RISK MANAGEMENT IN BANKING

PROJECT REPORT
ON

STUDY ON RISK ATTITUDES OF AXIS BANKs MANAGEMENT

Submitted By
Ambati.venkatareddy (1226212102)
Borra.Madhav (1226212105)
Ekta Tatyal (1226212107)
MBA (IBF) 2012-14

Under the guidance of

Prof. Ganti Subrahmanyam
Prof. M Subramanyam

Axis Bank:
AXIS Bank is one of the fastest growing banks in private sector. The Bank operates in four
segments, namely treasury, retail banking, corporate/ wholesale banking and other banking
business. The treasury operations include investments in sovereign and corporate debt, equity
and mutual funds, trading operations, derivative trading and foreign exchange operations on
the account, and for customers and central funding. Retail banking includes lending to
individuals/ small businesses subject to the orientation, product and granularity criterion. It
also includes liability products, card services, Internet banking, automated teller machines
(ATM) services, depository, financial advisory services, and nonresident Indian (NRI)
services. The corporate/ wholesale banking segment includes corporate relationships not
included under retail banking, corporate advisory services, placements and syndication,
management of publics issue, project appraisals, capital market related services, and cash
management services. The Bank's registered office is located at Ahmadabad and their Central
Office is located at Mumbai. The Bank has a very wide network of more than 1042 branches
(including 56 Service Branches/ CPCs as on June 30, 2010). The Bank has a network of over
4,474 ATMs providing 24 hrs a day banking convenience to their customers. This is one of
the largest ATM networks in the country.
OBJECTIVES
1. To find out the relationship between Axis banks stock and movement in the Bankex
and Sensex.
2. To find out reasons for fluctuation in Axis Bank stock.
BANKEX
Bombay Stock Exchange Limited launched "BSE BANKEX Index" on 23 June 2003. This
index consists of major Public and Private Sector Banks listed on BSE. The BSE BANKEX
Index is displayed on-line on the BOLT trading terminals nationwide. The main Objective of
BANKEX is: It is an Index to track the performance of listed equity of Banks It is a suitable
benchmark for the Central Government to monitor its wealth on the bourses.

Features:
A few important features of the BANKEX are:

BANKEX tracks the performance of the leading banking sector stocks listed on the
BSE.

BANKEX is based on the free float methodology of index construction.

The base date for BANKEX is 1st January 2002.

The base value for BANKEX is 1000 points. 14 stocks which represent 90% of total market
capitalization of all banking sector stocks listed on BSE are included in the index. The index
is determined on a real time basis through BSE online trading (BOLT) terminals.

SENSEX:
Sensex is basically an indicator of the health of the stock markets in India. It is the most popular stock market
index in India. It is just a number and the value of Sensex is closely followed by a number of investors,
promoters, market experts, brokers and several other stakeholders not only in India but across the world. One
can know the relative strength or weakness of the Indian stock market by the movement of Sensex on the
Bombay Stock Exchange, popularly known as BSE.
Sensex is an index of equity shares of Indias top 30 companies representing 12major sectors in India.
The composition of Sensex changes dynamically existing companies are excluded and new companies are
added on a regular basis. However, the total number of companies in the Sensex is always kept at thirty.

Is Sensex a barometer of Indias economy?

Sensex is the most popular index in Indian Stock Market. It is followed by millions of stakeholders and general
public all over the world. It is synonymous with the strength of financial markets. Its movement is widely
tracked because it is easily understandable by all people as it is just a number and investors find it extremely
simple to follow. It has attained iconic status in India in the last three decades. It has achieved massive brand
value not only in India but all over the globe. As Such, this is just a start-up or a springboard for several
investors who are testing the stock markets for the first time in India. It is no wonder it has become an integral
part of Indias economy and has become leading economic indicator in India. However, it is not necessary that
it is a barometer of Indias growing economy
Banking in India:
In the modern sense originated in the last decades of the 18th century. The first banks were
Bank of Hindustan (1770-1829) and The General Bank of India, established 1786 and since
defunct. Despite the provisions, control and regulations of Reserve Bank of India, banks in
India except the State Bank of India or SBI, continued to be owned and operated by private
persons. By the 1960s, the Indian banking industry had become an important tool to facilitate
the development of the Indian economy. At the same time, it had emerged as a large
employer, and a debate had ensued about the nationalization of the banking industry. Indira
Gandhi, the then Prime Minister of India, expressed the intention of the Government of
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India in the annual conference of the All India Congress Meeting in a paper entitled "Stray
thoughts on Bank Nationalization. The meeting received the paper with enthusiasm. In the
early 1990s, the then government embarked on a policy of liberalization, licensing a small
number of private banks. These came to be known as New Generation tech-savvy banks, and
included Global Trust Bank (the first of such new generation banks to be set up), which later
amalgamated with Oriental Bank of Commerce, UTI Bank (since renamed Axis Bank), ICICI
Bank and HDFC Bank. This move, along with the rapid growth in the economy of India,
revitalized the banking sector in India, which has seen rapid growth with strong contribution
from all the three sectors of banks, namely, government banks, private banks and foreign
banks. By 2010, banking in India was generally fairly mature in terms of supply, product
range and reach-even though reach in rural India still remains a challenge for the private
sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are
considered to have clean, strong and transparent balance sheets relative to other banks in
comparable economies in its region. The Reserve Bank of India is an autonomous body, with
minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is
to manage volatility but without any fixed exchange rate-and this has mostly been true.
SOURCES OF DATA
Monthly reports of axis Bank from Jun 2008 to Jun 2013 were retrieved from the internet.
Use of prowess for getting the values of Bankex, Sensex and Volume of shares.
FORMULA USED
Regression equations used
1. Return on stock = + ( Return on Bankex) +
2. Return on Bankex= + ( Return on Sensex) +
3. Actual error square= + (Change in volume) +
4. Actual error= + ( Estimated error) +
Regression: A statistical procedure used to find relationships among a set of variables.
Regression is the attempt to explain the variation in a dependent variable using the variation
in independent variables.

Observation 1:
Dependent Variable(Y) = axis bank actual
Independent Variable(X) =Bankex actual
H0: Axis bank actual is not depends on bankex actual
H1: Axis bank actual is depends on bankex actual
After running the regression the result which we got are:

Regression

Dependent variable

axis bank actual

Independent variable

Bankex actual

60

R2

0.813971929

Adjusted R2

0.810764548

P-value

7.57157E-23

T-value

15.93050229

0.0018464

1.099961514

F-value

253.7809031

Significance level

7.57157E-23

Value of R square, which indicates that 81% of the variance in axis bank actual, can
be predicted from the variables Bankex actual.

R square of 0.81 means that 81% of the variance in the observed values of the
dependent variable is explained by the model, and 19% of those differences remain
unexplained because so many other factors influence the axis bank actual.

The Adjusted R square is used to estimate the expected shrinkage in R square that
would not generalize to the population because our solution is over fitted to the data
set by including too many independent variables ,R square = .813971829and the
Adjusted R square= .810764548,These values are very close, anticipating minimal
shrinkage based on this indicator.

T-Value (15.93). we can conclude that the relationship between the axis bank actual
and Bankex actual is significant, i.e the higher the returns of Bankex, the higher the
returns of Axis and vice-versa
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Each independent variable has another number attached to it in the regression result
its p-value or significance level. The p-value is a percentage. It tells you how likely
it is that the coefficient for that independent variable emerged by chance and does not
describe a real relationship. A p-value of 0.00 means that there is a 0% chance that the
relationship emerged randomly and a 100% chance that the relationship is real.

There is also a significance level for the model as a whole. This is the Significance
Fvalue in Excel; some other statistical programs call it by other names. This
measures the likelihood that the model as a whole describes a relationship that
emerged at random, rather than a real relationship. As with the p-value, the lower the
significance F value, the greater the chance that the relationships in the model are real.

The value of significance F is 0.00 which is less than 0.05 hence it indicates that the
relationship among variables in the model is real.

F 0.05 at 95% confident interval H0 rejected

Observation 2:
Dependent Variable(Y) = Bankex actual
Independent Variable(X) = Sensex actual
H0: Bankex actual not depends on senex actual
H1: Bankex actual depends on senex actual
After running the regression the result which we got are:
Regression

Dependent variable

Bankex actual

Independent variable

Sensex actual

60

R2

0.849931993

Adjusted R2

0.847344613

P-value

1.46133E-25

T-value

18.12433277

0.007153469

1.309211549

F-value

328.4914383

Significance level

1.46133E-25

Value of R square, which indicates that 84% of the variance in Bankex actual, can be
predicted from the variables senex actual.

R square of 0.84 means that 84% of the variance in the observed values of the
dependent variable is explained by the model, and 16% of those differences remain
unexplained because so many other factors influence the banex actual.

The Adjusted R square is used to estimate the expected shrinkage in R square that
would not generalize to the population because our solution is over fitted to the data
set by including too many independent variables ,R square = .849931993and the
Adjusted R square= .847344613, These values are very close, anticipating minimal
shrinkage based on this indicator.

T-value (18.12). we can conclude that the relationship between the bankex actual and
senex actual is significant, i.e the higher the returns of Bankex, the higher the returns
of Axis and vice-versa.

Each independent variable has another number attached to it in the regression result
its p-value or significance level. The p-value is a percentage. It tells you how likely
it is that the coefficient for that independent variable emerged by chance and does not
describe a real relationship. A p-value of 0.00 means that there is a 0% chance that the
relationship emerged randomly and a 100% chance that the relationship is real.

The value of significance F is 0.00 which is less than 0.05 hence it indicates that the
relationship among variables in the model is real.

F 0.05 at 95% confident interval H0 rejected

Observation 3:
Dependent Variable (Y) = error square
Independent Variable(X) = volume change
H0: Error square not depends on volume change
H1: Error square depends on volume change
After running the regression the result which we got are:

Regression

Dependent variable

error square

Independent variable

volume change

60

R2

0.00749522

Adjusted R

-0.009616931

P-value

0.510707554

T-value

0.661820009

0.005249649

0.00084

F-value

0.438005724

Significance level

0.510707554

Value of R square, which indicates that 0.74% of the variance in error square of Axis,
can be predicted from the variables volume change of Axis.

R square of 0.0074 means that 0.74% of the variance in the observed values of the
dependent variable is explained by the model, and 99.26% of those differences remain
unexplained because so many other factors influence the error square.

Adjusted R square -0.009 means that The is used to estimate the expected shrinkage
in R square that would not generalize to the population because our solution is over
fitted to the data set by including too many independent variables, R square =
.00749522and the Adjusted R square= -0.009616931, These values are not very close,
anticipating minimal shrinkage based on this indicator.

T-value (0.66). Thus, we can conclude that the relationship between the estimated
error of Axis and volume of Axis stocks traded in the market are not significant.

Each independent variable has another number attached to it in the regression result
its p-value or significance level. The p-value is a percentage. It tells you how likely
it is that the coefficient for that independent variable emerged by chance and does not
describe a real relationship. A p-value of 0.51 means that there is a 51% chance that
the relationship emerged randomly and a 49% chance that the relationship is real.

The value of significance F is 0.51which is greater than 0.05 hence it indicates that
the relationship among variables in the model is not real.

F 0.05 at 95% confident interval H0 is accepted

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Observation 4:
Dependent Variable (Y) = Axis Actual error
Independent Variable(X) = Axis estimate error
H0: Actual error not depends on estimate error
H1: Actual error depends on estimate error
After running the regression the result which we got are:
Regression

Dependent variable

Axis Actual error

Independent variable

Axis estimate error

60

0.999932298

Adjusted R2

0.999931131

P-value

1.2758E-122

T-value

925.5483482

0.00513866

0.999882254

F-value

856639.7448

Significance level

1.2758E-122

Value of R square, which indicates that 99% of the variance in Actual error can be
predicted from the variables estimate error.

R square of 0.99 means that 99% of the variance in the observed values of the
dependent variable is explained by the model, and 1% of those differences remain
unexplained because so many other factors influence the actual error.

The Adjusted R square is used to estimate the expected shrinkage in R square that
would not generalize to the population because our solution is over fitted to the data
set by including too many independent variables ,R square = .99and the Adjusted R
square= .99, These values are very close, anticipating minimal shrinkage based on this
indicator.

T-value (925.54). we can conclude that the relationship between the Axis Actual error
and Axis estimate error is significant.

Each independent variable has another number attached to it in the regression result
its p-value or significance level. The p-value is a percentage. It tells you how likely
it is that the coefficient for that independent variable emerged by chance and does not
describe a real relationship. A p-value of 0.00 means that there is a 0% chance that the
relationship emerged randomly and a 100% chance that the relationship is real.

The value of significance F is 0.00 which is less than 0.05 hence it indicates that the
relationship among variables in the model is real.

F 0.05 at 95% confident interval H0 is rejected

Conclusion:
Axis Bank is co-related with Bankex & SENSEX. While analyzing the facts it was figured
out that the error occurs in between Axis Bank & Bankex results to be around 10%. Yet while
establishing the relation between Bankex & SENSEX the error was minimized to the extent
of 8%. Hence it can be said that, Bankex & SENSEX are highly affecting the Axis Banks
shares. But the error still prevails due to the change in demand and supply constrain. On
further research it was seen that, if we conglomerate all the above factors in our model the
error part would be limited to zero.

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