in the bank rate in the midterm review of monetary policy. Classical economic theory says that lower the interest rate, the better it is. In a low interest rate regime many good things happen. Demand for consumer goods like autos get a boost. These goods are mostly bought under installment purchase schemes and if interest rates are lowered, more people can afford them. The stock market too gets a boost. People shift their funds from fixed deposits in banks to buy shares. Corporates on the other hand reduce interest cost and invest such savings in crediting new capacities. Most importantly, the government can then cut taxes. The governments outgo on interest payments of its market borrowings reduces, and this allows it to reduce taxes.
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In other words, interest rates should go down as much as possible. If the above argument is true, the Japanese economy should have been booming. But it is not the case. If we take the case of India, vast majorities of our people have burnt their fingers in the stock market, in buying real estates where prices have gone down significantly. Even if we see the trend during the 9th plan period, there is a shift in the composition of financial assets of the household sector from deposits and shares and debentures to long term and less risky instruments. The decline in the share of deposits is probable due to the falling interest rates compared to other long-term instruments where impact was partly cushioned by favorable tax treatment. Thus not only the interest rates but the perceived riskiness can also affect the investment patterns in the economy. According to the expertise the outlook on interest rate appear to be optimistic with both the RBI and finance ministry insisting on softer interest rates regime to stimulate investment and revive demand in the economy. If the U.S Federal Reserve adapts tightening bias, it can affect the interest here. Industrial recovery leading to credit pick up can also affect the interest rates. Any strain on fiscal position and the exchange rate may also put pressure on it. The policy announcement in the budget and annual monetary and credit policy announcement will chart the direction of interest rate going forward. The lower interest rates can contribute to the greater competitive strength of the Indian industry through cost reduction. The interest rate continues to be below rate of growth of GDP, this is a sign of fiscal sustainability even though the ratio of debt to GDP keeps rising.
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Inflation Inflation rates for different years are as follow. INFLATION RATES 1998-99 6% 1999-00 3.30% 2000-01 7.10% 2001-02 3.60% In simple terms inflation is the rise in prices. During 2001-02 the inflation rate declined in terms of Wholesale Price Index. The 52-week average inflation rate declined from 7% at the beginning of 2001-02 to 4.7% for the week ended January 2002. The inflation rate is declining in these days. It has remained in range of 4%. ETIG computed the implied rate of inflation in the national account statistics. The exercise reveals that the implicit inflation rate in 2002-03 was just 2.3% down from 3.4% in the previous year. The implicit inflation rate in national account is considered to be the widest measure of inflation in the economy, since unlike the wholesale price index, it also incorporate the effect of price rise in services. As the inflation rate is at nominal level currently, so we can say that the savings will increase which indicates good signal for banks. Forex reserve FOREIGN DIRECT INVESTMENT 1998-99 13339.84 1999-00 16867.79
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2000-01 2001-02
19341.73 19265.1
It comprised mainly of foreign currency assets, gold and SDRS with RBI. The FER held by the RBI have crossed the market of 70 $ billion. Higher foreign reserves maintain confidence in the external value of the rupee. It assures economy agents that RBI has necessary resources to prevent the rupee from depreciating widely. In turn, this prevents any panic buying of imports or sudden liquidation of portfolio investment by foreigners. The rising reserves offer us an unusual opportunity to complete our trade liberalization program at rapid pace. Further liberalization will stimulate imports and create the necessary demand for dollars. This could help in the contingencies such as war. Fiscal Deficit The fiscal deficit, as a proportion of GDP, has gone up from 4.1% in 1996-97 to 5.9% in 2001-02 for the central government and from 9.6% in 1999-00 to 9.9% in 2001-02 for the general government (i.e. consolidated centre and states). The governments failure to rein in fiscal deficit has emerged as a major impediment threatening the economy, nullifying benefits arising out of low inflation, soft interest regime, high foreign exchange reserve and upturn in the performance of manufacturing sector. Inability to meet revenue growth targets and lack of adequate control over expenditure, particularly plan expenditure, as led to a situation where only drastic steps could contain the deficit from going out of hand. The situation has only worsened due to uncertainty over disinvestments, which was expected
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to generate Rs. 12000 crores during main reasons for fiscal deficit are subsidies, expenditure on account of and pension, the interest burden on defense spending.
2002-2003. The the areas like wages, salaries the centre and
While the rate of interest continues to be below the rate of growth of the economy, high primary deficits have led to progressive increase in both deficit to GDP and debt to GDP ratios. During the first half of the current fiscal, the fiscal deficit was marginally higher than the previous year. If fiscal deficit is not checked, interest rates would go up once investment demands picks up and inflation would also surge. Therefore the efforts made by the government to keep prices in control will vanish. The vicious circle would only end up making the economy uncompetitive. As per the mid-year review presented in parliament the govt. should adopt an expenditure rationalization and reprioritizing program, which must address the issue of subsidies, through a rationalization of prices of food, fertilizers, LPG and kerosene. As of today the government would manage to deflate its fiscal deficit purely through reduced interest cost, high loan recoveries from PSUs and unspent capex budget without undertaking any real expenditure restructuring, or increased revenue realization. Now lets look how the government would be able to cut expenditure on account of falling interest rates in global as well as domestic market. States are paying back high cost loans to the centre and replacing them with cheaper debt from small savings. The total interest payments budgeted during 2002-03 are Rs. 1,17,390 crore. The actual interest paid could be no
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more than Rs. 1,09,000 crores. Many PSUs whom the government had lent at higher interest rates are returning the money to the respective central government departments and accessing much cheaper money from the market. Finance minister Mr. Jaswant Singh has also began the process of asking department to return capex budget unspent. From the defense ministry alone about Rs. 3000 crores could be returned. All the above heads aggregated could save the centre about Rs. 20,000 crore as against the budgeted figure. This could take care of the expected revenue shortfall of Rs. 12,000 crore as well as the shortfall in disinvestments receipts of Rs. 6000 crores. Monetary and credit policy Monetary and credit policy of RBI determines the supply of money in the economy and the rate of interest and availability of credit. It also contains an economic overview and presents future forecasts. Monetary and credit policy has stance of a soft interest rate bias and efficient liquidity management. It has also maintained the RBIs focus on improving the regulatory and risk management framework for banks. In the mid term review in October 02, RBI reduce the bank rate to 6.25%, CRR to 4.75% and reduce repo rate by 25 basis point to 5.75%. Reduction in bank rate and repo rate reinforces the RBIs soft interest rate policy. The policy appears to aim at maintaining a stable, low interest rate scenario while taking measures to make the banking system more efficient, in order to crate a platform for growth.
INDUSTRY ANALYSIS
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When an economy grows, it is very unlikely that all industries in the economy would grow at the same rate. So it is necessary to examine industry specific factors, in addition to economy-wide factors. An appraisal of particular industrys prospects is essential, since the basic profitability of any company depends upon the economic prospects of the industry to which it belongs. 5.1 Structure of Banking Industry The banking system can be broadly classified as organized and unorganized banking system. The unorganized banking system comprises of moneylenders, indigenous bankers, lending pawnbrokers, landlords, traders, etc. Whereas the organized banking system comprises of Scheduled Banks and Non-Scheduled Banks that are permitted by RBI to undertake banking business. As of March 2002, there are about 294 Scheduled Commercial Banks and 67 Schedule Co-operative Banks. Of the 294 Scheduled Commercial Banks, 196 are regional rural banks. These 294 Scheduled Commercial Banks have an extensive branch network of 66,276 offices across the country, of which over 49% are in rural areas, 22% in semiThere were 16 Non-Scheduled Commercial Banks in June urban areas, 16% in urban areas and about 13% in metropolitan cities. 1969. As on March 2002, there are 5 Non-Scheduled Commercial Banks which are local area banks. However there are more then 2000 Non-Scheduled Co-operative Banks which are concentrated in few states like Maharashtra, Gujarat, Karnataka, Andhra Pradesh and Tamil Nadu. Further based on ownership, the Scheduled Commercial Banks can further be classified as Public Sector Banks, Private Sector Banks, Foreign Banks and
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Regional Rural Banks. Public Sector Banks are subclassified into the State Bank of India (erstwhile Imperial Bank of India nationalized by central enactment in 1955) and its 7 associates nationalized in 1959 and other Nationalised Banks which were nationalized in two phases; 14 banks were nationalised on July 19, 1969 and 6 others on April 15, 1980. Also the Private Sector Banks can be classified as old private sector banks and new private sector banks, wherein the latter enjoy superior discounting in the bourses. After RBI reopened the banking sector to private players, about eight private sector banks were licensed in 1995, which brought with them latest technology, customer-oriented service, innovative products and aggressive marketing. Despite increasing competition, public sector banks continue to dominate. This category currently accounts for more than 81% of all deposits and over 79% of all advances in the domestic banking industry. This scale of operations bestows upon them a higher bargaining power enabling them to play a dominant role in the liquidity and interest rate levels in the system. However, the scenario in the future may undergo a change with the growth of the new private sector banks. These banks are in a more advantageous position because of their superior technology-based operations, lower manpower and a lower non-performing assets (NPA) level. Among all the commercial banks, SBI is the largest bank, whereas ICICI Bank is the largest private sector bank. 5.2 Cost Dynamics
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Banking, everywhere in the world, is a highly regulated industry. The banking industry is the repository of savings of a nation contributed by millions of people. Thus a bank basically acts as an intermediary between savers and borrowers. Hence, costs to a bank are the interest cost paid to savers and the establishment cost. A bank's margin arises out of the difference in interest paid to depositors and charged to borrowers. The funds raised from savers are deployed in three ways - loans and advances to industry and agriculture, investment in government securities, investment in private sector equity, debentures, commercial papers, etc. A bank's sources of revenue are interest from loans and advances, income from government securities and dividend/interest from private sector equity investments and debt instruments. Apart from this, a bank also earns non-fund-based income, also called as fee-based income for the various services rendered by it as a banker or in the course of banking activities. It includes treasury and forex operations, income from trading in shares, guarantee commission, etc. The employee cost is about 9% of the normal banking income of private sector banks, while it is over 16% in public sector banks. Recently, the over-staffed public sector banks have rolled out a VRS package for their employees. Unlike in past where the bankers had practically forgotten the significance and importance of profits in the life and operations of a bank. They perceived that rules of the game have changed. Instead of deposits and priority sector lending, which were the yardstick for measuring the banks performance hitherto, it will now to be the
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profits. Innovative and unconventional methods of profits are being learnt and devised. With the economy engulfed in recession, many of the bank advances to core industries like steel, textiles have ended up as NPAs affecting the profitability, liquidity of banks and in some case their very financial viability. With prudential norms getting stringer, of late, banks incur substantial costs on account of reversal of income booked earlier in respect of non-performing assets, and the provisions to be made thereof. Further with the deregulation of interest rate structure, pricing of loan and deposit products will be determined by market forces as well as assets-liability profile of specific banks. This versatile instrument of interest rate can be very usefully employed to meet different or changing objectives of a bank from time to time. 5.3 Structural Changes Banks have started accessing Tier - II capital like preference shares and its deployment pattern has also changed, with new avenues like bonds, debentures etc. When funds are accessed as deposits, SLR (Statutory Liquidity Ratio) and CRR (Cash Reserve Ratio) needs to be maintained but if it is accessed as Tier II capital, it not only improves the bank's capital adequacy but the bank is also absolved of SLR and CRR requirements on such Tier II funds. Likewise, when lending, a bank needs to ensure priority sector lending does not fall below 40 % of the total lending, while deployment through debentures and other instruments is devoid of these restrictions. Even corporates prefer to access funds through such instruments, because, depending on their financial
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strength, coupon rates gets finer, thereby reducing their cost of funds. 5.4 Current Scenario Changing Face of Banking Industry Since its inceptions, banking has continually evolved but perhaps the pace of change has never been as rapid as in the current time. New thinking is emerging and focus has now changed in the banking industry. Nowadays, the banks do not rely on the lending as one of their main products. In todays competitive environment number of banks is increasing and the number of bankable corporates is reducing. The growth in number of banks has been fuelled by the emergence of several private sector banks while the bankability of more and more corporates is reducing owing to the continued recession in most industries. The stiff competition has reduced margins for the banks. The banks are now trying to increase the flow of transactions through their consumers which provides fee based income a comparative lower risk. The competition also makes relationship banking essential. Relationship helps the banks to sell standard products which are not very different from one bank to another as well as it also helps to understand the clients need in time and working out structured customized solutions. Several new products have been evolved in this area during the last few years. This area is witnessing growth at higher margin. The other focus area for the baking industry is channel finance. In this concept the bank use the credit-worthiness of the major corporates and provide funding to the channel partner viz. suppliers and dealers at spreads better than what the corporate
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offers but lower than what the channel partners get on their own strength. Pure lending has also given way to trade financing with structures to mitigate risk and improve pricing. The service levels and the turnaround times have also improved due to the increased competition. This is mainly because of centralization of processing and investment in technology. Banks are now moving towards, providing Internet banking to customers, which cannot only be used for inquiry but also for transaction initiation. Hence, banking is changing and the times are exciting for all the corporates as well as the professional bankers. Non-Performing Assets The issue of NPA Management is the biggest challenge before the banking sector. The higher competition has led the banks to accumulate poor quality of assets. The quantum of NPA is the true indicator of quality of assets. NPAs are a serious strain on the profitability as banks cannot book income in such accounts and they are required to charge the funding cost and provision requirement to their profits. The total non-performing loans for the financial sector were estimated at Rs. 110,000 crores. Banks alone have about Rs. 70,900 crore worth of NPAs, were estimated at approximately 10.4% of their gross advances. The level of gross NPAs of all groups of banks for the last three years is shown in the following table.
TABLE : NPAs in Cr)
(Rs.
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Bank Group Public Sector Banks
Gross NPAs* 200 0 2001 2002 5303 5477 3 3 56507 12.40 11.10 14% % % 4761 8.20 % 2614 6039 8.40 % 3071 6.80 % 6388 3 11.4 % as % of 11672 9.70% 2726
Private Sector Banks
Foreign Banks
7% 5.40% 6040 Total 8 70905 12.7 % 10.4% *% figures are gross NPAs gross advances Source: Professional Banker, March 2003
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Chart 1 : Gross NPAs as % of total advances 12 10 8 6 4 2 0 Public Sector Private Sector Foreign Banks Public Sector Private Sector Foreign Banks
Chart 2 : Gross NPAs (Rs. in Billion) 27.26 116.72 Public Sector Private Sector Foreign Banks 565.07
However after passing of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002, the banks will be able to reduce their NPA levels drastically. The reduction of the NPA levels will increase the bottom-line of the banks. And also the budget on Gilt-buyback will affect positively on banks balance sheet. If the government buyback the securities, banks will be able to show stronger balance sheet from the next financial year by providing for NPAs at the same time they can get rid of investment, which though paying a higher return
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cannot be off-loaded for an expected gain, simply because the securities are illiquid and coupon rates on such bonds are completely out of sync with prevailing market yields. Thus, banks have ample opportunity to reduce their NPAs. Spreads The magnitude of spread measures the intrinsic profit earning power of the banks. Spread is defined here simply as the difference between the ratio of interest earned to total assets and the ratio of interest expended to total assets, which is the formula used by the RBI in estimating a banks spread. By definition, higher the spread the greater is the banks efficiency and vice versa. According a recent study by RBI the average spread of 97 scheduled commercial banks both, Indian and Foreign, declined by 0.65% points during the last 5 years from 3.22% in 1996-97 to 2.57% in 2001-02. During this period the interest rates were falling at regular intervals. The fall in interest rates affected both interest earnings and interest expenditure of banks but its impact was higher on the earning side. Thus there is a steady decline in commercial banks spread in recent years and this indicates a decline in profit earning capacity. Technological Shift After entry of Private Sector Bank into the banking sector, the Public Sector Banks have loosened their clients, who switched their loyalties on discovering the joys of convenient banking. One of the biggest changes that the Private sector has brought about is in the application of modern technology like Internet banking and just around the corner ATMs. This has benefited
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both the banks and the customers and a lot of private banks actually have more ATMs than physical branches. And this has led many banks to invest heavily on the technological aspects. Private sector banks spend on technology goes in hand with their expansion while Public Sector and medium sized private banks focus on automating their urban branches and networking them. For instance, United Bank of India has announced its intention to spent Rs.150 crores on technology while Vysya Bank plans to spent Rs.60 crore on the same. The State Bank of India is going to spent Rs.500 crore over a 3 years period. Even the smaller banks like Bharat Overseas Bank and City Union Bank are also planning to spend on the IT aspect. The World Bank has also announced an automation fund for Indian banks under which Indian Bank, Dena Bank and Bank of Baroda will receive around $25 million to spend solely on IT. The number of fully computerized branches has increased from 5514 in Sep. 2000 to 11578 in March 2002. Therefore, it is very important for any bank to spend on IT to survive in the industry. Banking sector scenario in government security Bank has been warned that they cannot continue to invest heavily in low holding government securities to make up the commercial credit. The government is concerned that banks could take body below once interest rate start hardening. The concerned wise in the economy survey comes a month after financial ministry circulated report that said that only 10 of the 42 major banks in the country are hedged, in the since of starting to gain or loss less than 25% of equity
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capital in the event of a 320 basis point interest rate stock. Pointing out that bank are not passing on the full benefit of the reduction in landing cost to borrowers, the survey said that cuts in interest rate and increase in forex inflows have fail to result in any appreciable increase in credit flow to the commercial sector. The survey highlights that banks investment in government securities rose by a record 35%to 85738 crore during the current fiscal up to January 10,2003 from Rs 63,082 crore in the corresponding period last year and this was despite the fact there has been sharp fall in yields on government securities. Banks investment in G-Secs now amounts to 37.8% of banks net demand and time liabilities as compared to the statutory stipulation of 25%. As against this, bank credit to the commercial sector rose only 9.7% till January 10 this fiscal, compared to 11% in the year-ago period. Lending Rate Cuts Not Matched by Cut In Interest on Deposit Alarms bells are ringing big time. This time over banks lending below the primary lending rates. Though subPLR lending by the commercial Banks has been growing, the survey point out, taking up almost over one third of the total lending pie, the rate cuts, havent keep pace with the deposit rate snips. While the bank rate cut of 75 basis point from 7% in march 2001 to 6 point 25% in January 10/2003, has been matched by a cut in PLR by the bank from a band of 11%-12% in march 30, 2001 to a band of 10.75% to 11.5% in
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January 10/2003,the fall in deposit rate have been sharper in comparing to the cut in the PLR. The rates fill from a band of 8.5% to 10% in March 30/2001 to band of 5.5% to 6.5% in January 10/2003. Indeed, if anything the stats only point to the in efficiency of the banking sector. The interest spread the difference between interest charge to the borrower and interest paid to the deposit, increase by 6.8% in 2001-2002. A higher spread means higher cost of intermediation. But the ratio of interest spread to the total assets has declining from 2.9% into 2000-2001 to 2.6% in 2001-2002, meaning that the yields on assets have come down or that the repressing is thinner. Sharp Raise in Provisioning by private banks Private sector banks saw a share rise in provisions and contingencies during 02-03, while this declined for foreign banks, said the economy survey for 02-03. Provision for entire banking sector rose by 36.6% to Rs 18242 crore, from Rs 13,353 crore in previous years. While provisioning for new private sector bank grew by 83.3%, for old generation private rose by55.3% and public sector bank by 41% provision for foreign banks declined by 6.7%. Provision for new private banks rose to Rs 1337 crore, from Rs 730 crore. For old generation private sector banks, it grew to Rs 1512 crore, from Rs 974 crore Deposit the leap in provisions; the numbers of private sector banks are much smaller than public sector and foreign banks. Even though there has been declined in percentage terms for foreign banks, the provision for 01-02 was Rs2021 crore, compared to Rs 13372 crore, from Rs 9485 crore. In case of SBI group,
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it rose by almost 50% to Rs5270 crore from Rs 3518 crore. The increase in provisioning reflects provisioning for NPAs by banks to meet prudential requirements said the economy survey. During 01-02 the proportion of NPAs to net advances was the highest for public sector banks at 5.8%, closely followed by private sector banks (5.7%) 5.5 GOVERNMENT POLICY Securitisation Bill An ordinance on Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest was promulgated on 24th June 2002. The same has been passed by the Parliament in Nov. 2002. The ordinance will help banks and financial institutions improve their financial position in three ways. Firstly it will help banks and FIs turn their assets into securities, which could be traded in the market in smaller bundles. This would bring immediate liquidity, which can be lent, instead of waiting for loans to be realized. The new law will also help them in setting up asset reconstruction companies to recover their bad assets. And finally, it will help in the enforcement of security interest (i.e. right to the security in case of default by the client). This ordinance creates a right environment for faster recovery of dues and gives hope that the huge the burden (now estimated at over Rs 1,100 billion) of NPAs on Indian financial sector will be reduced to a more reasonable level. It also offers scope for Public Sector Banks to clean up their balance sheets faster. Using this law, banks may make lesser provisions for NPAs and recoveries may in fact result in some write backs thereby adding to the bottomline
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directly. No doubt this Act is a good thing to have happen, but in reality it is not magic wand against the mounted NPAs because of several reasons which are explained below. In the case of ARCs, while they would be in a position to make a concentrated efforts at recovery after buying out the problem assets, the issue of valuation of these assets and the role of the valuer yet to be clear. Besides secured assets would also include both tangible and intangible assets. Intangible could be things like software, brands, goodwill, and the like, valuation for which could be crucial. There is also the issue of the banks paying insurance and providing security to the assets. All these being highly manpower intensive, banks are finding themselves inadequate in dealing with this aspect. Besides, 75 percents of the lenders in the value will have to agree to the decision to attach the properties. Though banks may well go and attach properties under the Act, selling them would pose another problem since it is difficult to find buyers. Another cause for confusion remains: banks having to go to more than one forum for recourse. Most public sector banks have already find cases for majority of their NPAs with the debt recovery tribunals, which they say have proved a rather defensive mode of recovery. With the new Act some banks are now wondering how to balance the two fora. In conclusion, having got a powerful tool in hands, banks will now have to learn how best to use it to their advantage. On this Act, a lot of work remains to be done, with clear policies and guidelines required before the banks can truly reap its benefits. RBI Regulation The Reserve Bank of India (RBI) in its recent credit policy declared on 29th Oct. 2002 has decided to
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reduce the bank rate; cash reserve ratio (CRR) and the repo-rate by 25 basis points (bps) each. The bank rate has been reduced from 6.5% to 6.25%. Likewise, the repo-rate under RBI's liquidity adjustment facility (LAF) has been reduced from 5.75% to 5.5%. CRR has been reducing from 5% to 4.75%. However this will be effective from the fortnight beginning 16th Nov. 2002. RBI has also asked bank to maintain a minimum of 80% of the required CRR on a daily basis with effect from the fortnight beginning 16th Nov. 2002. As per industry estimate, the CRR reduction would infuse further liquidity of around Rs 3,000 crore into the interbank market. While fiscal policies are the domain of the government, the monetary policy is the domain of RBI. It has taken various measures to adjust the money supply in the economy in accordance with the internal and external business environment prevailing. Banks, which control sizeable flows of money of the nation, are accordingly advised/ directed by RBI. The Union Budget 2002 has furthered banking reforms and facilitated improvement in the margins of the sector. The finance minister announced that a new law will be enacted to improve foreclosure and enforcement of securities and also enable securitization of long term loans. It also promised that Asset Reconstruction Company would be formed by June'02. On direct taxes front, the Union Budget 2002 increased the provision for bad and doubtful debts from 5% hitherto to 7.5% of their total income w.e.f. accounting year 2002-03. Further, the optional deduction of their NPAs categorized as loss or doubtful debts has also been increased from 5% to 10%.
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The Budget 2002 also provided an option to foreign banks to either operate as branches of their parent banks or to set up subsidiaries. Such subsidiaries will however, have to adhere to all banking regulations, including priority sector lending norms that are applicable to other domestic banks. The Deposit Insurance Credit and Guarantee Corporation (DICGC) will be converted into the Bank Deposits Insurance Corporation (BDIC) to make it an effective institution for dealing with depositor's risks and for dealing with distressed banks. In Feb'02, RBI permitted FDI in private sector banks up to 49%. Likewise, FDI and portfolio investment in nationalized banks, SBI and its associate banks are subject to overall statutory limits of 20%. FDI in private sector banks will be under the automatic route for shares acquired through IPOs, private placements, ADRs/GDRs and acquisition oif shares from existing share holders. However, FIPB approval is required, followed by in principle approval from Exchange Control Department of RBI, if the existing shares of a bank are to be transferred from residents to non-residents.
In Mar'02, the government clarified that the portfolio investment by foreign institutional investors in the private sector banks would be outside the FDI limit of 49%. Hence, FII investments in private sector banks can go upto 49% subject to approval of the respective bank's board and its shareholders. Nevertheless, the maximum voting rights for a shareholder continues to be capped at 10% of the total voting rights of the bank.
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The central bank has been selective in approving establishment of new banks. In Jan'01, the RBI directive was that the promoter's shareholding in private sector banks should not exceed 40% and if they so exceed, have to be disinvested after completion of one year of banking operations. However, in June '02, RBI had enhanced the maximum limit of promoter's stake in private banks to 49%. Recent RBI directives, which enables banks to lend below prime lending rate (PLR) to premium clients, is likely to lead to churning of creamy clients amongst leading banks. SBI, Punjab National Bank, Corporation Bank and Bank of India have started offering loans priced about 100 basis points less than their respective PLRs to select corporates. RBI had formulated Prompt Correction Action (PCA) in August 2000, wherein trigger points are identified, for taking corrective actions, to prevent a bank from liquidating. The parameters identified are slippage of capital adequacy ratio (CAR) below 9%, surge of NPAs above 10% and fall in return on assets below 0.25%. Recently, the Income Tax Department has held that NPA provisioning as per RBI rules will not be allowed as a deduction, but only the actual amount written off will be allowed. This will increase the income tax liability of old public and private sector banks substantially, as they have to pay tax on NPAs provided in the books, to the extent not written off. Public sector banking is at the crossroads. The government has already announced its intention to reduce its share in the capital of the banks to around 33%, while retaining their public sector character. The impact of this move, for which legislation is with the
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Parliament, will go much beyond the financial impact. Banks will have to change their operating style and take into account the aspirations of the larger group of shareholders. RBI has directed the banks that their capital market exposure should be restricted to 5% of advances and 20% of their networth, whichever is less. While about 5 banks exceeded the 5% advance limit, nearly 25 banks have violated the limit of 20% of networth norm. Nevertheless, RBI is likely to take a case by case approach and give time to bring down the exposures of these banks to the limit fixed. 5.6 Critical Success Factors Asset liability management, effective monitoring of loans, recovery of NPAs, reducing cost of deposits, controlling establishment costs are critical success factors. Ensuring capital adequacy, exposure norms and other prudential norms in line with RBI guidelines are also critical. Wresting blue chip accounts, expanding depositor base and leveraging them for fee-based income are also essential for growth and development. Technology has already brought about revolutionary changes. Services like Internet Banking, Mobile Banking, Anywhere and Anytime Banking will not be added features but promise to be a standardised banking environment in the next few years. While on one hand it has the potential to reduce the transaction costs, the initial capital requirements will be heavy. Banks, which have a legacy of a large workforce, will have to find ways to offset these technology costs by reduction in staff costs, if any meaningful reduction in transaction costs has to be achieved. 5.7 Mergers and Acquisitions
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The RBI on 14th November 2002 notified the draft scheme for amalgamation of Nedungadi Bank (NBL) with PNB and the bank merged in the first week of February 2003. Dutch financial giant ING's has proposed to hike its stake in Vysya Bank by another 29% to 49%. In June 2002, the union government approved the amalgamation of Benaras State Bank (BSB) with Bank of Baroda. The former had total staff strength of 1400 and around 105 branches across the country. According to BOB, the amalgamation of BSB is likely to be completed in two months from the date of receipt of Centers approval. ICICI Bank has become the second largest bank in India (next only to State Bank of India), with the merger of its parent ICICI with itself wef March 2002. In Oct. 2001, LIC has picked up additional 15.28% stake in Corporation bank, thereby increasing its stake in the latter to 27%. The latest increase in stake comes on account of picking up 2.4 crore shares in Corporation Bank @ Rs 196 per share aggregating Rs 459.42 crore. In November 1999, HDFC Bank merged Times Bank with itself, starting off M&A activity in new private sector banks. Standard Chartered Bank became one of the world's leading emerging markets bank with the acquisition of ANZ Grindlays Bank and Chase Consumer Banking. Merger, Acquisitions and Alliances can emerge as a route to survival. The weaker banks would need to merge entirely or sell some of their networks to other banks. In this direction RBI directed PNB to takeover Nedungadi Bank. Next from the regulators list is Centurion Bank which is likely to be taken over by Andhra Bank. 5.8 Outlook of Indian Banking Industry
51
The banking scenario in the country has been undergoing a qualitative shift towards internationalism. Global best practices are finding greater acceptance and systemic deficiencies, which are a legacy of the past, are being addressed. The future, therefore, seems to be exciting, but only for those who can withstand the stress and strain that the reforms bring along. The new Capital Accord, on which deliberations are going on, will bring about changes in the CARs to provide for newer risks. It is expected that banks will have to improve their capital structure to meet these enhanced requirements, or else restrict their ambition for asset growth. The changes may call for conservation of capital resources and, for some banks; it may need a fresh infusion of funds. The gross NPAs will go up in March 2004 when the NPA recognition shift 180 days over due to 90 days. Recoveries are however expected to improve with the passing of new securitisation and reconstruction of financial assets and enforcement of security interest bill, 2002. Bankers will have to focus on cleaning their balance sheet and bring down their net NPAs to around 1% in the next 2-3 years, which may virtually impossible for weaker banks. Overall the outlook of the banking industry is looking optimistic. This will have a positive impact on the share prices of the banks.
52
Table : 1 Bank of Baroda

DATE KEY FINANCIALS Rs. In Million Industry : Banking Mar.2001 Mar.2002 Q.Sept.(U) '02 BSE Index : 3390.12 Operating Income 57573.4 59555.4 15477.2 P/E Ratio 3.8 Other income 7062.8 9931.7 3602.5 52 WK h/l : 78/35 Total Income 64636.2 69487.1 19079.7 Face Value : 10 Gross Profit 10364.7 13092.5 4488.2 CMP : 74.55 Tax 1851.4 2497.1 776 Listed at : BSE,NSE Provisions & Conting. 5766.7 5136.2 2340 BSE Group : A Net Profit 2746.6 5459.2 1372.2 BSE Code : 532134 Equity 2943.4 2943.4 2943.4 Market Cap. : 22067 Reserves 27851.5 32602.1 32602.1 Book Value : 129.4 CAR(%) 12.73 11.32 Volatility (%) 36.24 GPM % 16.03544 18.8416267 23.52343066 Price/BV : 0.576121 NPM % 4.249322 7.85642227 7.19193698 Book Closure : July EPS (Rs.) 9.28 18.44 4.64 Private Dividend (%) 40 40 NA SHP (%) NPA/ Net Adv.(%) NA 5.7 NA Promoters 66.22 Net Worth 33562.8 38277.6 NA FI/FII 15.9 Public 13.25 Others 4.63
Table 2 :Bank of India

DATE Industry : BSE Index : P/E Ratio 52 WK h/l : Face Value : CMP Listed at : 1/1/03 KEY FINANCIALS Rs. in Million Banking Mar.2001 Mar.2002 Q Sept.(U) '02 3390.12 Operating Income 53168.7 56086.8 15129.3 2.9 Other income 8619.1 11032.7 3560.8 39/14 Total Income 61787.8 67119.5 18690.1 10 Gross Profit 7720.2 14120.6 4642.7 36.5 Tax 660.6 1831.4 656.6 BSE,NSE Provisions & Conting. 4540.8 7200.9 2041.8
53

BSE Group : A Net Profit BSE Code : 532149 Equity Market Cap. : 17833 Reserves Book Value : 54.3 CAR (%) Volatility (%) 35.03 GPM % Price/BV : 0.672192 NPM % Book Closure : July EPS (Rs.) Private Dividend (%) SHP (%) NPA/ Net Adv. (%) Promoters 69.3 Net Worth FI/FII 6.94 Public 17.33 Others 6.43 DATE Industry : BSE Index : P/E Ratio 52 WK h/l : Face Value : CMP Listed at : BSE Group : BSE Code : Market Cap. : Book Value : Volatility (%) Price/BV : Book Closure : Private SHP (%) Promoters FI/FII Public Others 2518.8 5052.2 6384.2 4880.8 16503.7 21637.2 12.23 10.68 12.4947 21.037999 4.0765329 7.5271717 3.95 7.91 15 25 6 24830.9 26518 1944.3 4880.8 21637.2 10.12 24.84042354 10.40283359 3.98
Table 3 : Bank of Punjab

1/1/03 KEY FINANCIALS Rs.Million Banking Mar.2001 Mar.2002 Q. Sept.(U)'02 3390.12 Operating Income 3404.09 3631.77 887.48 4.3 Other income 428.16 1172.98 300.08 18/11 Total Income 3832.25 4804.75 1187.56 10 Gross Profit 646.98 744.5 270.95 14.7 Tax 60.08 222 10 BSE, NSE Provisions & Conting. 238.68 165.31 241.03 B1 Net Profit 348.21 357.19 19.92 500070 Equity 1050 1050 1050 1544 Reserves 743.08 863.37 18.2 CAR (%) 11.02 12.82 13.35 19.27 GPM % 16.88251 15.495083 22.81568931 0.8076923 NPM % 9.086307 7.43410167 1.677388932 June EPS (Rs.) 3.32 3.4 0.19 Dividend (%) 14 13 NA NPA/ Advances NA NA NA 37.66 Net Worth 1793.1 1913.4 4.44 41.61 16.29
Table 4 : Bank of Rajasthan

DATE Industry : BSE Index : P/E Ratio 52 WK h/l : Face Value : CMP Listed at : BSE Group : BSE Code : Market Cap. : 1/1/03 KEY FINANCIALS Rs.Million Banking Mar.2001 Mar.2002 Q Sept.(U) 02 3390.12 Operating Income 4424.32 4525.95 1143.67 3.2 Other income 564.79 972.17 349.51 21/9 Total Income 4989.11 5498.13 1493.19 10 Gross Profit 577.14 814.17 404.85 16.1 Tax 14.3 129.76 63.51 BSE,NSE Provisions & Conting. 240.6 281.27 185.95 B1 Net Profit 322.24 403.13 155.39 500019 Equity 1003.67 1003.66 1003.66 1616 Reserves 1104.79 NA
54

Book Value : 21 CAR (%) Volatility (%) 46.79 GPM % Price/BV : 0.7666667 NPM % Book Closure : Jul/Aug EPS (Rs.) Private Dividend (%) SHP (%) : NPA/ Advances (%) Promoters 42.51 Net Worth FI/FII 0.36 Public 36.2 Others 20.93 10.57 12.07 13.6 11.568 14.808126 27.11309344 6.458867 7.3321293 10.4065792 3 4.02 1.55 0 0 NA 8.9 NA 1553.6 2108.5 NA
Table 5 : Corporation Bank

DATE 1/1/03 KEY FINANCIALS Rs. In Million Industry : Banking Mar.2001 Mar.2002 Sept.(U) '02 BSE Index : 3390.12 Operating Income 18045.4 19456.9 10322.4 P/E Ratio 5 Other income 2920.9 3819.4 2519.6 52 WK h/l : 157/97 Total Income 20966.3 23276.3 12842 Face Value : 10 Gross Profit 5320.6 6229.3 4126.8 CMP 122.75 Tax 1351.5 1526.7 972.4 Listed at : BSE,NSE Provisions & Conting. 1350.7 1621.6 985.3 BSE Group : A Net Profit 2618.4 3081 2169.1 BSE Code : 532179 Equity 1200 1434.4 1434.4 Market Cap. : 17607 Reserves 12277 19028 21192.7 Book Value : 142.7 CAR% 13.3 17.9 22.2 Volatility (%) 21.21 GPM % 25.376914 26.762415 32.1351814 Price/BV : 0.860196 NPM % 12.488613 13.2366398 16.8906712 Book Closure : July EPS (Rs.) 21.82 23.65 15.12 Private Dividend (%) 40 40 NA SHP% NPA/ Advances (%) 2.3 NA Promoters 57.17 Net Worth 13477 20462.4 NA FI/FII 37.32 Public 4.41 Others 1.11
Table 6 : Dena Bank

DATE Industry : BSE Index : P/E Ratio 52 WK h/l : Face Value : CMP Listed at : BSE Group : BSE Code : Market Cap. : Book Value : Volatility (%) Price/BV : 1/1/03 KEY FINANCIALS Rs. In Million Banking Mar.2001 Mar.2002 Q Sept.(U) 3390.12 Operating Income 17,163.80 17,084.00 4,279.90 5.4 Other income 1,990.80 3,529.60 1,063.00 15/5 Total Income 19,154.60 20,613.60 5,342.90 10 Gross Profit 681.1 3,353.90 1,105.10 12.65 Tax -192 -203.7 BSE,NSE Provisions & Conting. 3,342.30 -3,048.30 -985.6 B1 Net Profit -2,661.20 113.6 84.6 532121 Equity 2,068.20 2,068.20 2,068.20 2616 Reserves 4,105.40 6,213.70 6,213.70 20.4 CAR% 7.73 7.64 7.71 38.8 GPM % 3.555804 16.2703264 20.68352393 0.620098 NPM % -13.89327 0.55109248 1.583409759
55

Book Closure : Jul/Aug EPS (Rs.) Private Dividend (%) SHP%: NPA/ Adv.(%) Promoters 70.99 Net Worth FI/FII 13.08 Public 13.64 Others 2.29 0 3801 0.55 0 16.3 4209.3 0.41
Table 7: Dhanlakshmi Bank

DATE 1/1/03 KEY FINANCIALS Rs. In Million Industry : Banking Mar.2001 Mar.2002 Q Sept.(U) '02 BSE Index : 3390.12 Operating Income 1,770.50 472.9 481.3 P/E Ratio 4.8 Other income 259.4 230 146 52 WK h/l : 27/14 Total Income 2,029.90 702.9 627.3 Face Value : 10 Gross Profit 194.9 195.6 138.8 CMP 17.6 Tax 10.5 Listed at : BSE,NSE Provisions & Conting. 102.8 243.6 149.3 BSE Group : B1 Net Profit 67.7 16.6 17.3 BSE Code : 532180 Equity 137.4 137.4 320.6 Market Cap. : 563 Reserves 595.1 664.6 NA Book Value : 35.1 CAR% 9.69 11.23 NA Volatility (%) 50.52 GPM % 9.6014582 27.8275715 22.12657421 Price/BV : 0.501425 NPM % 3.3351397 2.36164462 2.757851108 Book Closure : Aug/Sep EPS (Rs.) 4.93 0.95 0.98 Private Dividend (%) 15 15 NA SHP %: NPA/ Net Adv.(%) 11.9 NA Promoters Net Worth 781.5 849 NA FI/FII 0.55 Public 84.5 Others 14.95
Table 8: Federal Bank

DATE Industry : BSE Index : P/E Ratio 52 WK h/l : Face Value : CMP Listed at : BSE Group : BSE Code : Market Cap. : Book Value : Volatility (%) Price/BV : Book Closure : Private 1/1/03 KEY FINANCIALS Rs.In Million Banking Mar.2001 Mar.2002 Q Sept.(U) 02 3390.12 Operating Income 9,191.70 10,423.90 2,719.90 2.1 Other income 1,251.00 2,204.20 773.4 127/42 Total Income 10,442.70 12,628.10 3,493.30 10 Gross Profit 1,870.40 3,054.00 1,036.30 87.3 Tax 226.6 443.3 197.7 BSE,NSE Provisions & Conting. 2142.4 3000.2 800.30 A Net Profit 610.4 820.1 339.2 500469 Equity 217.2 217.2 217.2 1935 Reserves 3,849.70 4,186.60 NA 202.6 CAR% 10.29 10.63 10.56 31.13 GPM % 17.91107664 24.1841607 29.6653594 0.430898 NPM % 5.845231597 6.49424696 9.710016317 Aug NPM % 28.11 37.76 15.62 Dividend (%) 25 35 NA
56

SHP% Promoters FI/FII Public Others NPA/ Net Adv (%) 0 Net Worth 29.49 61.08 9.43 NA 4154.8 8.7 4487.9 NA NA
Table 9: Global Trust Bank

DATE 1/1/03 KEY FINANCIALS Industry : Banking BSE Index : 3390.12 Operating Income P/E Ratio 5.4 Other income 52 WK h/l : 30/14 Total Income Face Value : 10 Gross Profit CMP 17.2 Tax Listed at : BSE,NSE Provisions & Conting. BSE Group : B1 Net Profit BSE Code : 500161 Equity Market Cap. : 2087 Reserves Book Value : 32.5 CAR% Volatility (%) 31.43 GPM % Price/BV : 0.529231 NPM % Book Closure : Aug/Sep EPS (Rs.) Private Dividend (%) SHP% NPA/ Advances (%) Promoters 21.96 Net Worth FI/FII 1.16 Public 39.92 Others 36.95 Rs.In Million Mar.2001 Mar.2002 QSept.(U) '02 8,975.00 7,242.20 1,520.50 1,644.40 2,292.40 444.2 10,619.40 9,534.60 1,964.70 2,007.70 1,480.30 113.6 105 749 0.5 1,099.40 1,826.70 48.3 803.3 402.6 64.8 1,213.60 1,213.60 1,213.60 4,670.50 2,729.60 NA 12.71 11.21 10.64 18.90596 15.52556 5.78205324 7.564458 4.2225159 3.298213468 6.62 3.32 0.53 15 10 NA 9.2 NA NA NA NA
Table 10: HDFC Bank

DATE Industry : BSE Index : P/E Ratio 52 WK h/l : Face Value : CMP 1/1/03 KEY FINANCIALS Banking Mar.2001 3390.12 Operating Income 12594.6 18 Other income 1855.3 256/187 Total Income 14449.9 10 Gross Profit 3816.5 213.45 Tax 1049.4 BSE, NSE, Listed at : NYSE Provisions & Conting. 665.9 BSE Group : A Net Profit 2101.2 BSE Code : 500180 Equity 2436 Market Cap. : 60759 Reserves 6694.9 Book Value : 69.2 CAR (%) 11.09 Volatility (%) 22.21 GPM % 26.41 Price/BV : 3.084538 NPM % 14.54 Book Closure : May EPS (Rs.) 8.64 SHP% Dividend (%) 20 Promoters 24.43 NPA/ Advances (%) Rs. In Million Q Sept.(U) Mar.2002 02 17029.9 4817.3 33332.5 1215.1 20362.4 6032.4 5445.5 1707.7 1283.4 446.8 1191.7 2970.4 2813.7 16609.1 13.93 26.742 14.588 11.01 25 0.5 364 896.9 2819.1 NA 13.35 28.3087992 14.8680459 3.18 NA NA
57

FI/FII Public Others 26.48 Private 18.12 30.97
Table 11: ICICI Bank

DATE 1/1/03 KEY FINANCIALS Rs in Million Industry : Banking Mar.2001 Mar.2002 Q Sept.(U) 02 BSE Index : 3390.12 Operating Income 12421.3 21519.3 46753.3 P/E Ratio 12.9 Other income 2200.1 5746.6 21815.8 52 WK h/l : 165/86 Total Income 14621.4 27265.9 68569.1 Face Value : 10 Gross Profit 2901.7 5450.9 19004.2 CMP : 140.4 Tax 654.2 315 4430 Listed at : NSE,BSE Provisions & Conting. 636.5 2552.9 18052.2 BSE Group : A Net Profit 1611 2583 5382 BSE Code : 532174 Equity 2203.6 6130.3 6125.5 Market Cap. : 86069 Reserves 10922.6 56355.4 61706.1 Book Value : 101.9 CAR% 11.44 12.32 Volatility (%) 38.03 GPM % 19.845569 19.991638 27.7154 Price/BV : 1.377821 NPM % 11.018097 9.4733715 7.849017 Book Closure : Sep EPS (Rs.) 8.13 11.61 8.78 Private Dividend (%) 20 20 NA SHP%: NPA/Net Adv.(%) NA 5.6 NA Promoters 0 Net worth 12890.8 58559 NA FI/FII 42.67 Public 9.58 Others 47.75
Table 12: IDBI Bank

DATE 1/1/03 KEY FINANCIALS Rs. In Million Industry : Banking Mar.2001 Mar.2002 Q Sept.(U) 02 BSE Index : 3390.12 Operating Income 5,391.00 5,093.10 1,452.90 P/E Ratio 7.9 Other income 695.8 1,225.40 314.1 52 WK h/l : 35/17 Total Income 6,086.80 6,318.50 1,767.00 Face Value : 10 Gross Profit 686.2 1,231.20 283.8 CMP 26.25 Tax 184.9 72 Listed at : BSE,NSE Provisions & Conting. 449.6 919.4 188.3 BSE Group : A Net Profit 193.6 524.2 160.9 BSE Code : 532235 Equity 1,400.00 1,400.00 1,400.50 Market Cap. : 3676 Reserves 1,281.20 1,608.90 Book Value : 21.5 CAR% 11.72 9.59 9.05 Volatility (%) 38.19 GPM % 11.2735756 19.4856374 16.06112054 Price/BV : 1.22093 NPM % 3.18065322 8.29627285 9.105829089 Book Closure : July EPS (Rs.) 1.38 3.74 1.15 Private Dividend (%) 7 10 SHP%: NPA/ Advances (%) 2.2 Promoters 71.4 Net Worth 2681.2 3009.1 FI/FII 10.38 Public 14.47 Others 3.75
58
Table : 13 Indian Overseas Bank

DATE 1/1/03 KEY FINANCIALS Industry : Banking BSE Index : 3390.12 Operating Income P/E Ratio 2.5 Other income 52 WK h/l : 16/7 Total Income Face Value : 10 Gross Profit CMP 15.2 Tax Listed at : BSE, NSE Provisions & Conting. BSE Group : A Net Profit BSE Code : 532388 Equity Market Cap. : 761 Reserves Book Value : 21.7 CAR % Volatility (%) 24.68 GPM % Price/BV : 0.7004608 NPM % Book Closure : Jun/Jul EPS (Rs.) SHP % Dividend (%) Promoters 75 Net Worth FI/FII 3.37 Private Public 19.73 Others 1.9 Rs. In Million Mar.2001 Mar.2002 Q Sept.(U) '02 27934.16 31,706.85 8762.58 3024.17 5,308.01 1152.25 30958.33 37,014.86 9914.84 3066.04 6,163.59 2016.96 67.02 552.56 354.33 1839.75 3,308.94 782.96 1159.27 2,302.09 879.67 4448 4,448.00 4448 3592.84 5,199.19 5199.19 10.24 10.82 10.48 9.903764 16.65166 20.34283962 3.744614 6.219367 8.872256133 2.6 5.18 10 12 7620.2 9647.2
Table 14 : Indusind Bank

DATE 1/1/03 KEY FINANCIALS Rs. In Million Industry : Banking Mar.2001 Mar.2002 Q Sup(U) '02 BSE Index : 3390.12 Operating Income 7,287.20 7,100.60 1,486.50 P/E Ratio 3.6 Other income 1,165.50 1,843.70 720 52 WK h/l : 20/10 Total Income 8,452.70 8,944.30 2,206.50 Face Value : 10 Gross Profit 1,727.40 2,524.80 550.8 CMP 15.5 Tax 150.4 272.9 57.9 Listed at : BSE,NSE Provisions & Conting. 1305.6 1947.3 302.4 BSE Group : B1 Net Profit 405.4 507.5 253.8 BSE Code : 532187 Equity 1,590.30 1,590.30 1,590.40 Market Cap. : 2480 Reserves 3,854.20 4,028.90 NA Book Value : 35.2 CAR% NA 12.51 15.75 Volatility (%) 31.21 GPM % 20.436074 28.228033 24.9626105 Price/BV : 0.440341 NPM % 4.7961007 5.6740047 11.5023793 Book Closure : Sep EPS (Rs.) 2.53 3.17 1.59 Private Dividend (%) 15 15 NA SHP %: NA NPA/ Advances NA NA NA Net Worth 5444.5 5619.3
Table 15 : Karnataka Bank
59

DATE 1/1/03 KEY FINANCIALS Rs in Million Industry : Banking Mar.2002 Q. Sept.(U) '02 BSE Index : 3390.12 Operating Income 7433.73 1,979.50 P/E Ratio 1.6 Other income 2,410.20 547.5 52 WK h/l : 78/37 Total Income 9,842.60 2,527.00 Face Value : 10 Gross Profit 2,508.80 661.9 CMP 47.8 Tax 818.5 208.1 Listed at : BSE,NSE Provisions & Conting. 1668.7 372.8 BSE Group : B1 Net Profit 911.3 322.3 BSE Code : 590002 Equity 135 135 Market Cap. : 1598 Reserves 4,284.90 Book Value : 163.7 CAR % 12.96 12.82 Volatility (%) 43.57 GPM % 25.4892 26.19311436 Price/BV : 0.291998 NPM % 9.2587324 12.75425406 Book Closure : Aug EPS (Rs.) 67.57 23.9 Private Dividend (%) 60 SHP % NA NPA/ Net Adv. (%) 6 Net Worth 4419.9
Table 16 : Karur Vysya Bank

DATE Industry : BSE Index : P/E Ratio 52 WK h/l : Face Value : CMP Listed at : BSE Group : BSE Code : Market Cap. : Book Value : Volatility (%) Price/BV : Book Closure : Private SHP % 1/1/03 KEY FINANCIALS Rs. In Million Banking Mar.2002 Q Sep.(U) '02 3390.12 Operating Income 4823.1 1273.2 2.9 Other income 1047 203.8 176/106 Total Income 5870.1 1477 10 Gross Profit 1617.6 370.3 144 Tax 352.7 138.7 BSE,NSE Provisions & Conting. 179.8 17.4 B1 Net Profit 1085.1 249 590003 Equity 60 60 864 Reserves 4241.4 4241.4 245.6 Capital Adequacy Ratio% 16.9 41.88 GPM % 27.5566004 25.07109005 0.586319 NPM % 18.48520468 16.85849695 July EPS (Rs.) 180.85 41.5 Dividend (%) 70 NA NPA/ Net Advances (%) 6.3 Net Worth 4301.1
Table : 17 Oriental Bank of Commerce

DATE Industry : BSE Index : P/E Ratio 52 WK h/l : 1/1/03 KEY FINANCIALS Banking 3390.12 Operating Income 2.6 Other income 53/33 Total Income Rs. In Million Mar.2001 Mar.2002 Q Sep.(U) '02 27587.3 30404.7 8291.5 2677.2 4739.1 1394.5 30264.5 35143.8 9686
60

Face Value : CMP Listed at : BSE Group : BSE Code : Market Cap. : Book Value : Volatility (%) Price/BV : Book Closure : Private SHP % Promoters FI/FII Public Others 10 Gross Profit 5341 9170.9 2928.6 50.1 Tax 786.2 2488.8 800 BSE,NSE Provisions & Conting. 2526 3476.6 998.5 A Net Profit 2028.8 3205.5 1130.1 500315 Equity 1925.4 1925.4 1925.4 9646 Reserves 13561.2 14271.9 84.1 CAR % 11.81 10.99 21.56 GPM % 17.647739 26.095357 30.23539129 0.595719 NPM % 6.7035636 9.1210968 11.66735495 Jun EPS (Rs.) 10.54 16.65 5.87 Dividend (%) 35 35 NPA/ Advances (%) 3.2 66.48 Net Worth 15486.6 16197.3 16.44 15.63 1.45
Table 18 : Punjab National Bank

DATE 1/1/03 KEY FINANCIALS Rs. In Million Industry : Banking Mar.2002 Q Sept.(U) '02 BSE Index : 3390.12 Operating Income 66,478.70 19,703.70 P/E Ratio 2.7 Other income 9,777.20 3,278.90 52 WK h/l : 74/35 Total Income 76,255.90 22,982.60 Face Value : 10 Gross Profit 14,738.00 6,064.10 CMP 65.15 Tax 1,981.50 1,230.00 Listed at : BSE,NSE Provisions & Conting. 20295.8 6484.9 BSE Group : B1 Net Profit 5,623.90 2,089.40 BSE Code : 532461 Equity 2,122.40 2,653.00 Market Cap. : 17284 Reserves 26,658.20 26,658.20 Book Value : 110.5 CAR % 10.7 Volatility (%) 34.55 GPM % 19.327029 26.38561346 Price/BV : 0.589593 NPM % 7.3750359 9.091225536 Book Closure : July EPS (Rs.) 26.5 7.88 Private Dividend (%) 30 SHP % NPA/ Net Advances (%) 5.3 Promoters 80 Net Worth 28780.6 FI/FII 8.9 Public 9.99 Others 1.1
Table 19 : State Bank of India

DATE Industry : BSE Index : P/E Ratio 52 WK h/l : Face Value : CMP 1/1/03 KEY FINANCIALS Banking 3390.12 Operating Income 5.3 Other income 306/185 Total Income 10 Gross Profit 284.2 Tax Rs. In Million Mar.2001 Mar.2002 QSept.(U) '02 260033.7 298,100.90 78,595.60 40178.2 41,744.80 11,328.30 300211.9 339,845.70 89,923.90 39667.8 60,448.30 17,285.60 9713.6 16,030.20 4,529.30
61

Listed at : BSE,NSE Provisions & Conting. 13911.7 20,101.90 4,404.30 BSE Group : A Net Profit 16042.5 24,316.20 8,352.00 BSE Code : 500112 Equity 5263 5,263.00 5,263.00 Market Cap. : 145974 Reserves 129,352.40 152,243.80 146,980.80 Book Value : 289.3 CAR % 12.79 13.35 13.99 Volatility (%) 20.91 GPM % 13.213267 17.786984 19.22247589 Price/BV : 0.982371 NPM % 5.3437255 7.1550707 9.287853396 Book Closure : July EPS (Rs.) 30.48 46.2 15.87 Private Dividend (%) 50 60 SHP % NPA/ Net Adv. (%) 5.6 Promoters Net Worth 134615 152244 FI/FII 90.45 Public 7.85 Others 1.7
Table : 20 State Bank of Travencore

DATE Industry : BSE Index : P/E Ratio 52 WK h/l : Face Value : CMP Listed at : BSE Group : BSE Code : Market Cap. : Book Value : Volatility (%) Price/BV : Book Closure : Private SHP % 1/1/03 KEY FINANCIALS Rs. In Million Banking Mar.2001 Mar.2002 Q Sept.(U) '02 3390.12 Operating Income 13,153.59 14,538.97 3,988.20 1.4 Other income 1,942.59 2,301.83 587.6 428/228 Total Income 15,096.18 16,840.80 4,575.80 100 Gross Profit 2,302.36 3,212.64 998.9 385 Tax 251 469.7 245.3 BSE,NSE Provisions & Conting. 3846.16 3983.65 1126.8 B1 Net Profit 974.9 1,209.27 248.6 532191 Equity 500 500 500 1925 Reserves 4,645.31 5,601.38 5,601.40 1220.3 CAR % 11.79 12.54 12.24 GPM % 15.25128 19.07653 21.8300625 0.315496 NPM % 6.457925 7.180597 5.432929761 June EPS (Rs.) 194.98 241.86 49.72 Dividend (%) 30 30 NA NA NPA/ Net Adv. (%) NA 5.7 NA Net Worth 5146.3 6101.4 NA
Table : 21 Syndicate Bank

DATE 1/1/03 KEY FINANCIALS Rs. Million Industry : Banking Mar.2001 Mar.2002 Q. Sept.(U) '02 BSE Index : 3390.12 Operating Income 27,921.80 28,824.10 7,044.20 P/E Ratio 2.9 Other income 2,814.20 2,760.30 979.1 52 WK h/l : 19/9 Total Income 30,736.00 31,584.40 8,023.30 Face Value : 10 Gross Profit 2,978.00 3,552.30 1,569.00 CMP 16.45 Tax 222 225 350 Listed at : BSE,NSE Provisions & Conting. 406.6 821.8 577.7 BSE Group : B1 Net Profit 2,349.40 2,505.50 641.3 BSE Code : 532276 Equity 4,719.40 4,719.50 4,719.40 Market Cap. : 7764 Reserves 5,386.20 7,325.40 7,325.40
62

Book Value : Volatility (%) Price/BV : Book Closure : Private SHP % Promoters FI/FII Public Others 25.5 CAR % 31.05 GPM % 0.6451 NPM % May EPS (Rs.) Dividend (%) NPA/ Net Adv. (%) 73.52 Net Worth 1.55 22.74 2.19 11.72 11.72 9.688964 11.24701 7.643805 7.932714 4.98 5.31 12 12 4.6 10105.6 12044.9 12.71 19.55554448 7.992970473 1.36
Table 22 : United Western Bank

DATE 1/1/03 KEY FINANCIALS Rs. In Million Industry : Banking Mar.2001 Mar.2002 Q. Sept.(U) '02 BSE Index : 3990.12 Operating Income 47247.3 4924 1207.5 P/E Ratio 2.6 Other income 462.8 1525.9 226.6 52 WK h/l : 30/16 Total Income 5190.1 6449.9 1434.1 Face Value : 10 Gross Profit 620.3 1534.5 277.1 CMP 23.1 Tax 45.2 51 Listed at : BSE, NSE Provisions & Conting. 589.8 1231.7 217.6 BSE Group : B1 Net Profit 156.8 257.6 8.5 BSE Code : 500430 Equity 298.9 298.9 298.9 Market Cap. : 690 Reserves 1778 1990.7 Book Value : 76.6 CAR % 9.59 9.79 10.03 Volatility (%) 39.29 GPM % 11.9516 23.79107 19.322223 Price/BV : 0.3015666 NPM % 3.021136 3.99386 0.592706227 Book Closure : Dec EPS (Rs.) 8.62 1.14 Private Dividend (%) 10 15 SHP % NPA/ Net Adv. (%) 7.9 Promoters 0.26 Net Worth 2076.9 2289.6 FI/FII 7.16 Public 63.08 Others 29.51
Table 23 : UTI Bank

DATE Industry : BSE Index : P/E Ratio 52 WK h/l : Face Value : CMP Listed at : BSE Group : BSE Code : Market Cap. : Book Value : Volatility (%) 1/1/03 KEY FINANCIALS Rs. In Million Banking Mar.2001 Mar.2002 Q Sept.(U) '02 3390.12 Operating Income 8896.2 11795.3 3673.6 5.3 Other income 1630 4158.7 1183.7 47/26 Total Income 10526.2 15954 4857.3 10 Gross Profit 1325 4099.3 1135.3 43.55 Tax 179.5 792.3 234.6 BSE,NSE Provisions & Conting. 284.3 1965.6 459 A Net Profit 861.2 1341.4 441.7 532215 Equity 1319 1918.8 1918.1 8356 Reserves 1695.5 4229.5 32.1 CAR % 9 10.65 30.86 GPM % 12.5876 25.6945 23.37306734
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Price/BV : 1.356698 NPM % Book Closure : July EPS (Rs.) Private Dividend (%) SHP % NA NPA/ Net Adv. (%) Net Worth 8.18149 8.407923 6.53 9.34 15 20 3.5 3014.5 6147.6 9.093529327 2.3
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Table 24 : Vijaya Bank

DATE 1/1/03 KEY FINANCIALS Rs. In Million Industry : Banking Mar.2001 Mar.2002 QSept.(U) '02 BSE Index : 3390.12 Operating Income 13561.9 15385.1 4070.4 P/E Ratio 3.1 Other income 1562.6 1888.2 530.2 52 WK h/l : 15/7 Total Income 15124.5 17273.3 4600.6 Face Value : 10 Gross Profit 1784.8 2525.1 776.8 CMP 14.15 Tax 63.6 100 70 Listed at : BSE, NSE Provisions & Conting. 1013.9 1116 329.4 BSE Group : B1 Net Profit 707.3 1309.1 377.4 BSE Code : 532401 Equity 3592.4 3335.2 3335.2 Market Cap. : 4719 Reserves 1669 2621.1 2521.1 Book Value : 17.9 CAR % 11.5 12.25 12.37 Volatility (%) 28.9 GPM % 11.8007 14.618515 16.88475416 Price/BV : 0.7905028 NPM % 4.67652 7.5787487 8.203277833 Book Closure : Jul/Aug EPS (Rs.) 2.48 3.65 NA Private Dividend (%) 3 12 NA SHP % NPA/ Net Adv.(%) NA 6 NA Promoters 70.02 Net Worth 5261.4 5956.3 NA FI/FII 4.09 Public 22.73 Others 3.16
6.2 Selection Fundamentals
of
the
Banks
Having
Strong
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Table 25 : Selection parameters for banks * NPA/NA- Non Performing Assets/ Net Assets,
Div. BANKS Bank of Baroda Bank of India Bank of Punjab Bank of Rajasthan Corporation Bank Dena Bank Dhanlakshmi Bank Federal Bank Global Trust Bank HDFC Bank ICICI Bank IDBI Indian Overseas Bank Indusind Bank Karnataka Bank Karur Vysya Bank Oriental bank of Commerce PNB SBI State Bank of Travancore Syndicate Bank United Western Bank UTI Bank Vijaya Bank 7.9 3.5 6 2289.6 6147.6 5956.3 9.79 10.65 12.25 2.6 5.3 3.1 0.3 76.34 8.62 15 20 12 5.7 4.6 6101.4 12044.9 12.54 11.72 1.4 2.9 0.32 86.33 241.9 30 0.65 91.26 5.31 12 3.2 5.3 5.6 16197.3 28780.6 152244 10.98 10.7 13.35 2.6 2.7 5.3 0.6 86.52 16.65 35 30 60 6 6.3 6.3 9647.2 5619.3 4419.9 4301.1 10.82 12.51 12.96 16.9 2.5 3.6 1.6 2.9 0.7 86.12 5.18 12 15 8.9 2.3 16.3 11.9 8.7 9.2 0.5 5.6 2.2 58559 3009.1 NPA/NA* Net Worth 5.7 6 38277.6 26518 1913.4 2108.5 20462.4 4209.3 849 4487.9 CAR 11.32 10.68 12.82 12.07 17.9 7.64 11.23 10.63 11.21 13.93 P/E P/BV OI/TI** EPS 3.8 2.9 4.3 3.2 5 5.4 4.8 2.1 5.4 18 %
0.58 85.71 18.44 40 0.67 83.56 7.91 0.81 75.59 3.4 25 13 0
0.77 82.32 4.02 0.86
83.6 23.65 40 0 15
0.62 82.88 0.55 0.5 67.23 0.95
0.43 82.55 37.76 35 0.53 75.96 3.32 10
3.08 83.63 11.01 25
11.44 12.9 1.38 78.92 11.61 20 9.59 7.9 1.22 80.61 3.74 10
0.44 79.39 3.17
0.29 75.53 67.57 60 0.59 82.16 180.9 70
0.59 87.18 26.5 0.98 87.72 46.2
1.36 73.93 9.34 0.8 89.07 3.65
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** OI/TI- Operating Income/ Total Income The above table shows the different parameters of the all the banks listed on BSE as on the 1-1-2003. This table is used to find out the banks, which are fundamentally very strong. The parameters which are used to select the banks are NPA/Net Advances ratio, Net worth, Capital Adequacy Ratio, Price/Earnings Ratio, Price/ Book Value Ratio, Operating Income/ Total Income, EPS, Dividend. Non-Performing Assets/ Net Advances: The sum of substandard and lost loans net of loss provisions expressed as a percentage of Net Advances. This ratio directly affects the profitability of the bank. Lower the ratio, better for the bank. Net Worth: Net worth of the bank could be found by adding share capital and reserves and surplus. Net worth should be higher. This can be better aspect for the liquidity as well as for the expansion purpose. Capital Adequacy Ratio: The capital-to-risk weighted assets ratio, as submitted to the RBI for 2001-2002. The prescribed level for the capital adequacy ratio, as per RBI, is 9%. If CAR of any bank is between 6 and 9 then that bank has to submit a plan to reinforce its capital base. And they will have to face restrictions such as contraction of its risk weighted assets, no entry in new lines of business, either skip or reduce dividend, to cut cost. For the banks with a CAR below 6% but above 3%, RBI has said that recapitalisation will be ordered immediately. For this purpose RBI can change the management, appoint consultant for restructuring, change the shareholding pattern or can force a merger. Banks where the CAR is below 3% may be placed under an moratorium in addition to the measures prescribed earlier.
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Price/ Earnings Ratio: It is found by dividing price per share by the earnings per share. The average P/E ratio of the banking industry is 6. Higher the P/E ratio, better the stock because this indicates strong market expectation about the bank.
Price/ BV: it is found by dividing price per share by book value per share. Higher the ratio better for the bank. Operating Income/ Total Income: this ratio could be helpful to find whether the bank has gained the profit from its operating income or from treasury income. EPS: Earnings per Share could be found by dividing the profit after tax by the total no. of outstanding equity shares. Higher the ratio better for the shareholders. We have taken the 24 banks, which are listed on the BSE as on 1-1-2003. Based on the parameters given above, we have chosen six banks, which according to us are fundamentally strong. These are: ICICI bank, State Bank of India, Corporation bank, IDBI, UTI bank, and HDFC Bank. ICICI bank has the highest net worth among the private sector banks. The CAR of the bank is also higher than the prescribed level. The banks P/E ratio and P/BV is also attractive which indicates the market has the good faith in the management of the bank. EPS are also very high which attracts the shareholder to invest in ICICI bank. The only negative factor is the higher NPA levels but by looking at the factors we feel that the bank would be able to overcome this point especially after the passing of securitisation bill. SBI bank has the highest net worth among the all banks. The CAR is also very high. The banks P/E ratio
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is at par with industry average. The P/BV ratio is also very good. Higher EPS and higher dividend rate gives a good picture for the investor. Here again, the negative point is only the higher NPA, which could be reduced by the bank due to reason as prescribed in the above paragraph. Corporation bank has low the NPA/ Net Advances ratio. Even the capital adequacy ratio is the highest. The P/BV ratio is the lowest among the six selected banks but higher than the other banks. The P/E ratio is 5, which is not very below the industry average, so this factor could not affect that much. The EPS and Dividend are also attractive. IDBI banks NPA/Net Advances ratio is low and the CAR is slightly higher than the RBI norms. P/E ratio is higher than the industry average. P/BV ratio is also high. However the banks EPS and dividend are low, this bank would be able to give the average return to the investors. The above parameters for the UTI bank are above the required level. So the fundamentals of the bank are even though not very strong , it is on an average satisfactory. HDFC bank has the strongest fundamentals on the basis of above parameters. Its NPA/Net Advances ratio is only 0.5%, which is lower than the international standard also. Its CAR is also higher than the prescribed level. Its P/E and P/BV ratio are the highest among all the listed banks. Its EPS and dividend ratio is also quiet satisfactory.
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FUNDAMENTAL ANALYSIS 7.1 Introduction To select a company for investment purposes a number of qualitative factors have to be seen. Before purchasing the shares of a company, relevant information must be collected and properly analysed. An illustrative list of the factors, which help the analyst in taking the investment decision, is given below. However, it must be emphasized that past performance and information is relevant only to the extent it indicates the future trends. Hence, the investment manager has to visualize the performance of the company in future by analyzing its past performance. Size and Ranking: A rough idea regarding the size and ranking of the company within the economy, in general, and the
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industry, in particular, would help the investment manger in assessing the risk associated with the company. In this regard the net capital employed, the net profits, the return on investment and the sales figure of the company under consideration may be compared with similar data of other companies in the same industry group. It may also be useful to assess the position of the company in terms of technical knowhow, research and development activity and price leadership. Growth record: The growth in sales, net income, net capital employed and earnings per share of the company in the past few years should be examine. The following three growth indicators may be particularly looked into : (i) Price earnings ratio, (ii) Percentage growth rate of earnings per annum, and (iii) Percentage growth rate of net block. The price earnings ratio is an important indicator for the investment manager since it shows the number of times the earnings per share are covered by the market price of a share. By a comparison of this ratio pertaining to different companies the investment manager can have an idea about the image of the company and can determine whether the share is under-price or over-price. The percentage growth rate of net blocks shows how the company has been developing its capacity levels. Obviously, a dynamic company will keep on expanding its capacities and diversify its business. This will enable it to enter new and profitable lines and avoid stagnation in its growth. In this context, an evaluation of future growth prospects of the company should be carefully made.
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This requires an analysis of existing capacities and their utilization, proposed expansion and diversification plans and the nature of the companys technology. The existing capacity utilization levels can be known from the quantitative information given in the published profits and loss accounts of the company. The plans of the company, in terms of expansion or diversification, can be known from the Directors Reports, the Chairmans statements and from the future capital commitments as shown by way of notes in the balance sheets. The nature of technology of a company should be seen with reference to technological developments in the concerned fields, the possibility of its product being superseded or the possibility of emergence of a more effective method of manufacturing. Growth is the single most important factor in company analysis for the purpose of investment management. A company may have a good record of profits and performance in the past; but if it does not have growth potential, its shares cannot be rated high from the investment point of view. Financial Analysis: An analysis of its financial statements for the past few years would help the investment manager in understanding the financial solvency and liquidity, the efficiency with which the funds are used, the profitability, the operating efficiency with which the funds are used, the profitability, the operating efficiency and the financial and operating leverages of the company. From the investment point of view, the most important figures are earnings per share, price
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earning ratios, yield, book value and the intrinsic value of the shares. The five elements may be calculated for the past 10 years or so and compared with similar ratios computed from the financial accounts of other companies in the industry and with the average ratios for the industry as a whole. The yield and the asset backing of a share are important considerations in a decision regarding whether the particular market price of the share is proper or not. Various other ratios to measure profitability, operating efficiency and turnover efficiency of the company may also be calculated. To examine the financial solvency or liquidity of the company, the investment manger may work out current ratio, liquidity ratio, debt-equity ratio, etc. These ratios will provide an overall view of the company to the investment analyst. He/she can analyze its strengths and weaknesses and see whether it is worth the risk or not. Quality of Management: This is an intangible factor. Yet it is a very important bearing on the value of the share. Every investment manager knows that the shares of certain business houses command a higher premium than those of similar companies managed by other business houses. This is because of the quality of management, the confidence that investors have in a particular business house, its policy vis--vis its relationship with the investors, dividend and financial performance record of other companies in the same group, etc. This is perhaps the reason that an investment manager always gives a close look to the management of a company in whose shares he/she is to invest. Quality of management has to be seen with
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reference to the experience, skills and integrity of the persons at the helm of affairs of the company. The policy of the management regarding relationship with the shareholders is an important factor since certain business houses believe in very generous dividend and bonus distributions while other are rather conservative.
Location and Labor-Management Relations: The location of the companys manufacturing facilities determines its economic viability, which depends on the availability of crucial inputs like power, skilled labor and raw materials, etc. Nearness to markets is also a factor to be considered. In the past few years, the investment manager has begun looking into the state of labor management relations in the company under consideration and the area where it is located. Pattern of Existing Stock Holding: An analysis of the pattern of existing stock holdings of the company would also be relevant. This would show the stake of various parties in the company. An interesting case in this regard is that of the Punjab National Bank in which the Life Insurance Corporation and other financial institutions had substantial holdings. When the bank was nationalized, the residual company proposed a scheme whereby those shareholders, who wish to opt out, could receive a certain amount as compensation in cash. It was only at the instance and the bargaining strength, of institutional investors that the compensation offered to the shareholders, who wished to opt out of the company, was raised considerably.
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Marketability of the Shares: Another important consideration for an investment manager is the marketability of the shares of the company. Mere listing of a share on the stock exchange does not automatically mean that the share can be sold or purchased at will. There are many shares, which remain inactive for long periods with no transactions being effected. To purchase or sell such scrip is a difficult task. In this regard, dispersal of shareholding with special reference to the extent of public holding should be seen. The other relevant factors are the speculative interest in the particular scrip, the particular stock exchange where it is traded and the volume of trading.
Fundamental analysis thus is basically and examination of the economic and financial aspects of a company with the aim of estimating future earnings and dividend prospects. It includes an analysis of the macro-economic and political factors, which will have an impact on the performance of the firm. After having analyzed all the relevant information about the company and its relative strength vis--vis firms in the industry, the investor is expected to decide whether he should buy or sell the securities.
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FUNDAMENTAL ANALYSIS OF ICICI BANK 8.1 Qualitative Analysis of ICICI Bank Size and Ranking: ICICI bank is the biggest private sector bank and the second largest bank in the country. Their product range covers everything from housing loans to auto loans. The total capital employed is Rs. 1,041,099,204,000 as on March 31, 2002. The net profit of the bank for the year 2001-02 was Rs. 2,582,990,000. Thus though the bank has a huge capital but its net profit is lower than the other banks. The return on investment is just 0.25%, which is very low compared to other banks. There are 500 branches of ICICI. It also ranks second in terms of network. ICICI
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is spending very high on the IT aspect. It has 1200 ATMs and the largest call centre with 1700 seats. IT has played an important role in creating a strategic differentiation for their products and distribution channels. It plays a major role in bringing efficiencies. Thus though ICICI bank stand at no 2 in terms of size, its net profit and return on capital employed is low compared to the other scrutinized banks. Growth Record For assessing the growth record of the company we have taken three indicators, which are percentage growth rate of earnings per annum, price earnings ratio, and percentage growth rate of net block. If we look at the past data of ICICI bank, we can find that EPS is continuously increasing. Year EPS (Rs.) % Growth 1995 0.13 1996 1.14 77.69 1997 2.68 135.08 1998 3.04 134.32 1999 3.84 26.30 2000 6.38 66.14 2001 8.13 27.43 2002 11.61 42.80 However, EPS calculation cannot be the sole basis of deciding about an investment. The P/E ratio of the bank on January 1, 2003 was 12.9, which is quiet higher than the industry average of six. As per the theoretical basis we should choose the stock with less P/E ratio. But the market decides P/E ratio and higher P/E ratio indicates that the market has strong view about the company. The market has the information about the company, which as an investor we do not have.
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In the year 2000-01, ICICI acquired Bank of Madura Limited. In the year 2001-02, ICICI was merged with ICICI bank, which made ICICI bank the largest private sector bank. Recently, ICICI Bank announced plans to acquire retail financial services company Transamerica Apple Distribution Finance for around Rs 74 crore. The deal will be finalized after the completion of the audit of accounts of TADF for April-November 2002. Total assets of TADF stood at Rs 218 crore (Rs 2.18 billion) as on 31 March 2002, and the company had reported a net profit of Rs 4.6 crore. TADF is primarily engaged in financing two-wheelers and tractors. Thus, ICICI bank is continuously looking for the growth opportunities. This point is the main point for an investor. Quality of Management This is an intangible factor. However, if we look at the past performance of the bank, we would find that the bank is continuously growing. This gives a good sign of the management. If we compare the P/E ratio of ICICI bank with that of the industry average, we will find that the P/E ratio of bank is higher than that of the industry. It means that the shares of ICICI command higher premium than the industry. This is because of the quality of management, the confidence that investors have in a particular business house. If we look this point with reference to experience and qualification, all the directors are highly qualified with high degrees such as MBA, CA, law etc. and also they are highly experienced people having experience of more than 25 years in the same institution.
Year
Dividend
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1997 1998 1999 2000 2001 2002
(%) 10 10 12 15 20 20
The policy of the management regarding relationship with the shareholders is moderate since they are declaring the dividend in a limited range. Pattern of existing stock holding
Category Non Promoter's Holding Institutional Investors Mutual Funds and UTI Banks,Financial Institutions,Insurance Co. FIIS Sub Total Others Private Corporate Bodies Indian Public NRIs/OCBs Any Other Foreign Companies ADS Holders Shares in Transit Sub Total Grand Total 128698 160022118 101395949 351436040 613031404 0.02 26.1 16.54 57.33 100 29875700 58735791 1277784 4.87 9.58 0.21 27944529 108094663 125556172 261595364 4.56 17.63 20.48 42.67 No. of Shares held % shareholding
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In the shareholding pattern of ICICI bank the institutional investors have very high share. This is good for an individual investor because this group prevents company to take any decision which is not in favour of shareholders. Marketability of the shares This factor is basically related to the public shareholding in the bank. In ICICI bank, public holding is 9.58%, which is moderate. The average trading volume is also moderate. This scrip is mainly traded on BSE and NSE.
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8.2 Financial Statements of ICICI bank

PROFIT AND LOSS ACCOUNT (Rs. Million) PARTICULARS Interest on Advances Interest on Investments Interest on Balances Others Interest Earned, Operating income Other Income Total Income Interest Expended Payment/provision for employees Other operating expenses Operating Expenses Total Expenditure Operating Profit Profit Before Tax Tax Provision and Contingencies Profit After Tax Net Profit Profit/loss brought forward Total APPROPRIATIONS/ TRANSFERS Statutory Reserve Investment fluctuation Reserve Special Reserve Revenues & Other Reserves Proposed Dividend Interim Dividend Paid Corporate Dividend Tax Balance carried to Balance Sheet Total 2000 3479.1 4097.1 946.2 6.4 8528.8 1940.5 10469.3 6669.5 363.7 1169.4 1533.1 8202.6 2266.7 2266.7 266 947.8 1052.9 1052.9 1.4 1054.3 517.1 2825.9 3343 11719.7 2901.7 2901.7 654.2 636.5 1611 1611 8 1619 5709.1 5557.3 1086.7 68.2 12421.3 2200.1 14621.4 8376.7 1471.8 4754 6225.8 21815 5450.9 5450.9 315 2552.9 2583 2583 8.3 2591.3 2001 7716.7 12338 1226.2 238.4 21519.3 5746.6 27265.9 15589.2 2002
250 **** *** 528.2 247.5 *** 27.2 1.4 1054.3
800 65 *** 260 440.7 *** 45 8.3 1619
650 160 140 960 *** 440.7 45 195.6 2591.3
The above table shows the profit and loss account of ICICI bank for the last three years. The balance sheet for the last three years is shown in the next table.
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BALANCE SHEET (Rs. in Million) PARTICULARS CAPITAL & LIABILITIES Capital Reserves and surplus Statutory Reserve Debenture Redemption reserve Special Reserve Share Premium Investment Fluctuation Reserve Revenue and other Reserve Balance in P & L account Total Deposits Borrowings Other liabilites and provisions TOTAL 1038.6 *** *** 7690.3 *** 796.6 1.4 9526.9 98660.2 4914.7 5656.3 120726.3 2000 1968.2 1844. 3 *** *** 8045. 4 113.4 911.2 8.3 10922.6 163782.1 10327.9 10129.7 197365.9 2001 2203.6 2002 9630.3
2494.3 100 10940 8045.4 273.4 34306.7 195.6 56355.4 320851.1 492186.6 162075.8 1,041,099.2
ASSETS Cash and balance with RBI Balances with banks and money at call and short notice Investments Advances Fixed Assets Other Assets TOTAL
7219 26932.7 44166.8 36573.4 2221.2 3613.2 120726.3
12316.6 23620.3 81868.6 70314.6 3847.5 5398.3 197365.9
17744.7 110118.8 358910.8 470348.7 42393.4 41582.8 1041099.2
8.3 Financial Ratios Return on Equity (ROE): ROE = Profit after taxes Net Worth For the year 2000, ROE= 1052.9/11495.1=0.092 or 9.2% 2001, ROE= 1611/13126.2= .123 or 12.3% 2002, ROE= 2583 /62485.7= 0.041 or 4.1%
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The ratio of ROE has declined drastically in the year 2002; this is mainly because of merger of ICICI with ICICI bank. Earning per share (EPS): EPS = Profit after Tax No. of common shares outstanding For the year 2000, EPS = 1052900000/ 2001, EPS = 1610974000/ 198237717 = Rs. 8.13 2002, EPS = 2582990000/22510311 = Rs. 11.61 The banks earnings per share have increased over the last three years. This is a good indication as a point of view of shareholders. Return on Investments Return on Investments = PAT/ Total Assets For the year 2000, ROI = 1052.9/ 120726.3 = 0.00872 or 0.88% 2001, ROI = 1611/ 197365.9 = 0.00816 or 0.82% 2002, ROI = 2582.9/ 1041099.2 = 0.00248 or 0.24% The ratio of this year is not comparable with the last years ratio because of the merger of ICICI and ICICI bank. Total Working Funds Total Working Funds = Paid up share capital + Reserves and surplus + Deposits +
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Borrowings + Other liabilities and provisions For the year 2000, TWF = Rs. 120726.2 million 2001, TWF = Rs. 197365 million 2002, TWF = Rs. 1041099.2 million
Interest income to working funds (per cent) For the year 2000, interest income to working funds = 10.59 2001, interest income to working funds = 10.07 2002, interest income to working funds = 8.44 As we can see from the above ratio, the total working funds of ICICI bank has increased but the proportion of interest income to that of working funds has declined in the last three years. Non-interest income to working funds (per cent) For the year 2000,non- interest income to working funds = 2.41 2001, non-interest income to working funds = 1.78 2002, non-interest income to working funds = 2.25 The non- interest income has increased in the last year. Thus from the above two ratios, we can say that the total income of ICICI bank forms a little portion of the total working capital.
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8.4 Projections of Future Earnings of ICICI Bank When a person invest in shares of any company, it becomes very important for him/her to know whether the company is a growth company or not. A person should have the information about the future earnings of the company. Therefore it is very important to predict the future earnings of the company. In this project we have predicted the profit and loss account, balance sheet and cash flow of all the four selected banks. While predicting, some assumptions have been taken which are disclosed with the respective projected statements of each bank. The general procedure followed to predict the future earnings is to use the historical growth of each component. The historical growth is found by taking the average of growth of the each component in the year 2000-01 and 2001-02. Since in 2000-01, Bank of Madura was merged with the ICICI bank and in 2001-02 ICICI was merged with the ICICI bank, it is not possible to predict the future earnings based on the historical data. Therefore we have taken the quarter results of 2002-03 as the base for predicting the earnings in the year 2002-03. While for the year 2003-04 the historical base is used since ICICI does not have any plan to acquire a large company so that its balance sheet can increase by considerable numbers. Bases for the projections For the year 2002-03 Since ICICI bank Ltd. Does not have any plan of acquisition of any big company; we have assumed that its share capital will remain constant.
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We have assumed that bank would be able to provide dividend of 25%. Therefore, total proposed dividend would be dividend per share multiplied by weighted average no. of equity shares outstanding. The weighted average no. of equity shares outstanding are 222510311. Corporate dividend tax is taken as 10.2% of proposed dividend. The appropriations are done on the basis of last years appropriation. According to that the proposed dividend and the corporate dividend tax is subtracted from the total profit available and the remaining amount is appropriated using following percentage rates. Particulars Statutory Reserve Investment fluctuation Reserve Special Reserve Revenues & Other Reserves Balance carried to Balance Sheet % 30 8 7 46 9
For other liabilities and provisions, the average of growth of other liabilities and provisions of last three years is equal to 540 %. The growth rate for other liabilities and provisions was 41%, 79% and 1500% in the years 2000, 2001 and 2002 respectively. This growth rate is very unreasonable therefore we have taken it as 75% based on the data available for the last ten years. In the year 2001, the fixed assets of ICICI bank increased by 72% due to the amalgamation of bank of
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Madura with ICICI bank while it increase by 1012% due to the reverse merger of ICICI with ICICI bank. In 1999 and 2000, the fixed assets increased by 8% and 11% respectively. Therefore we have assumed that the fixed assets of ICICI bank will increase by 10% in 2003 and 2004. For other assets, the average of growth of other assets of last three years is equal to 275%. The growth rate for other assets was 110%, 50% and 665% in the years 2000, 2001 and 2002 respectively. This rate is found very unreasonable; therefore we have taken it as 90% based on the data available for the last ten years. Since the detailed information of the fixed assets of ICICI bank is not given, we have taken the depreciation amount as a 1.51% of the total fixed assets, which is equivalent to last years. For the year 2003-04 In the year 2002-03, the income and others factors of icici bank increased drastically because of merger. We have assued that after 2002-03 the bank will have normal growth rate and which is found from the historical data. From the historical data, we have found that the banks interest income has increased 60% in the last three years on average basis. So we have assumed that the banks interest income will increase by 60% in the year 2003-04.
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The growth rates for each component are given below in the table. PARTICULARS Interest on Advances Interest on Investments Interest on Balances Others Other Income Interest Expended Payment/provision for employees Other operating expenses Provision and Contingencies % 50 80 14 300 95 55 110 100 135
Other bases regarding the tax, dividend, transfer to reserves, corporate dividend tax are similar to that for the year 2002-03.
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PROJECTED PROFIT AND LOSS ACCOUNT (Rs. in Million) PARTICULARS Interest on Advances Interest on Investments Interest on Balances Others Interest Earned, Operating income Other Income Total Income 59418.6 32572.3 2606.9 1287.4 95885.2 37467.8 133353 2003 89127.9 58630.14 2971.866 5149.6 155879.5 73062.21 228941.7 2004
Interest Expended Payment/provision for employees Other operating expenses Operating Expenses Total Expenditure 8093.3 16887.2
87923.1 15134.471 31579.064 24980.5 112903.6
136280.8
46713.54 182994.3
Operating Profit Profit Before Tax Tax Provision and Contingencies Profit After Tax Net Profit Profit/loss brought forward Total
20449.4 20449.4 1226.96 9192.2 10030.24 10030.24 195.6 10225.84
45947.38 45947.38 2756.843 21601.67 21588.86 21588.86 865.15 22454.01
APPROPRIATIONS/ TRANSFERS Statutory Reserve Investment fluctuation Reserve Special Reserve 2,883.85 769.03 672.90 6515.92 1737.579 1520.381
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Revenues & Other Reserves Proposed Dividend Corporate Dividend Tax Balance carried to Balance Sheet Total 4,421.90 556.28 56.74 865.15 10225.84 9991.077 667.53 66.75 1954.776 22454.01
PROJECTED BALANCE SHEET (Rs. In Million) PARTICULARS CAPITAL & LIABILITIES Capital Reserves and surplus Statutory Reserve Debenture Redemption reserve Special Reserve Share Premium Investment Fluctuation Reserve Revenue and other Reserve Balance in P & L account Total Deposits Borrowings Other liabilites and provisions 5378.15 100 11612.9 8045.4 1042.43 38728.6 865.15 65772.63 1827968.6 2545590.1 293528.95 11894.07 100 13133.28 8045.4 2780.01 39719.68 1954.78 77627.22 2833365 3945807.1 473051.72 9630.3 9630.3 2003 2004
TOTAL
4,742,490.6
7,339,481.3
ASSETS Cash and balance with RBI Balances with banks and money at call and short notice Investments Advances Fixed Assets Other Assets 947523.93 3621685.6 46632.74 79007.32 1705543.074 5432528.39 51296.014 150113.908 6669.734 40971.23 13011.76 79929.4
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TOTAL 4742490.55 7339481.386
PROJECTED CASH FLOW STATEMENT (Rs. In Million) 2003 Cash flow from Operating Activities Net Profit Before taxes Adjustments for: Depreciation on fixed assets 704.15 774.57 20449.4 45947.4 2004
Adustments for: (Increase)/ Decrease in Investments(-) (Increase)/ Decrease in Advances (-) Increase/(Decrease) in Borrowings Increase/(Decrease) in Deposits (Increase)/ Decrease in Other Assets(-) Increase/(Decrease) in Other liabilities & Prov. 588613.1 3151337 2053404 1507118 37424.52 121556.9 758019.1 1810843 1400217 1005396 71106.59 241087.8
Direct taxes paid(-)
1226.96
2756.84
Net Cash Generated from Operating Activities
-75370.18
50697.76
Net Cash Generated from Investing Activities(-) Net Cash Generated from Financing Activities(-) 613.02 734.28 4239.34 4663.274
Net increase/(decrease) in cash & cash equiv.
-80222.54
45300.2
Cash and Cash Equivalents as at April1
127863.5
47640.96
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Cash and Cash Equivalents as at March 31 47640.96 92941.16
Returns of ICICI Bank

0.3 0.2 0.1 0 -0.1 -0.2 -0.3
Returns
The above figure shows the variability of the ICICI Banks share returns. A wide variation in the ICICI returns could be noticed.
Market returns Vs.ICICI return
0.3 0.2 0.1 0 -0.1 -0.2
Return ICICI Return BSE
Nov-01
May-01
May-02
Sep-01
Sep-02
Nov-02
Mar-02
Jan-02
Jul-02
Jul-01
Jan-03
-0.3
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The above figure shows ICICIs monthly returns against the market returns. We can observe that there is a positive movement between ICICI return and market return. That is generally an increase in the market returns is followed by an increase in the ICICIs return and vice versa.
Month/Year Price BSE Price ICICI Bank Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 Apr-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Total 3911.865 3386.665 3590.05 3469.63 3377.725 3300.095 2931.4 2901.03 3190.88 3300.385 3351.745 3524.055 3606.27 3417.685 3287.875 3263.225 3149.545 3058.43 3100.795 2933.7 3087.305 3300.225 3308.05 3279.99 179.175 172.45 150.6 137.625 122.425 116.55 88.2 91.475 104.5 90.95 93 116.375 128.75 121.225 131.8 149 146.175 138.3 138.9 134 124.625 141.7 143.6 146.15 -0.134258212 0.060054656 -0.033542708 -0.026488415 -0.022982925 -0.111722541 -0.010360237 0.09991279 0.034318119 0.015561821 0.051409042 0.023329659 -0.052293644 -0.03798185 -0.007497244 -0.034836703 -0.028929576 0.013851878 -0.053887793 0.052358796 0.068966299 0.00237105 -0.008482339 -0.141130078 -0.037533138 -0.126703392 -0.086155378 -0.11044505 -0.047988564 -0.243243243 0.037131519 0.142388631 -0.129665072 0.022539857 0.251344086 0.106337272 -0.058446602 0.087234481 0.130500759 -0.018959732 -0.053873781 0.004338395 -0.035277178 -0.069962687 0.137011033 0.01340861 0.01775766 -0.068261515 0.005039132 -0.007609129 0.002889885 0.002925514 0.001102918 0.027175753 -0.000384691 0.014226445 -0.004449861 0.000350761 0.012921359 0.002480812 0.003056386 -0.003313327 -0.000978396 0.000660495 0.001558546 6.00949E-05 0.001901009 -0.003663162 0.009449144 3.17925E-05 -0.000150626 0.065280853 Return BSE(X) Returns ICICI Bank (Y) X*Y X^2
0.01802
0.00360
0.00112
0.00070
0.00052
0.01248
0.00010
0.00998
0.00117
0.0002
0.0026
0.00054
0.00273
0.00144
5.62087
0.00121
0.0008
0.00019
0.00290
0.00274
0.0047
5.62188
7.19501
0.06812
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8.5 Application of Different Models Application of Capital Asset Pricing Model to ICICI Bank
Calculation of Beta
Beta = = N XY (X )( Y) N X
2
(X ) 2
24(0.065281) - (-0.141130078)(-0.068261515) 24(0.068121) - (-0.141130078) 2 = 0.964
ICICI has a beta of 0.964 based on the monthly returns during March 2001 to March 2003, which is approximately equal to one. A beta of 0.964 means that the ICICI shares are as risky as market.
Calculation of Alpha
Alpha = =Y X =-0.00284423 - (-0.00588042)(0.964) =0.00275
The alpha (intercept) is 0.00275(0.275%). It shows ICICIs returns when the market return is zero. ICICIs expected monthly return is 0.275% when the market earns nothing. If the monthly market return is expected to be 1%, ICICIs expected monthly return is
R = + R m
= 0.00275 + 0.964*0.01 = 0.01239

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Calculation of Coefficient of correlation
Coef icient of cor elation =
[{(N Y2) ( Y)2}{N X 2 ( X)2}]1/2
N XY - ( X)( Y)
The coefficient of correlation is 0.483. The positive correlation indicates that when the market sensex return goes up ICICI return also goes up.
Coefficient of Determination The squared coefficient of correlation is 0.23(23%). It indicates the percentage of variance of ICICI Banks returns explained by the changes in the market returns. Thus, 23% of ICICIs risk is explained by the market. It is called the market risk and therefore it is undiversifiable. 77% unexplained variance is the firm specific it is called unsystematic risk and it is diversifiable. Discounted Cash Flow Approach For ICICI Bank Risk free rate: we have assumed it at 7%. Market premium: The difference between expected market rate of return and the risk free rate of return is the expected market premium. There are no estimates of market premium available in India. The average monthly sensex return during the period March 2001 to March 2003 has been -0.22%, this implies an annual market rate of return of -2.64% which appears unreasonable. If we take a relatively recent period, say November 2001 to March 2003, and then the average
4(2 0.065281) -(-0.141 30 78)(-0.068261515) = [{(24*0.268753) -(-0.068261515)2}{24(0.068121) -(-0.141 30 78)2}]1/2 = 0.483
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market return works out to be 1% on monthly basis and 12% on yearly basis. Thus the calculated market return is sensitive to the period chosen for the calculation. So we can say that 12% market return is reasonable. If we assume that the investor expects to earn this rate of return then the risk premium is 0.120.07=0.05. Bank ICICI Bank State Bank of India Corporation Bank HDFC Bank Beta 0.964 1.158 0.88 0.32
As indicated in the previous chapter risk-free rate is equal to 7% and the market premium is 5%. The value of Beta of ICICI bank is 0.964. Therefore, the cost of equity for ICICI bank can be found by the following formula.
k e = r f + ( rm r f )
Which can be written as following Cost of equity = Risk-free rate + (Market rate Risk free rate)* ICICIs Beta Therefore, Cost of equity of ICICI bank= 0.07 + (0.12 0.07) * 0.964 = 0.1182 or 11.82% Thus, the cost of equity of ICICI bank is 11.28%. For determining total economic value, we will discount its cash flows by 11.28%. For the year 2002-03, the bank has net cash outflow of Rs. 80222.54 million and for the year 2003-04 it has net cash inflow of Rs. 45300.204 million. Therefore,
96
Economic value of equity = Present value of cash flow of ICICI bank = - 80222.54 + 45300.204 (1+0.1128) =-38514.23303 As the cash flows are negative it is difficult to apply discounted cash flow model.
Market-To-Book Value Approach for ICICI Bank
The market value per share of ICICI bank was Rs. 128.75 in March 2002, while its book value per share is Rs. 101.90. Therefore, MV/BV = 128.75/101.90 = 1.26 A firm is said to create shareholder value when its market value per share is greater than its book value per share. Here MV/BV > 1 for ICICI bank, this implies that the firm is creating value of shareholders. FUNDAMENTAL ANALYSIS OF HDFC BANK 9.1 Qualitative Analysis of HDFC Bank Size and Ranking: HDFC bank is one of the Indias leading private sector banks has established its distinctive identity to the market. The bank has extended its presence to cover 85 cities with over 183 branches and more than 520 ATMs. It is also the first bank in India to get the ISO 9001:2000 certification for depository service at the central processing unit and back-end processing of retail liabilities and direct marketing operations. This bank is also aggressively cross selling product under
97
HDFC bank name. Their product range covers everything from housing loans to auto loans. The bank has over 2.2 million retail customers. The net profit of the bank for the year 2001-02 was Rs. 2970.4 million. IT and its management have played an important role in creating a strategic differentiation for their products and distribution channels. It plays a major role in bringing efficiencies. Growth Record The growth record of the company we find from two parameters, which are percentage growth rate of earnings per annum and price earnings ratio. If we look at the past data of HDFC bank, we can find that EPS is between ranges, which is not very low and not very high. Year EPS (Rs.) 1995 14 1996 16 1997 20 1998 24 1999 28 2000 34 2001 40 2002 48 % Growth 14.28 25 20 16.66 21.42 17.64 20
However, EPS calculation cannot be the sole basis of deciding about an investment. The P/E ratio of the bank on January 1, 2003 was 18 which is highest among all banks As per the theoretical basis we should choose the stock with less P/E ratio. But P/E ratio is decided by the market and higher P/E ratio indicates that the market has strong view about the company. The
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market has the information about the company, which as an investor we do not have. So, HDFC bank is continuously looking for the growth opportunities. This point is the main point for an investor. Quality of Management However, if we see the Quality of management than it is world class. It is also the first bank in India to get the ISO 9001:2000.If we see NPA/Net Advances ratio is only 0.5%, which is lower than the international standard also. Its CAR is 13.93also higher than the prescribed level of RBI. Its P/E and P/BV ratio are 18 and 3.08 respectively. Which is highest among all the listed banks. So we can say market has very high expectation from bank due to its high manageability in all the criteria. Its EPS and dividend ratio is also quiet satisfactory. Its human resource management is very good the high Quality workers are working with high efficiency. If we judge from past trends than we see that PAT, EPS, Deposits, Borrowings, etc are managed perfectly. Which shows good management of bank Pattern of Existing Stock Holding
% Of shareholding
5.412 18.695 8.027 11.564 13.297 24.473 FIIs, NRIs, OCBs Mutual Fund, Banks, 18.532 Promoters ADS Issue Chase group Individuals Companies
FIs In the shareholding pattern of HDFC bank the Promoters, individual and FIIs, NRIs, OCBs have more
99
or less same share. This is good for an individual investor because no one group force its decision to the bank. Marketability of the shares This factor is basically related to the public shareholding in the bank. In ICICI bank, public holding is 18.53 %, which is high. But if we see the trading volume than it is very low. This scrip is mainly traded on BSE and NSE.
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9.2 Financial Data of HDFC

PROFIT AND LOSS ACCOUNT of HDFC (Rs. In Millions) PARTICULARS Income Operating income Fees and other charges Other income 19376.5 757 22.1 20155.6 Expenditure and charges Interest and other charges Staff expenses Establishemnt expenses Other expenses Depreciation Provisions for contingencies 14369.5 273.3 108.9 280 435.8 80 15547.5 Profit Before Tax Provision for tax PAT available for appropriations 4608.1 590 4018.1 16896.1 346.1 124.6 363.4 456.8 80 18267 5556.5 820 4736.5 18712.4 406.8 159.5 412.8 318.3 82.5 20092.3 6909.3 1109.2 5800.1 22737.1 1028.2 58.2 23823.5 25802.1 1122.1 77.4 27001.6 1999-02 2000-01 2001-02
Appropriations Special reserve General reserve Debenture redemption reserve Shelter assistance reserve Interim dividend (millennium) Interim dividend Proposed dividend Additional tax on dividend Total 1000 466 0 40 1191.1 1072 0 248.9 4018 1250 1592.3 200 40 0 0 1501.1 153.1 4736.5 1750 967.3 0 40 0 0 3042.8 0 5800.1
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BALANCE SHEET (Rs. In Millions) PARTICULARS CAPITAL & LIABILITIES Share Capital Reserves and surplus Special Reserve General Reserve Debenture Redemption reserve Share Premium Employe stock option outstanding Capital redemption reserve Shelter assistance reserve Capital reserve Total Loan Funds Loans Bonds Debentures Deposits 46425.7 7514.1 13707.1 62238.5 129885.4 TOTAL ASSETS Loans Investments Deferred tax assets Current asset, loans & advances Less : current liab and Prov. Net current assets Fixed assets Gross Block Less : Depreciation 4243.5 2113.6 25328.3 10586.6 14741.8 5620.6 2405.1 100630.0 33343.3 0.0 25252.4 12727.9 12524.6 6921.4 2655.7 132246.7 30430.5 0.0 32043.2 14271.1 8772.1 171692.0 29310.3 545.2 150845.0 52946.4 7041.8 22211.3 72498.2 154697.7 178417.1 61385.0 6250.0 35011.7 84910.2 187556.9 214585.3 5954.9 4975.8 0.0 8248.1 18.3 500.0 71.0 0.4 19768.5 7003.0 6199.8 200.0 8506.0 26.9 500.0 82.5 0.4 22518.6 8403.0 7651.5 200.0 8937.2 23.5 500.0 95.7 0.4 25811.3 1191.1 1200.8 1217.1 2000 2001 2002
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Net Block TOTAL 2129.9 150845.0 3215.5 178417.3 4265.6 214585.2
9.3 Financial Ratios Return on Equity (ROE): ROE = Profit after taxes Net Worth For the year 2000, ROE= 4018.1/20959.6= 0.1917 or 19.17% 2001, ROE= 4736.5/23719.4= 0.2 or 203% 2002, ROE= 5800.1 /27028.4= 0.2146 or 21.46% The ratio of ROE has increased in the year 2002; so we can say that the bank is using its equity efficiently. Earning per share (EPS) : EPS = Profit after Tax No. of common shares outstanding For the year 2000, EPS = Rs.34 2001, EPS = Rs.40 2002, EPS = Rs.48 The banks earnings per share has increased over the last three years. This is a good indication as a point of view of shareholders. Return on Investments Return on Investments = PAT/ Total Assets For the year 2000, ROI = 4018.1/ 150845 = 0.0266 or 2.66%
103
2001, ROI = 4736.5/ 178417.1 = 0.0265 or 2.65% 2002, ROI = 5800.1 / 214585.3 = 0.027 or 2.7% The Banks ROI has remained almost same for the last three years.
Total Working Funds Total Working Funds = Paid up share capital + Reserves and surplus + Deposits + Borrowings + Other liabilities and provisions For the year 2000, TWF = Rs. 150845 million 2001, TWF = Rs. 178417.1 million 2002, TWF = Rs. 214585.3 million Interest income to working funds (per cent) For the year 2000, interest income to working funds = 12.85 2001, interest income to working funds = 12.74 2002, interest income to working funds = 12.02 As we can see from the above ratio, the total working funds of HDFC bank has increased but the proportion of interest income to that of working funds has declined in the last three years. Non-interest income to working funds (per cent)
104
For the year 2000,non- interest income to working funds = 0.015 2001, non-interest income to working funds = 0.03 2002, non-interest income to working funds = 0.036 The non- interest income has increased in the last year. Thus from the above two ratios, we can say that the total income of HDFC bank forms a little portion of the total working capital.
9.4 Projections of Future Earnings of HDFC Bank Basis For Projections We have assumed that the operating income of HDFC Bank will increase by 16% in next two years. Fees and other charges will increase by 22%. Other income will increase by 98%. Interest and other expenses will increase by 14%. Staff expenses will increase by 22%. Establishment expenses will increase by 21%. Other expenses will increase by 22%. Provisions and contingencies will remain constant. Provisions for tax is 15%. Share capital will remain constant for the next two years. Fixed assets will increase by 28% and the depreciation rate 38.4%.
105
Investments will increase by 6%. One basic assumption is taken that interest rate which the bank will earn or spent will remain same. The proportion of interest on investments and advances and balances is taken constant for the projected P & L.
PROJECTED PROFIT AND LOSS ACCOUNT of HDFC (Rs. In Millions) PARTICULARS Income Operating income Fees and other charges Other income 29930.44 1368.962 153.252 31452.7 Expenditure and charges Interest and other charges Staff expenses Establishemnt expenses 21332.14 496.296 192.995 24318.64 605.4811 233.524 34719.31 1670.134 303.439 36692.88 2002-03 2003-04
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Other expenses Depreciation Provisions for contingencies 503.616 318.3 82.5 22925.8 Profit Before Tax Provision for tax Profit after tax available for appropriations 7247.79 8942.023 8526.81 1279.02 614.4115 318.3 82.5 26172.85 10520.03 1578.004
Appropriations Special reserve General reserve Debenture redemption reserve Shelter assistance reserve Interim dividend (millennium) Interim dividend Proposed dividend Additional tax on dividend Total 2475.68 1368.42 0 40 0 0 3042.8 304.3 7247.79 3550.979 1962.778 0 40 0 0 3042.8 304.3 8942.023
Projected Balance Sheet (Rs. In Million) PARTICULARS CAPITAL & LIABILITIES Share Capital Reserves and surplus Special Reserve General Reserve Debenture Redemption reserve Share Premium Employee stock option outstanding Capital redemption reserve Shelter assistance reserve 10878.7 9019.9 200 8937.2 23.5 500 135.7 14429.68 10982.68 200 8937.2 23.5 500 175.7 1217.1 1217.1 2003 2004
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Capital reserve Total Loan Funds Loans Bonds Debentures Deposits 69978.9 7125 39913.34 127933.2 244950.5 TOTAL ASSETS Loans Investments Deferred tax assets Current asset, loans and advances Less : current liab and Prov. Net current assets Fixed assets Gross Block Less : Depreciation Net Block TOTAL 8859.392 3402.007 5457.385 275863 11340.02 4354.568 6985.453 344756.3 36208.82 16554.48 19654.34 40915.96 19203.19 21712.77 223199.6 27551.68 290159.5 25898.58 275863 79775.95 8122.5 45501.21 174890.3 308290 344756.2 0.4 29695.4 0.4 35249.16
CASH FLOW SATEMENT OF HDFC BANK (Rs. In Million) 2003 Cash flow from Operating Activities Net Profit Before taxes Adjustments for : Depreciation on fixed assets 746.3065 952.6 7247.786 8942.023 2004
Adjustments for: (Increase)/ Decrease in Loans (Increase)/ Decrease in Bonds 8593.9 9797.046 875 9975
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Increase/(Decrease) in Deposits (Increase)/ Decrease in Loans (Assets) Increase/(Decrease) in Investments Increase/Decrease in Current Assets
11887.4 13551.87 51507.6 66959.88 1758.6 4725.672 1653.1 5244.8
Direct taxes paid (-)
1279.021 1578.004
-26403.3
-28911
Increase/(Decrease) in Debentures Proposed Dividend Net Cash Generated from Financing Activities Net cash generated from Investing activities
4901.6 5587.867 3042.8 3042.8
7944.4 8630.667 1191.8 1528.1
Net increase/(decrease) in cash and cash equivalents -17267.1 -18752.3
Cash and Cash Equivalents as at April1 Cash and Cash Equivalents as at March 31
9041.8
-8225.3
-8225.3 -26977.6
Returns of HDFC Bank

0.15 0.1 0.05 0 -0.05 -0.1 -0.15 Series1
109
The above figure shows the variability of the HDFC Banks share returns. A wide variation in the HDFC returns could be noticed.
Market returns Vs.HDFC Bank returns
0.15 0.1 0.05 0 -0.05 -0.1 -0.15
Returns HDFC Return BSE
Nov-01
May-01
May-02
Sep-01
Sep-02
Nov-02
Jul-01
Mar-02
Jul-02
The above figure shows HDFCs monthly returns against the market returns. We can observe that there is a positive movement between HDFC return and market return. That is generally an increase in the market returns is followed by an increase in the HDFCs return and vice versa.
Average HDFC Month/Year 1-Mar Apr-01 May-01 Jun-01 Jul-01 Average BSE 3911.865 3386.665 3590.05 3469.63 3377.725 Bank 245 231.875 236.45 215.75 217.5 -0.134258212 0.060054656 -0.033542708 -0.026488415 Return BSE(X)
Jan-03
Jan-02
Returns HDFC Bank (Y) X*Y
-0.053571429 0.019730458 -0.087544936 0.00811124
0.007192 0.001185 0.002936 -0.00021
110

Aug-01 Sep-01 Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 Apr-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Total 3300.095 2931.4 2901.03 3190.88 3300.385 3351.745 3524.055 3606.27 3417.685 3287.875 3263.225 3149.545 3058.43 3100.795 2933.7 3087.305 3300.225 3308.05 3279.99 233.5 212.125 221.525 223.5 225.525 236.775 238.175 236.25 227.75 221.275 217.075 210.25 207 217.025 201.75 194 205.45 227.425 244 -0.022982925 -0.111722541 -0.010360237 0.09991279 0.034318119 0.015561821 0.051409042 0.023329659 -0.052293644 -0.03798185 -0.007497244 -0.034836703 -0.028929576 0.013851878 -0.053887793 0.052358796 0.068966299 0.00237105 -0.008482339 -0.141130078 0.073563218 -0.091541756 0.044313494 0.008915472 0.009060403 0.049883605 0.005912786 -0.008082292 -0.035978836 -0.028430296 -0.018980906 -0.031440746 -0.015457788 0.048429952 -0.070383596 -0.038413879 0.059020619 0.106960331 0.07288117 0.026956288 -0.00169 0.010227 -0.00046 0.000891 0.000311 0.000776 0.000304 -0.00019 0.001881 0.00108 0.000142 0.001095 0.000447 0.000671 0.003793 -0.00201 0.00407 0.000254 -0.00062 0.032074
9.5 Application of Different Models Application of Capital Asset Pricing Model to HDFC Bank
Calculation of Beta
111
Portfolio Management With Respect To Banking Industry Beta = = N XY ( X )( Y ) N X 2 ( X ) 2
24(0.032074) - (-0.141130078)(0.026956288) 24(0.068121) - (-0.141130078) 2 = 0.32.
HDFC has a beta of 0.32 based on the monthly returns during March 2001to March 2003. A beta of less than one indicates that the share is less risky than the market. Therefore, we can say that the HDFCs shares are less risky than the market.
Calculation of Alpha Alpha = = Y X = 0.001123179 - (0.32)(-0.00588042) = 0.003
The alpha (intercept) is 0.003(0.3%). It shows HDFCs returns when the market return is zero. HDFCs expected monthly return is 0.275% when the market earns nothing. If the monthly market return is expected to be 1%, HDFCs expected monthly return is
R = + R m = 0.003 + 0.32*0.01 = 0.0062
Calculation of Coefficient of correlation Coefficient of correlation = = N XY - ( X)( Y)
[{(N Y 2 ) ( Y ) 2 }{N X 2 ( X ) 2 }]1 / 2
24(0.032074) - (-0.141130078)(0.026956288) [{(24 * 0.062196) - (0.026956288) 2 }{24(0.068121) - (-0.141130078) 2 }]1 / 2 = 0.41
The coefficient of correlation is 0.41. The positive correlation indicates that when the market sensex return goes up HDFC return also goes up.
112
Coefficient of Determination The squared coefficient of correlation is 0.17(17%). It indicates the percentage of variance of HDFC Banks returns explained by the changes in the market returns. Thus, 17% of HDFCs risk is explained by the market. It is called the market risk and therefore it is undiversifiable. 83% unexplained variance is the firm specific it is called unsystematic risk and it is diversifiable. Discounted Cash Flow Approach for HDFC Bank As indicated in the previous chapter risk-free rate is equal to 7% and the market premium is 5%. The value of Beta of HDFC bank is 0.32. Therefore, the cost of equity for HDFC bank can be found by the following formula.
k e = r f + ( rm r f )
Which can be written as following Cost of equity = Risk-free rate + (Market rate Risk free rate)* HDFCs Beta Therefore, Cost of equity of HDFC bank = 0.07 + (0.12 0.07) * 0.32 = 0.086 or 8.6% Thus, the cost of equity of HDFC bank is 8.6%. For determining total economic value, we will discount its cash flows by 8.6%. For the year 2002-03, the bank has net cash outflow of Rs. 80222.54 million and for the year 2003-04 it has net cash inflow of Rs. 45300.204 million. Therefore,
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Economic value of equity = Present value of cash flow of HDFC bank = - 80222.54 + 45300.204 (1+0.1128) = -38514.23303 As the cash flows are negative, it is difficult to apply discounted cash flow model.
Market-To-Book Value Approach for HDFC Bank
The market value per share of HDFC bank was Rs. 236.25 in March 2002, while its book value per share is Rs. 69.2 Therefore, MV/BV = 236.25 / 69.2 = 3.41 A firm is said to create shareholder value when its market value per share is greater than its book value per share. Here MV/BV > 1 for HDFC bank, this implies that the firm is creating value of shareholders.
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FUNDAMENTAL ANALYSIS OF THE CORPORATION BANK
Size and Ranking The corporation bank is one of the largest banks in Indian economy. The corporation bank is shredded in Metro, Port Town & Urban, Semi-Urban, and Rural areas to satisfy need of different segments of the country. The following is the table of different branches in past and in present.
Category
Metro Port Town Urban Semi-Urban Rural Total
Branches No Presen t 173 26 & 169 26 152 165 659 23 25 100
The following table include branch category-wise Business as on 31-03-2002 Branches % Of business Metro 18068 (60.41%) Port Town & 5789 (19.35%)
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Urban Semi Urban Rural
3868 (12.93%) 2186 (7.31%)
The Metro branches, with 26 percent in terms of number of branches, handle over 60 percent business of the Bank, which is highest. The future plan of the bank also indicate increase its network through different ways. So size wise Corporation is one of the successful giant in banking industry.
Growth aspect For assessing the growth record of the company we have taken two indicators, which are percentage growth rate of earnings per annum and price earnings ratio, and percentage growth rate of net block. Year EPS (Rs.) 1995 6.48 1996 9.35 1997 15.26 1998 13.91 1999 16 2000 19.37 2001 21.82 2002 32.65 % Growth 44.29012 63.20856 -8.84666 15.02516 21.0625 12.64843 49.63336
If we look at the past data of Corporation bank, we can find that EPS is continuously increasing except some years. However, EPS calculation cannot be the sole basis of deciding about an investment. The P/E ratio of the bank on January 1, 2003 was 5%, which is quiet low
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than the industry average of six. So we can say market have moderate expectation from bank. But the net profit and its investment of the bank is continuously increasing so the past trend of the bank predict good growth of the bank Quality Of Management In the corporation bank total no of director is 14 from that 11 are non-executives director which are independent director not engaged in day-to-day operation. But its effect cannot find in the performance of Corporation bank. If we see the CAR of the company than it is highest among the all listed banks. Which shows good capital-to-risk weighted assets position of the bank. The NPAs level is also under control. The bank is also rewording to its shareholders in good terms. The management is not only worried about the profit but they also doing social good also. If we see the cautious trend of the bank than wee find the bank cautiously improving its CAR and also managing its NPAs level properly. The net profit of bank is also cautiously increasing. The bank has comparatively young workforce. Out of the total staff 77% are with in 45 ages, of which 28% are in office cards. To improve quality of there labor they organize different trainings programs and different motivational schemes. The industrial relation in the bank continued to remain cordial and harmonious during the year. So the company labor management is quit well. So we can say the quality of management is good in all faces of economy Pattern Of Shareholdings The pattern of shareholding in corporation bank is as follow.
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Category Shareholders
of % Of total holding Government of India 57.17 Life Insurance 27.02 Corporation of India Indian Financial 2.31 Institutions & Banks Mutual Fund, & UTI 4.78 Bodies Corporate 0.67 Foreign Institutional 3.39 Investors (FIIs) Overseas Corporate 0.04 Bodies (OCBs) Overseas Corporate 0.33 Bodies (OCBs) Resident Individuals 4.29 On the corporation bank government has major share holding. The government has higher control over the decision taken by the bank. So the government is more committed towers management. The life corporation of India is also major stakeholder of corporation bank. Marketability of share Liquidity: The Bank's shares are included in the Specified Group in BSE and CNX Nifty Junior Index of NSE. The fair volume of trading provides enough entry/exit opportunities to the shareholders. The share price of the Bank which was Rs.109.90 as at 31st March 2001 in BSE, moved up to Rs.134.00 as on 31st March 2002.
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10.2 Financial Data of Corporation Bank

PROFIT AND LOSS ACCOUNT (Rs. In Million) PARTICULARS Interest on Advances Interest on Investments Interest on Balances Others Interest Earned, Operating income 8060.1 6890.5 944.3 149 16043.9 2000 9340.7 7438.4 937 329.3 18045.4 2001 9968.7 8237.1 913.4 337.7 19456.9 2002
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Other Income 2708.1 2920.9 3819.4
Total Income Interest Expended Payment/provision for employees Other operating expenses Operating Expenses Total Expenditure 1772.6 1267.3
18752 11460.9 2000 1413.6 3039.9 14500.8
20966.3 12232.1 2139 1703.2 3413.6 15645.7
23276.3 13204.8
3842.2 17047
Operating Profit Profit Before Tax Tax Provision and Contingencies Profit After Tax Net Profit Total APPROPRIATIONS/ TRANSFERS Statutory Reserve Staff Welfare Fund Investment fluctuation Reserve Proposed Dividend Corporate Dividend Tax Transfer to General Reserves Total
4251.2 4251.2
5320.6 5320.6 1351.5
6229.3 6229.3 1526.7 1621.6 3081 3081 3081
1926.8 2324.4 2324.4 2324.4
1350.7 2618.4 2618.4 2618.4
622 60 66 480 83.4 1013 2324.4
656.9 60 -35.8 480 49 1408.3 2618.4
772.4 70 825.9 521.1
891.6 3081
BALANCE SHEET (Rs. In Million) PARTICULARS CAPITAL & LIABILITIES Capital Reserves and surplus 1200 1200 1434.4 2000 2001 2002
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Statutory Reserve Capital Reserves Share Premium Investment Fluctuation Reserve General Reserves TOTAL Deposits Borrowings Other liabilities and provisions TOTAL 10416.2 167623 12004.2 197032 12101.5 236042 107.5 4647 10247.6 142796 2962.8 71.8 6055.2 12277 165601 5949.5 897.7 6848 19027.9 189242.7 14235.5 2833.1 0.3 2659.7 3490 0.3 2659.7 4262.5 0.3 7019.6
ASSETS Cash & balance with RBI Balance with banks& money at call&short notice Investments Advances Fixed Assets Other Assets TOTAL 57909.2 77774.7 1434.7 5970.8 167623 68603.4 86661 1552.2 8371.6 197032 80,564.9 109874 1993.4 10148.4 236042 11616.7 12916.7 10877.7 20966.1 13362.4 20098.8
10.3 Financial Ratios Return on Equity (ROE): ROE = Profit after taxes Net Worth For the year 2000, ROE= 2324.4/11447.6 = 20.30%
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2001, ROE= 2618.4/13477 = 19.42% 2002, ROE= 3081 /20462.3= 15.05% The ROE has declined in the last three years. The main reason behind this is the increase in the capital base of the firm. Earning per share (EPS) : EPS = Profit after Tax No. of common shares outstanding
For the year 2000, EPS = 2324400000/ 120000000 = Rs 19.37 2001, EPS = 2618400000/ 120000000 = Rs 21.82 2002, EPS = 3081000000/120000000 = Rs 25.68 The earnings per share of Corporation bank is increasing . EPS is a good measure for the shareholder because one can know how much one can earn on a share. The increased EPS gives good indication for the investors. Return on Investments Return on Investments = PAT/ Total Assets For the year 2000, ROI = 2324.4/ 167623 = 1.5 2001, ROI = 2618.4/ 197032 = 1.55 2002, ROI = 3081/ 236042 = 1.6 The Corporation Banks ROI remained almost same in the last three years. This indicates that the bank has constant growth rate. Total Working Funds
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Total Working Funds = Paid up share capital + Reserves and surplus + Deposits + Borrowings + Other liabilities and provisions For the year 2000, TWF = Rs. 167622.8million 2001, TWF = Rs. 197032 million 2002, TWF = Rs. 236042 million Interest income to working funds For the year 2000, interest income to working funds = 9.57% 2001, interest income to working funds = 9.51% 2002, interest income to working funds = 8.24% As we can see from the above ratio, the total working funds of Corporatioan bank has increased but the proportion of interest income to that of working funds has declined in the last three years. But the profit of the bank has increased. This indicates that the firms non-operating income has played main role in boosting its profit. Non-interest income to total income (per cent) For the year 2000,non- interest income to total income = 2.41 2001, non-interest income to total income = 1.78 2002, non-interest income to total income = 2.25 The non- interest income has increased in the last year. The above ratio supports the statement made in the previous ratio.
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Net NPA to Net Advances For the year 2000, Net NPA to Net Advances = 1.92 2001, Net NPA to Net Advances = 1.98 2002, Net NPA to Net Advances = 2.31 The Net NPA to Net Advances of the Corporation bank has increased but it is very less compared to the other banks such as ICICI and SBI which are the top large banks in India. This indicates the banks managements ability. This also gives us an indication about the quality of the assets the firm has. When investing into shares one must see the quality of the assets the firm has. Book value per share The corporation banks book value per share is Rs. 142.44 . 10.4 Projections Of Future Earnings Of Corporation Bank For projecting the future earnings of Corporation bank, we have used the technique of projecting the earnings using the historical growth data. For that we have taken some assumptions which are as following. The no. of shares outstanding are 13027500. Bases For Projections One basic assumption is taken that the interest rates that the bank will earn or spend will remain same.
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The proportions of interest on advances, interest on investments and balances is taken constant for the projected period. The tax rate is taken as 25% of net profit. The Corporation bank has paid 40% dividend for the last three years, so we have assumed that it will pay 40% dividend for the next two years also. The corporate dividend tax is taken as 10.2%. Other liabilities will increase by 8.2%. Fixed assets will increase by 18%. The other assets will increase by 30%. The depreciation rate is 14%.
PROJECTED PROFIT AND LOSS ACCOUNT (RS in Million) PARTICULARS Interest on Advances Interest on Investments Interest on Balances Others Interest Earned, Operating income Other Income Total Income 11065.26 9007.269 898.3289 540.32 21511.17 4545.086 26056.26 2003 12282.44 9849.448 883.5065 864.512 23879.9 5408.652 29288.55 2004
Interest Expended Payment/provision for employees Other operating expenses Operating Expenses Total Expenditure 2352.9 1975.712
14129.14 2588.19 2291.826 4328.612 18457.75
15118.18
4880.016 19998.19
Operating Profit Profit Before Tax Tax
7598.513 7598.513 1899.628
9290.363 9290.363 2322.591
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Provision and Contingencies Profit After Tax Net Profit 1540.52 4158.365 4158.365 1463.494 5504.278 5504.278
Total APPROPRIATIONS/ TRANSFERS Statutory Reserve Staff Welfare Fund Investment fluctuation Reserve Proposed Dividend Corporate Dividend Tax Transfer to General Reserves Total
4158.365
5504.278
1075.23 107 1146.9 521.1 53.1522 1254.983 4158.365
1479 147.9 1577.61 521.1 53.1522 1725.516 5504.278
PROJECTED BALANCE SHEET (Rs. In Million) PARTICULARS CAPITAL & LIABILITIES Capital Reserves and surplus Statutory Reserve Capital Reserves Share Premium Investment Fluctuation Reserve General Reserves Total Deposits Borrowings Other liabilities and provisions TOTAL 5337.73 0.3 7019.6 2044.6 8102.98 22505.21 201860.4 32559.29 13093.82 271453.2 6816.73 0.3 7019.6 3622.21 9828.496 27287.34 215990.7 34838.38 14167.52 293718.3 1434.4 1434.4 2003 2004
ASSETS Cash and balance with RBI 17920.2 33394.15
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Balances with banks & money at call and short notice Investments Advances Fixed Assets Other Assets TOTAL 88366 120918.3 2352.212 13192.92 269630 98097 134232.9 2775.61 17150.8 335741.7 26880.4 50091.22
PROJECTED CASH FLOW STATEMENT ( Rs. In Million) 2003 Cash flow from Operating Activities Net Profit Before taxes Adjustments for : Depreciation on fixed assets 329.3 388.6 7598.518 9290.363 2004
Adjustments for: (Increase)/ Decrease in Investments (-) (Increase)/ Decrease in Advances (-) Increase/(Decrease) in Borrowings Increase/(Decrease) in Deposits (Increase)/ Decrease in Other Assets (-) Increase/(Decrease) in Other liabilities & Provisions 7801.1 9731
11044.2 13314.6 18323.79 2279.09 12617.23 14130.24 3044.52 3957.879 992.323 1073.693
Direct taxes paid
1899.628 2322.591
52252.84 -2164.08
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Net Cash Generated from Investing Activities(-) Net Cash Generated from Financing Activities Proposed Net increase/(decrease) in cash & cash equivalents
358.81 423.3982 574.2522 574.2522
53185.9 -3161.73
33461.2 86647.1 86647.1 83485.36
Returns of Corporation Bank

0.2 0.15 0.1 0.05 0 -0.05 -0.1 -0.15 -0.2
Series1
The above figure shows the variability of the Corporation Banks share returns. A wide variation in the Corporation returns could be noticed.
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Market return Vs. Corporation Bank returns
0.2 0.15 0.1 0.05 0 -0.05 -0.1 -0.15 -0.2
Returns Corp. Bank Return BSE
Nov-01
Nov-02
Jul-01
Jul-02
May-02
May-01
Sep-01
Mar-02
The above figure shows Corporation bank monthly returns against the market returns. We can observe that there is a normally same movement between Corporation banks return and market return. That is generally an increase in the market returns is followed by an increase in the corporation bank return and vice versa.
Sep-02
Returns Month Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Price BSE Price corp. Bank Return BSE(X) 3911.865 3386.665 3590.05 3469.63 3377.725 3300.095 2931.4 2901.03 126.875 122.3 -0.134258212 129.2 0.060054656 -0.036059113 0.004841 0.018025 0.0013 Corp.Bank(Y) X*Y X^2 Y^2
0.056418643 0.003388 0.003607 0.003183 0.08630031 -0.00289 0.001125 0.007448 0.058425365 -0.00155 0.000702 0.003414 -0.054190508 0.001245 0.000528 0.002937 -0.139323843 0.015566 0.012482 0.019411 -0.015918958 0.000165 0.000107 0.000253
140.35 -0.033542708 148.55 -0.026488415 140.5 -0.022982925 120.925 -0.111722541 119 -0.010360237
Jan-03
Jan-02
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Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 Apr-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Total 3190.88 3300.385 3351.745 3524.055 3606.27 3417.685 3287.875 3263.225 3149.545 3058.43 3100.795 2933.7 3087.305 3300.225 3308.05 3279.99 130.5 132 118.1 130.7 142.7 0.09991279 0.034318119 0.015561821 0.051409042 0.023329659 0.096638655 0.009655 0.009983 0.009339 0.011494253 0.000394 0.001178 0.000132 -0.10530303 -0.00164 0.000242 0.011089 0.106689246 0.005485 0.002643 0.011383 0.091813313 0.002142 0.000544 0.00843
140.375 -0.052293644 130.95 -0.03798185
-0.016292922 0.000852 0.002735 0.000265 -0.067141585 0.00255 0.001443 0.004508
117.475 -0.007497244 113.25 -0.034836703 106.85 -0.028929576 105.325 0.013851878
-0.102901871 0.000771 5.62E-05 0.010589 -0.035965099 0.001253 0.001214 0.001293 -0.056512141 0.001635 0.000837 0.003194 -0.014272344 -0.0002 0.000192 0.000204
101.225 -0.053887793 104.75 119.9 141.3 0.052358796 0.068966299 0.00237105
-0.03892713 0.002098 0.002904 0.001515 0.034823413 0.001823 0.002741 0.001213 0.144630072 0.009975 0.004756 0.020918 0.178482068 0.000423 5.62E-06 0.031856 0.020877565 -0.00018 7.2E-05 0.000436
144.25 -0.008482339 -0.141130078
0.203784357 0.057806 0.068121 0.154309
10.5 Application of Different Models to Corporation Bank Application of Capital Asset Pricing Model to Corporation Bank Calculation of Beta
Beta = = N XY (X )( Y) N X
2
(X ) 2
24(0.057806) - (-0.141130078)(0.203784357) 24(0.068121) - (-0.141130078) 2 = 0.88
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Corporation Bank has a beta of 0.88 based on the monthly returns during March 2001to March 2003, which is approximately equal to 1. A beta of 0.88 means that the corporation bank shares are as risky as market. Calculation of Alpha
Alpha = =Y X = 0.008491015 - (-0.00588042)(0.88) = 0.0137
The alpha (intercept) is 0.0137(1.37%). It shows Corporation banks returns when the market return is zero. Corporation banks expected monthly return is 1.37% when the market earns nothing. If the monthly market return is expected to be 1%, Corporation banks expected monthly return is R = + R m = 0.0137 + 0.88 *0.01 = 0.0225 Calculation of Coefficient of correlation
[{(N Y ) ( Y) }{N X ( X) }]
2 2
N XY -( X)( Y)
2 2 1/ 2
4(2 0.057806)-(-0.141 30 78)(0.203784357) = [{(24*0.154309)-(0.203784357)2}{24(0.06812 )-1 (-0.141 30 78)2}]1/2 = 0.58
The coefficient of correlation is 0.58. The positive correlation indicates that when the market sensex return goes up ICICI return also goes up. Coefficient of Determination
The squared coefficient of correlation is 0.364(36%). It indicates the percentage of variance of corporation Banks returns explained by the changes in the market returns. Thus, 36% of corporation banks risk is explained by the market. It is
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called the market risk and therefore it is undiversifiable. 66% unexplained variance is the firm specific it is called unsystematic risk and it is diversifiable. Discounted Cash Flow Approach For Corporation Bank The value of Beta of Corporation Bank is 0.88. Therefore, the cost of equity for Corporation bank can be found by the following formula.
k e = r f + ( rm r f )
Which can be written as following Cost of equity = Risk-free rate + (Market rate Risk free rate)* Corporations Beta = 0.07 + (0.12 0.07)*0.88 = 0.144 or 14.4% Thus, the cost of equity of Corporation bank is 14.4%. For determining total economic value, we will discount its cash flows by 14.4%. For the year 2002-03, the bank has net cash outflow of Rs. 53185.9 million and for the year 2003-04 it has net cash inflow of Rs -3161.73 million. Therefore, Economic value of equity = Present value of cash flow of Corporation bank = 53185.9 - 3161.73 (1+0.144) = 50422.15 Economic Value per share is found by dividing the total economic value by the no. Of shares. The total no. Of shares outstanding of Corporation Bank are 120000000.
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Therefore, EVPS = 50422150000 120000000 = Rs. 420.18
The market price of Corporation Bank is Rs.139 whereas the economic value per share is Rs.420.18, so the share price is undervalued. So it will be profitable to purchase the shares of Corporation Bank.
Market-To-Book Value Approach for Corporation Bank
The market value per share of Corporation bank was Rs. 142.7 in March 2002, while its book value per share is Rs. 142.7 Therefore, MV/BV = 142.7 / 142.7 =1 Here, MV/ BV ratio is 1 which indicates that it neither create nor destroy the shareholders value.
ANALYSIS OF STATE BANK OF INDIA
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11.1 Qualitative Analysis Size and Ranking of SBI State Bank of India is the largest bank in the country with a towering presence of over 9,000 branches and a staff in excess of 2,00,000. it is planning to take on the private players on their turf with an increase concentration on technology. On of the first result in this direction has been the fact that in the short period of time, it has already built up a thousand plus ATM network but thats not all. The bank proposes to spent Rs.500 crores on IT which will be implemented in the next few years in the era of branch networking, ATMs and so on. SBI has become a major player in Home Loans segment and bank has already disbursed fresh home loans amounting to merely Rs.800 crores in the current financial year.
Growth records Year 1999-00 2000-01 2001-02 EPS (Rs.) 38.98 30.48 46.20 % Growth (21.8) 51.6
The earnings per share have reduced from 38.98 to 30.48 in the year 1999-00 to 2000-01. The reason may due to the reduction in EPS may that the company was facing stiff competition from the private sector banks and so it had decided to compete them by investing more in technology. In the year 2001-02 the EPS has increased to 46.20Rs. Which shows the growth of 51.6%, which shows a good indication of improvement. The P/E ratio of the bank on January 1, 2003 was 5.3, which is less than the industry average of six but is close of the average. So it is better to purchase the
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shares of SBI because the future prospects are good and currently the shares are getting at a lower price. Quality of Management In the year 2001 and 2002 SBI has given dividend of Rs.50 and Rs.60 respectively, which shows an increase of 12%. SBI has wide network of branches i.e.13000 all over India. SBI is at the top position in India. Having a wide network SBI is able to maintain its position in the banking industry. SBI also updates the skills and knowledge of its employees by providing training to them. So we can say that the quality of management is good. SBI bank has the highest net worth among the all banks. The CAR is also very high. The banks P/E ratio is at par with industry average. The P/BV ratio is also very good. The only negative factor is the higher NPA levels but by looking at the factors we feel that the bank would be able to overcome this point especially after the passing of securitisation bill. So over all the management of bank is good. Pattern of Share Holding
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RBI 7.87 1.47 4.32 7.2 Bank,Fis including Insurance Co. MF/UTI 19.41 59.73 Domestic co./Pvt.Corporat Bodies/Trusts Resident Individuals Non-Residents
If we look in to the shareholding pattern of SBI the maximum shares are held by RBI, which is the governor of the Financial system in India. So the decision making power lies in the hands of RBI according to the rules and regulations and which wont be against the shareholders. Industrial Relations In the area of industrial relations, the Bank aims at development of a collaborative culture and resolving issues through joint consultations/negotiations. Wellestablished and on-going consultative machinery is functioning at various tiers of the administration in the Bank for achieving these objectives. The industrial relations during the year remained peaceful and cordial. Marketability of the shares This factor is basically related to the public shareholding in the bank. In SBI, public holding is 7.87%, which is moderate. But if we see the trading
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volume of SBI in BSE and NSE then it is high so the marketability of shares is high.
11.2 Financial Data of State Bank of India

Profit and Loss account of SBI (Rs. In million) Particulars Interest earned, Operating income Interest on Advance Interest on Investment Interest on balances Others Other Income Total Income 95539.5 95061.6 15733.5 15674.6 35693.3 257702.5 2000 222009.3 111432.5 112297.2 17032.5 19271.5 40178.2 300211.9 2001 260033.7 110634.1 142718.7 30548.8 14199.3 41744.8 339845.7 2002 298100.9
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Interest Expended Operating Expenses Provisions for Employees Other Operating Expenses Total Expenditure 152725.8 62951.7 44778.7 18173 215677.5 177555.8 82988.3 60116.5 22871.8 260544.1 207228.4 72109.0 51527.8 20581.2 279337.4
Operating Profit Profit before tax Tax Provisions and Contingencies Profit after tax Net Profit Profit brought forward Total Appropriations Transfer to Statutory reserves Transfer to other reserves Transfer to proposed dividend Transfer to tax on dividend Balance carried over to B/S
42025 42025
39667.8 39667.8 9713.6
60508.3 60508.3 16030.2 20101.9 24316.2 24316.2 3.4 24319.6
21509.5 20515.5 20515.5 3.4 20518.9
13911.7 16042.5 16042.5 3.4 16045.9
14870.6 2579.2 2631.5 434.2 3.4 20518.9
11937.2 1205.4 2631.5 268.4 3.4 16045.9
14573.6 1350 2631.5 250 3.4 24319.6
BALANCE SHEET (Rs. In Millions) PARTICULARS CAPITAL & LIABILITIES Capital Reserves and surplus Statutory Reserve Capital Reserve Share Premium Investment Fluctuation Reserve 65958.3 531.0 35105.7 0.0 77895.5 1100.7 35105.7 4473.6 96815.9 1100.7 35105.7 6711.5 5263.0 5263.0 5263.0 2000 2001 2002
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Revenue and other Reserve Balance in P & L account Total Deposits Borrowings Other liabilites and provisions TOTAL 14611.5 3.4 116209.8 1968210.7 92780.7 432585.4 2615049.6 10773.5 3.4 129352.4 2428283.8 107010.4 486532.5 3156442.1 7243.5 3.4 146980.8 2705601.4 93239.4 531197.8 3482282.5
ASSETS Cash and balance with RBI Balances with banks and money at call and short notice Investments Advances Fixed Assets Other Assets TOTAL 282334.0 918786.9 981019.7 24776.1 219102.6 2615049.6 422133.2 1228764.9 1135902.7 25933.0 158749.6 3156442.1 430576.3 1451420.3 1208064.7 24152.3 149343.6 3482282.5 189030.5 184958.7 218725.3
11.3 Financial Ratios Return on Equity (ROE): ROE = Profit after taxes Net Worth For the year 2000, ROE= 0.1688 or 16.88% 2001, ROE= 0.1191 or 11.91% 2002, ROE= 0.1598 or 15.98%
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The ratio of ROE has declined drastically in the year 2001; this is mainly because of decline in net profit of SBI. Earning per share (EPS): EPS = Profit after Tax No. of common shares outstanding
For the year 2000, EPS = Rs.38.9 2001, EPS = Rs.30.48 2002, EPS = Rs. 44.62 The banks earnings per share for 2002 is 44.62, which is a good indication as a point of view of shareholders. Return on Investments Return on Investments = PAT/ Total Assets For the year 2000, ROI = 0.0078 or 0.78% 2001, ROI = 0.00508 or 0.51% 2002, ROI = 0.00698 or 0.70% The ratio of this year is good comparable with the last years ratio and if we compare with other banks than also it is good.
Total Working Funds Total Working Funds = Paid up share capital + Reserves and surplus + Deposits + Borrowings + other liabilities and provisions For the year 2000, TWF = Rs. 2515049.6 million
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2001, TWF = Rs. 3156442.1 million 2002, TWF = Rs. 3482282.5 million Interest income to working funds (per cent) For the year 2000, interest income to working funds = 8.49 2001, interest income to working funds = 8.24 2002, interest income to working funds = 8.56 As we can see from the above ratio, the total working funds of ICICI bank has increased but the proportion of interest income to that of working funds has almost remain same in the last three years. Non-interest income to working funds (per cent) For the year 2000,non- interest income to working funds = 1.36 2001, non-interest income to working funds = 1.28 2002, non-interest income to working funds = 1.20 The non- interest income has decreased in the last year. Thus from the above two ratios, we can say that the total income of SBI bank forms a little portion of the total working capital.
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11.4 Projections of Future Earnings of State Bank of India

Basis for Projections
We have assumed that the interest earned and operating income will increase by 16% in the next two years. Interest on advances will increase by 8% and interest on investment by 23%. Interest on balances will increase by 44%. Other income will increase by 10%. Interest expended will increase by 16.5% in the next two years. Operating expenses will increase by 9%. Provisions for employees will increase by 10%. Tax rate is 25%. Provisions and contingencies will increase by 5%. We have assumed the bank will not issue any additional shares in the coming two years. Cash and balance with RBI will increase by 33% in the next two years. Balances with banks and money at short notice will increase by 67%. Fixed asset will remain constant in both the years. Other assets will reduce by 10%.
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Projected Profit and Loss account SBI (Rs. In Million) Particulars Interest earned, Operating income Interest on Advance Interest on Investment Interest on balances Others Other Income Total Income 119484.8 175544 43990.27 13915.31 45084.38 398018.8 2003 345797 129043.6 215919.1 63345.99 13637.01 48691.13 470636.9 2004 401124.6
Interest Expended Operating Expenses Provisions for Employees Other Operating Expenses Total Expenditure
241421.1 78598.81 56680.58 21918.23 320019.9
281255.6 85672.7 62348.64 23324.06 366928.3
Operating Profit Profit before tax Tax Provisions and Contingencies Profit after tax Net Profit Profit brought forward Total Appropriations Transfer to Statutory reserves Transfer to other reserves
77998.9 77998.9 19499.73 21107 37392.18 37392.18 3.7 37395.88
103708.6 103708.6 25927.15 22162.34 55619.11 55619.11 5.1 55624.21
30326.1 3592.8
46622.6 5475.8
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Transfer to proposed dividend Transfer to tax on dividend Balance carried over to B/S 3157.8 315.8 5.1 37397.6 3157.8 315.8 7.82 55579.82
PROJECTED BALANCE SHEET (Rs. In Millions) PARTICULARS CAPITAL & LIABILITIES Capital Reserves and surplus Statutory Reserve Capital Reserve Share Premium Investment Fluctuation Reserve Revenue and other Reserve Balance in P & L account Total Deposits Borrowings Other liabilities and provisions TOTAL 127142.0 1100.7 35105.7 10303.8 7243.5 5.1 180900.9 3165553.7 94638.0 589629.6 4035985.2 173764.6 1100.7 35105.7 15779.6 7243.5 7.8 233002.1 3703697.8 96057.6 654488.8 4692509.3 5263.0 5263.0 2003 2004
ASSETS Cash and balance with RBI Balances with banks& money at call and short notice Investments Advances Fixed Assets Other Assets TOTAL 498139.3 1828789.6 1340951.8 24152.3 123955.2 4061340.3 552451.4 2304274.9 1488456.5 24152.3 102882.8 4744320.7 245352.2 272102.9
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PROJECTED CASH FLOW STATEMENT OF SBI BANK (Rs. In Million) 2003 Cash flow from Operating Activities Net Profit Before taxes Adjustments for : Depreciation on fixed assets 4249.568 4249.568 77998.903 103708.6 2004
Adjustments for: (Increase)/ Decrease in Investments (-) (Increase)/ Decrease in Advances (-) Increase/(Decrease) in Borrowings Increase/(Decrease) in Deposits (Increase)/ Decrease in Other Assets Increase/(Decrease) in Other liabilities and Provisions 377369.28 475485.3 132887.1 147504.7 1398.591 1419.6
459952.244 538144.1 25388.4 21072.4 58431.8 64859.3
Direct taxes paid (-)
19499.73 25927.15
97663.396 84536.42
Proposed Dividend Net Cash Generated from Financing Activities Net increase/(decrease) in cash and cash equivalents
3473.593 3473.593 3473.593 3473.593 94189.803 81062.83
649301.663 743491.5 743491.466 824554.3
145
Returns of SBI
0.2 0.15 0.1 0.05 0 -0.05 -0.1 -0.15 -0.2
Returns
The above figure shows the variability of the SBIs share returns. A wide variation in the SBI returns could be noticed.
Market return Vs.SBI return

0.2 0.15 0.1 0.05 0 -0.05 -0.1 -0.15 -0.2
Returns SBI Return BSE
-0 Ju 1 lSe 01 pN 01 ov J a 01 nM 02 ar M 02 ay -0 Ju 2 lSe 02 pN 02 ov Ja 0 2 n03
ay
146
The above figure shows SBIs monthly returns against the market returns. We can observe that there is a positive movement between SBI return and and market return. That is generally an increase in the market returns is followed by an increase in the SBIs return and vice versa.
Average Month/Year 1-Mar Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 Apr-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Total BSE 3911.865 3386.665 3590.05 3469.63 3377.725 3300.095 2931.4 2901.03 3190.88 3300.385 3351.745 3524.055 3606.27 3417.685 3287.875 3263.225 3149.545 3058.43 3100.795 2933.7 3087.305 3300.225 3308.05 3279.99 Average SBI Bank 237.75 207.75 227.95 219 218.45 204.15 169.325 182.675 201.575 189.2 203.85 237.875 229.725 233.75 224.05 238.225 232.8 232.2 234.325 230.85 248.3 282 288.15 300.325 -0.134258212 0.060054656 -0.033542708 -0.026488415 -0.022982925 -0.111722541 -0.010360237 0.09991279 0.034318119 0.015561821 0.051409042 0.023329659 -0.052293644 -0.03798185 -0.007497244 -0.034836703 -0.028929576 0.013851878 -0.053887793 0.052358796 0.068966299 0.00237105 -0.008482339 -0.141130078 -0.126182965 0.09723225 -0.039262996 -0.002511416 -0.065461204 -0.170585354 0.078842463 0.103462433 -0.061391542 0.07743129 0.166911945 -0.034261692 0.017520949 -0.041497326 0.063267128 -0.022772589 -0.00257732 0.009151593 -0.01482983 0.07559021 0.135722916 0.021808511 0.042252299 0.307859753 Return BSE(X) Returns SBI Bank (Y)
X Y
X^2
Y^2
0.016941 0.018025 0.015922 0.005839 0.003607 0.009454 0.001317 0.001125 0.001542 6.65E-05 0.000702 6.31E-06 0.001504 0.000528 0.004285 0.019058 0.012482 0.029099 -0.00082 0.000107 0.006216 0.010337 0.009983 0.010704 -0.00211 0.001178 0.003769 0.001205 0.000242 0.005996 0.008581 0.002643 0.02786
-0.0008 0.000544 0.001174 -0.00092 0.002735 0.000307 0.001576 0.001443 0.001722 -0.00047 5.62E-05 0.004003 0.000793 0.001214 0.000519 7.46E-05 0.000837 6.64E-06 0.000127 0.000192 8.38E-05 0.000799 0.002904 0.00022
0.003958 0.002741 0.005714 0.00936 0.004756 0.018421 5.17E-05 5.62E-06 0.000476 -0.00036 7.2E-05 0.001785
0.076117 0.068121 0.149283
147
11.5 Application of Different Models to SBI Application of Capital Asset Pricing Model to SBI
Calculation of Beta
N XY (X )( Y) N X
2
Beta = =
(X ) 2
24(0.076117) - (-0.141130078)(0.307859753) 24(0.068121) - (-0.141130078) 2 =1.158
SBI has a beta of 1.158 based on the monthly returns during March 2001to March 2003, which is more than 1. A beta of 1.158 means that the SBI shares is as risky as market. Calculation of Alpha
Alpha = =Y X =0.01282749 - (-0.00588042)(1.158) =0.0196
The alpha (intercept) is 0.0196(1.96%). It shows SBIs returns when the market return is zero. SBIs expected monthly return is 1.96% when the market earns nothing. If the monthly market return is expected to be 1%, SBIs expected monthly return is
R = + R m = 0.0196 + 1.158*0.01 = 0.03118
148
Calculation of Coefficient of Correlation
[{(N Y ) ( Y) }{N X ( X) }]
2 2 2
N XY - ( X)( Y)
2 1/ 2
Coefficient of Determination The squared coefficient of correlation is 0.62(62%). It indicates the percentage of variance of SBI Banks returns explained by the changes in the market returns. Thus, 62% of SBIs risk is explained by the market. It is called the market risk and therefore it is undiversifiable. 38% unexplained variance is the firm specific it is called unsystematic risk and it is diversifiable. Discounted Cash Flow Approach For SBI Given a risk free rate of return of 7%, risk premium of 5% and Beta of State Bank of India of 1.158, the cost of equity of SBI is SBIs cost of equity= Risk free rate + (Market rate-Risk free rate) SBIs Beta =0.07+(0.12-0.07) * 1.158 =0.1279 or 12.79% In this method for determining the shareholders economic value is to calculate the value of equity by
4(2 0.0761 7) - (-0.141 30 78)(0.307859753) = [{(24*0.149283-(0.307859753)2}{24(0.068121) - (-0.141 30 78)2}]1/2 = 0.789
The coefficient of correlation is 0.789. The positive correlation indicates that when the market sensex return goes up SBI return also goes up.
149
discounting Cash flows available to shareholder by the cost of equity. The cash flows of SBI for the year 200203 and 2003-04 are 743491.466 and 824554.3 respectively. Therefore, economic value of equity = Present value of equity cash flows = 94189.803 + 81062.83 (1+0.1279) = 94189.803 + 71870.5825 = 166060.3855 (million) Economic Value per share is found by dividing the total economic value by the no. of shares. The total no. of shares outstanding of SBI is 526298878. Therefore, EVPS = 166060385500 = Rs. 315.53 526298878 The current market price of SBI is Rs. 313.19. Thus an investor would be able to get 12% return on SBIs share after one year.
Market-To-Book Value Approach for SBI
The market value per share of SBI was Rs. 229.7 in March 2002, while its book value per share is Rs. 289.3 Therefore, MV/BV = 229.7 / 289.3 = 0.79 Here, MV/ BV ratio is less than one which indicates that it is destroying the value of shareholders.
150
COMPARATIVE ANALYSIS
PARTICULARS ICICI Bank HDFC Bank Corporation Bank SBI Return on Equity(%) 2002-03 13.3 23.45 17.37 20.09 2003-04 24.74 24.52 19.16 23.34 Return on Assets(%) 2002-03 0.21 2.63 1.53 0.93 2003-04 0.03 2.59 1.87 1.19 Cost of Equity 11.82 8.6 14.4 12.79 DCF NA NA Underpriced Fairly valued MV/BV 1.26 3.41 1 0.79 Beta 0.964 0.32 0.88 1.155 Alpha 0.01239 0.003 0.0137 0.0196 Coeff. of Correlation 0.483 0.41 0.58 0.789 Coeff. of Determination 0.233289 0.1681 0.3364 0.622521
Table 26: Comparison of Selected Banks The above table shows the comparison of selected banks. From the above table, it is apparent that HDFC bank is stronger than the other banks. The return on equity of HDFC bank is the highest among all other banks
151
for both years which indicates that the shareholders will earn more per share. Return on Assets of HDFC bank is also the highest among all the banks. This indicates that the firm is utilizing its assets more efficiently. Whereas the cost of equity of HDFC bank is the lowest, which is also a positive point. MV/BV ratio of HDFC bank is higher above one. It indicates that the firm is creating value for the shareholders. Beta shows the riskiness of the firm and it should be lower than one. Among the four banks beta for HDFC bank is lower than any other bank therefore it is less risky than the other three banks. The positive correlation shows that the HDFCs return is positively related with the market. The banks coefficient of determination is also the lowest among the banks. This means that the firms major risk is unsystematic and it could be diversified. Recommendation ICICI banks return on equity is expected to increase drastically, however its higher beta value indicates that it is a riskier share. So we recommend that the person with riskier nature can buy these shares. As indicated above, HDFC bank is the strongest among all the four banks. Therefore we recommend buying its share. Corporation banks share is under priced that may attract an investor. But the other aspects are not in favour of this share. Its beta is very high which shows its riskiness and it is also not creating value for shareholders, its return on equity is also lower than the other three banks. SBI s return on equity is attractive but it is very risky share. Its beta is greater than one and even its most part of the risk is explained by the market. So according to us it is not worth to invest in this share.
152
CONCLUSION From this study, we can conclude that the Indian economy is standing on the strong foothold. This can be attributed to lower interest rate, lower inflation rate, high forex reserves and favorable monetary and fiscal policy. This study also highlights the outlook for the banking industry. The passing of the securitization bill has accelerated the growth for the banking industry. Even the
153
monetary policy has also been in favor of banking industry. Lowering interest rates also affects the profitability of the banks. The banking industry is now moving towards technology. Overall, the outlook for the banking industry is also good. From the last part of the study we can find that ICICI bank, SBI, HDFC bank and Corporation bank have strong fundamentals. From the application of different valuation models we can conclude that HDFC bank is stronger than the other three banks. So one can buy HDFCs share. However, the investment decision for an investor depends on it risk nature.
BIBLIOGRAPHY
Books Financial Management, I.M.Pandey.
154
Financial Management, Theory and Practices. Management Accounting & Financial Analysis, CA Final. Security Analysis and Portfolio Management, Fischer & Jordan. Annual Reports Annual Report 2002. Annual Report 2001-2002. Annual Report Annual Report 2002. of ICICI Bank, 2000-01 and 2001of Corporation Bank, 2000-01 and of SBI, 2000-01 and 2001-2002. of HDFC Bank, 2000-01 and 2001-
Sites www.bseindia.com www.hdfcsec.com www.indiamart.com www.5paisa.com www.businessworld.com Capitalline 2002 Articles The journal of Indian Institute of Bankers, Bank Quest, Accounting and Auditing Standards for Banks-Contemporary issues in Corporate Governance The journal of Indian Institute of Bankers, Special feature Basel Committee-Consultative Documentimplication of credit risk and capital allocation. SBI Monthly review, Feb.2002 Definition of Capital funds Business India, Jan. 2003 A new Beginning
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Magazines The banking and Investment Review, 12 Aug. 2002. Report on Bank Economists conference, 2002. Professional Banker, March 2003 Management Challenges in Banking. Business Standard, 16 Dec. 2002 The smart Investor.
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Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

To scrutinize fundamentally strong banks listed

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

AprilSeptember 2002200103 02 2.5 3.3 7.5 5.5 8.9 7.6

8 5.1 8.9 4.8 14.8 -6.5

2.4 2.1 6.8 2.1 2.8

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

TABLE : NPAs in Cr)

Portfolio Management With Respect To Banking Industry

Bank Group Public Sector Banks

Private Sector Banks

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry

Table : 1 Bank of Baroda

Table 2 :Bank of India

Portfolio Management With Respect To Banking Industry

250 ** * 528.2 247.5 *** 27.2 1.4 1054.3

800 65 * 260 440.7 * 45 8.3 1619