Body of The Project

Risk and return of equity investments in banking sector
1.1 INVESTMENT AN OVERVIEW:

Investment refers to the employment of funds with the aim of achieving additional
income or growth in value. The essential quality of an investment is that it involves
waiting for a reward. It involves the commitment of resources which have been saved or
put away from current consumption in the hope that its benefit will accrue in future.
Investment is the allocation of monetary resources to assets that are expected to yield
some gain or positive return over a given period of time. These assets range from safe
investment to risky investments. Investment in this form is called as Financial
Investments.
Investment has different meanings in finance and economics.
In economics, investment is related to saving and deferring consumption. Investment is
involved in many areas of the economy, such as business management and finance whether
for households, firms, or governments.
In finance, investment is putting money into something with the expectation of gain,
usually over a longer term. This may or may not be backed by research and analysis. Most
or all forms of investment involve some form of risk, such as investment in equities,
property, and even fixed interest securities which are subject, inter alia, to inflation risk.
In contrast putting money into something with a hope of short-term gain, with or without
thorough analysis, is gambling or speculation. This category would include most forms of
derivatives, which incorporate a risk element without being long-term homes for money,
and betting on horses. It would also include purchase of e.g. a company share in the hope of
a short-term gain without any intention of holding it for the long term.
Under the efficient market hypothesis, all investments with equal risk should have the
same expected rate of return: that is to say there is a trade-off between risk and expected
return. But that does not prevent one from investing in risky assets over the long term in the
hope of benefiting from this
trade-off.
The common usage
of investment to
describe speculation has had an effect in real life as well. It reduced investor capacity to
discern investment from speculation, reduced investor awareness of risk associated with
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speculation, increased capital available to speculation, and decreased capital available to
investment.
In finance, investment is the application of funds to hold assets over a longer term in the
hope of achieving gains and/or receiving income from those assets. It generally does not
include deposits with a bank or similar institution. Investment usually involves
diversification of assets in order to avoid unnecessary and unproductive risk.
Investments are often made indirectly through intermediaries, such as pension
funds, banks, brokers, and insurance companies. These institutions may pool money
received from a large number of individuals into funds such as investment trusts, unit
trusts etc.to make large scale investments. Each individual investor then has an indirect or
direct claim on the assets purchased, subject to charges levied by the intermediary, which
may be large and varied.
1.1.1) Reasons to invest
One needs to invest to:
Earn return on idle resources,
Generate a specified sum of money for a specific goal in life
Make a provision for an uncertain future
One of the important reasons why one needs to invest wisely is to meet the cost of
Inflation. Inflation is the rate at which the cost of living increases.The cost of living is
simply what it costs to buy the goods and services you need to live. Inflation causes money
to lose value because it will not buy the same amount of a good or a service in the future as
it does now or did in the past. The aim of investments should be to provide are turn above
the inflation rate to ensure that the investment does not decrease in value.
1.1.2) FACTORS INFLUENCING INVESTMENT:

1. Increasing rate of taxation.
2. High interest rate.
3. High rate of inflation
4.
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1.1.3) TYPES OF INVESTMENT:
1. Short term investments
2. Long term investment
CLASSIFICATION OF INVESTMENTS
SHORT TERM
Savings Bank Account
LONG TERM
Post Office Savings
Money Market or Liquid Funds
Public Provident Fund
Fixed Deposits with Banks
Company Fixed Deposits
Securities (Shares, Bonds)
1.2) EQUITY INVESTMENT AN OVERVIEW:

Equity investment generally refers to the buying and holding of shares of stocks in the
stock market by individual and funds in anticipation of income from dividend and capital
gain as the value of the stock rises. It also sometimes refers to the acquisition of equity
participation in a private company or a company being created or newly created. In simple
terms, equity share is the total equity capital of a company divided into equal units of small
denominations, each called a share.
1.2.1 Need to issue shares to the public: Most companies are usually started privately by
their promoter(s). However, the promoters capital and the borrowings from banks and
financial institutions may not be sufficient for setting up or running the business over a long
term. So companies invite the public to contribute towards the equity and issue shares to
individual investors. The way to invite share capital from the public is through a Public
Issue. Simply stated, a public issue is an offer to the public to subscribe to the share capital
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of a company. Once this is done, the company allots shares to the applicants as per the
prescribed rules and regulations laid down by SEBI.
1.2.2 Reasons for investing in equities
When a person buys a share of a company he becomes a shareholder in that company.

Shares are also known as Equities. Equities have the potential to increase in value over
time. It also provides your portfolio with the growth necessary to reach your long term
investment goals. Research studies have proved that the equities have outperformed most
other forms of investments in the long term.
This may be illustrated with the help of following examples:
a) Over a 17year period between 1990 to 2007,Nifty has given an annualized return of 20
%.
b) In the last 15-20 years, the average return from equity was about 18 percent p.a.
c) Equities are considered the most challenging and the rewarding when compared to other
investment options.
d) Research studies have proved that investments in some shares with a longer tenure of
investment have yielded far superior returns than any other investment.
1.2.3 The average return on Equities in India
Since 1990 till date, Indian stock market has returned about 20% to investors on an average
in terms of increase in share prices or capital appreciation annually. Besides, that on
average stocks have paid 1.7%dividend annually. Dividend is a percentage of the face value
of a share that a company returns to its shareholders from its annual profits. Compared to
37 most other forms of investments, investing in equity shares offers the highest rate of
return, if invested over a longer duration.
1.2.4 Factors that influence the price of a stock:

Broadly there are two factors:
(1) Stock specific and
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(2) Market specific.
The stock-specific factor is related to peoples expectations about the company, its future
earnings capacity, financial health and management, level of technology and marketing
skills.
The market specific factor is influenced by the investors sentiment towards the stock
market as a whole. This factor depends on the environment rather than the performance of
any particular company. Events favorable to an economy, political or regulatory
environment like high economic growth, friendly budget, stable government etc. can fuel
euphoria in the investors resulting in a boom in the market.
On the other hand, unfavorable events like war, economic crisis, communal riots, minority
government etc. depress the market irrespective of certain companies performing well.
However, the effect of market-specific factor is generally short-term. Despite ups and
downs, price of a stock in the long run gets stabilized based on the stock specific factors.
Therefore, a prudent advice to all investors is to analyze and invest and not speculate in
shares.
Growth Stock v/s Value Stock

Growth Stocks:
In the investment world we come across terms such as Growth stocks, Value stocks etc.
Companies, whose potential for growth in sales and earnings are excellent, are growing
faster than other companies in the market or other stocks in the same industry are called the
Growth Stocks. These companies usually pay little or no dividends and instead prefer to
reinvest their profits in their business for further expansions.
Value Stocks: The task here is to look for stocks that have been overlooked by other
investors and which may have a hidden value. These companies may have been beaten
down in price because of some bad event, or may be in an industry that's not fancied by
most investors. However, even a company that has seen its stock price decline still has
assets to its name buildings ,real estate, inventories, subsidiaries, and so on. Many of these
assets still have value, yet that value may not be reflected in the stock's price. Investors
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look to buy stocks that are undervalued, and then hold those stocks until the rest of the
market realizes the real value of the company's assets.
1.2.5 Way to acquire equity shares

The investor can acquire equity share either by the following two ways,
1. Primary market
2. Secondary market
You may subscribe to issues made by corporates in the primary market. In the primary
market, resources are mobilized by the corporates through fresh public issues (IPOs) or
through private placements. Alternately, you may purchase shares from the secondary
market. To buy and sell securities you should approach a SEBI registered trading member
(broker) of a recognized stock exchange.
PRIMARY MARKET:
The primary market provides the channel for sale of new securities. Primary Market
provides opportunity to issuers of securities; Government as well as Corporates, to raise
resources to meet their requirements of investment and/or discharge some obligation. They
may issue the securities at face value, or at a discount/premium and these securities may
take a variety of forms such as equity, debt etc. They may issue the securities in domestic
market and/or international market.
SECONDARY MARKET:
Secondary market refers to a market where securities are traded after being initially offered
to the public in the primary market and/or listed on the Stock Exchange. Majority of the
trading is done in the secondary market. Secondary market comprises of equity markets and
the debt markets.
1.3) RISK:
Risk, for most of us, refers to the likelihood that in lifes games of chance, we will receive
an outcome that we will not like. For instance, the risk of driving a car too fast is getting a
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speeding ticket, or worse still, getting into an accident. Websters dictionary, in fact,
defines risk as exposing to danger or hazard. Thus, risk is perceived almost entirely in
negative terms.
In finance, the definition of risk is both different and broader. Risk, as we see it, refers to
the likelihood that we will receive a return on an investment that is different from the return
we expected to make. Thus, risk includes not only the bad outcomes, i.e., returns that are
lower than expected, but also good outcomes, i.e., returns that are higher than expected. In
fact, we can refer to the former as downside risk and the latter is upside risk; but we
consider both when measuring risk.
Risk is a concept that denotes a potential negative impact to an asset or some characteristic
of value that may arise from some present process or future event. In everyday usage, risk
is often used synonymously with the probability of a known loss. Paradoxically, a probable
loss can be uncertain and relative in an individual event while having a certainty in the
aggregate of multiple events.
The variance and standard deviations of return serve as the alternative statistical measures
of the risk of the security in absolute sense. Similarly covariance measures the risk of the
security relative to the other securities in a portfolio.
1.3.1TYPES OF RISK:
1] Systematic risk and
2] Unsystematic risk
CLASSIFICATION OF RISK
Systematic risk
Unsystematic risk
Market risk or Economic risk
Business risk
Interest rate risk
financial risk
Purchase power risk

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SYSTEMATIC RISK:
The systematic risk affects the entire market. Also known as "un-diversifiable risk"
or "market risk." Systematic risk is a risk of security that cannot be reduced through
diversification. This indicates that the entire market is moving in a particular
direction either downward or upward. The economic conditions, political situations
and sociological changes affect the security market.
Variability in a securitys total returns that is directly associated with overall

movements in the general market or economy is called systematic or market or
general risk. In other words, Systematic risk is the risk attributable to broad macro
factors affecting all securities.
Virtually all securities have some systematic risk, whether bonds or stocks, because
systematic risk directly encompasses the interest rate, market risk and inflation risk.
The investor cannot escape this part of risk, because no matter how well he or she
diversifies, the risk of the overall market cannot be avoided.
Systematic risk is non-diversifiable and is associated with securities market as well as the
economy, sociological, political and legal considerations of the price of all securities in the
economy. The effect of these factors is to put pressure on all securities in such a way that
the price of all stocks will move in the same direction. The following are the factors that
influence systematic risk,
The systematic risk is further sub-divided into
Market Risk
Purchasing Power Risk
Interest Rate Risk
MARKET RISK: Market risk is referred to as stock variable due to change in investors
attitude and expectations. The investors reaction towards tangible events is the chief cause
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affecting market risk. Market risks cannot be eliminated while financial risk can be
reduced. Market risk includes such factors as business recessions, depressions and long-run
changes in consumption in the economy.
Jack Clark Francis has defined market risk as that portion of total variability of return
caused by the alternating forces of bull and bear markets. When the security index moves
upward with frequent irregular pauses for a significant period of time, it is known as bull
market. In the bull market, the index moves from a low level to the peak. Bear market is
just a reverse to the bull market; the index declines haltingly from the peak to a market low
point called trough for a significant period of time. During the bull and bear market more
than 80 per cent of the securities prices rise or fall along with the stock market indices.
The forces that affect stock market are tangible and intangible events. The tangible events
are real events such as earthquake, war, political uncertainty, an election year, illness or
death of president, and fall in the value of currency.
Intangible events are related to market psychology. The market psychology is affected
by the real events. But reactions to the tangible events become over reactions and they push
the market in a particular direction.
The market risk in equity shares is much greater than it is in bonds. Equity shares
value and prices are related in some fashion to earnings. Current and prospective dividends,
which are made possible by earnings, theoretically, should be capitalized at a rate that will
provide yields to compensate for the basic risks.
INTEREST RATE RISK:

The price of all securities rise or fall depending on the change in interest rates, the
longer the maturity period of a security, the higher the yield on an investment and lower the
fluctuations in prices.
Interest rates continuously change for bond, preference stock and equity stocks.
Interest rate risk can be reduced by diversifying in various kinds of securities and also
buying securities of different maturity dates.
A major source of risk to the holders of high quality bonds is changes in interest rates,
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commonly referred to an interest rate risk. These high- quality bonds are not subject to
either substantial business risk or financial risk.
If there is an increase in risk free rate of interest (i.e., MIBOR, interest rate on government
bonds and interest rate on treasury bills), then there would be definite shift in the funds
from low yielding bonds to high yielding bonds and from stocks to bonds.
Likewise, if the stock market is in a depressed condition, investors would like to shift their
money to the bond market, to have an assured rate of return. For example: The best
example is that in April 1996, most of the initial public offerings of many companies
remained undersubscribed but IDBI and IFC bonds were oversubscribed. The assured rate
of return attracted the investors from the stock market to the bond market.
PURCHASE POWER RISK:
Purchasing power risk is also known as inflation risk. This risk arises out if change in
the prices of goods and services and technically it covers both inflation and deflation
period. Therefore, in India, purchasing power risk is associated with inflation and rising
price in the economy.
The negative relation between equity valuations and expected inflation is found to be the
result of two effects: a rise in expected inflation coincides with both
(i)
lower expected real earnings growth and
(ii)
Higher required real returns.
A one percentage point increase in expected inflation is estimated to rise required real stock
returns about one percentage point, which on average would imply a 20 percent decline in
stock prices. But the inflation factor in expected real stock returns is also in long-term
Treasury yields; consequently, expected inflation has little effect on the long-run equity
premium.
Variations in the returns are caused also by the loss of purchasing power of currency.
Inflation is the reason behind the loss of purchasing power. Purchasing power risk is the
probable loss in the purchasing power of the returns to be received. The rise in price
penalizes the returns to the investor, and every potential rise in the price is a risk to the
investor.
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UNSYSTEMATIC RISK:
Unsystematic risk is unique and peculiar to an industry or to a firm. Unsystematic risk
stems from managerial inefficiency, technological change in the production process,
availability of raw materials, change in the consumer preference, and labour problems. The
nature and magnitude of above factors differ from industry to industry, and company to
company.
Technological changes affect the information technology industry more than that of
consumer product industry. Thus, it differs from industry to industry. The changes in the
consumer preference affect the consumer products like television sets, washing machines,
refrigerators, etc more than they affect the iron and steel industry.
Unsystematic risk can be classified into two categories namely:
Business Risk
Financial Risk
Unsystematic risk is unique to a firm of industry. It does not affect an average investor.
Unsystematic risk is caused by factors like labour strike, irregular & disorganized
management policies and consumer preference. These factors are independent of the price
mechanism operating in the securities market. The following are the factors that influence
unsystematic risk.
BUSINESS RISK:
Business risk, which is sometimes called operating risk, is the risk associated with the
normal day-to-day operations of the firm. Business risk is concerned to Earnings before
interest and tax. Earnings before interest and taxes can be viewed as the operating profit of
the firm; that is, the profit of the firm before deducting financing charges and taxes.
Business risk represents the chance of loss and the variability of return created by a firms
uses of funds. The two components of business risk signify the chance that the firm will fail
because of the inability of the assets of the firm to generate a sufficient level of earnings
before interest and the variability of such earnings.
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Every corporate organization has its own objectives and goals and aims at a particular
gross profit and operating income and also expects to provide a certain level of dividend
income to its shareholders. It also hopes to plough back some profit.
Business risk is also associated with risks directly affecting the internal environment of
the firm and those if circumstance beyond its control. The former is classified as internal
business risk and the latter as external business risk, within these two broad categories of
risk, the firm operations.
FINANCIAL RISK:
Financial risk is created by the use of fixed cost securities (i.e., debt and preference
shares). Financial risk is the chance of loss and the variability of the owners return created
by a firms sources of funds. Financial risk is the chance of loss and the variability of the
owners return created by a firms sources of funds. The two components of financial risk
reflect the chance that the firm will fail because of the inability to meet interest and/ or
principal payments on debt, and the variability of earnings available to Equity holders
caused by fixed financing changes (i.e., interest expense and preferred dividends). In case
the firm does not employ debt, there will be no financial risk.
An important aspect of financial risk is the interrelationship between financial risk
and business risk. In effect, business risk is basic to the firm, but the firms risk can be
affected by the amount of debt financing used by the firm. Whatever be the amount of
business risk associated with the firm, the firms risk will be increased by the use of debt
financing. As a result, it follows that the amount of debt financing used by the firm should
be determined largely by the amount of business risk that the firm faces. If its business risk
is low, then it can use more debt financing without fear of default, or a marked impact on
the earnings available to the equity share holders. Conversely, if the firm faces, a lot of
business risk, then the use of a lot of debt financing may jeopardize the firms operations.
Financial risk in a company is associated with the method through which it plans its
financial structure. If the capital structure of a company tends to make earnings unstable,
the company may fail financially. How a company rises funds to finance its needs and
growth will have an impact on its future earnings and consequently on the stability of
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earnings. Debt financing provides a low cost source of funds to a company, at the same
time providing financial leverage for the common stock holders.
1.4 RETURN:
A major purpose of investment is to set a return or income on the funds investment. On a
bond, an investor expects to receive interest. On a stock, dividends may be anticipated. The
investor may expect capital gains from some investments and rental income from house
property.
Return is the amount or rate of produce, proceeds, gain, fruit and profit which accrues to
an economic agent from an undertaking or enterprise or investment. It is a reward for and a
motivating force behind investment, the objective of which is usually to maximize return.
Return on a typical investment has two components; the basic one which is the periodic
cash or income receipts, and the other which is the appreciation or depreciation in the price
of value of the asset, called the capital gain or the capital loss. The capital gain is the
difference between the purchase price of the asset and the price at which it can be or is sold.
The income component is usually but not necessarily received in cash viz., stock dividend.
The total return on an investment thus can be defines as income plus/minus
appreciation/depreciation.
1.4.1)TYPES OF RETURN:
1. Internal rate of return
2. Expected return
3. Rate of return
4. Holding period return
INTERNAL RATE OF RETURN:
The internal rate of return (IRR) is a capital budgeting method used by firms to decide
whether they should make long-term investments. The IRR is the annualized effective
compounded return rate which can be earned on the invested capital, i.e. the yield on the
investment. A project is a good investment proposition if its IRR is greater than the rate of
return that could be earned by alternative investments (investing in other projects, buying
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bonds, even putting the money in a bank account). The IRR should include an appropriate
risk premium. Mathematically, the IRR is defined as any discount rate that results in a net
present value of zero of a series of cash flows. In general, if the IRR is cost of capital, or
hurdle rate, the project will add value for the company greater than the project's.
EXPECTED RETURN:
The expected rate of return is the weighted average of all possible return multiplied by their
respective probabilities. Expected return is the estimation of the value of an investment,
including the change in price and any payments or dividends, calculated from a probability
distribution curve of all possible rates of return. In general, if an asset is risky, the expected
return will be the risk-free rate of return plus a certain risk premium, also called expected
value. The average of a probability distribution of possible returns, calculated by using the
following formula:
Expected Return:
RATE OF RETURN :
In finance, rate of return (ROR) or return on investment (ROI) is the ratio of money
gained or lost on an investment relative to the amount of money invested. The amount of
money gained or lost may be referred to as interest, profit/loss, gain/loss, or net
income/loss. The money invested may be referred to as the asset, capital, principal, or the
cost basis of the investment.
ROI is also known as rate of profit, rate of return or return. ROI is the return on a past or
current investment, or the estimated return on a future investment. ROI is usually given as a
percent rather than decimal value. However, ROI is most often stated as an annual or
annualized rate of return, and it is most often stated for a calendar or fiscal year Rate of
return for the given period is calculated by using the formula,
Annual income + (Ending price Beginning price)
Rate of return =
-------------------------------------------------------------Beginning price
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HOLDING PERIOD RETURN:

Holding period yield (HPY) measures the total return an investment during a given or
designing time period in which the asset is held by the investor. It is to be noted that HPY
does not mean that the security is actually sold and the gain or loss is actually realized by
the investor. The concept of HPY is applicable whether one is measuring the realized return
or estimated the future return.
1.5 Definition of Bombay Stock Exchange (BSE):

The first and largest securities market in India, the Bombay Stock Exchange (BSE)
was established in 1875 as the Native Share and Stock Brokers' Association. Based in
Mumbai, India, the BSE lists over 6,000 companies and is one of the largest exchanges in
the world. The BSE has helped develop the country's capital markets, including the retail
debt market, and helped grow the Indian corporate sector.
In 1995 the BSE switched from an open-floor to an electronic trading system. Securities
listed by the BSE include stocks, stock futures, stock options, index futures, index options
and weekly options. The BSE's overall performance is measured by the Sensex, an index of
30 of the BSE's largest stocks covering 12 sectors.
1.5.1BSE Bankex:
Banking sector reforms such as fall in interest rates and enactments of securitization bill
have given a major fillip to Indian banking industry .These developments have significantly
impacted the performance of bank stocks and bank stocks have emerged as a major
segment in the equity markets.
The index named as Bankex is based on the free float methodology of index
construction. Bankex tracks the performance of the leading banking sector stocks listed on
the BSE. Twelve stocks, which represent 90 percent of the total market capitalization of all
banking sector stocks listed on BSE, are included in the index. The base date for Bankex is
1st
January
2002
and
the
base
value
is
1000
points.
BSE BANKEX Index Bombay Stock Exchange Limited launched "BSE BANKEX Index"
on 23 June 2003. This index consists of major Public and Private Sector Banks listed on
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BSE. The BSE BANKEX Index is displayed on-line on the BOLT trading terminals
nationwide
1.5.2 Objectives:
a. An Index to track the performance of listed equity of Banks.
b. A suitable benchmark for the Central Government to monitor its wealth on the bourses.
1.5.3FEATURES:
Bankex tracks the performance of the leading banking sectors stocks listed on the BSE.
Bankex is based on the free-float methodology of index construction
The base data for BANKEX is ist January 2002
The base value for BANKEX is 1000 points.
BSE has calculated the historical index value of BANKEX since ist januaury 2002.
14 stocks which represent 90 %of the total market capitalization of all banking
sectors listed on BSE are included in the Index.
The Index is disseminated on a real-time basis through BSE Online Trading

(BOLT) terminals.
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Stocks forming part if the BANKEX along with the particulars of their free-float
adjusted market capitalization are listed below.
Stocks Constituting Bankex
UTI Bank Ltd

Kotak Mahindra Bank
UCO Bank
Indian Overseas Bank
Jammu & Kashmir Bank
Vijaya Bank
Allahabad Bank Ltd
Centurion Bank Ltd
Indusind Bank Ltd
Karnataka Bank Limited
Federal Bank Ltd
Karnataka Bank Ltd
Yes Bank Ltd
IDBI Bank Ltd
1.5.4Maintenance of BSE Indices:

One of the important aspects of maintaining continuity with the past is to update the base
year average. The base year value adjustment ensures that replacement of stocks in Index,
additional issue of capital and other corporate announcements like 'rights issue' etc. do not
destroy the historical value of the index. The beauty of maintenance lies in the fact that
adjustments for corporate actions in the Index should not affect the index values.
The BSE Index Cell does the day-to-day maintenance of the index within the broad index
policy framework set by the BSE Index Committee. The BSE Index Cell ensures that all
BSE Indices maintain their benchmark properties by striking a delicate balance between
frequent replacements in index and maintaining its historical continuity.
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2.1 LITERATURE REVIEW
The review for the purpose of the study is done by means of collecting information
from different sources.
Risk Sensitivity of Bank Stocks in Malaysia: Empirical Evidence Across the

Asian Financial Crisis
By: Hooy, Chee Wooi; Tan, Hui Boon; Nassir, Annuar Md (September 2004)
This research article examines the sensitivity of commercial banks' stock
excess returns to their volatility and financial risk factors, measured by interest rates
and exchange rates, across the recent Asian financial crisis. In general, we found
that there were no significant differences among Malaysian commercial banks in
their risk exposure prior to and during the Asian financial crisis. The introduction of
selective capital controls, a fixed exchange rate regime and a forced banking
consolidation program, however, had increased the risk exposure of both large and
small domestic banks. The effects of these risk factors were significantly detected in
both large and small banks.
Risk And Return In Banking: Evidence From Banking Stock Returns

By: Jonathan.A.Neuberger (November 1990)
In the research article titled suggests that bank stock risks changed significantly
during the 1980s.The returns on these stocks became increasingly sensitive to
factors that influence overall stock market returns. At the same time, bank stocks
were increasingly insensitive to change in interest rates. While these results add to
our knowledge of bank stock risks and returns.
Common Risk Factors in Bank Stocks published in JEL Classifications
By:James W. Kolari, Texas A&M University(2006)
This research article provides evidence on the risk factors that are priced in
bank equities. Alternative empirical models with precedent in the nonfinancial asset
pricing literature are tested, including the single-factor CAPM, three-factor FamaCity college
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French model, and ICAPM. Our empirical results indicate that an unconditional
two-factor ICAPM model that includes the stock market excess return and shocks to
the slope of the yield curve is useful in explaining the cross section of bank stock
returns. However, we find no evidence that firm specific factors such as size and
book-to-market ratios are priced in bank stock returns. We also provide evidence
that shocks to the default spread are priced in a conditional version of the two-factor
ICAPM model. These results have a number of practical implications for event
studies of banking firms, estimation of bank cost of capital and investment
performance, as well as regulatory initiatives to utilize market discipline to evaluate
bank risk under Basel II.
An Analysis Of Commercial Bank Common Stock Returns

By: J. Van Fenstermaker ; R. Phil Malone ; Stanley R. Stansell (1998)
In this research article - J. Van Fenstermaker ; R. Phil Malone ; Stanley R.
Stansell analyses for the first time a continuous index of returns on commercial
bank common stocks listed in a specific market. The index is constructed from a
unique set of historical data and is calculated on a weighted and unweighted basis,
first including and then excluding dividends. A measure of volatility is calculated
annually.
The results indicate that the dividend component of holding period returns is very
important. Including dividends, average returns were 6.0% for the century;
excluding dividends, average returns were 0.1%. Excess returns were calculated
using two different measures of a riskless rate of return. Cumulative excess returns
for the first half of the nineteenth century were negative. Real returns were
calculated,
and
found
to
be
generally
positive
over
the
century.
Examining the effects of significant economic and political events on bank

common stock returns, we find that the War of 1812, the Civil War, and the
National Banking System had a significant impact on bank stock returns. Several
economic panics, several depressions, the First and Second Banks of the United
States, the Embargo of 1807, and the Suffolk Bank had no measureable impact.
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Understanding Distribution Pattern of Banking Sector Prices in Indian Stock Market
By: Praloy, Sooraj, Archana
This paper comes out with the understanding of the different distributions that might
explain the stock price returns of banking companies and hence should also help in
predicting future movement for fund manager. The Indian stock market prices, which have
been mostly tracked and understood by various techniques, were assumed to follow the
normal distribution properties. The pattern of stock price returns of different companies
was assumed to fit the same normal Gaussian distribution in analyzing their properties in
most of the studies. Prediction of future movements with their probabilities was also
calculated and the various graphs also interpreted. The hierarchies of the distributions,
which will best fit the stock price returns, were also analysed by conducting suitable tests.
Stable distributions which handle skewed data with heavy tails were read and understood in
detail and their various forms analyzed alongside their parameters. The parameters with
their values were interpreted and the top three distributions for each of the companies
explained. The research generates that burr, dagum, log logistic and Cauchy distribution are
almost common factors in fitting the data values.
Equity Returns in the Banking Sector in the Wake of the Great Recession and the
European Sovereign Debt Crisis
By: Jorge A. Chan-Lau, Estelle X. Liu, and Jochen M. Schmittmann (july 2012)
The successive realization of two major crises since 2008 has eroded banks
earnings prospects owing partly to tight funding conditions and potential large losses from
sovereign debt holdings of European countries undergoing significant duress. While it is
difficult for banks to insulate completely from major shocks affecting global economic
conditions, our analysis suggest that banks with a stronger capital base have been better
able to cope with major stresses, a fact priced in their equity prices. Increased reliance on
deposits rather than short-term wholesale funding could help banks to withstand negative
shocks better, as our results suggest that lower loan to deposit ratios are reflected in a better
equity return performance.
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Risk-Return Relationship in Equities: Evidence from the Automobile and
Sector of the Nigerian Stock Exchange
By: E. Chuke Nwude (Vol 3, No 6, 2012)
It is hereby recommended that the investors in the Nigerian Stock Exchange(NSE)
will find the betas helpful in assessing systematic risk and understanding the impact market
movements can have on the return expected from a share of Nigerian automobile/tyre
stocks. For example, if the market is expected to provide a 10% rate of return over the next
year, Dunlop and R.T Briscoe stocks with average beta of -2.01 and 1.51 respectively
would be expected to experience a decrease (in Dunlop) and an increase (in RT Briscoe) in
return of approximately -20.1% and 15.1% respectively over the same period. Decreases in
market returns are also translated into decreasing security returns, and this is where the risk
lies. In the preceding example, if the market is expected to experience a negative return of
10%, then the Dunlop with a beta of -2.01 should experience 20.1% decrease in its return.
Stocks having less than 1 will, of course, be less responsive to changing returns in the
market, and therefore are considered less risky.
2.2 TITLE OF THE STUDY:

A STUDY ON RISK AND RETURN OF EQUITY INVESTMENTS IN BANKING
SECTOR
2.3 STATEMENT OF THE PROBLEM:

The study was conducted to analyze the investors behavior towards the banking
stocks. It also evaluate the performance of banking share stock mainly to
identification of required rate of return and risk of a particular stock based upon
different risk elements prevailing in the market and other Economic Factors.
Equity investment includes high risk at the same time it earns higher return
unusually high returns may not be sustainable. Since the banking industry is under the
control of Reserve Bank of India (RBI), it is adversely used as the tool to control the
external problems like inflation, interest rate, money supply, etc., Because of this,
there is a high instability in the share price that reduces the real investors interest. So
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investors are short selling their holdings with respect to the market fluctuation to keep
away them from the loss of investment.
This study is structured to analyze the performance of the selected shares in the
banking industry to reveal the risk and return in a particular period of time and the
investors perception towards the Banking industry.
2.4 SCOPE OF THE STUDY:

The scope of the study has been limited to the analysis of the investors behavior
and the performance of banking sector ten leading banks by using the risk
measurement tools like Beta, Alpha and Standard Deviation methods. The study is
specifically focused on to reveal the investors interest and expectations on the
banking stocks and the actual return earned by the stocks in a particular period of
time. The risk and return factors are calculated by using the available market data
(purely historical).
2.5 OBJECTIVES OF THE STUDY

1. To entrap the investors awareness on the banking sector stocks, the level of
expected return and risk in the changing economy.
2.
To know what are the factors are going to affect to investor in selecting equity.
3. To Analyze the Risk and Return of banking sector Stock with the bankex index
4. To Test the Variability between Variables, Such as variance of returns corelations standard deviation.
5. To suggest improvise suggestion regarding banking sector investment.
2.6 HYPOTHESIS:
Based on the above objectives following are the hypotheses formulated to test in
this research study.
2.6.1 Null and alternative Hypothesis

H0: there is no significant relation between the banking and non-banking
equity.
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H1: there is a significant relation between the banking and non-banking
equity.
2.7 STATISTICAL PROCEDURE:

The research has been done by using the following statistical techniques used are:
A) Return: - A return is a measurement of how much an investment has
increased or decreased in value over any given time period.
Todays price Yesterdays price
Security return =
--------------------------------------------* 100
Yesterdays price
B) Standard Deviation: Standard deviation is applied to the annual rate of

return of an investment to measure the investment's volatility. It is also
known as historical volatility.
The standard deviation can be calculated by using the following formula,
Standard Deviation () = P (Ri-E(Ri))
C) Variance: The variance is a somewhat abstract measure of the variability in
a set of data. Unlike the variability the standard deviation can be easily
conceptualized by plotting it along with the individual points in the set. It is
easy to visualize the standard deviation in this way along with the data set.
Variance () = Pi (Ri-E(Ri) )
D) Correlation: The correlation is used to find the relation between stocks and
the market, it also find the strength of the linear association between two
variables. The correlation will range from +1 to -1 to indicate whether the
relationship is positive or negative. A correlation of 1 shows a perfect
correlation and a correlation of 0 shows no correlation. The formula is:
E)
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E) Beta: The coefficient measures the asset's non-diversifiable risk, also

called systematic risk or market risk. The most important part of the
equation is () beta. It is used to describe the relationship between the
stocks return and market indexs return. A 0.5 beta indicates that the
market index changes of 1% was reflected by a 0.5% price change in
stocks. Similarly, a 1.5% beta would reflect that whenever the market
index rose or fell by 1%, the stock would rise and fall by 1.5%.
NXY - X y
= ..
NX (X)
F) Alpha :- It measures risk-adjusted performance, factoring in the risk
due to the specific security, rather than the over all market. A high value
for alpha implies that the stock has performed better than would have
been expected given its beta .
ALPHA () = Y ( * x)
2.8)RESEARCH METHODOLOGY
A) Sample Size:
Ten banking and three non-banking equity are selected for analysis.
B) Sampling technique:
The sampling technique adopted for the study is simple random sampling. It is the
primary probability sampling design. A process that not only give to each element a
chance of being included in the sample but also makes the selection of every
possible combination of cases in the desire size equally.
C) Sources of data collection:
The data for the present study is drawn from secondary sources.
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SECONDARY DATA:
Secondary data refers to those data that has already been collected and analyzed by
someone else. In this study secondary data is collected from various sources like:
Internet
Journals and business magazines
Newspapers
D) Analysis of Data:
Data collected is analysed with the help of various financial tools.
Software used for data analysis:
EXCEL SPREADSHEET
2.9 STATISTICAL ANALYSIS

The statistical methods to be used for data analysis in this study are
Descriptive statistics, regression and t-test.
Regression :Statistical approach used to forecast change in a

dependent variable on the basis of change in one or more
independent variables
T-test: this tool is used for testing the hypothesis i.e whether we have
to accept the null hypothesis (Ho) or alternative hypothesis (H1) via
t-stat and t-critical value.
2.10LIMITATIONS OF THE STUDY:

Although the study covers a lot of information, there are some limitations as
mentioned below:
Statistics taken from the websites may not be exact and correct.
The findings and conclusions made during the study may not be a long time
appraisal because of high volatility in stock market.
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3.1 Revolution in Indian banking Sector:
Indian banking is the lifeline of the nation and its people. Banking has helped in developing
the vital sectors of the economy. The sector has translated the hopes and aspirations of
millions of people into reality. But to do so, it has had to control miles and miles of difficult
terrain, suffer the indignities of foreign rule and the pangs of partition. Today, Indian banks
can confidently compete with modern banks of the world .Before the 20th century, usury,
or lending money at a high rate of interest, was widely prevalent in rural India. Entry of
Joint stock banks and development of Cooperative movement have taken over a good deal
of business from the hands of the Indian money lender, who although still exist, have lost
his menacing teeth.
In the Indian Banking System, Cooperative banks exist side by side with commercial banks
and play a supplementary role in providing need-based finance, especially for agricultural
and agriculture-based operations including farming, cattle, milk, hatchery, personal finance
etc. along with some small industries and self-employment driven activities.
Generally, co-operative banks are governed by the respective co-operative acts of state
governments. But, since banks began to be regulated by the RBI after 1stMarch 1966, these
banks are also regulated by the RBI after amendment to the Banking Regulation Act 1949.
The Reserve Bank is responsible for licensing of banks and branches, and it also regulates
credit limits to state co-operative banks on behalf of primary co-operative banks for
financing SSI units.
Banking in India originated in the first decade of 18th century with The General Bank of
India coming into existence in 1786. This was followed by Bank of Hindustan. Both these
banks are now defunct. After this, the Indian government established three presidency
banks in India. The first of three was the Bank of Bengal, which obtains charter in 1809, the
other two presidency bank, viz., the Bank of Bombay and the Bank of Madras, were
established in 1840 and 1843, respectively. The three presidency banks were subsequently
amalgamated into the Imperial Bank of India (IBI) under the Imperial Bank of India Act,
1920 which is now known as the State Bank of India.
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A couple of decades later, foreign banks like Credit Lyonnais started their Calcutta
operations in the 1850s. At that point of time, Calcutta was the most active trading port,
mainly due to the trade of the British Empire, and due to which banking activity took roots
there and prospered. The first fully Indian owned bank was the Allahabad Bank, which was
established in 1865.
By the 1900s, the market expanded with the establishment of banks such as Punjab
National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai both of which
were founded under private ownership. The Reserve Bank of India formally took on the
responsibility of regulating the Indian banking sector from 1935. After Indias
independence in 1947, the Reserve Bank was nationalized and given broader powers.
As the banking institutions expand and become increasingly complex under the impact of
deregulation, innovation and technological up gradation, it is crucial to maintain balance
between efficiency and stability. During the last 30 years since nationalization tremendous
changes have taken place in the financial markets as well as in the banking industry due to
financial sector reforms. The banks have shed their traditional functions and have been
innovating, improving and coming out with new types of services to cater emerging needs
of their .
Banks have been given greater freedom to frame their own policies. Rapid advancement of
technology has contributed to significant reduction in transaction costs, facilitated greater
diversification of portfolio and improvements in credit delivery of banks. Prudential norms,
in line with international standards, have been put in place for promoting and enhancing the
efficiency of banks. The process of institution building has been strengthened with several
measures in the areas of debt recovery, asset reconstruction and securitization,
consolidation, convergence, mass banking etc. Despite this commendable progress, serious
problem have emerged reflecting in a decline in productivity and efficiency, and erosion of
the profitability of the banking sector. There has been deterioration in the quality of loan
portfolio which, in turn, has come in the way of banks income generation and
enchancement of their capital funds. Inadequacy of capital has been accompanied by
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inadequacy of loan loss provisions resulting into the adverse impact on the depositors and
investors confidence. The Government, therefore, set up Narasimham Committee to look
into the problems and recommend measures to improve the health of the financial system.
The massive and speedy expansion and diversification of banking has not been without its
strains. The banking industry is entering a new phase in which it will be facing increasing
competition from non-banks not only in the domestic market but in the international
markets also. With the emergence of new private banks, the private bank sector has become
enriched and diversified with focus spread to the wholesale as well as retail banking. The
existing banks have wide branch network and geographic spread, whereas the new private
banks have the clout of massive capital, lean personnel component, the expertise in
developing sophisticated financial Products and use of state-of-the-art technology.
Gradual deregulation that is being ushered in while stimulating the competition would also
facilitate forging mutually beneficial relationships, which would ultimately enhance the
quality and content of banking. In the final phase, the banking system in India will give a
good account of itself only with the combined efforts of cooperative banks, regional rural
banks and development banking institutions which are expected to provide an adequate
number of effective retail outlets to meet the emerging socio-economic challenges during
the next two decades.
The electronic age has also affected the banking system, leading to very fast electronic fund
transfer. However, the development of electronic banking has also led to new areas of risk
such as data security and integrity requiring new techniques of risk management.
Cooperative (mutual) banks are an important part of many financial systems. In a number
of countries, they are among the largest financial institutions when considered as a group.
Moreover, the share of cooperative banks has been increasing in recent years; in the sample
of banks in advanced economies and emerging markets analyzed in this paper, the market
share of cooperative banks in terms of total banking sector assets increased from about9
percent in mid-1990s to about 14 percent in 2004.
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3.2) Industry scenario of Indian Banking Industry:
The growth in the Indian Banking Industry has been more qualitative than quantitative and
it is expected to remain the same in the coming years. Based on the projections made in
the" India Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the
report forecasts that the pace of expansion in the balance-sheets of banks is likely to
decelerate.
The Indian Banking industry, which is governed by the Banking Regulation Act of India,
1949 can be broadly classified into two major categories, nonscheduled banks and
scheduled banks. Scheduled banks comprise commercial banks and the co-operative banks.
In terms of ownership, commercial banks can be further grouped into nationalized banks,
the State Bank of India and its group banks, regional rural banks and private sector banks
(the old/ new domestic and foreign). These banks have over 67,000 branches spread across
the country .The Public Sector Banks (PSBs), which are the base of the Banking sector in
India account for more than 78 per cent of the total banking industry assets. Unfortunately
they are burdened with excessive Non Performing assets (NPAs),massive manpower and
lack of modern technology. On the other hand the Private Sector Banks are making
tremendous progress. They are leaders in Internet banking, mobile banking, phone banking,
ATMs. As far as foreign banks are concerned they are likely to succeed in the Indian
Banking Industry.
In the Indian Banking Industry some of the Private Sector Banks operating are IDBI Bank,
ING Vyasa Bank, SBI Commercial and International Bank Ltd, Bank of Rajasthan Ltd. and
banks from the Public Sector include Punjab National bank, Vijaya Bank, UCO Bank,
Oriental Bank, Allahabad Bank among others. ANZ Grindlays Bank, ABN-AMRO Bank,
American Express Bank Ltd, Citibank are some of the foreign banks operating in the Indian
Banking Industry.
As far as the present scenario is concerned the Banking Industry in India is going through a
transitional phase. The first phase of financial reforms resulted in the nationalization of 14
major banks in 1969 and resulted in a shift from Class banking to Mass banking. This in
turn resulted in a significant growth in the geographical coverage of banks. Every bank had
to earmark a minimum percentage of their loan portfolio to sectors identified as priority
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sectors. The manufacturing sector also grew during the 1970s in protected environs and
the banking sector was a critical source. The next wave of reforms saw the nationalization
of 6 more commercial banks in 1980. Since then the number of scheduled commercial
banks increased four-fold and the number of bank branches increased eight-fold.
After the second phase of financial sector reforms and liberalization of the sector in the
early nineties, the Public Sector Banks (PSB) s found it extremely difficult to compete with
the new private sector banks and the foreign banks .The new private sector banks first made
their appearance after the guidelines permitting them were issued in January 1993. Eight
new private sector banks are presently in operation. These banks due to their late start have
access to state-of-the-art technology, which in turn helps them to save on manpower costs
and provide better services.
3.3)Current Scenario of Indian banking system:

The industry is currently in a transition phase. On the one hand, the public sector banks
(PSBs),which are the mainstay of the Indian Banking system are in the process of shedding
their flab in terms of excessive manpower, excessive non-Performing Assets (NPAs) and
excessive governmental equity, while on the other hand the private sector banks are
consolidating themselves through mergers and acquisitions. PSBs, which currently account
for more than 78 percent of total banking industry assets are saddled with NPAs (a mindboggling Rs 830 billion in 2000), falling revenues from traditional sources, lack of modern
technology and a massive workforce while the new private sector banks are forging ahead
and rewriting the traditional banking business model by way of their sheer innovation and
service.
The PSBs are of course currently working out challenging strategies even as 20 percent of
their massive employee strength has dwindled in the wake of the successful Voluntary
Retirement Schemes (VRS) schemes.
The private players however cannot match the PSBs great reach great size and access to
low cost deposits. Therefore one of the means for them to combat the PSBs has been
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through the merger and acquisition (M& A) route. Over the last two years, the industry has
witnessed several such instances Private sector Banks have pioneered internet banking,
phone banking, anywhere banking, mobile banking, debit cards, Automatic Teller
Machines (ATMs) and combined various other services and integrated them into the
mainstream banking arena, while the PSBs are still grappling with disgruntled employees in
the aftermath of successful VRS schemes.
Meanwhile the economic and corporate sector slowdown has led to an increasing number
of banks focusing on the retail segment. Many of them are also entering the new vistas of
Insurance. Banks with their phenomenal reach and a regular interface with the retail
investor are the best placed to enter into the insurance sector. Banks in India have been
allowed to provide fee-based insurance services without risk participation, invest in an
insurance company for providing infrastructure and services support and set up of a
separate joint venture insurance company with risk participation.
3.4)Challenges Facing by Banking Industry:

The bank marketing is than an approach to market the services profitability. It is a device to
maintain commercial viability. The changing perception of bank marketing has made it a
social process. The significant properties of the holistic concept of management and
marketing has made bank marketing a device to establish a balance between the
commercial and social considerations, often considered to be opposite of each other. A
collaboration of two words banks and marketing thus focuses our attention on the
following:
* Bank marketing is a managerial approach to survive in highly competitive market as well

as reliable service delivery to target customers.
* It is a social process to sub serve social interests.
* It is a fair way of making profits
* It is an art to make possible performance-orientation.
* It is a professionally tested skill to excel competition.
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3.5) Emerging players/Users of Banking Services:
The emerging trends in the level of expectation affect the formulation of marketing mix.
Innovative efforts become essential the moment it finds a change in the level of
expectations. There are two types of customers using the services of banks, such as general
customers and the industrial customers.
3.5.1) General Users:

Persons having an account in the bank and using the banking facilities at the terms and
conditions fixed by a bank are known as general users of the banking services. Generally,
they are the users having small sized and less frequent transactions or availing very limited
services of banks.
3.5.2) Industrial Users:
The industrialists, entrepreneurs having an account in the bank and using creditfacilities
and other services for their numerous operations like establishments and expansion,
mergers, acquisitions etc. of their businesses are known as industrial users. Generally, they
are found a few but large sized customers.
3.6) Challenges to Indian Banking:

The banking industry in India is undergoing a major change due to the advancement in
Indian economy and continuous deregulation. These multiple changes happening in series
has a ripple effect on banking industry which is trying to be organized completely,
regulated sellers of market to completed deregulated customers market.
3.6.1) Deregulation:
This continuous deregulation has given rise to extreme competition with greater autonomy,
operational flexibility, and decontrolled interest rate and liberalized norms and policies for
foreign exchange in banking market. The deregulation of the industry coupled with
decontrol in the interest rates has led to entry of a number of players in the banking
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industry. Thereby reduced corporate credit off which has resulted in large number of
competitors battling for the same pie.
3.6.2) Modified New rules:
As a result, the market place has been redefined with new rules of the game. Banks are
transforming to universal banking, adding new channels with lucrative pricing and freebees
to offer. New channels squeezed spreads, demanding customers better service, marketing
skills heightened competition, defined new rules of the game pressure on efficiency. Need
for new orientation diffused customer loyalty. Bank has led to a series of innovative
product offerings catering to various customer segments, specifically retail credit.
3.6.3.) Efficiency:
Excellent efficiencies are required at banker's end to establish a balance between the
commercial and social considerations Bank need to access low cost funds and
simultaneously improve the efficiency and efficacy. Owing to cutthroat competition in the
industry, banks are facing pricing pressure; have to give thrust on retail assets.
3.6.4) Diffused customer loyalty:
Attractive offers by MNC and other nationalized banks, customers have become more
demanding and the loyalties are diffused. Value added offerings bound customers to change
their preferences and perspective. These are multiple choices; the wallet share is reduced
per bank with demand on flexibility and customization. Given the relatively low switching
costs; customer retention calls for customized service and hassle free, flawless service
delivery.
3.6.5) misaligned mindset: These changes are creating challenges, as employees are made
to adapt to changing conditions. The employees are resisting to change and the seller
market mindset is yet to be changed. These problems coupled with fear of uncertainty and
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control orientation. Moreover banking industry is accepting the latest technology but
utilization is far below from satisfactory level.
3.6.6) Competency gap:

The competency gap needs to be addressed simultaneously otherwise there will be missed
opportunities. Placing the right skill at the right place will determine success. The focus of
people will be doing work but not providing solutions, on escalating problems rather than
solving them and on disposing customers instead of using the opportunity to cross sell.
3.7)Strategic options to cope with the challenges:

Dominant players in the industry have embarked on a series of strategic and tactical
initiatives to sustain leadership. The major initiatives incorporate:
a) Focus on ensuring reliable service delivery through Investing on and implementing right
technology..
b) Leveraging the branch networks and sales structure to mobilize low cost current and
savings deposits.
c) Making aggressive forays in the retail advances segments of home and personal loans.
d) Implementing initiatives involving people, process and technology to reduce the fixed
costs and the cost per transaction.
e) Focusing on fee based income to compensate foe squeezed spread.
f) Innovating products to capture customer 'mind share' to begin with and later the wallet
share.
g) Improving the asset quality as Basel II norms.
The banking environment of today is rapidly changing and the rules of yesterday no longer
applicable. The corporate and the legal barriers that separate the various banking,
investment and insurance sectors are less well defined and the cross-over are increasing. As
a consequence the marketing function is also changing to better support the bank in this
dynamic market environment. The key marketing challenge today is to support and advice
on the focus positioning and marketing resources needed to deliver performance on the
banking products and services. Marketing, as an investment advisor, is about defining 4Ps
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and implementing key strategic initiatives to Market segments, increasingly redefined,
relevant micro-segments to survive and flourish in the highly competitive market
3.8) Technology in Banking

Technology will bring fundamental shift in the functioning of banks. It would not
only help them bring improvements in their internal functioning but also enable
them to provide better customer service. Technology will break all boundaries and
encourage cross border banking business.
Banks would have to undertake extensive Business Process Re- Engineering and tackle
issues like
a) How best to deliver products and services to customers
b) designing an appropriate organizational model to fully capture the benefits of
technology and business process changes brought about.
c) How to exploit technology for deriving economies of scale and how to create cost
efficiencies, and
d) How to create a customer - centric operation model.
Entry of ATMs has changed the profile of front offices in bank branches.
Customers no longer need to visit branches for their day to day banking
transactions like cash deposits, withdrawals, cheque collection, balance enquiry etc.
E-banking and Internet banking have opened new avenues in convenience
banking. Internet banking has also led to reduction in transaction costs for banks
to about a tenth of branch banking.
Technology solutions would make flow of information much faster, more accurate
and enable quicker analysis of data received. This would make the decision making
process faster and more efficient. For the Banks, this would also enable
development of appraisal and monitoring tools which would make credit
management much more effective. The result would be a definite reduction in
transaction costs, the benefits of which would be shared between banks and
customers.
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While application of technology would help banks reduce their operating costs in
the long run, the initial investments would be sizeable. IT spent by banking and
financial services industry in USA is approximately 7%of the revenue as against
around 1% by Indian Banks. With greater use of technology solutions, we expect
IT spending of Indian banking system to go up significantly.
One area where the banking system can reduce the investment costs in technology
applications is by sharing of facilities. We are already seeing banks coming
together to share ATM Networks. Similarly, in the coming years, we expect to see
banks and FIs coming together to share facilities in the area of payment and
settlement, back office processing, data-warehousing, etc. While dealing with
technology, banks will have to deal with attendant operational risks. This would be
a critical area the Bank management will have to deal with in future.
The present Payment and Settlement systems such as Structured Financial

Messaging System (SFMS),Centralized Funds Management System(CFMS),
Centralized Funds Transfer System (CFTS) and Real Time Gross Settlement
System (RTGS) will undergo further fine-tuning to meet international standards.
Needless to add, necessary security checks and controls will have to be in place. In
this regard, Institutions such as IDRBT will have a greater role to play.
3.8) Rural and Social Banking Issues:

Since the second half of 1960s, commercial banks have been playing an important
role in the socio-economic transformation of rural India. Besides actively
implementing Government sponsored lending schemes ,Banks have been providing
direct and indirect finance to support economic activities. Mandatory lending to the
priority sectors has been an important feature of Indian banking. The Narasimham
committee had recommended for doing away with the present system of directed
lending to priority sectors in line with liberalization in the financial system. There
commendations were, however, not accepted by the Government. In the prevailing
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political climate in the country any drastic change in the policy in this regard appears
unlikely.
The banking system is expected to reorient its approach to rural lending. Going
Rural could be the new market mantra. Rural market comprises74% of the
population, 41% of Middle class and 58% of disposable income. Consumer growth is
taking place at a fast pace in 17113 villages with a population of more than 5000. Of
these, 9989 villages are in 7States, namely Andhra Pradesh, Bihar, Kerala,
Maharashtra, Tamilnadu ,Uttar Pradesh and West Bengal. Banks approach to the
rural lending will be guided mainly by commercial considerations in future.
Commercial Banks, Co-operatives and Regional Rural Banks are the three major
segments of rural financial sector in India. Rural financial system, in future has a
challenging task of facing the drastic changes taking place in the banking sector,
especially in the wake of economic liberalization. There is an urgent need for rural
financial system to enlarge their role functions and range of services offered so as to
emerge "one stop destination for all types of credit requirements of people in
rural/semi-urban centres.
Barring commercial banks, the other rural financial institutions have a weak structural
base and the issue of their strengthening requires to be taken up on priority. Cooperatives will have to be made viable by infusion of capital. Bringing all cooperative
institutions under the regulatory control of RBI would help in better control and
supervision over the functioning of these institutions. Similarly Regional Rural banks
(RRBs) as a group need to be made structurally stronger. It would be desirable if
NABARD takes the initiative to consolidate all the RRBs into a strong rural
development entity.
Small Scale Industries have, over the last five decades, emerged as a major
contributor to the economy, both in terms of employment generation and share in
manufactured output and exports. SSIs account for 95% of the industrial units and
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contribute about 40% of the value addition in the manufacturing sector. There are
more than 32 lac units spread all over the country producing over 7500 items and
providing employment to more than 178 lac persons. The employment generation
potential and favourable capital-output ratio would make small scale sector remain
important for policy planners.
Removal of quantitative restrictions on a large number of items under the WTO and
opening up of Indian market to greater international competition have thrown both
challenges and opportunities for the SSI sector. Low capital base and weak
management structure make these units vulnerable to external shocks, more easily.
However the units which can adopt to the changing environment and show
imagination in their business strategy will thrive in the new environment.
Instead of following the narrow definition of SSI, based on the investment in fixed
assets, there is a move to look at Small and Medium Enterprises (SME) as a group for
policy thrust and encouragement. For SMEs, banks should explore the option of Ebanking channels to develop web-based relationship banking models, which are
customer-driven and more cost-effective. Government is already considering
legislation for the development of SME sector to facilitate its orderly growth.
In the next ten years, SME sector will emerge more competitive and efficient and
knowledge-based industries are likely to acquire greater prominence. SMEs will be
dominating in industry segments such as Pharmaceuticals, Information Technology
and Biotechnology. With SME sector emerging as a vibrant sector of the Indian
economy, flow of credit to this sector would go up significantly. Banks will have to
sharpen their skills for meeting the financial needs of this segment. Some of the
Banks may emerge as niche players in handling SME finance.
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MAJOR BANKS IN INDIA:
Nationalized Banks
Private Sector Banks
Indian Overseas Bank
Axis Bank
Indian Bank
HDFC Bank
State Bank Of Hyderabad
Yes Bank
Corporation Bank
ICICI Bank
Andhra Bank
Centurion Bank Punjab
Bank Of India
Kotak Mahindra Bank
Bank Of Baroda
Indusind Bank
Canara Bank
KarurVysya Bank
Oriental Bank Of
Commerce
Union Bank Of India
Federal Bank
Vijaya Bank
Tamilnadu Mercantile Bank
Allahabad Bank
Bank Of Rajasthan
State Bank Of Mysore
South Indian Bank
Punjab & Sind Bank
Jammu & Kashmir Bank
Syndicate Bank
ING Vysya Bank
State Bank Of Travancore
Karnataka Bank
State Bank Of Bikaner &

Jaipur
Punjab National Bank
Development Credit Bank
IDBI Bank
Catholic Syrian Bank
Bank Of Maharashtra
Foreign Banks
State Bank Of Patiala
Bank Of America
State Bank Of Indore
HSBC
Dena Bank
Standard Chartered Bank
United Bank Of India
Citibank
Central Bank Of India
Deutsche Bank
State Bank Of India
Bank Of Nova Scotia
State Bank Of Saurashtra
ABN Amro Bank
UCO Bank
BNP Paribas
City Union Bank
Lakshmi Vilas Bank
American Express Bank
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1) Axis bank:
Type
Industry
Founded
Headquarters
Key people
Private sector bank

Banking, Financial services
1994 (As UTI Bank)
Mumbai, Maharashtra, India
Adarsh
Kishore(chairman),Shikhasharma(MD
&
CEO)
Products
Credit cards, consumer banking, corporate banking,

finance and insurance, investment banking, mortgage
loans, private banking, private equity, wealth
management
Revenue
274.82 billion (US$5 billion) (2012)
Net income
42.19 billion (US$767.86 million) (2012)
Logo
Axis Bank Limited is an Indian financial services firm headquartered in Mumbai,

Maharashtra. It had begun operations in 1994, after the Government of India allowed new
private banks to be established. The Bank was promoted jointly by the Administrator of the
Specified Undertaking of the Unit Trust of India (UTI-I), Life Insurance Corporation of
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India (LIC), General Insurance Corporation Ltd., National Insurance Company Ltd., The
New India Assurance Company, The Oriental Insurance Corporation and United India
Insurance Company UTI-I holds a special position in the Indian capital markets and has
promoted many leading financial institutions in the country.
As on the year ended 31 March 2012, Axis Bank had operating revenue of 134.37 billion
and a net profit of 42.42 billion.
Axis Bank (erstwhile UTI Bank) opened its registered office in Ahmedabad and corporate
office in Mumbai in December 1993. The first branch was inaugurated in April 1994 in
Ahmedabad by Dr. Manmohan Singh, then the Honorable Finance Minister. The Bank, as
on 31 March 2012, is capitalized to the extent of Rest. 4.132 billion with the public
holding (other than promoters and GDRs) at 54.08%.
Network: The Bank's Registered Office is situated in Ahmedabad and its Central Office is
located at Mumbai. The Bank has an extensive network of more than 1600 branches
(including 169 Service Branches/CPCs as on 31 March 2012). The Bank has a network of
over 10000 ATMs (as on 31 March 2012.Axis Bank operates one of the worlds highest
ATM sites at Thegu, Sikkim (at a height of 13,200 feet above sea level) and has the largest
ATM network among private banks in
International Branches
Singapore
Hong Kong
Dubai
Shanghai
Abu Dhabi
Colombo
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2) HDFC bank:
Type
Industry
Founded
Headquarters
Key people
Products
Private sector bank

August 1994
Mumbai, Maharashtra; India
Mr Aditya Puri (MD)

finance
and
insurance,
investment
banking,
mortgage loans, private banking, private equity,

wealth management
Revenue
US$ 6.487 billion (2012)
Net income
US$ 1.451 billion (2012)
Logo
HDFC Bank Limited is an Indian financial services company based in Mumbai,

Maharashtra that was incorporated in August 1994. HDFC Bank is the fifth or sixth largest
bank in India by assets and the first largest bank by market capitalization as of November 1,
2012. The bank was promoted by the Housing Development Finance Corporation, a
premier housing finance company (set up in 1977) of India. As on December 2012, HDFC
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Bank has 2,776 branches and 10,490 ATMs, in 1,399 cities in India, and all branches of the
bank are linked on an online real-time basis.
HDFC Bank was incorporated in 1994 by Housing Development Finance Corporation
Limited (HDFC), India's largest housing finance company. It was among the first
companies to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set
up a bank in the private sector. The Bank started operations as a scheduled commercial
bank in January 1995 under the RBI's liberalization policies.
Times Bank Limited (owned by Bennett, Coleman & Co The Times Group) was merged
with HDFC Bank Ltd., in 2000. This was the first merger of two private banks in India.
Business focus
HDFC Bank deals with three key business segments. - Wholesale Banking Services, Retail
Banking Services and Treasury. It has entered the banking consortia of over 50 corporates
for providing working capital finance, trade services, corporate finance, and merchant
banking. It is also providing sophisticated product structures in areas of foreign exchange
and derivatives, money markets and debt trading And Equity research.
Distribution network
HDFC Bank is headquartered in Mumbai and as of March 31, 2012, the Banks distribution
network was at 2,544 branches and 8,913 ATMs in 1,399 cities as against 1,986 branches
and 10000 ATMs in 996 cities as of October,2012.
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3) ICICI bank:
Type
Industry
Founded
Headquarters
Key people
Products
Private sector bank

1995
Mumbai, Maharashtra; India

Chanda Kochhar (MD & CEO)
Credit
cards,
consumer banking,
corporate
banking, finance and insurance, investment

banking, mortgage loans, private banking, private
equity, wealth management
Revenue
US$ 13.52 billion (2012)
Net income
US$ 98.99 billion (2012)
Logo
ICICI Bank Limited is an Indian diversified financial services company headquartered in

Mumbai, Maharashtra. It is the second largest bank in India by assets and third largest
by market capitalization. It offers a wide range of banking products and financial services
to corporate and retail customers through a variety of delivery channels and through its
specialized subsidiaries in the areas of investment banking, life and non-life insurance,
venture capital and asset management. The Bank has a network of 2,883 branches and
10021 ATM's in India, and has a presence in 19 countries, including India.
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ICICI Bank is one of the Big Four banks of India, along with State Bank of India, Punjab
National Bank and Canara Bank
ICICI Bank was established in 1994 by the Industrial Credit and Investment Corporation of
India, an Indian financial institution, as a wholly owned subsidiary. The parent company
was formed in 1955 as a joint-venture of the World Bank, India's public-sector banks and
public-sector insurance companies to provide project financing to Indian industry. The bank
was initially known as the Industrial Credit and Investment Corporation of India Bank,
before it changed its name to the abbreviated ICICI Bank. The parent company was later
merged into ICICI Bank. ICICI Bank launched internet banking operations in 1998.
In the 1990s, ICICI transformed its business from a development financial institution
offering only project finance to a diversified financial services group, offering a wide
variety of products and services, both directly and through a number of subsidiaries and
affiliates like ICICI Bank.
In 2000, ICICI Bank became the first Indian bank to list on the New York Stock Exchange
with its five million American depository shares issue generating a demand book 13 times
the offer size.
ICICI Bank has contributed to set up different institutions which include the following:
National Stock Exchange
Credit Rating Information Services of India Limited
National Commodities and Derivatives Exchange Limited
Financial Innovation Network and Operations Pvt Ltd.
Entrepreneurship Development Institute of India
North Eastern Development Finance Corporation
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4) Jammu and Kashmir bank :
Type
Industry
Founded
Headquarters
Key people
Products
Private sector bank

October 1, 1938
Srinagar, Jammu and Kashmir, India

Mushtaq Ahmad (Chairman & CEO)
Credit
banking,
cards,
consumer
finance
and
banking,
insurance,
corporate
investment
banking, mortgage loans, private banking,

Revenue
5,169.70 crore (US$940.89 million)(2011-12)
Net income
803.25 crore (US$146.19 million)(2011-12)
Logo
The Jammu & Kashmir Bank was founded on October 1, 1938 under letters patent issued
by the Maharaja of Jammu and Kashmir, Hari Singh. The Maharaja invited eminent
Kashmiri investors to become founding directors and shareholders of the bank, the most
notable of which were Abdul Aziz Mantoo, Pesten Gee and the Bhaghat Family, all of
whom acquired major shareholdings.
The Bank commenced business on July 4, 1939 and was considered the first of its nature
and composition as a State owned bank in the country. The Bank was established as a semi-
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State Bank with participation in capital by State and the public under the control of State
Government.
The bank had to face serious problems at the time of independence when out of its total of
ten branches two branches of Muzaffarabad, Rawalakot and Mirpur fell to the other side of
the line of control (now Pakistan-administered Kashmir) along with cash and other assets.
Following the extension of Central laws to the state of Jammu & Kashmir, the bank was
defined as a government company as per the provisions of Indian companies act 1956.
Mushtaq Ahmed is the new Chairman and CEO of Jammu & Kashmir Bank.
Dr Haseeb Drabu was chairman and chief executive of the bank for the period 2005 to
2010.
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4) State bank of India :
Type
Industry
Founded
Headquarters
Key people
Products
Public sector bank

1 July 1955
Mumbai, Maharashtra, India

Pratip Chaudhuri (Chairman)

finance
mortgage
and
insurance,
loans,
investment
private
banking,
banking,
wealth
management.
Revenue
US$ 36.950 billion (2012)
Net income
US$ 3.202 billion (2012)
Logo
State Bank of India (SBI) is a banking and financial services company based in India. It is
a state-owned corporation with its headquarters in Mumbai, Maharashtra. As of March
2012.The bank traces its ancestry to British India, through the Imperial Bank of India, to
the founding in 1806 of the Bank of Calcutta, making it the oldest commercial bank in
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the India Subcontinent. Bank of Madras merged into the other two presidency banks
Bank of Calcutta and Bank of Bombayto form the Imperial Bank of India, which in turn
became the State Bank of India. SBI provides a range of banking products through its
network of branches in India and overseas, including products aimed at non-resident
Indians(NRIs). SBI has 14 regional hubs and 57 Zonal Offices that are located at important
cities throughout the country.
The State Bank of India was named the 29th most reputed company in the world according
to Forbes 2009 rankings and was the only bank featured in the "top 10 brands of India" list
in an annual survey conducted by Brand Finance and The Economic Times in 2010.
Associate banks
SBI has five associate banks; all use the State Bank of India logo, which is a blue circle,
and all use the "State Bank of" name, followed by the regional headquarters' name:
State Bank of Bikaner & Jaipur
State Bank of Hyderabad
State Bank of Mysore
State Bank of Patiala
State Bank of Travancore
Earlier SBI had seven associate banks, all of which had belonged to princely states until the
government nationalised them between October 1959 and May 1960.
SBI has become the first bank to install an ATM at Drass in the Jammu & Kashmir Kargil
region. This was the Bank's 27,032nd ATM on 27 July 2012.
Major competitor
Some of the major competitors for SBI in the banking sector are ICICI Bank, HDFC
Bank, Axis Bank, Punjab National Bank and Bank of Baroda. However in terms of average
market share, SBI is by far the largest player in the market.
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6) Canara bank:
Type
Industry
Public sector bank

1969
Founded
Headquarters
Key people
Bangalore, Karnataka, India

Rajiv Kishore Dubey
Investment
Products
banking,
consumer
banking,
commercial banking , mortgage loans, private

banking,etc.
339.2 billion (2012)
Revenue
Net income
33.41 billion (2012)
Logo
..
Canara Bank is an Indian bank headquartered in Bangalore, Karnataka. It was established

in 1906, making it one of the oldest banks in the country. As of December 2011, the bank
had a network of 3564 branches and 4000 ATMs spread across India. The bank also has
offices abroad in London, Hong Kong, Moscow, Shanghai, Doha, and Dubai. Widely
known for customer centricity, Canara Bank was founded in 1906 by Shri Ammembal
Subba Rao Pai, a great visionary and philanthropist, at Mangalore, then a small port in
Karnataka. The bank was nationalisated in 1969. In 2006, the bank completed a century of
operation in the Indian banking industry.
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7) Federal bank:
Type
Industry
Public sector bank

Banking and allied industries
Kochi, 1945
Founded
Federal Towers,
Aluva, Kochi - 683 101,
Headquarters
Key people
Products
Kerala, India
Shyam Srinivasan (CEO)
Loans, Savings, etc.
Logo
.
In the year 1931, Travancore Federal Bank was inaugurated at Pattamukkil Varattisseril
at Nedumpuram, near Thiruvalla, Kerala. After it had functioned for nearly 10 years, the
bank's day to day transaction had to be stopped due to the ill-health of the Manager.
Understanding this situation, a lawyer from Perumbavoor named Sri K.P.Hormis and his
acquaintances joined together, bought the bank and took over the management. In 1945,
they moved the bank's registered office to Aluva and Hormis became the Managing
Director. In 1947,the bank's name was shortened from Travancore Federal Bank to Federal
Bank.
In 1970, the bank became a Scheduled Commercial Bank. Recently, it opened a
representative office in Dubai.
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8) Punjab national bank:
Type
Industry
Founded
Headquarters
Key people
Public sector bank

1895
New Delhi, India
K R Kamath (Chairman & MD)
Investment
Products
banking,
credit
cards,
consumer
banking, commercial banking, mortgage loans,

private banking etc.
Revenue
Net income
Logo
416.86 billion (2012)

416.86 billion (2012)
..
Punjab National Bank was registered on 19 May 1894 under the Indian Companies Act
with its office in Anarkali Bazaar Lahore. The founding board was drawn from different
parts of India professing different faiths and a varied back-ground with, however, the
common objective of providing country with a truly national bank which would further the
economic interest of the country. PNB has the distinction of being the first Indian bank to
have been started solely with Indian capital that has survived to the present. (The first
entirely Indian bank, Commercial Bank, was established in 1881 in Faizabad, but failed in
1958).
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9) Andhra bank:
Type
Industry
Founded
Headquarters
Key people
Public sector bank

20 November 1923
Hyderabad
B A Prabhakar
Investment
Products
banking,
credit
cards,
consumer

Revenue
Net income
121.99 billion (2012)

13.45 billion (2012)
Logo
..
Andhra Bank is a medium-sized public sector bank (PSB), with a network of 1,938
branches. The bank now operates in 25 states and three Union Territories .The bank has
done a total business of Rs. 1,905.35 billion for the year ended 31 March 2012. The bank
has done a total business of Rs. 1,905.35 billion for the year ended 31 March 2012. .
Andhra Bank has introduced Smart Card Scheme Pilot project in Warangal District and the
same will be extended to other Lead Districts in due course. Bank has opened 211,000
accounts under "No-frill accounts" category till 30 June 2008.Andhra Bank has been
ranked No.1 in terms of number of Life Insurance Policies mobilised amongst all the
agency banks dealing with the Life Insurance Corporation of India Andhra Bank was
ranked 532nd for the year ended 31 March 2007 amongst Top 1000 Banks in the world.
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10) Indian bank:
Type
Industry
Founded
Headquarters
Key people
Public sector bank

20 November 1923
Hyderabad
B A Prabhakar
Investment
Products
banking,
credit
cards,
consumer

Revenue
Net income
121.99 billion (2012)

13.45 billion (2012)
Logo
Indian Bank is an Indian state-owned financial services company headquartered

in Chennai, India. It has 22,000 employees, 2089 branches and is one of the big public
sector banks of India. It has overseas branches in Colombo, Jaffna, Sri Lanka, Singapore,
and 229 correspondent banks in 69 countries. Since 1969 the Government of India has
owned the bank, which celebrated its centenary in 2007. It is the only Indian bank other
than State Bank of India to feature in the List of Fortune 500 Companies in the World.
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Secondary Data Analysis and Interpretation
4.1 TABLE SHOWING THE PERFORMANCE ANALYSIS OF HDFC BANK

SHARE
FOR A PERIOD OF SIX MONTH
(JULY 2012 TO 31ST DECEMBER 2012)
RETURN
BETA()
18.28%
ALPHA()
0.0566%
VARIANCE()
2.4219%
STANDARD DEVIATION()
1.5562%
CORRELATION(r)
-0.0068
0.0055
Analysis:
The actual return for the period of six months is 18.28 percent. Beta describes the return
of the individual security in response to unit change in the return of the BANKEX index.
Beta indicates that a 1 unit of BANKEX return would result in 0.005 units of HDFC Bank
stock return. Alpha indicates that the stock return is independent of the market return. In the
above case, alpha 0.0566percent which indicates that the stock has earned a positive return.
The variance is a somewhat abstract measure of the variability in a set of data. The
variance is calculated to be 2.4219percent.The correlation coefficient can vary between -0.1
and +0.1.The Correlation of the above stock is -0.0068 means the stock and market returns
are relatively negative correlated.
Inference:
From the analysis it is known that the share has earned a positive return with less beta
value, which shows the investment earned a positive return in the presence of low risk
factor.
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4.2 TABLE SHOWING THE PERFORMANCE ANALYSIS OF AXIS BANK
SHARE
RETURN
31.82%
BETA()
1.3407
ALPHA()
0.0371%
VARIANCE()
7.0372%
2.6527%
CORRELATION(r)
-0.3289
Analysis:
The actual return for the period of six months is 31.82 percent. Beta indicates that a 1 unit
of BANKEX return would result in 1.3407 units of Axis Bank stock return. Alpha indicates
that the stock return is independent of the market return. In the above case alpha 0.0371
percent which indicates that the stock earned a positive return.
variance is calculated to be 7.0372 percent. The correlation coefficient can vary between 0.1 and +0.1.The Correlation of the above stock is -0.3289 means the stock and market
returns are relatively negative correlated.
Inference: From the analysis it is known that the share has earned a positive return with
little high beta value, which shows the investment earned a positive return in the presence
of high risk factor.
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4.3 TABLE SHOWING THE PERFORMANCE ANALYSIS OF ICICI BANK
SHARE
RETURN
27.22%
BETA()
1.2630
ALPHA()
0.0158%
VARIANCE()
5.2302%
2.2869%
CORRELATION(r)
-0.4613
Analysis:
The actual return for the period of six months is 27.22 percent. Beta indicates that a 1 unit
of BANKEX return would result in 1.2630units of ICICI stock return. Alpha indicates that
the stock return is independent of the market return. In the above case alpha 0.0158 percent
which indicates that the stock earned a positive return.
variance is calculated to be5.2302 percent. The correlation coefficient can vary between 0.1 and +0.1.The Correlation of the above stock is -0.4613 means the stock and market
Inference:
From the analysis it is known that the share has earned a positive return with little high beta
value, which shows the investment earned return with high risk.
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4.4 TABLE SHOWING THE PERFORMANCE ANALYSIS OF J&K BANK SHARE
RETURN
29.57%
BETA()
0.4070
ALPHA()
0.17033%
VARIANCE()
6.6028%
2.5696%
CORRELATION(r)
-0.1085
Analysis:
The actual return for the period of six months is 29.57percent. Beta indicates that a 1 unit of
BANKEX return would result in0.4070 units of J&K Bank stock return. Alpha indicates
that the stock return is independent of the market return. In the above case alpha 0.17033
percent which indicates that the stock earned a positive return.
variance is calculated to be6.6028percent. The correlation coefficient can vary between -0.1
and +0.1.The Correlation of the above stock is -0.1085 means the stock and market returns
Inference:
From the analysis it is known that the share has earned a positive return with little less beta
value, which shows the investment earned return with less risk. Therefore ,the market
expected return is greater than the investors expected return.
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4.5TABLE SHOWING THE PERFORMANCE ANALYSIS OF SBI BANK SHARE
RETURN
9.3%
BETA()
1.1485
ALPHA()
-0.0850%
VARIANCE()
0.9539%
0.9766%
CORRELATION(r)
65.7907
Analysis:
The actual return for the period of six months is 9.3percent. Beta describes the return of
the individual security in response to unit change in the return of the BANKEX index. Beta
indicates that a 1 unit of BANKEX return would result in 1.1485 units of SBI stock return.
Alpha indicates that the stock return is independent of the market return. In the above case,
alpha -0.0850 percent which indicates that the stock earned a positive return .
variance is calculated to be 0.9539 percent. The correlation coefficient can vary between 0.1 and +0.1.The Correlation of the above stock is65.7907 means the stock and market
Inference:
From the analysis it is known that the share has earned a positive return with little high
beta value, which shows the investment earned a positive return in the presence of high risk
factor.
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4.6 TABLE SHOWING THE PERFORMANCE ANALYSIS OF CANARA BANK
SHARE
RETURN
25.89%
BETA()
1.2081
ALPHA()
0.0268%
VARIANCE()
5.3619%
2.3155%
CORRELATION(r)
-0.4264
Analysis:
Beta indicates that a 1 unit of BANKEX return would result in 1.2081 units of CANARA
Bank stock return. Alpha indicates that the stock return is independent of the market return.
In the above case alpha 0.0268percent which indicates that the stock earned a positive
return.
variance is calculated to be 5.3619 percent .The correlation coefficient can vary between 0.1 and +0.1.The Correlation of the above stock is -0.4264means the stock and market
Inference:
From the analysis it is known that the share has earned a positive return with little high
factor.
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4.7 TABLE SHOWING THE PERFORMANCE ANALYSIS OF FEDERAL BANK
SHARE
RETURN
18.89%
BETA()
0.1170
ALPHA()
0.1347%
VARIANCE()
2.8544%
1.6895%
CORRELATION(r)
-0.1077
Analysis:
Beta indicates that a 1 unit of BANKEX return would result in 0.1170units of FEDERAL
In the above case alpha 0.1347 percent which indicates that the stock earned a positive
return.
variance is calculated to be 2.8544 percent. The correlation coefficient can vary between 0.1 and +0.1.The Correlation of the above stock is -0.1077means the stock and market
Inference:
factor.
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4.8TABLE SHOWING THE PERFORMANCE ANALYSIS OF PUNJAB BANK
SHARE
RETURN
15.87%
BETA()
1.1283
ALPHA()
-0.0420%
VARIANCE()
2.0147%
1.4194%
CORRELATION(r)
-2.0246
Analysis:
Beta indicates that a 1 unit of BANKEX return would result in 1.1283 units of FEDERAL
In the above case ,alpha -0.0420 percent which indicates that the stock earned a positive
return.
variance is calculated to be 2.0147 percent. The correlation coefficient can vary between 0.1 and +0.1.The Correlation of the above stock is -2.0246 means the stock and market
Inference:
From the analysis it is known that the share has earned a positive return with little more
factor.
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4.9TABLE SHOWING THE PERFORMANCE ANALYSIS OF ANDHRA BANK
SHARE
RETURN
1.74%
BETA()
1.0197
ALPHA()
-0.1396%
VARIANCE()
0.0242%
0.1566%
CORRELATION(r)
8.4095
Analysis:
The actual return for the period of six months is 1.74 percent. Beta describes the return of
indicates that a 1 unit of BANKEX return would result in 1.0197units of ANDHRA Bank
above case ,alpha -0.1396percent which indicates that the stock earned a positive return.
variance is calculated to be 0.0242 percent .The correlation coefficient can vary between 0.1 and +0.1.The Correlation of the above stock is8.4095 means the stock and market
Inference:
From the analysis it is known that the share has earned a positive return with a little more
factor.
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4.10 TABLE SHOWING THE PERFORMANCE ANALYSIS OF INDIAN BANK
SHARE
RETURN
12.62%
BETA()
0.9203
ALPHA()
-0.0369%
VARIANCE()
1.2740%
1.1287
CORRELATION(r)
-6.6233
Analysis:
The actual return for the period of six months is 12.62percent. Beta describes the return of
indicates that a 1 unit of BANKEX return would result in 0.9203 units of INDIAN Bank
above case ,alpha -0.0369percent which indicates that the stock earned a positive return.
variance is calculated to be 1.2740percent.The correlation coefficient can vary between -0.1
and +0.1.The Correlation of the above stock is-6.6233 means the stock and market returns
Inference:
factor.
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Descriptive statistics:
BANKS
Standard
deviation
Skewness
Kurtosis
Range
0.14
0.99
0.64
0.82
5.49
AXIS
0.23
1.81
0.83
2.72
12.60
J&K
0.23
2.15
1.31
6.12
16.66
ICICI
0.20
1.55
0.88
1.63
8.94
SBI
0.08
1.78
-0.03
1.76
11.23
CANARA
0.20
3.62
-0.05
22.90
44.66
FEDERAL 0.15
1.81
0.88
3.74
13.56
PUNJAB
0.12
2.15
1.49
11.14
20.10
ANDHRA
0.01
1.87
0.24
1.57
11.47
INDIAN
0.10
1.93
0.34
1.10
11.57
HDFC
Mean
The above table shows that, average return of the equity ranges between 0.01% to
0.23%. J&K and AXIS shows the highest average return of 0.23% and the minimum
average return is for ANDHRA bank has the lowest average of 0.01%. Standard deviation
of return is highest in CANARA bank with 3.62% and lowest in HDFC with 0.99%.
CANARA bank has the highest range of 44.66% which indicates it has more dispersion
and HDFC has the lowest range of 5.49 with lower dispersion.
The skewness of all equity has got positive sign except SBI and CANARA bank i.e
positively skewed which indicates values are lying above the mean. CANARA bank and
PUNJAB bank has the highest kurtosis of 22.90 and 11.14 respectively, which exhibit
high peakedness
City college
Page 65

HYPOTHESIS:
H0:there is no significant relation between the return of banking and non-banking equity.
H1: there is a significant relation between the return of banking and non-banking equity.
T-test assuming unequal variance
Mean
Variance
Observations
Hypothesized
Mean Difference
Df
t Stat
P(T<=t) one-tail
t Critical one-tail
P(T<=t) two-tail
t Critical two-tail
Mean
Variance
Observations
Hypothesized
Mean Difference
Df
t Stat
P(T<=t) one-tail
t Critical one-tail
P(T<=t) two-tail
t Critical two-tail
City college
J&K
0.23
4.67
123.00
0.00
122.00
-1.24
0.11
1.66
0.22
1.98
SBI
0.09
3.22
123.00
0.00
228.00
-0.14
0.44
1.65
0.89
1.97
INFOSYS
13.10
13195.76
123.00
Mean
Variance
Observations
Hypothesized
Mean Difference
Df
t Stat
P(T<=t) one-tail
t Critical one-tail
P(T<=t) two-tail
t Critical two-tail
DLF
0.13 Mean
5.50 Variance
123.00 Observations
Hypothesized
Mean Difference
Df
t Stat
P(T<=t) one-tail
t Critical one-tail
P(T<=t) two-tail
t Critical two-tail
J&K
0.23
4.67
123.00
DLF
0.13
5.50
123.00
0.00
242.00
0.37
0.35
1.65
0.71
1.97
SBI
INFOSYS
0.09
13.10
3.22 13195.76
123.00
123.00
0.00
122.00
-1.26
0.11
1.66
0.21
1.98
Page 66
Mean
Variance
Observations
Hypothesized
Mean Difference
Df
t Stat
P(T<=t) one-tail
t Critical one-tail
P(T<=t) two-tail
t Critical two-tail
PUNJAB
BANK
0.07
3.79
123.00
0.00
122.00
-0.90
0.18
1.66
0.37
1.98
RELIANCE
6.74 Mean
6744.35 Variance
123.00 Observations
Hypothesized
Mean Difference
Df
t Stat
P(T<=t) one-tail
t Critical one-tail
P(T<=t) two-tail
t Critical two-tail
PUNJAB
BANK
INFOSYS
0.07
13.10
3.79 13195.76
123.00
123.00
0.00
122.00
-1.26
0.11
1.66
0.21
1.98
In all samples calculated value(t Stat) is less than the tabulated value(t critical two tail).
Hence accept the null hypothesis. Thus, there is no significant relation between the return
of banking and non-banking equity.
City college
Page 67

Regression:
SUMMARY OUTPUT
Regression Statistics of sbi
Multiple R
0.836754
R Square
0.700157
Adjusted R
Square
0.697699
Standard Error
87.59434
Observations
124
Observation
actual 1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
City college
Predicted
sbi
2012.564
2023.486
2032.551
2050.97
2054.243
2040.443
2068.515
2062.805
2045.607
2041.811
2036.336
2034.727
2042.088
2044.134
2020.722
1985.18
1988.01
1982.049
1952.43
1959.366
2005.924
2000.978
2007.14
2000.727
1989.651
2014.14
2035.672
2025.839
Residuals
167.0356
160.4641
191.6989
181.2302
163.7574
166.0571
153.685
153.1948
171.2435
137.4885
158.1143
164.123
143.8624
113.6156
13.82827
107.3705
106.7903
88.60077
64.72003
-18.1658
25.57589
4.221938
25.56039
13.92254
15.89863
4.05999
23.62758
35.26115
actual
2179.6
2183.95
2224.25
2232.2
2218
2206.5
2222.2
2216
2216.85
2179.3
2194.45
2198.85
2185.95
2157.75
2034.55
2092.55
2094.8
2070.65
2017.15
1941.2
2031.5
2005.2
2032.7
2014.65
2005.55
2018.2
2059.3
2061.1
Observati
on
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
Predicted
sbi
2013.157
1997.83
2005.15
2024.526
2010.819
2008.567
2017.561
2018.36
2014.727
1995.249
1962.93
1946.036
1939.508
1949.045
1941.776
1930.606
1939.621
1908.28
1917.156
1956.123
1961.36
1947.984
1958.077
1967.387
1969.951
2042.752
2101.952
2114.989
Residuals
-41.2071
-109.88
-99.3998
-114.276
-117.169
-112.267
-103.911
-105.71
-102.277
-100.449
-116.98
-102.986
-110.208
-108.795
-96.7756
-81.4064
-67.3707
-76.5802
-64.4064
-68.473
-65.9102
-86.6836
-100.727
-108.537
-102.501
-72.2024
-25.8019
35.66075
Actual
1971.95
1887.95
1905.75
1910.25
1893.65
1896.3
1913.65
1912.65
1912.45
1894.8
1845.95
1843.05
1829.3
1840.25
1845
1849.2
1872.25
1831.7
1852.75
1887.65
1895.45
1861.3
1857.35
1858.85
1867.45
1970.55
2076.15
2150.65
Page 68

Observati
on
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
City college
Predicted
sbi
2093.996
2170.08
2179.606
2180.217
2179.261
2178.237
2185.292
2182.078
2180.391
2218.115
2196.306
2172.137
2185.939
2160.086
2185.454
2177.52
2184.809
2168.459
2169.9
2210.694
2193.446
2213.302
2208.529
2215.519
2197.094
2191.579
2145.06
2156.555
2163.627
2188.979
2191.054
2202.876
2224.125
2216.637
2192.529
2211.145
2202.719
2199.507
2167.601
Residuals
27.40444
42.51995
17.44401
16.98325
48.93915
68.26257
52.60815
87.22248
115.1092
126.6851
142.9936
97.7126
94.26139
67.11409
83.29609
73.07987
79.49135
60.49062
44.75002
65.95564
63.20378
28.59756
26.67104
-14.3189
-23.8942
-21.2294
-70.5602
-46.955
-49.4774
-36.4789
-48.0042
-30.0261
-9.77492
26.91318
63.82066
-20.4945
-31.0686
-46.1072
-60.101
actual
2121.4
2212.6
2197.05
2197.2
2228.2
2246.5
2237.9
2269.3
2295.5
2344.8
2339.3
2269.85
2280.2
2227.2
2268.75
2250.6
2264.3
2228.95
2214.65
2276.65
2256.65
2241.9
2235.2
2201.2
2173.2
2170.35
2074.5
2109.6
2114.15
2152.5
2143.05
2172.85
2214.35
2243.55
2256.35
2190.65
2171.65
2153.4
2107.5
Observati
on
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
Predicted
sbi
2165.215
2163.141
2187.945
2198.125
2191.288
2185.326
2221.655
2277.17
2307.318
2298.845
2314.48
2328.511
2353.139
2342.033
2333.559
2340.981
2334.09
2327.479
2354.275
2355.596
2362.881
2370.781
2366.127
2337.225
2337.093
2365.884
2364.25
2364.13
2366.309
2332.502
2335.735
2338.968
2342.201
2345.434
2348.667
2349.601
2351.174
2353.234
2355.132
Residuals
-70.265
-97.2412
-127.245
-98.4752
-101.588
-94.4264
-109.455
-145.12
-137.268
-95.5453
-76.2303
-59.3111
-45.8893
-31.1832
-14.0592
-37.3313
-39.3404
-65.6787
-34.1253
-12.0958
8.518653
-1.88062
13.97281
-3.52523
-8.79317
5.31591
24.55009
13.62014
17.44123
-59.3992
-60.3496
-61.3
-62.2503
-63.2007
-64.1511
-65.231
-66.876
-67.231
-68.1132
Actual
2094.95
2065.9
2060.7
2099.65
2089.7
2090.9
2112.2
2132.05
2170.05
2203.3
2238.25
2269.2
2307.25
2310.85
2319.5
2303.65
2294.75
2261.8
2320.15
2343.5
2371.4
2368.9
2380.1
2333.7
2328.3
2371.2
2388.8
2377.75
2383.75
2273.103
2275.386
2277.668
2279.951
2282.233
2284.516
2285.12
2286.12
2288.91
2292.42
Page 69

Graph showing the actual and predicted values of SBI .
3000
2500
2500
2000
2000
1500
1500
1000
1000
actual
500
Predicted Y
500
0
1
6
11
16
21
26
31
36
41
46
51
56
61
66
71
76
81
86
91
96
101
106
111
116
121
126
131
Interpretation:
From the above graph,it is clear that there is a significant relationship between actual and
predicted values. It is showing an increasing trend in future with a slight difference between
them. So ,in the future banking equity will show a positive trend.
City college
Page 70

5.1) FINDINGS:
From the calculation, AXIS banks is showing the higher return of 31.82% and
ANDHRA bank is showing the less return of 1.74% (refer table no. 4.1 and 4.9).
The AXIS bank is showing the higher risk 1.34% while as the HDFC and
FEDERAL bank are showing the less risk of 0.005% and 0.117% (refer table 4.2
,4.1 and 4.7 )
Standard deviation of return is highest in CANARA bank with 3.62% and lowest
in HDFC with 0.99%.
CANARA bank has the highest range of 44.66% which indicates it has more
dispersion and HDFC has the lowest range of 5.49 with lower dispersion.
The skewness of all equity has got positive sign except SBI and CANARA bank
i.e positively skewed which indicates values are lying above the mean.
CANARA bank and PUNJAB bank has the highest kurtosis of 22.90 and 11.14
respectively, which exhibit high peakedness.
The return of ICICI bank and J&K bank are more than the AXIS, SBI and HDFC
while as the risk is less in HDFC and J&K bank as compared to the ICICI, AXIS
and SBI bank.
From the t-test it has been observed that there is no significant relation between the
return of banking and non-banking equity.
The actual and the predicted values are showing an increasing trend in future with a
slight difference between them. So ,in the future banking equity will show a positive
trend.
City college
Page 71

5.2) CONCLUSION:
This study has dealt with the risk and returns on equity investment in banking sector
reveals that the investors are in a critical dilemma in respect of taking correct decision on
investing in banking sector since the industry is influenced by the market very much but at
the same time some shares are performed extremely well in spite of market influence.
As the study was undertaken by considering secondary data .It is clear that the
investing in banking shares include high risk at the same time it earns less return which is
revealed by the performance analyses on selected banking shares. Fro the analysis , it is
known that most of the banking shares performing a high return with medium range of risk.
On the basis of ten banks taken into consideration and by knowing there past performance
(1 July 2012 -31 December 2012), through alpha, beta, variance, standard deviation, returns
we can say that the investors who wants to take more risk can invest in banks such as SBI,
ICICI,CANARA, PUNJAB,ANDHRA& AXIS banks as these banks beta () is more than 1
and there variance is also more which reflect high risk. And the investor who wants to take
low risk can invest in banks such as J&K,FEDERAL,INDIAN and HDFC as these bank
beta is less than 1 and there variance is also less which reflect low risk.
From the t-test , the analysis banking equity with the three non-banking equity (reliance,
Infosys and DLF) shows that there is no relation between the banking and the non-banking
equity.so, it has been concluded that equitys are performing irrespective of the sectors.
City college
Page 72

5.3)SUGGESTIONS:
The following are the suggestions proposed after carrying the study,
The banking industry is having the highest growth opportunity in the near
future, since banking plays an important role in the economic development.
As we know Indian economy is growing at a constant growth of 9% it is
expected that banking will be highest performer in the upcoming years.
Since equity investment yields high return the investors are suggested to
invest regularly and invest for long term to earn maximum returns with
minimum risk.
Since the Indian economy is growing rapidly there will be a good return in
the banking sector investments, so it is suggested to hold the shares for a
long term of more than 1 year.
To be safer it is suggested to take the advisers help to take the right
decisions and to keep constant watch on the state of economy for further
investment decisions.
Study the performance of the sector and about its related facts before
investing in equity.
Investors should know the basic fund of the investment i.e. High Risk High
Return and Low Risk Low Return. They should be continuously educated
and advised regarding the best opportunities available in investment in the
current recession period.
City college
Page 73

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Risk and return of equity investments in banking sector

1.1 INVESTMENT AN OVERVIEW:

The common usage

Risk and return of equity investments in banking sector

1.1.2) FACTORS INFLUENCING INVESTMENT:

Risk and return of equity investments in banking sector

Money Market or Liquid Funds

Public Provident Fund

Fixed Deposits with Banks

Company Fixed Deposits

Securities (Shares, Bonds)

1.2) EQUITY INVESTMENT AN OVERVIEW:

Risk and return of equity investments in banking sector

When a person buys a share of a company he becomes a shareholder in that company.

1.2.3 The average return on Equities in India

1.2.4 Factors that influence the price of a stock:

Risk and return of equity investments in banking sector

Growth Stock v/s Value Stock

Risk and return of equity investments in banking sector

1.2.5 Way to acquire equity shares

Risk and return of equity investments in banking sector

Market risk or Economic risk

Interest rate risk

Purchase power risk

Risk and return of equity investments in banking sector

Variability in a securitys total returns that is directly associated with overall

Purchasing Power Risk

Interest Rate Risk

Risk and return of equity investments in banking sector

INTEREST RATE RISK:

Risk and return of equity investments in banking sector

lower expected real earnings growth and

Higher required real returns.

Risk and return of equity investments in banking sector

Risk and return of equity investments in banking sector

Risk and return of equity investments in banking sector

INTERNAL RATE OF RETURN:

Risk and return of equity investments in banking sector

Risk and return of equity investments in banking sector

HOLDING PERIOD RETURN:

1.5 Definition of Bombay Stock Exchange (BSE):

Risk and return of equity investments in banking sector

Bankex is based on the free-float methodology of index construction

The base data for BANKEX is ist January 2002

The base value for BANKEX is 1000 points.

The Index is disseminated on a real-time basis through BSE Online Trading

Risk and return of equity investments in banking sector

Stocks Constituting Bankex

UTI Bank Ltd

1.5.4Maintenance of BSE Indices:

Risk and return of equity investments in banking sector

Risk Sensitivity of Bank Stocks in Malaysia: Empirical Evidence Across the

Risk And Return In Banking: Evidence From Banking Stock Returns

Risk and return of equity investments in banking sector

An Analysis Of Commercial Bank Common Stock Returns

Examining the effects of significant economic and political events on bank

Risk and return of equity investments in banking sector

Risk and return of equity investments in banking sector

2.2 TITLE OF THE STUDY:

2.3 STATEMENT OF THE PROBLEM:

Risk and return of equity investments in banking sector

2.4 SCOPE OF THE STUDY: