Economic Value Addition by Public and Private Sector Banks of India

1
FREFACE
This report explains the concept of Economic Value Added that is

gaining popularity in India, found by the Stern & Stewart co. which can
be used by bankers to measure the financial performance of their bank.
The report studies Indian bank’s profile to demonstrate a direct

correlation between the investment in stakeholder relationships and
corporate performance. Many Indian banking seems to have destroyed
shareholder’s wealth over a period of time and only a few have
positively contributed to their wealth. With the help of EVA (Economic
Value Added) which tell what the institution is doing with investor’s hard
earned money, the report examines an appropriate way of evaluating
bank’s performance and also finds out which Indian banks have been
able to create (or destroy) shareholders wealth since 2003-2004 to 2007-
2008.
The overriding message of this report is that banks must always

strive to maximize shareholders value without which their stocks can
never be fancied by the market. This analysis helps us to dig below the
surface numbers to tell us more about the underlying business and
whether there is a prima facie case for using EVA as one of the range of
performance measurement tools.
2
ACKNOLEDGEMENT
On the eve of completion and submission of grand project we

would like to express our deep sense of gratitude to our Management
Institute and Gujarat University for providing us Platform of
management studies.
We are immensely thankful to our guide Mr. S. O. Junare

(Director of MBA Department) for providing us great insight into the
project and for sparing his valuable time with us. Without his co-
operation it was impossible to reach up to this stage. We also thankful
to Faculty members for their moral support during the project.
We humbly express our feelings and heartily thank Altaf Kabra and
Bankim Soni who have helped us in one or the other way during the
completion of this report.
At last, our sincere regards to our parents and friends who have
directly or indirectly helped us in the project. Without their inspiration
and support we would not have been where we are.
3
DECLARATION
We, Jay Mehta and Uday Bhavsar, the students of MBA-II declare
that the project titled "A Study On Economic Value Addition By Public
and Private Sector Banks" has been prepared based on the detailed
literature review and the sources benevolent to the study as shown in
the bibliography, remarks, analysis and interpretation in this project to
prove the concept true as per law.
Moreover, we also declare that the said project is not submitted

anywhere else for the award of M.B.A. degree.
Date: Signature:
4
TABLE OF CONTENTS
Chapter 1 : Grand Project - An Introduction
• 1.1 Executive Summery

• 1.2 Introduction to Project
Chapter 2 : Research Design
• 2.1 Research Objectives

• 2.2 Research Methodology
Chapter 3 : Overview Of Banking
• 3.1 Overview of SBI, BOB, ICICI Bank and HDFC Bank
Chapter 4 : Introduction to Economic Value Added
• 4.1 What is EVA ?

• 4.2 Benefits of EVA for Banks
• 4.3 Limitation of traditional Methods
• 4.4 Performance Measurement
• 4.5 EVA a superior Performancee Measure
Chapter 5 : Data Analysis & Interpretation
• 5.1 Net Operating Profit After Tax

• 5.2 Return On Invested Capital
• 5.3 Cost of Capital
• 5.4 Capital Charge
• 5.5 Economic Value Added
Chapter 6 : Conclusion and Findings
Bibliography
Annexures
5
6
Chapter
1.
Grand Project -
An Introduction
1.1 1.2
Executive Introduction to
Summery Project
7
EXECUTIVE SUMMERY
A bank’s management creates value when it takes decisions that
provide benefits, in excess of costs. These benefits may come to banks in
the near or distant future depending on the strategies involved in
decision making process. The bankers of today’s world therefore must
be sensitive to two fundamental drivers that drive shareholders’ wealth.
First, there must be an unrelenting focus to ensure that funds mobilized
by the banks (whether through depositors, equity or debt issues)
generate returns in excess of the cost of capital (or can reasonably be
expected to do so) with an eye toward returning non productive capital
back to providers of the capital or shareholders. Second, bankers should
constantly seek to invest in technology that increases their reach and
also be open to strategic alliances, mergers & acquisitions and
restructuring.
The purpose of report is to examine an appropriate way of

evaluating bank’s performance and also see which Indian banks have
been able to create (or destroy) shareholders wealth since 2005-2006.
To fulfill the purpose of creating shareholders’ value, firstly NOPAT

has to be calculated, our analysis shows that the public sector banks lead
the private banks when NOPAT is emphasized where SBI was in the front
spot for each year respectively as it is the leading bank of India
The Cost of Capital useful for identification of Capital charge for

public sector banks gave a clear indication of effectiveness in 2007-08
but had a failure in each of the respective years of 2006-07 and 2005-06
where private sector banks have the higher cost of capital.
8
The another factor is capital charge sustaining the impact that
Private Banks have a greater focus than public sector banks in each year
respectively. As being a private bank, they have to increase their image
in market by giving higher return to their shareholders.
The next area covered under the study was the calculation of EVA
in percentage terms. The EVA in percentage terms was higher for private
banks because the amount of invested capital is low compared to public
sector banks but in 2005-06, Public sector banks had a bit more
effectiveness compared to private banks due to higher NOPAT compared
to private sector banks.
The EVA in rupees terms was followed after the calculation of EVA
in Percentage terms and it was found to be higher for public sector
banks compared to private sector banks in each of the years due to their
invested capital gives higher return to public sector banks so as to
generate a consistent amount of NOPAT.
All the Banks under our analysis have been found economic value
creator for its shareholders throughout 3 years.
Finally, we met with a successful completion of our Grand Project

Report emphasizing the various concerns of EVA which did help us to
entertain a variety of interpretations and categories of business
etiquettes and compliances.
9
INTRODUCTION
Indian Banking has seen many changes in the last decade like
imposition of prudential standards, greater competition among banks,
entry of new private banks, etc. This paradigm shift in the Indian banking
sector can be seen in terms of two dimensions: One relates to
operational aspect especially performance and risk-management system
and the second dimension relates to structural and external
environment or exogenous aspects. Is evaluating Indian bank’s
performance a rather straight forward issue? The answer is no. One
might say that like a corporate, even banks can be judged from the
behavior of their stock prices. However, as bank stocks have not been
very active on exchanges, barring few on few occasions, should we
conclude that Indian banks have by and large failed to add values to
their shareholders’ wealth. The answer is once again no as one needs to
evaluate private and public sector banks in a more dynamic manner than
just looking at their stock prices, non-performing assets (NPAs), C/D
ratios and others. Some may also argue that the general slowdown in
lending by banks and their eternal problem of recovery of non –
performing assets (NPAs) has led to the sufferings of Indian banks.
Many Indian banks are discovering that the key to their long-term
growth does not lie in products and services alone but in assets that can
never be replicated, that is, their unique relationship with customers,
employees, suppliers and distributors, investors and the communities
they serve. One of the most fateful errors bankers usually commit
relates to their belief that merely reducing NPAs and thereby maximizing
profit would solve “the problem of banking industry”. Not only is this
belief still held by most of the bankers in India - and therefore
10
professionally unacquainted by the changing profile of their
shareholders and the capital market- it is held by virtually large number
of myopic captains of the industry. That things are not going as well as
they ought to be going for such banks could be due to economic
recession, poor demand for credit, rising manpower costs, political
uncertainty, inefficient ways of doing business. Or is it something else?
In order to help management understand their own economics

and arrive at value creating investment decision that adequately satisfies
the two sensitive factors mentioned earlier, bankers must understand
the concept and relevance of “Economic Value Added (EVA)”., a period
based measure of value creation. EVA provides a unique insight into
value creation and links theory of finance with the competitive strategy
framework as enumerated by Michael Porter. EVA is also a quantifiable
driver of value creation for the stock markets. Large number of
International banks (such as Citibank, Deutsche Bank, Barclays, ABN
AMRO) use value based frameworks such as EVA to run their banking
operations. Although EVA an a yardstick in India may be at an evolving
stage, banks like HDFC Bank, ICICI Bank etc. have gradually started
adapting such measure to cater to the increasingly discerning investor
base.
A bank’s management creates value when it takes decisions that

provide benefits, in excess of costs. These benefits may come to banks in
the near or distant future depending on the strategies involved in
decision making process. The bankers of today’s world therefore must
be sensitive to two fundamental drivers that drive shareholders’ wealth.
First, there must be an unrelenting focus to ensure that funds mobilized
by the banks (whether through depositors, equity or debt issues)
generate returns in excess of the cost of capital (or can reasonably be
11
expected to do so) with an eye toward returning non productive capital
back to providers of the capital or shareholders. Second, bankers should
constantly seek to invest in technology that increases their reach and
also be open to strategic alliances, mergers & acquisitions and
restructuring.
In the same context it is worth considering that the capital

mobilized by banks earns a satisfactory return. While it is true that
substantial amount of value creation for a bank or corporate takes place
from less than half of the capital employed, it proves that the entity can
unlock huge amount of capital employed for adding to the value for the
shareholders. The second point mentioned earlier, a necessary corollary
to the first point, emphasizes on the importance of investing in value
creating projects and strategies. It implies criticality of the fact that
bankers must remain sensitive to all such balance sheet items that add
value either through mergers or acquisitions or simply through
restructuring, re-capitalization or any other method such as sell-off of
unproductive assets. Further, bank’s management must be able to
differentiate between projects and strategies. While projects are
generally viewed financially from NPV or IRR point of view, they may not
really convey the fact that whether value is being added to the
shareholders. For example, what distinguishes HDFC Bank, the new
futuristic bank from other savvy banks is its position in the new e-
economy. The “anywhere-anytime” bank is not averse of accepting the
fact that “customer is the king and the bank has to tailor its products as
per his requirements” – even if the new product has a negative NPV as
its alternative strategy of doing nothing may only destroy value for HDFC
Bank. Having established a massive base of customers and holding
extensive information about them, banks such as ICICI Bank and HDFC
12
Bank have already made major head start. They are now all set to
leverage these assets. As we all know the Internet has already started
radically affecting fundamental structures of even Indian banks, not only
in retail operations, but in many other areas including private banking.
The bankers in the new millennium therefore must attempt to make
investment in “strategies” and not merely “remain confined to
borrowing and lending”. They should now play a role of “financial service
providers” for increasing their shareholder’s value.
13
Chapter
2.
Research
Design
2.1 2.2
Research Research
Objectives Methodology
14
2.1 Research Objectives
This report aims to study the selected bank’s performance
evaluation and to demonstrate a direct correlation between the
investment in stakeholder relationships and corporate performance.
EVA (Economic Value Added) tells what the institution is doing with
investor’s hard earned money. If we look at the Indian banking industry,
many of them seem to be destroying shareholder’s wealth and only a
few have positively contributed to wealth for its shareholders.
The purpose of report is to examine an appropriate way of

evaluating bank’s performance and also see which Indian banks have
been able to create (or destroy) shareholders wealth since 2005-2006.
The overriding message of this report is that banks must always strive to
maximize shareholders value without which their stocks can never be
fancied by the market. Banks which shrug off this as a trivial matter, they
do so only at their own peril.
 To study the shareholders value (in terms of Economic Value Added)

of selected banks during the last three years. I.e. since 2005-06 to
2007-08.
 To learn about the business policies and practices of increasing the

value of organization.
 To learn EVA and its applications to increase the shareholder’s

wealth.
 To measure a bank’s historical success in creating values
 To study the determining factors which affects the future

performance of bank’s stock
 To examine the excess returns in future and its impact on the value of
the banks.
15
2.2 Research Methodology
 Rationale Of The Study
Being Finance Management Students, we have four decisive fields

i.e. Manufacturing, Financial Services, Stock Markets and Banks where
we find opportunity to prepare our grand project.
We have prepared our comparative report on Banking. We have

used EVA tool to measure the economic value of the public and private
sector banks i.e. SBI, BOB, ICICI Bank and HDFC. To acquire the
knowledge of Banking Sector and how their shares perform we have
prepared our report on Banks. By gaining the knowledge of EVA a
measure of economic soundness, we can use it in every fields of finance.
 METHODS OF COLLECTION OF DATA
The study is mainly based on secondary data, all the data of four
Indian public and private sector banks i.e. SBI, BOB, ICICI Bank and HDFC
Bank that are listed on the National Stock Exchange are collected from
respective annual reports, publications of RBI and from the various
websites.
 TOOLS AND TECHNIQUES OF ANALYSIS
The data from the reports have been analyzed by using various
tools and techniques with a view to evaluate the performance of the
banks. We have calculated following indicators for conducting overall
analysis on 4 banks’ financial performance between 2005-06 to 2007-08.
16
Net Operating profit after (Net Profit + Provisions and contingencies + Interest on
Taxes (NOPAT) Borrowings) less (Taxes)
Incremental NOPAT NOPAT (t) – NOPAT (t-1)
Invested capital Total equity & Reserves + Total borrowings
Incremental Invested capital Invested capital (t) – Invested Capital (t-1)
Return on invested capital

NOPAT / Invested capital
(ROIC)
Beta () nxy - (x) (y)  nx2 - (x)2
Cost of Equity (Ke) Rf +  ( Rm - Rf )
Cost of Debt (Kd) (Interest Expense - Interest on Deposit) / Total Borrowings
Weighted Average Cost of

Weighted cost of Equity + Weighted cost of Debt
capital (WACC)
Economic Value Added (EVA

(ROIC – WACC)
in %)
Economic Value Added (EVA

NOPAT - (WACC  Invested Capital)
in Rs.)
Incremental EVA EVA (t)- EVA (t-1)
 LIMITATION OF THE STUDY
The analysis was purely based on the secondary data. So, any
error in the secondary data might also affect the study undertaken.
With regard to the estimation of EVA for banks, one important
difference between financial institution and other firms is the role of
debt. For non banking firms debt forms an integral part of financing
operations and therefore interest expense/income is excluded from
NOPAT calculations so that returns are unlevered. Debt (including
deposits) does off course help finance a bank’s assets but financial
institutions are different at least in two important ways. Deposits are
17
value generating in themselves, or can be, since they usually represent
funding a below market costs (that is it would be incorrect to calculate
the value of whole enterprise and arrive at the value of the equity simply
by excluding the liabilities). A bank’s debt funding is effectively the raw
material which is intermediated (“manufactured”) into high yielding
assets. Interest expense, on this view is the equivalent of the cost of
goods sold.
The above has two consequences.
I. Interest expense on deposit is included in NOPAT and, because of
this,
II. When calculating the cost of capital we define capital as equity &
reserves and borrowings.
18
SBI
Chapter 3
HDFC Overview BOB
Of Banking
ICICI
19
3.1 Overview Of Banking
The major participants of the Indian financial system are the
commercial banks, the financial institutions (FIs), encompassing term-
lending institutions, investment institutions, specialized financial
institutions and the state-level development banks, Non-Bank Financial
Companies (NBFCs) and other market intermediaries such as the stock
brokers and money-lenders. The commercial banks and certain variants
of NBFCs are among the oldest of the market participants. The FIs, on
the other hand, are relatively new entities in the financial market place.
Bank of Hindustan, set up in 1870, was the earliest Indian Bank.

Banking in India on modern lines started with the establishment of three
presidency banks under Presidency Bank's act 1876 i.e. Bank of Calcutta,
Bank of Bombay and Bank of Madras. In 1921, all presidency banks were
amalgamated to form the Imperial Bank of India. Imperial bank carried
out limited central banking functions also prior to establishment of RBI.
It engaged in all types of commercial banking business except dealing in
foreign exchange.
Reserve Bank of India Act was passed in 1934 & Reserve Bank of
India (RBI) was constituted as an apex bank without major government
ownership. Banking Regulations Act was passed in 1949. This regulation
brought Reserve Bank of India under government control. Under the act,
RBI got wide ranging powers for supervision & control of banks. The Act
also vested licensing powers & the authority to conduct inspections in
RBI.
In 1955, RBI acquired control of the Imperial Bank of India, which

was renamed as State Bank of India. In 1959, SBI took over control of
eight private banks floated in the erstwhile princely states, making them
as its 100% subsidiaries.
RBI was empowered in 1960, to force compulsory merger of weak

banks with the strong ones. The total number of banks was thus reduced
from 566 in 1951 to 85 in 1969. In July 1969, government nationalised
14 banks having deposits of Rs.50 crores & above. In 1980, government
acquired 6 more banks with deposits of more than Rs.200 crores.
20
Nationalisation of banks was to make them play the role of catalytic
agents for economic growth. The Narsimham Committee report
suggested wide ranging reforms for the banking sector in 1992 to
introduce internationally accepted banking practices.
The State Bank of India, the country’s oldest Bank and a premier in
terms of balance sheet size, number of branches, market capitalization
and profits is today going through a momentous phase of Change and
Transformation – the two hundred year old Public sector behemoth is
today stirring out of its Public Sector legacy and moving with an agility to
give the Private and Foreign Banks a run for their money.
The bank is entering into many new businesses with strategic tie
ups – Pension Funds, General Insurance, Custodial Services, Private
Equity, Mobile Banking, Point of Sale Merchant Acquisition, Advisory
Services, structured products etc – each one of these initiatives having a
huge potential for growth.
The Bank is forging ahead with cutting edge technology and

innovative new banking models, to expand its Rural Banking base,
looking at the vast untapped potential in the hinterland and proposes to
cover 100,000 villages in the next two years.
It is also focusing at the top end of the market, on whole sale

banking capabilities to provide India’s growing mid / large Corporate
with a complete array of products and services. It is consolidating its
global treasury operations and entering into structured products and
derivative instruments. Today, the Bank is the largest provider of
infrastructure debt and the largest arranger of external commercial
21
borrowings in the country. It is the only Indian bank to feature in the
Fortune 500 list.
The Bank is changing outdated front and back end processes to

modern customer friendly processes to help improve the total customer
experience. With about 8500 of its own 10000 branches and another
5100 branches of its Associate Banks already networked, today it offers
the largest banking network to the Indian customer. The Bank is also in
the process of providing complete payment solution to its clientele with
its over 8500 ATMs, and other electronic channels such as Internet
banking, debit cards, mobile banking, etc.
Bank of Baroda, a leading banking institution in India, has a wide

range of products for almost every user segment. The Bank has classified
its range of products into six lines of business (Personal, Business,
Corporate, International, Treasury and Rural).
The bank has had a web presence for some time however to tap
the potential of the online medium remained a daunting task. The Bank
also faced several issues regarding management of database that was
being generated through use of the website. Moreover the ability of the
online medium to be used as a marketing vehicle was a territory never
visited. The look & feel lacked human touch and the six lines of business
were lost between excessive irrelevant information. The website failed
to educate the users about the Bank’s impressive international presence
and new age products such as credit cards, debit cards, fund transfers,
etc.
22
Thus a sound overall flow of content to provide the user with
reader-friendly content, centralization of database to eliminate data
replication, a pleasing look and feel of international repute, a human
approach, better functionality of tools and the right exposure to
important areas formed the core objectives of the new proposed
website
Bank of Baroda is the sixth largest bank in India. It has total assets
in excess of Rs. 1.78 lakh crores, or Rs. 1,780 bn., a network of over 2800
branches and offices, and about 1000+ ATMs. Bank of Baroda offers a
wide range of banking products and financial services to corporate and
retail customers through a variety of delivery channels and through its
specialised subsidiaries and affiliates in the areas of investment banking,
credit cards and asset management. Maharajah of Baroda Sir Sayajirao
Gaekwad III founded the bank on July 20, 1908 in the princely state of
Baroda, in Gujarat. The bank, along with 13 other major commercial
banks of India, was nationalised on 19 July 1969, by the Government of
India.
In its international expansion Bank of Baroda followed the Indian

diaspora, and especially that of the Gujaratis. It has significant
international presence with a network of 72 offices in 25 countries, six
subsidiaries, and four representative offices. Among Bank of Baroda's 42
overseas branches are ones in the world’s major financial centers i.e.
New York, London, Dubai, Hong Kong (which it has upgraded recently),
Brussels and Singapore, as well as a number in other countries. The bank
is engaged in retail banking via 17 branches of subsidiaries in Botswana,
Guyana, Kenya, Tanzania, and Uganda. Bank of Baroda also has a joint-
venture bank in Zambia with nine branches.
23
ICICI Bank is India's second-largest bank with total assets of Rs.
3,744.10 billion (US$ 77 billion) at December 31, 2008 and profit after
tax Rs. 30.14 billion for the nine months ended December 31, 2008. The
Bank has a network of 1,416 branches and about 4,644 ATMs in India
and presence in 18 countries. ICICI Bank 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 and affiliates in the areas of investment banking, life and
non-life insurance, venture capital and asset management. The Bank
currently has subsidiaries in the United Kingdom, Russia and Canada,
branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka,
Qatar and Dubai International Finance Centre and representative offices
in United Arab Emirates, China, South Africa, Bangladesh, Thailand,
Malaysia and Indonesia. Our UK subsidiary has established branches in
Belgium and Germany.
ICICI Bank was originally promoted in 1994 by ICICI Limited, an

Indian financial institution, and was its wholly-owned subsidiary. ICICI's
shareholding in ICICI Bank was reduced to 46% through a public offering
of shares in India in fiscal 1998, an equity offering in the form of ADRs
listed on the NYSE in fiscal 2000, ICICI Bank's acquisition of Bank of
Madura Limited in an all-stock amalgamation in fiscal 2001, and
secondary market sales by ICICI to institutional investors in fiscal 2001
and fiscal 2002. ICICI was formed in 1955 at the initiative of the World
Bank, the Government of India and representatives of Indian industry.
After consideration of various corporate structuring alternatives in

the context of the emerging competitive scenario in the Indian banking
24
industry, and the move towards universal banking, the managements of
ICICI and ICICI Bank formed the view that the merger of ICICI with ICICI
Bank would be the optimal strategic alternative for both entities, and
would create the optimal legal structure for the ICICI group's universal
banking strategy. The merger would enhance value for ICICI
shareholders through the merged entity's access to low-cost deposits,
greater opportunities for earning fee-based income and the ability to
participate in the payments system and provide transaction-banking
services. The merger would enhance value for ICICI Bank shareholders
through a large capital base and scale of operations, seamless access to
ICICI's strong corporate relationships built up over five decades, entry
into new business segments, higher market share in various business
segments, particularly fee-based services, and access to the vast talent
pool of ICICI and its subsidiaries. In October 2001, the Boards of
Directors of ICICI and ICICI Bank approved the merger of ICICI and two of
its wholly-owned retail finance subsidiaries, ICICI Personal Financial
Services Limited and ICICI Capital Services Limited, with ICICI Bank. The
merger was approved by shareholders of ICICI and ICICI Bank in January
2002, by the High Court of Gujarat at Ahmedabad in March 2002, and by
the High Court of Judicature at Mumbai and the Reserve Bank of India in
April 2002. Consequent to the merger, the ICICI group's financing and
banking operations, both wholesale and retail, have been integrated in a
single entity.
The Housing Development Finance Corporation Limited (HDFC)

was amongst the first to receive an 'in principle' approval from the
Reserve Bank of India (RBI) to set up a bank in the private sector, as part
25
of the RBI's liberalisation of the Indian Banking Industry in 1994. The
bank was incorporated in August 1994 in the name of 'HDFC Bank
Limited', with its registered office in Mumbai, India. HDFC Bank
commenced operations as a Scheduled Commercial Bank in January
1995.
HDFC Bank Ltd. is a commercial bank of India, incorporated in
August 1994, after the Reserve Bank of India allowed establishing private
sector banks. The Bank was promoted by the Housing Development
Finance Corporation, a premier housing finance company (set up in
1977) of India. HDFC Bank has 1,500 branches and over 2,890 ATMs, in
530 cities in India, and all branches of the bank are linked on an online
real-time basis. As of September 30, 2008 the bank had total assets of
INR 1006.82 billion.
In 2008 HDFC Bank acquired Centurion Bank of Punjab taking its
total branches to more than 1,000. Though, the official license was given
to Centurion Bank of Punjab branches, to continue working as HDFC
Bank branches, on May 23, 2008
The financial performance during the fiscal year 2007-08 remained

healthy with total net revenues (net interest income plus other income)
increasing by 50.7% to Rs. 7,511.0 crores from Rs.4,984.7 crores in 2006-
07. The revenue growth was driven principally by an increase in net
interest income. Net interest income grew by 50.7% primarily due to
increase in the average Balance sheet size by 39.8% and an increase in
net interest margin from 4.0% to around 4.4%. The key driver in volumes
was growth in advances. Margin expansion was contributed by increase
in yields across all products partially offset by increase in time deposit
costs.
26
4.1 What is EVA ?
4.2 Benefits of
EVA for Banks
Chapter 4 : 4.3 Limitation of

Introduction to traditional
EVA Methods
4.4 Performance
Measurement
4.5 EVA a superior

Performancee
Measure
27
4.1 What is EVA ?
EVA is the invention of Stern Stewart & Co., a global consulting

firm, which launched EVA in 1989. EVA is Economic Value Added, a
measure of economic profit. It is calculated as the difference between
the Net Operating Profit After Tax and the opportunity cost of invested
Capital. This opportunity cost is determined by the weighted average
cost of Debt and Equity Capital (“WACC”) and the amount of Capital
employed.
What separates EVA from other performance metrics such as EPS,

EBITDA, and ROIC is that it measures all of the costs of running a
business— operating and
financing. This makes
When, EVA is greater than zero, value is
EVA the created during the period for the bank
soundest
performance and if EVA is less than zero, value is metric, and the
destroyed during the period. In order to
one most closely aligned
create values, ROIC for a bank must be
with the greater than weighted average cost of creation of
shareholder capital value. In fact,
EVA and Net Present Value
arithmetically tie, so companies can be assured that increasing EVA is
always a good thing for its investors—certainly not the case with EPS or
Free Cash Flow. Many even argue that EVA is a better decision tool than
NPV because it captures the period-by-period value creation or
28
destruction of a given firm or investment, and makes it easy to audit
performance against management projections.
Given the usefulness of the measure, many companies have

adopted it as part of a comprehensive management and incentive
system that drives their decision processes. They strive to increase their
EVA by:
 Increasing the NOPAT generated by existing Capital

 Reducing the WACC
 Investing in new projects where the Return exceeds the WACC
 Divesting Capital where the Return is below the WACC
Such focus on value creation has served the shareholders of these

companies well.
A bank’s invested capital multiplied by WACC gives the minimum

level of operating profits the bank should generate to satisfy
shareholders. EVA measures how much net operating profit (adjusted
for tax and also called NOPAT) exceeds the capital charge.
Mathematically, EVA can be estimated focusing both on Management of
Capital as well as the Management of Profits.
A bank’s present value should equal its invested capital plus the
present value of future EVA and if the bank’s present value is lower, the
stock is undervalued and vice versa. Value of a bank’s share is also said
to equal the market value of assets and the sum of EVAs of all future
periods discounted back to the present. A bank once it reaches a period
when it no longer earns a return on its incremental investments greater
than its cost of capital, from this period onward no EVA is added or
destroyed from new investments. While competitive forces are likely to
29
drive returns to WACC for Indian banks, the emergence of indifference
vary from bank to bank and is determined by several factors such as
industry structure, a bank’s position in the industry, capital spending for
strategic investments etc.
A bank’s invested capital multiplied by WACC gives the minimum

level of operating profits the bank should generate to satisfy
shareholders. EVA measures how much net operating profit (adjusted
for tax and also called NOPAT) exceeds the capital charge.
Mathematically, EVA can be estimated focusing both on Management of
Capital as well as the Management of Profits.
EVA - (As a measure of Value creation through Management of Profits)
EVA - (As a measure of value creation through Management of Capital)
30
The use of this formula will produce either a positive or negative
EVA number. A positive EVA reflects that the company is increasing its
value to its shareholders, whereas a negative EVA reflects that it is
diminishing its value to its
shareholders. EVA is
“Until a business returns a profit
based on the principle
that is greater than its cost of
that since a company’s
capital, it operates at a loss... The
management employs
enterprise still returns less to the
equity capital to earn a
economy than it devours in
profit, it must pay for the
resources…Until then it does not
use of this equity capital.
create wealth; it destroys it”
Including a cost for the use
- Peter Drucker
of equity capital sets EVA
apart from more popular
measures of bank performance, such as return on assets (ROA), return
on equity (ROE) and the efficiency ratio, which do not consider the cost
of equity capital employed. As a result, these measures may suggest a
bank is performing well, when in fact it may be diminishing its value to
its shareholders.
31
4.2 Benefits of EVA System for Banks
As banks become ‘capital hungry’ to meet their growth
expectations and simultaneously meeting the regulatory requirements in
the Basel-II era, they would have to remain responsive to the
expectations of the market on a risk adjusted basis to ensure continued
supply of financial capital from the shareholders and human capital from
the ultimate stakeholders.
One of the fundamental limitations in the existing business growth

strategies of Indian banks, especially public sector banks, is its virtual, if
not complete, disconnect with riskiness. ‘Profit rich but Risk poor’
strategies are doomed for failure in the long-run!
Finalization of business targets should no longer remain a

mundane ‘volume-mix’ targeting exercise but should built-in inherent
risk-return dimensions. Business strategies that ensure ‘Risk & Return by
Choice and not by Chance’ are key to ensure continuing success of banks
in the emerging market.
In order to align the performance of individual

zones/regions/branches to the overall corporate expectations in terms
of EVA, the vocabulary of risk management has to percolate down the
hierarchy of banks to the individual unit level. New performance
benchmarks in the form of EVA should naturally form the unifying
cord/link in every bank.
EVA can be an important tool that bankers can use to measure

and improve the financial performance of their bank. Since EVA takes
the interest of the bank’s shareholders into consideration, the use of
32
EVA by bank management may lead to different decisions than if
management relied solely on other measures.
As mentioned earlier an important difference between banks and
others is the role of debt. For other firms debt is a part of the financing
operations and interest expenses are excluded from Net Operating Profit
After Taxes (NOPAT) so that returns are unlevered. A bank’s debt
funding is effectively the raw material which is intermediated into higher
yielding assets. Interest expense, on this view, is equivalent of the cost
of goods sold. This has an important consequence. In our analysis
NOPAT for each year was therefore arrived at after adding interest on
RBI loans and other loans to Profit before Depreciation and Taxes less
Cash Taxes. The component of cash taxes represented as if banks were
debt free. In order to calculate cash taxes, tax shield on the interest paid
on RBI loans and others were added back to Tax Provision and tax paid
on other incomes were deducted from tax provision of the year. A tax
rate of 30 percent per year was assumed for maintaining consistency
over years in our analysis.
The economic capital of a bank is defined as the shareholders

funds plus reserves excluded from equity, such as loan losses or
contingency reserve which in economic terms, function as capital. In this
fund total long term borrowings of the bank are added to arrive at the
Invested Capital (IC). In our analysis we have first attempted to critically
evaluate bank’s performance in generating Return on Invested Capital
(ROIC) over years, we have taken two most critical indicators viz. Return
on Invested Capital (ROIC) and Incremental ROIC.
33
4.3 Limitations of Traditional Methods
Most of the accounting based measures such as Price: Earnings,
Book Value, Returns on Equity, Return on Net worth etc. fail to provide a
clear understanding of the major variables that drive value, except to
some extent Returns on Invested Capital. These methods are easily
influenced by the smart and perhaps mischievous management through
window dressings. They also do not incorporate risk or time value of
money also and do not help investors understand the intricate process
of value creation. In addition, these traditional measures use, for most
part, historical data to measure current performance. Ideally, one would
like to measure how current decisions will affect the firm’s future
performance.
Unlike accounting measures, Economic Value Added, raises the

issue highlighted in the Nobel Prize work of Franco Modigliani and
Merton Miller: just as debt holders of a bank expect a specific return, the
shareholders of the bank, expect a certain rate of return for taking risk
of investing in the bank.
34
4.4 Performance Measurement
Investors measure overall performance of a bank as a whole to
decide whether to invest in the bank or to continue with the bank or to
exit from it. In order to achieve goal congruence, managers’
compensation is often linked with the performance of the responsibility
centers and also with bank-performance. Therefore selection of the right
measure is critical to the success of a bank. To measure performance of
a bank we need a simple method for correctly measuring value created /
enhanced by it in a given time frame. All the current metrics trade off
between the precision in measuring the value and its cost of
measurement. In other words, each method takes into consideration the
degree of complexities in quantifying the underlying measure. The more
complex is the process, the more is the level of subjectivity and cost in
measuring the performance of the bank.
There is a continuous endeavor to develop a single measure that

captures the overall performance, yet it is easy to calculate. Each metric
of performance claims its superiority over others. Performance of a bank
is usually measured with reference to its past record and the
performance of other banks with comparable risk profile. The various
performance metrics currently in use are based on the returns on
investment generated by the business entity. Therefore to reach a
meaningful conclusion, returns generated by the bank in a particular
year should be compared with returns generated by assets with similar
risk profile (cross sectional analysis). Similarly return on investment for
the current period should be compared with returns generated in past
(time series analysis). A bank creates value only if it is able to generate
35
return higher than its cost of capital. Cost of capital is the weighted
average cost of equity and debt (WACC).
The performance of a bank gets reflected on its valuation by the

capital market. Market valuation reflects investor’s perception about the
current performance of the bank and also their expectation on its future
performance. They build their expectations on the estimated growth of
the bank in terms of return on capital. This results in an incongruence
between current performance and the value of the bank. Even if the
current
performance “The EVA framework takes a look at is better in
relative the balance sheet, income statement, terms, poor
growth and the concept of risk all at the prospects
adversely same time. You want to invest lots affects the
value of the and lots of money in NPV-positive bank.
Therefore projects. The more such projects you any metric
of invest in, the greater is the premium
performance, of market value over book value.” to be
effective, should be
-Joel Stern, Chairman and CEO of
able to not only capture
Stern Stewart & Co
the current
performance but also should be able to incorporate the direction and
magnitude of future growth. Therefore the robustness of a measure is
borne out by the degree of correlation the particular metric has with
respect to the market valuation.
Metrics of performance have a very important and critical role not

only in evaluating the current performance of a bank but also in
achieving high performance and growth in the future. The metrics of
performance have a variety of users, which include all the stakeholders
36
whose well being depends on the continued well being of the bank.
Principal stakeholders are the equity holders, debt holders,
management, and suppliers of material and services, employees and the
end-users of the products and services. Value creation and maximization
depends on the alignment of the various conflicting interests of these
stakeholders towards a common goal. This means maximization of the
bank value without jeopardizing the interests of any of the stakeholders.
Any metric, which measures the bank value without being biased
towards any of the stakeholders or particular class of participants, can
be hailed as the true metric of performance. However it is difficult, if not
impossible, to develop such a metric. Most of the conventional
performance measures directly relate to the current net income of a
business entity with equity, total assets, net sales or similar surrogates of
inputs or outputs. Examples of such measures are return on equity
(ROE), return on assets (ROA) and operating profit margin. Each of these
indices measure a different aspect of performance, ROE measures the
performance from the perspective of the equity holders, ROA measures
the asset productivity and operating profit margin reflects the margin
realized by the bank at the market place. The net income figure in itself
is dependent on the operational efficiency, financial leverage and the
ability of the entity to formulate right strategy to earn adequate margin
in the market place.
It is important to note that none of these measures truly reflect

the complete picture by themselves but have to be seen in conjunction
with other metrics. These measures are also plagued by the bank level
inconsistencies in the accounting figures as well as the inconsistencies in
the valuation methods used by accountants in measuring assets,
liabilities and income of the bank. Accounting valuation methods are in
37
variance with the methods that are being used to value individual
projects and banks. The value of an asset or a bank, which is a collection
of assets, is computed by discounting future stream of cash flows. The
net present value (NPV) is the surplus that the investment is expected to
generate over the cost of capital. Measures of periodical performance of
a bank, which is the collection of assets in place, should follow the same
underlying principles. Economic value added (EVA) is a measure that
captures the valuation principles.
38
4.5 EVA a Superior Performance Measure
First let us look into the claim of EVA being superior than the
conventional measures such as ROI, ROE and ROA, which are based on
the accounting figures. Most of these measures give us the rate of return
earned by the bank with respect to capital invested in the bank. The
most important limitation of these measures are derived from
limitations inherent in the measurement of accounting profit. As per
current accounting practices, while historical-cost-based accounting
measures are being used to carry most of the assets in the balance
sheet, revenue and expenses (other than depreciation) are recognized in
the profit and loss account at their current value. Therefore accounting
rate of returns do not reflect the true return from an investment and
tend to be biased downwards in the 10 initial years and upwards in the
latter years. Similarly as noted by Malkelainen (Esa Malkelainen 1998),
distortion occurs basically due to the historical cost and straight line
depreciation schedule used by most businesses to value their assets.
This leads to a bias in these measures due to the composition of assets
of a bank at any given point in time. By composition he refers to the
current nature of the assets, more current the assets are, the accounting
rate of return is closer to the true rate of return. This distortion will not
be significant if there is a continuous stream of investments in assets i.e.
the value of the mix of assets is nearer to the current value of the assets.
But the probability, that at any point of time, a bank should have such a
composition of assets is rare, in most cases either the assets are old or
relatively new. This precludes these accounting measures from being
used to reach any meaningful conclusion regarding the true
performance of the bank.
39
The other important limitation of accounting measures is that
they ignore the cost of equity and only consider the borrowing cost. As a
result it ignores the risk inherent in the project and fails to highlight
whether the return is commensurate with the risk of the underlying
assets. This might result in selecting projects that produce attractive rate
of return but destroys bank value because their cost of capital is higher
than the benchmark return established by the management. On the
other hand accounting measures encourage managers to select projects
that will improve the current rate of return and to ignore projects even if
their return is higher than their cost of capital. Selection of projects with
returns higher than the current rate of return does not automatically
increase shareholders’ wealth. Taking up only those projects, which
provide returns that are higher than the hurdle rate (cost of capital)
results in increasing the wealth of the shareholder. Therefore use of
ROE, ROA or similar accounting measures as the benchmark, might
result in selection of those projects that though provide rate of return
higher than the current rate of return destroys bank-value. Similarly use
of these measures result in continuing with activities that destroys bank
value until the rate of return falls below the benchmark rate of return.
EVA proponents claim that because of these imperfections, the

accounting based measures are not good proxies for value creation.
Managerial compensation based on these measures does not encourage
value enhancement actions by managers. Value enhancement and
earnings are two different things and might be at cross-purposes
because short-term performance might be improved at the cost of long
term health of the bank. Activities involving enhancement of current
earnings may be short term in nature, whereas any value enhancing
activities should focus on long term well being of the bank. Avoidance of
40
discretionary costs improves current performance while destroying
value of the bank.
The question arises whether EVA is an improvement over

conventional measures and serves the purpose of motivating managers
to pay attention to shareholders value even if that results in
compromising current performance. The answer may be negative
because all the above limitations are also associated with EVA. As shown
in equation, the calculation of EVA entails the usage of an accounting
rate of return, the difference lies only in the fact that the cost of equity
is also factored in to arrive at the residual income figure. Though
incorporation of the cost of equity capital is the virtue of EVA, because it
measures economic surplus, it does not remove the limitations of the
accounting profit that forms the basis for computing EVA. Moreover the
virtue might not be realized in practice since it is not easy to calculate
the cost of equity. Market returns cannot be used as a proxy for cost of
equity that supports assets in place because market discounts the
expectations. Similarly it is difficult to use CAPM in measuring cost of
equity because it is difficult to measure risk-free-rate of return, beta and
market premium. Difficulties get compounded in an economic
environment like India, where interest rates fluctuate frequently, the
capital market is volatile and the regulators are yet to have a complete
grip on the capital market to enhance its efficiency. Empirical studies
show that the volatility in the Indian capital markets, like capital markets
in other developing economies, is higher than capital markets in
developed economies. Therefore even if for the sake of argument it can
be said that the potential of EVA as a measure of performance can be
realized fully in an advanced economy, the argument that EVA is a better
measure is not tenable in the Indian context.
41
Chapter 5:
Data Analysis
&
Interpretation
Cost of NOPAT
Capital
Capital
Charge
42
5.1 Net Operating Profit After Tax
 The NOPAT curriculum includes Interest Income, Other Income
deducting interest on deposit and other operating expenses less
tax so as to give an overall emphasis for Operating Profit.
 Net Operating Profit is considered instead of Net Profit so as to
highlight the economic value of a firm.
(Net Profit + Provisions and contingencies + Interest on Borrowings)

less (Taxes)
Net Operating Profit

2007-08 2006-07 2005-06
SBI 17,963 13,478 14,058
BOB 3,525 2,856 2,275
ICICI 14,335 10,586 7,650
HDFC 4,269 3,048 2,348
Tax
2007-08 2006-07 2005-06
SBI 5,389 4,043 4,217
BOB 1,058 857 682
ICICI 4,301 3,176 2,295
HDFC 1,281 914 704
NOPAT
2007-08 2006-07 2005-06
SBI 12,574 9,435 9,841
BOB 2,468 1,999 1,592
ICICI 10,035 7,410 5,355
HDFC 2,988 2,134 1,644
14,000
12,000
12,574
10,000
10,035 9,841
8,000 9,435
6,000 7,410
4,000 5,355
2,000 2,988
2,468 2,134
1,999 1,592 1,644
0
2007-08 2006-07 2005-06
SBI 12,574 9,435 9,841
BOB 2,468 1,999 1,592
ICICI 10,035 7,410 5,355
HDFC 2,988 2,134 1,644
43
As per the above tables, the following interpretation has been made.
Comparing all the four esteemed Banks for analysis, we can
prelude that State Bank of India leads the race by holding the highest
Net Operating Profit After Tax of 12574 crores in 2007-08 for both Public
Sector and Private Sector Banks whereas ICICI stood second with 10035
crores in 2007-08in the overall competition but first when Private Sector
Banks were concerned. HDFC stood third in the race with an overall net
operating profit after tax of 2988 crores in 2007-08 keeping BOB at the
last stage with an overall net operating profit after tax of 2468 crores in
2007-08.
Even when years 2006-07 and 2005-06 were taken, same was the
result with State Bank of India holding the top spot in overall context
and ICICI in private sector concerns.
44
Incremental NOPAT
The Incremental NOPAT shows the change in the overall NOPAT in the
year 2007-08 when compared to 2006-07.
NOPAT (t) – NOPAT (t-1)
3,500
3,000
3,139
2,500
2,625
2,000
2,055
1,500
1,000
500 854
469 407 490
0
-406
-500
-1,000
2007-08 2006-07
SBI 3,139 -406
BOB 469 407
ICICI 2,625 2,055
HDFC 854 490
We can adjudicate that the NOPAT for SBI gave an increment of

3139 crores in 2007-08 with the comparison of its NOPAT of 2006-07
taking SBI at the prime stage of competition. But the case was reverse in
2006-07 when the NOPAT of SBI gave a decrement of -406 crores making
it fell to the 4th slope in the race.
But the remaining three banks have always shown constant

growth in their performances where ICICI bank lead the 2nd spot in 2007-
08 with an incremental NOPAT of 2625 crores and 1st spot in 2006-07
with an incremental NOPAT of 2055 crores. BOB and HDFC have too
shown an immense contribution in the incremental value for the firm.
45
Invested Capital
The invested capital includes Total Equity and Reserves and borrowings
excluding Total Deposits because these are the prime essentials for
undermining the operations of a business unit.
Total equity & Reserves + Total borrowings
120,000 112,468
100,000
100,760
80,000
60,000 71,002 75,919
58,285 61,078
40,000
20,000
14,971 15,976 9,793 9,248 12,646 8,158
0
2007-08 2006-07 2005-06
SBI 100,760 71,002 58,285
BOB 14,971 9,793 12,646
ICICI 112,468 75,919 61,078
HDFC 15,976 9,248 8,158
From the above curriculum, we can proclaim that ICICI Bank has made
the highest Capital Investment each time in comparison with other
banks with an investment of 112468 crores in 2007-08, 75919 crores in
2006-07 and 61078 crores in 2005-06.
Whereas SBI holds the second spot, HDFC holds the third spot and
BOB holding the fourth spot in 2007-08. For 2006-07 and 2005-06, SBI
did hold the second spot again with BOB holding the third spot and
HDFC holding the fourth spot each respective year.
46
Incremental Invested Capital
The incremental Invested capital determines the overall change in the
invested capital as compared to the previous year.
Invested capital (t) – Invested Capital (t-1)
40,000
35,000
36,549
30,000
29,758
25,000
20,000
15,000
12,717 14,841
10,000
5,000
5,178 6,728 1,090
0 -2,853
-5,000
2007-08 2006-07
SBI 29,758 12,717
BOB 5,178 -2,853
ICICI 36,549 14,841
HDFC 6,728 1,090
Forecasting the above analysis, we can sort out that ICICI bank holds the
key position with an incremental capital glance of 36549 crores in 2007-
08 and 14841 crores in 2006-07 respectively. SBI stood second each time
with an incremental capital glance of 29758 crores and 12717 crores in
2007-08 and 2006-07 respectively. HDFC holds the third position in
2007-08 and 2006-07 respectively. But the performance of BOB
deteriorated drastically in the economy when it suffered a decrement of
-2853 crores in 2006-07 but covered marginally and took it capital
increment base to 5178 crores in 2007-08.
47
5.2 Return on invested capital
The return on invested capital signifies the return that the firm earns on
the capital invested for a given period of time.
NOPAT / Invested capital
2007-08 2006-07 2005-06

Capital Capital Capital
NOPAT NOPAT NOPAT
Employed Employed Employed
SBI 12,574 100,760 9,435 71,002 9,841 58,285
BOB 2,468 14,971 1,999 9,793 1,592 12,646
ICICI 10,035 112,468 7,410 75,919 5,355 61,078
HDFC 2,988 15,976 2,134 9,248 1,644 8,158
ROIC
2007-08 2006-07 2005-06
SBI 0.12 0.13 0.17
BOB 0.16 0.20 0.13
ICICI 0.09 0.10 0.09
HDFC 0.19 0.23 0.20
0.25
0.23
0.2
0.2 0.2
0.19
0.15 0.17
0.16
0.13 0.13
0.1 0.12
0.1
0.09 0.09
0.05
0
2007-08 2006-07 2005-06
SBI 0.12 0.13 0.17
BOB 0.16 0.2 0.13
ICICI 0.09 0.1 0.09
HDFC 0.19 0.23 0.2
48
HDFC bagged the Highest return each time with a return of 19% in
2007-08, 23% in 2006-07 and 20% in 2005-06. For 2007-08 and 2006-07,
BOB stood at the second spot by receiving annual returns of 16% and
20% respectively leading SBI with annual returns of 12% and 13%
respectively and ICICI bank with 9% and 10% respectively. But the
scenario was bit different in 2005-06 where SBI bagged the second spot
by receiving an annual return of 17%, BOB holding the third spot with
13% return and ICICI with the least return of 9%.
49
Beta ()
Beta can be defined as a risk measuring factor for different capital

allotments. Higher the Beta, higher the risk. Beta here has been
calculated based on stock prices vis a vis NIFTY for each year separately.
nxy - (x) (y) ÷ nx2 - (x)2
1.4
1.2
1.22 1.22 1.22
1.15 1.14
1 1.08 1.1
1.03
0.8 0.91 0.93 0.93
0.6
0.64
0.4
0.2
0
2007-08 2006-07 2005-06
SBI 0.91 1.22 1.1
BOB 1.08 0.64 0.93
ICICI 1.15 1.14 1.22
HDFC 0.93 1.22 1.03
50
NIFTY (X) SBI (Y)
2007- BETA
CLOSING CHANGE CHANGE CLOSING CHANGE CHANGE X2 XY
2008 (b)
PRICE (Rs.) (%) PRICE (Rs.) (%)
Mar 3,821.55 970.17
Apr 4,087.90 266.35 6.97 1,075.00 104.83 10.81 48.58 75.31
May 4,295.80 207.90 5.09 1,320.60 245.60 22.85 25.86 116.19
Jun 4,318.30 22.50 0.52 1,504.36 183.76 13.91 0.27 7.29
Jul 4,528.85 210.55 4.88 1,601.03 96.67 6.43 23.77 31.33
Aug 4,464.00 -64.85 -1.43 1,573.57 -27.46 -1.72 2.05 2.46
Sep 5,021.35 557.35 12.49 1,929.55 355.98 22.62 155.89 282.45
0.91
Oct 5,900.65 879.30 17.51 2,051.76 122.21 6.33 306.64 110.91
Nov 5,762.75 -137.90 -2.34 2,272.61 220.85 10.76 5.46 -25.16
Dec 6,138.60 375.85 6.52 2,331.77 59.16 2.60 42.54 16.98
Jan 5,137.45 -1,001.15 -16.31 2,134.58 -197.19 -8.46 265.99 137.92
Feb 5,223.50 86.05 1.67 2,059.45 -75.13 -3.52 2.81 -5.90
Mar 4,734.50 -489.00 -9.36 1,585.40 -474.05 -23.02 87.64 215.49
 26.21 59.61 967.50 965.27
NIFTY (X) SBI (Y)
2006- BETA
CLOSING CHANGE CHANGE CLOSING CHANGE CHANGE X2 X*Y
2007 (b)
Mar 3,402.55 927.01
Apr 3,508.10 105.55 3.10 853.17 -73.84 -7.97 9.62 -24.71
May 3,185.30 -322.80 -9.20 823.40 -29.77 -3.49 84.67 32.11
Jun 3,128.20 -57.10 -1.79 709.98 -113.42 -13.77 3.21 24.69
Jul 3,143.20 15.00 0.48 790.47 80.49 11.34 0.23 5.44
Aug 3,413.90 270.70 8.61 908.52 118.05 14.93 74.17 128.62
Sep 3,588.40 174.50 5.11 1,003.54 95.02 10.46 26.13 53.46
1.22
Oct 3,744.10 155.70 4.34 1,068.90 65.36 6.51 18.83 28.26
Nov 3,954.50 210.40 5.62 1,284.90 216.00 20.21 31.58 113.56
Dec 3,966.40 11.90 0.30 1,215.19 -69.71 -5.43 0.09 -1.63
Jan 4,082.70 116.30 2.93 1,112.61 -102.58 -8.44 8.60 -24.75
Feb 3,745.30 -337.40 -8.26 1,016.42 -96.19 -8.65 68.30 71.45
Mar 3,821.55 76.25 2.04 970.17 -46.25 -4.55 4.14 -9.26
 13.27 11.16 329.57 397.22
NIFTY (X) SBI (Y)
2005- BETA
CLOSING CHANGE CHANGE CLOSING CHANGE CHANGE X2 X*Y
2006 (b)
Apr 1,902.50 549.5
May 2,087.55 185.05 9.73 629.93 80.43 14.64 94.61 142.37
Jun 2,220.60 133.05 6.37 652.69 22.76 3.61 40.62 23.03
Jul 2,312.30 91.70 4.13 765.97 113.28 17.36 17.05 71.67
Aug 2,384.65 72.35 3.13 762.19 -3.78 -0.49 9.79 -1.54
Sep 2,601.40 216.75 9.09 898.01 135.82 17.82 82.62 161.97
Oct 2,370.95 -230.45 -8.86 803.15 -94.86 -10.56 78.48 93.58 1.10
Nov 2,652.25 281.30 11.86 858.24 55.09 6.86 140.76 81.38
Dec 2,836.55 184.30 6.95 869.25 11.01 1.28 48.29 8.91
Jan 3,001.10 164.55 5.80 848.38 -20.87 -2.40 33.65 -13.93
Feb 3,074.70 73.60 2.45 839.91 -8.47 -1.00 6.01 -2.45
Mar 3,402.55 327.85 10.66 927.01 87.10 10.37 113.70 110.58
 61.32 57.48 665.58 675.57
51
NIFTY (X) BOB (Y)
2007- X2 BETA
CLOSING CHANGE CHANGE CLOSING CHANGE CHANGE XY
2008 (b)
Mar 3,821.55 204.67
Apr 4,087.90 266.35 6.97 224.61 19.94 9.74 48.58 67.90
May 4,295.80 207.90 5.09 262.39 37.78 16.82 25.86 85.54
Jun 4,318.30 22.50 0.52 260.09 -2.30 -0.88 0.27 -0.46
Jul 4,528.85 210.55 4.88 288.72 28.63 11.01 23.77 53.67
Aug 4,464.00 -64.85 -1.43 258.89 -29.83 -10.33 2.05 14.79
Sep 5,021.35 557.35 12.49 317.11 58.22 22.49 155.89 280.78
1.08
Oct 5,900.65 879.30 17.51 329.14 12.03 3.79 306.64 66.43
Nov 5,762.75 -137.90 -2.34 373.41 44.27 13.45 5.46 -31.43
Dec 6,138.60 375.85 6.52 437.89 64.48 17.27 42.54 112.62
Jan 5,137.45 -1,001.15 -16.31 376.3 -61.59 -14.07 265.99 229.39
Feb 5,223.50 86.05 1.67 348.63 -27.67 -7.35 2.81 -12.32
Mar 4,734.50 -489.00 -9.36 272.84 -75.79 -21.74 87.64 203.51
 26.21 40.20 967.50 1,070.44
NIFTY (X) BOB (Y)
2006- BETA
2007 (b)
Mar 3,402.55 210.74
Apr 3,508.10 105.55 3.10 202.56 -8.18 -3.88 9.62 -12.04
May 3,185.30 -322.80 -9.20 215.35 12.79 6.31 84.67 -58.10
Jun 3,128.20 -57.10 -1.79 186.82 -28.53 -13.25 3.21 23.75
Jul 3,143.20 15.00 0.48 208.59 21.77 11.65 0.23 5.59
Aug 3,413.90 270.70 8.61 235.33 26.74 12.82 74.17 110.40
Sep 3,588.40 174.50 5.11 270.66 35.33 15.01 26.13 76.74
0.64
Oct 3,744.10 155.70 4.34 261.79 -8.87 -3.28 18.83 -14.22
Nov 3,954.50 210.40 5.62 244.67 -17.12 -6.54 31.58 -36.75
Dec 3,966.40 11.90 0.30 225.2 -19.47 -7.96 0.09 -2.39
Jan 4,082.70 116.30 2.93 234.49 9.29 4.13 8.60 12.10
Feb 3,745.30 -337.40 -8.26 205.73 -28.76 -12.26 68.30 101.36
Mar 3,821.55 76.25 2.04 204.67 -1.06 -0.52 4.14 -1.05
 13.27 2.24 329.57 205.38
NIFTY (X) BOB (Y)
2005- BETA
2006 (b)
Apr 1,902.50 155.06
May 2,087.55 185.05 9.73 179.11 24.05 15.51 94.61 150.86
Jun 2,220.60 133.05 6.37 179.75 0.64 0.36 40.62 2.28
Jul 2,312.30 91.70 4.13 235.42 55.67 30.97 17.05 127.89
Aug 2,384.65 72.35 3.13 223.86 -11.56 -4.91 9.79 -15.36
Sep 2,601.40 216.75 9.09 227.6 3.74 1.67 82.62 15.19
Oct 2,370.95 -230.45 -8.86 200.36 -27.24 -11.97 78.48 106.02 0.93
Nov 2,652.25 281.30 11.86 210.88 10.52 5.25 140.76 62.29
Dec 2,836.55 184.30 6.95 220.34 9.46 4.49 48.29 31.17
Jan 3,001.10 164.55 5.80 228.33 7.99 3.63 33.65 21.04
Feb 3,074.70 73.60 2.45 203.93 -24.40 -10.69 6.01 -26.21
Mar 3,402.55 327.85 10.66 210.74 6.81 3.34 113.70 35.61
 61.32 37.65 665.58 510.78
52
NIFTY (X) ICICI (Y)
2007- BETA
2008 (b)
Mar 3,821.55 829.02
Apr 4,087.90 266.35 6.97 841.16 12.14 1.46 48.58 10.21
May 4,295.80 207.90 5.09 892.94 51.78 6.16 25.86 31.31
Jun 4,318.30 22.50 0.52 938.48 45.54 5.10 0.27 2.67
Jul 4,528.85 210.55 4.88 910.98 -27.50 -2.93 23.77 -14.29
Aug 4,464.00 -64.85 -1.43 869.28 -41.70 -4.58 2.05 6.55
Sep 5,021.35 557.35 12.49 1,041.37 172.09 19.80 155.89 247.17
1.15
Oct 5,900.65 879.30 17.51 1,242.53 201.16 19.32 306.64 338.26
Nov 5,762.75 -137.90 -2.34 1,154.13 -88.40 -7.11 5.46 16.63
Dec 6,138.60 375.85 6.52 1,213.06 58.93 5.11 42.54 33.30
Jan 5,137.45 -1,001.15 -16.31 1,126.63 -86.43 -7.12 265.99 116.20
Feb 5,223.50 86.05 1.67 1,058.51 -68.12 -6.05 2.81 -10.13
Mar 4,734.50 -489.00 -9.36 755.34 -303.17 -28.64 87.64 268.13
 26.21 0.51 967.50 1,046.01
NIFTY (X) ICICI (Y)
2006- BETA
2007 (b)
Mar 3,402.55 562.53
Apr 3,508.10 105.55 3.10 540.66 -21.87 -3.89 9.62 -12.06
May 3,185.30 -322.80 -9.20 544.24 3.58 0.66 84.67 -6.09
Jun 3,128.20 -57.10 -1.79 465.93 -78.31 -14.39 3.21 25.79
Jul 3,143.20 15.00 0.48 538.06 72.13 15.48 0.23 7.42
Aug 3,413.90 270.70 8.61 580.42 42.36 7.87 74.17 67.80
Sep 3,588.40 174.50 5.11 679.65 99.23 17.10 26.13 87.39
1.14
Oct 3,744.10 155.70 4.34 754.99 75.34 11.09 18.83 48.10
Nov 3,954.50 210.40 5.62 847.58 92.59 12.26 31.58 68.92
Dec 3,966.40 11.90 0.30 866.08 18.50 2.18 0.09 0.66
Jan 4,082.70 116.30 2.93 914.27 48.19 5.56 8.60 16.31
Feb 3,745.30 -337.40 -8.26 805.85 -108.42 -11.86 68.30 98.00
Mar 3,821.55 76.25 2.04 829.02 23.17 2.88 4.14 5.85
 13.27 44.95 329.57 408.09
NIFTY (X) ICICI (Y)
2005- BETA
2006 (b)
Apr 1,902.50 338.15

May 2,087.55 185.05 9.73 368.31 30.16 8.92 94.61 86.75
Jun 2,220.60 133.05 6.37 399.97 31.66 8.60 40.62 54.79
Jul 2,312.30 91.70 4.13 502.08 102.11 25.53 17.05 105.42
Aug 2,384.65 72.35 3.13 460.1 -41.98 -8.36 9.79 -26.16
Sep 2,601.40 216.75 9.09 574.61 114.51 24.89 82.62 226.22
Oct 2,370.95 -230.45 -8.86 476.15 -98.46 -17.14 78.48 151.79 1.22
Nov 2,652.25 281.30 11.86 513.82 37.67 7.91 140.76 93.86
Dec 2,836.55 184.30 6.95 558.71 44.89 8.74 48.29 60.71
Jan 3,001.10 164.55 5.80 581.82 23.11 4.14 33.65 24.00
Feb 3,074.70 73.60 2.45 587.55 5.73 0.98 6.01 2.42
Mar 3,402.55 327.85 10.66 562.53 -25.02 -4.26 113.70 -45.41
 61.32 59.95 665.58 734.39
53
NIFTY (X) HDFC (Y)
2007- BETA
2008 (b)
Mar 3,821.55 942.47
Apr 4,087.90 266.35 6.97 1,011.61 69.14 7.34 48.58 51.13
May 4,295.80 207.90 5.09 1,141.27 129.66 12.82 25.86 65.18
Jun 4,318.30 22.50 0.52 1,140.42 -0.85 -0.07 0.27 -0.04
Jul 4,528.85 210.55 4.88 1,193.97 53.55 4.70 23.77 22.89
Aug 4,464.00 -64.85 -1.43 1,163.54 -30.43 -2.55 2.05 3.65
Sep 5,021.35 557.35 12.49 1,428.07 264.53 22.73 155.89 283.86
0.93
Oct 5,900.65 879.30 17.51 1,657.80 229.73 16.09 306.64 281.70
Nov 5,762.75 -137.90 -2.34 1,708.52 50.72 3.06 5.46 -7.15
Dec 6,138.60 375.85 6.52 1,707.47 -1.05 -0.06 42.54 -0.40
Jan 5,137.45 -1,001.15 -16.31 1,541.44 -166.03 -9.72 265.99 158.59
Feb 5,223.50 86.05 1.67 1,440.80 -100.64 -6.53 2.81 -10.94
Mar 4,734.50 -489.00 -9.36 1,312.71 -128.09 -8.89 87.64 83.23
 26.21 38.90 967.50 931.70
NIFTY (X) HDFC (Y)
2006- BETA
2007 (b)
Mar 3,402.55 759.94
Apr 3,508.10 105.55 3.10 808.97 49.03 6.45 9.62 20.01
May 3,185.30 -322.80 -9.20 740.92 -68.05 -8.41 84.67 77.40
Jun 3,128.20 -57.10 -1.79 786.21 45.29 6.11 3.21 -10.96
Jul 3,143.20 15.00 0.48 785.27 -0.94 -0.12 0.23 -0.06
Aug 3,413.90 270.70 8.61 841.62 56.35 7.18 74.17 61.80
Sep 3,588.40 174.50 5.11 914.02 72.40 8.60 26.13 43.97
1.22
Oct 3,744.10 155.70 4.34 992.3 78.28 8.56 18.83 37.16
Nov 3,954.50 210.40 5.62 1,108.07 115.77 11.67 31.58 65.56
Dec 3,966.40 11.90 0.30 1,054.88 -53.19 -4.80 0.09 -1.44
Jan 4,082.70 116.30 2.93 1,065.40 10.52 1.00 8.60 2.92
Feb 3,745.30 -337.40 -8.26 923.55 -141.85 -13.31 68.30 110.03
Mar 3,821.55 76.25 2.04 942.47 18.92 2.05 4.14 4.17
 13.27 24.97 329.57 410.58
NIFTY (X) HDFC (Y)
2005- BETA
2006 (b)
Apr 1,902.50 520.74

May 2,087.55 185.05 9.73 529.58 8.84 1.70 94.61 16.51
Jun 2,220.60 133.05 6.37 624.3 94.72 17.89 40.62 114.00
Jul 2,312.30 91.70 4.13 686.52 62.22 9.97 17.05 41.16
Aug 2,384.65 72.35 3.13 628.42 -58.10 -8.46 9.79 -26.48
Sep 2,601.40 216.75 9.09 672.49 44.07 7.01 82.62 63.74
Oct 2,370.95 -230.45 -8.86 595.44 -77.05 -11.46 78.48 101.50 1.03
Nov 2,652.25 281.30 11.86 674.21 78.77 13.23 140.76 156.95
Dec 2,836.55 184.30 6.95 695.65 21.44 3.18 48.29 22.10
Jan 3,001.10 164.55 5.80 748.36 52.71 7.58 33.65 43.96
Feb 3,074.70 73.60 2.45 723.53 -24.83 -3.32 6.01 -8.14
Mar 3,402.55 327.85 10.66 759.94 36.41 5.03 113.70 53.66
 61.32 42.34 665.58 578.95
54
For 2007-08, the Beta for ICICI bank was highest stating its risk
parameters of 1.15, BOB at the second stage with a beta of 1.08, HDFC
at the third spot with a beta of 0.93 and SBI with the least risk concerned
beta of 0.91.
For 2006-07, the scenario was bit different. Beta for SBI bank and
HDFC Bank were highest stating their risk parameters of 1.22 for both
the banks respectively, ICICI bank at the second stage with a beta of 1.14
and BOB at the third spot with a beta of 0.64.
For 2005-06, the Beta for ICICI bank was highest stating its risk
parameters of 1.22, SBI at the second stage with a beta of 1.10, HDFC at
the third spot with a beta of 1.03 and BOB with the least risk concerned
beta of 0.93.
55
Cost of Equity (Ke)
It determines the expected rate of return for the investors. We
have calculated the cost of equity for the following banks using CAPM
model and taking inputs such as Rf (365 days T-bills rate –same for each
year i.e. 4.55%), Rm (3 years market monthly return of NIFTY) and .
Rf +  ( Rm - Rf )
Change Change
2007-08 Closing Price
Rs. (%)
Mar-07 3,821.55
Apr-07 4,087.90 266.35 6.97
May-07 4,295.80 207.90 5.09
Jun-07 4,318.30 22.50 0.52
Jul-07 4,528.85 210.55 4.88
Aug-07 4,464.00 -64.85 -1.43
Sep-07 5,021.35 557.35 12.49
Oct-07 5,900.65 879.30 17.51
Nov-07 5,762.75 -137.90 -2.34
Dec-07 6,138.60 375.85 6.52
Jan-08 5,137.45 -1,001.15 -16.31
Feb-08 5,223.50 86.05 1.67
Mar-08 4,734.50 -489.00 -9.36
Rm 2.18
Ke (SBI)= Ke (BOB)= Ke (ICICI)= Ke (HDFC)=
6.7 7.11 7.27 6.75
Change Change
Rs. (%)
Mar-06 3,402.55
Apr-06 3,508.10 105.55 3.10
May-06 3,185.30 -322.80 -9.20
Jun-06 3,128.20 -57.10 -1.79
Jul-06 3,143.20 15.00 0.48
Aug-06 3,413.90 270.70 8.61
Sep-06 3,588.40 174.50 5.11
Oct-06 3,744.10 155.70 4.34
Nov-06 3,954.50 210.40 5.62
Dec-06 3,966.40 11.90 0.30
Jan-07 4,082.70 116.30 2.93
Feb-07 3,745.30 -337.40 -8.26
Mar-07 3,821.55 76.25 2.04
Rm 1.11
56
8.75 6.75 8.48 8.75
Change Change
Rs. (%)
Apr-05 1,902.50
May-05 2,087.55 185.05 9.73
Jun-05 2,220.60 133.05 6.37
Jul-05 2,312.30 91.70 4.13
Aug-05 2,384.65 72.35 3.13
Sep-05 2,601.40 216.75 9.09
Oct-05 2,370.95 -230.45 -8.86
Nov-05 2,652.25 281.30 11.86
Dec-05 2,836.55 184.30 6.95
Jan-06 3,001.10 164.55 5.80
Feb-06 3,074.70 73.60 2.45
Mar-06 3,402.55 327.85 10.66
Rm 5.57
3.42 3.6 3.3 3.49
0.1
0.09
0.08 0.0875 0.0875
0.07 0.0848
0.0727
0.06 0.0675
0.0711 0.0675
0.05 0.067
0.04 SBI
0.03 0.036 0.0349 BOB
0.02 0.0342 0.033 ICICI
0.01
HDFC
0
2007-08 2006-07 2005-06
SBI 0.067 0.0875 0.0342
BOB 0.0711 0.0675 0.036
ICICI 0.0727 0.0848 0.033
HDFC 0.0675 0.0875 0.0349
57
In 2007-08, ICICI offered the highest cost of equity to its equity
holders taking the utmost risk in the firm and likewise gained a return of
7.27% leading BOB offering 7.11%, HDFC offering 6.75% and SBI with the
least cost of equity of 6.7%.
Whereas in 2006-07, SBI and HDFC were the frontliners offering

cost of equity at around 8.75% each leading ICICI bank offering 8.48%
and BOB with the least offering of 6.75%.
But the scenario was totally different in 2005-06 when BOB

offered the highest cost of equity with 3.6% leading HDFC offering
3.49%, SBI offering 3.42% and ICICI offering the least return of 3.3%.
The Market return of NIFTY in 2005-06 was comparatively very

high therefore the capital gains is high under such cases compared to
2006-07 and 2007-08. The Cost of equity for 2005-06 was therefore very
low compared to 2006-07 and 2007-08 offering high cost of equity.
58
Cost of Debt (Kd)
It can be defined as the total interest paid divided by the total
borrowings by a firm.
(Total Interest Expense - Interest on Deposit) / Total Borrowings
2007-08 2006-07 2005-06
Interest Paid 4,856 Interest Paid 3,479 Interest Paid 2758

SBI
Borrowings 51,727 Borrowings 39,703 Borrowings 30,641
Kd 0.065720419 Kd 0.061344821 Kd 0.063
2007-08 2006-07 2005-06
Interest Paid 497 Interest Paid 441 Interest Paid 357.88

BOB
Borrowings 3,927 Borrowings 1,143 Borrowings 4,802.20
Kd 0.088645084 Kd 0.269879042 Kd 0.052166683
2007-08 2006-07 2005-06
Interest Paid 6,374 Interest Paid 4,711 Interest Paid 3,761

ICICI
Borrowings 65,648 Borrowings 51,256 Borrowings 38,522
Kd 0.067965053 Kd 0.064334978 Kd 0.06833865
2007-08 2006-07 2005-06
Interest Paid 504.39 Interest Paid 484.13 Interest Paid 370.07

HDFC
Borrowings 4,478.86 Borrowings 2,815.39 Borrowings 2,858.48
Kd 0.078830997 Kd 0.12037089 Kd 0.090624738
59
0.3
0.25 0.2699
0.2
0.15
0.1 0.0886 0.1204

0.0906
0.05 0.0788
0.0657 0.0613 0.0643 0.063 0.0683
0.068 0.0522
0
2007-08 2006-07 2005-06
SBI 0.0657 0.0613 0.063
BOB 0.0886 0.2699 0.0522
ICICI 0.068 0.0643 0.0683
HDFC 0.0788 0.1204 0.0906
In 2007-08, BOB offered the highest cost of debt leading HDFC having
7.88% under its belt, ICICI offering 6.8% and SBI offering 6.57%.
In 2006-07, BOB had made a huge outflow of cost of debt offering

26.99% because the total borrowings were very low compared to other
players and on the other hand, it paid nominal interest as others did.
HDFC was on the second spot with 12.04% and ICICI and SBI ruled the
third and fourth spot with 6.43% and 6.13% respectively.
In 2005-06, the scenario totally changed when BOB offered the

least cost of debt of 5.22%. HDFC offered the highest cost of debt of
9.06%, ICICI following it with 6.83% and SBI on the third spot with 6.3%.
60
5.3 Cost of Capital (WACC)
The weighted average cost of capital (WACC) is the minimum rate of

return on capital required to compensate debt and equity investors for
bearing risk
Weighted cost of Equity + Weighted cost of Debt
Cost Of Equity Cost Of Debt

2007-08 2006-07 2005-06 2007-08 2006-07 2005-06
SBI 0.0670 0.0875 0.0342 0.0657 0.0613 0.0630
BOB 0.0711 0.0675 0.0360 0.0886 0.2699 0.0522
ICICI 0.0727 0.0848 0.0330 0.0680 0.0643 0.0683
HDFC 0.0675 0.0875 0.0349 0.0788 0.1204 0.0906
Weight Of Equity Weight Of Debt

2007-08 2006-07 2005-06 2007-08 2006-07 2005-06
SBI 0.49 0.44 0.47 0.51 0.56 0.53
BOB 0.74 0.88 0.62 0.26 0.12 0.38
ICICI 0.42 0.32 0.37 0.58 0.68 0.63
HDFC 0.72 0.7 0.65 0.28 0.3 0.35
0.1200
0.1000
0.0974
0.0800 0.0918
0.0757
0.0707 0.0728 0.0709
0.0600 0.0663
0.0700 0.0552
0.0400 0.0495
0.0421 0.0544
0.0200
0.0000
2007-08 2006-07 2005-06
SBI 0.0663 0.0728 0.0495
BOB 0.0757 0.0918 0.0421
ICICI 0.0700 0.0709 0.0552
HDFC 0.0707 0.0974 0.0544
61
In 2007-08, the WACC for BOB was highest of 7.57% because the
proportion of equity for the firm was very high for the bank as against its
proportion of borrowings. HDFC, ICICI and SBI stood firm on second,
third and fourth spot with 7.07%, 7% and 6.63% respectively.
In 2006-07, the weightage of equity was 88% for BOB as against the
weightage of borrowed funds of 12% bringing its WACC to 9.18%. The
same was 7:3 in case of HDFC bank when concerned bringing its WACC
to 9.74% holding the top spot.
In 2005-06, the WACC was low for each bank compared to future years
as the cost of equity was very low.
62
5.4 Capital Charge
Capital charge is the total cost planned with to the bank to pay
interest and dividend for fulfilling the criterias of equity holders and
debt-borrowers.
Cost Of Capital x Capital Invested
2007-08
WACC Capital Invested Capital Charge
SBI 0.066337 100,760 6,684
BOB 0.07566 14,971 1,133
ICICI 0.069974 112,468 7,870
HDFC 0.070664 15,976 1,129
2006-07
SBI 0.049464 71,002 3,512
BOB 0.09179 9,793 899
ICICI 0.055239 75,919 4,194
HDFC 0.054395 9,248 503
2005-06
SBI 0.034328 58,285 2,001
BOB 0.04214 12,646 533
ICICI 0.043724 61,078 2,671
HDFC 0.03612 8,158 295
63
9,000
8,000 7,870
7,000
6,000 6,684
5,000
4,000
4,194
3,000 3,512
2,000 2,671
1,000 2,001
1133 1,129 899 503 533 295
0
2007-08 2006-07 2005-06
SBI 6,684 3,512 2,001
BOB 1133 899 533
ICICI 7,870 4,194 2,671
HDFC 1,129 503 295
ICICI bank provides the highest amount of capital charge to

investors in each year amounting to Rs. 7870 crores in 2007-08, Rs. 4194
crores in 2006-07 and Rs. 2671 crores in 2005-06 because they had huge
amount of capital investment. SBI gained the second spot providing
capital charge of Rs. 6684 crores in 2007-08, 3512 crores in 2006-07 and
2001 crores in 2005-06. BOB remained third each time leading HDFC
each time.
64
5.5 Economic Value Added (in %)
(EVA - As a measure of Value creation through Management of Profits)
This concern is used by the following sequence:-

ROIC which includes NOPAT divided by capital employed minus
WACC which pertains the addition of weighted cost of equity and
weighted cost of debt.
ROIC – WACC
ROIC WACC
2007-08 2006-07 2005-06 2007-08 2006-07 2005-06
SBI 0.12 0.13 0.17 SBI 0.0663 0.0495 0.0343
BOB 0.16 0.2 0.13 BOB 0.0757 0.0918 0.0421
ICICI 0.09 0.1 0.09 ICICI 0.0700 0.0552 0.0437
HDFC 0.19 0.23 0.2 HDFC 0.0707 0.0544 0.0361
0.2000
0.1800
0.1600 0.1756
0.1639
0.1400
0.1200 0.1357
0.1000 0.1193
0.1082
0.0800
0.0843 0.0879
0.0600 0.0805
0.0400 0.0537
0.0200 0.0448 0.0463
0.0200
0.0000
2007-08 2006-07 2005-06
SBI 0.0537 0.0805 0.1357
BOB 0.0843 0.1082 0.0879
ICICI 0.0200 0.0448 0.0463
HDFC 0.1193 0.1756 0.1639
65
When the question arises so as to create the economic value,
HDFC bank stands firm at the top spot with 11.93% in 2007-08, 17.56%
in 2006-07 and 16.39% in 2005-06. BOB too gave consistent
performance in 2007-08 and 2006-07 giving the economic value added
of 8.43% and 10.82% with second spot. SBI was steady on the third spot
with 5.37% and 8.05% in 2007-08 and 2006-07 respectively. But showed
excellent performance in 2005-06 holding the second spot with a
brilliant EVA of 13.57%. Instead of excellent capital investment, capital
charge and cost of equity, it failed to give better EVA compared to other
sectors.
66
Economic Value Added (in Rs.)
(EVA - As a measure of value creation through Management of Capital)
This scenario is used by the following consequence:-

NOPAT including net operating profit less tax subtracting capital
charge comprising of cost of capital multiplied by capital employed gives
the title at a substantial exposure.
NOPAT - (WACC x Invested Capital)
NOPAT Capital Charge

2007-08 2006-07 2005-06 2007-08 2006-07 2005-06
SBI 12,574 9,435 9,841 SBI 6,684 3,512 2,001
BOB 2,468 1,999 1,592 BOB 1133 899 533
ICICI 10,035 7,410 5,355 ICICI 7,870 4,194 2,671
HDFC 2,988 2,134 1,644 HDFC 1,129 503 295
9,000
8,000
7,000 7,840
6,000
5,000 5,890 5,923
4,000
3,000
3,216
2,000 2,684
2,165
1,000 1,859
1,335 1,631 1,059 1,349
1,100
0
2007-08 2006-07 2005-06
SBI 5,890 5,923 7,840
BOB 1,335 1,100 1,059
ICICI 2,165 3,216 2,684
HDFC 1,859 1,631 1,349
67
SBI holds higher size of balance sheet and therefore it is consistent
enough to stand firm and provide higher EVA each time revealing Rs.
5890 crores in 2007-08, 5923 crores in 2006-07 and 7840 crores in 2005-
06 proving it as the top public sector bank in the nation. Whereas ICICI
bank stood at the second place with an EVA of 2165 crores in 2007-08,
3216 crores in 2006-07 and 2684 crores in 2005-06 followed by HDFC in
terms of rupees. Instead it stood in terms of percentage sequence, but
failed to secure the position due to the poor size of capital. Though BOB
stood at the last spot, it did provide firm amount of Economic value.
68
Incremental EVA (in Rs.)
The incremental EVA determines the overall change in the EVA as
compared to the previous year.
EVA (t)- EVA (t-1)
1000
500
41 532
235 228 282
0
-33
-500
-1,051
-1000
-1500
-1,917
-2000
-2500
2007-08 2006-07
SBI -33 -1,917
BOB 235 41
ICICI -1,051 532
HDFC 228 282
While comparing the EVA parameter with that of its previous year,
we proclaimed that SBI lacked the consistency and gave a decrement of -
33 crores in 2007-08 somehow covering the huge decrement of -1917
crores as of 2006-07. But ICICI failed drastically from a superb
Incremental EVA of 532 crores in 2006-07 to a poor decrement of -1051
crores in 2007-08 which was the worst performance by any bank in
2007-08. BOB gave the most consistent Incremental EVA standing firm in
2007-08 and giving an increment of 235 crores crossing its mark of 41
crores’ incremental EVA of 2006-07. HDFC too gave beneficial
Increments to its EVA each time with 228 crores in 2007-08 and 282
crores in 2006-07.
69
Conclusion
Chapter
6
Findings
70
Conclusion
Banking industry in India is undergoing a rapid metamorphosis.
Their role of a traditional banker has been replaced with financial
services provider for the clients. Most of the PSU and private sector
banks in our country have already started looking at their portfolio of
services offered and what they should do in the future for remaining
competitive in the industry. As public sector banks are likely to undergo
major consolidation, suddenly for many Indian banks things have
changed. The following factors of interpretation serve the purpose of
analyzing the overall concern of proving the study.
NOPAT
2007-08 2006-07 2005-06
PUBLIC BANKS 15,042 11,434 11,433
PRIVATE BANKS 13,023 9,544 6,999
The public sector banks lead the private banks when NOPAT is
emphasized in terms of the analysis where SBI was in the front spot for
each year respectively as it is the leading bank of India.
Capital Charge
2007-08 2006-07 2005-06
PUBLIC BANKS 7,817 4,411 2,534
PRIVATE BANKS 8,999 4,697 2,966
The capital charge factor determines the impact that Private

Banks have a greater focus than public sector banks in each year
respectively. As being a private bank, they have to increase their image
in market by giving higher return to their shareholders.
ROIC
2007-08 2006-07 2005-06
PUBLIC BANKS 0.14 0.165 0.15
PRIVATE BANKS 0.14 0.165 0.145
ROIC gave an equal importance to both the sectors concerned

including public sector and private sector in 2007-08 and 2006-07
71
respectively, but 2005-06 predicted that public sector were more
effective than private sectors by a small margin.
WACC
2007-08 2006-07 2005-06
PUBLIC BANKS 0.0710 0.0823 0.0458
PRIVATE BANKS 0.0703 0.0841 0.0548
WACC for public sector banks gave a clear indication of

effectiveness in 2007-08 but had a failure in each of the respective years
of 2006-07 and 2005-06 where private sector banks did lead the game.
EVA (%)
2007-08 2006-07 2005-06
PUBLIC BANKS 0.0690 0.0944 0.1118
PRIVATE BANKS 0.0697 0.1102 0.1051
The EVA in percentage terms was higher for private banks because
the amount of invested capital is low compared to public sector banks
but in 2005-06, Public sector banks had a bit more effectiveness
compared to private banks due to higher NOPAT compared to private
sector banks.
EVA (Rs.)
2007-08 2006-07 2005-06
PUBLIC BANKS 7225 7023 8899
PRIVATE BANKS 4024 4847 4033
The EVA in rupees terms was higher for public sector banks
compared to private sector banks in each of the years due to their
invested capital gives higher return to public sector banks so as to
generate a consistent amount of NOPAT.
72
Findings
After the detailed analysis of financial data and qualitative
information of the selected banks, we have derived the following
findings,
 We found during our analysis that In Public Sector SBI ruled the
market in terms of creating shareholders value in terms of amount
where in the Private Sector HDFC was at the top spot in terms of
percentage.
 We found that after bearing all the expenditures including firms’

return to all stakeholders, the remaining wealth i.e. EVA is
accumulated by the shareholders after being reinvested so as to
create an increment in its wealth resources.
 As the result of our analysis we found that all the selected Banks
have been creating an EVA and value addition for its shareholders
throughout 3 years.
 We found that all banks are creating shareholders’ value in terms

of capital gain as well as reinvestment of the remaining profit into
the business which will surely influence the stock prices in future.
 It was found that the reinvestment criteria and its impact will be a
great deal for the firm’s expected success and value creations for
the firm in the mere future.
73
Bibliography
Books:
Frank K. Reilly, Keith C. Brown; Investment Analysis & Portfolio Management;

7th Edition, P. 175.
Prasanna Chandra; Financial management; 7th Edition, P. 828
Robert Anthony and Govindrajan; Management Control System; 11th

Edition, P. 299
V.K.Bhalla; Investment Management; 11th Edition, P. 624
William F. Sharpe, Godron J. Alexander, Jeffery V. Bailey; Investments; Fifth

Edition, P. 261.
Websites:
http://en.wikipedia.org/wiki/economic_value_added
http://in.finance.yahoo.com/
http://investopedia.com/university/eva
http://rbidocs.rbi.org.in/rdocs/Publications/DOCs/87122.xls
http://seminars.sternstewart.com/articles.asp
http://seminars.sternstewart.com/whatiseva.html
http://www.banknetindia.com/banking/boverview.htm
http://www.bankofbaroda.com/
http://www.hdfcbank.com/
http://www.icicibank.com/
http://www.rbi.org.in
http://www.statebankofindia.com/
74
Annexures
State Bank of India

Particular 2005-06 2006-07 2007-08
No. of offices 9384 9632 10369

No. of employees 198774 185388 179205
Business per employee (in Rs. lakh) 299.23 357.00 456.00
Profit per employee (in Rs. lakh) 2.17 2.37 3.73
Capital and reserves & surplus 27644 31299 49033

Deposits 380046 435521 537404
Borrowings 30641 39703.34 51727.41
Investments 162534 149149 189501
Advances 261801 337336 416768
Interest income 35980 37242 48950

Other income 7435 6765 8695
Interest expended 20390 22184 31929
Operating expenses 11725 11824 12609
Cost of Funds (CoF) 4.88 4.55 5.64

Return on advances adjusted to CoF 2.74 3.74 3.70
Wages as % to total expenses 25.29 23.33 17.48
Return on Assets 0.89 0.84 1.01

CRAR 11.88 12.34 12.64
Net NPA ratio 1.88 1.56 1.78
(Source: http://rbidocs.rbi.org.in/rdocs/Publications/DOCs/87122.xls)
75
Bank Of Baroda
Particular 2005-06 2006-07 2007-08
No. of offices 2777 2812 2931

No. of employees 38774 38604 37496

Deposits 93662 124916 152034
Borrowings 4802 1143 3927
Investments 35114 34944 43870
Advances 59912 83621 106701



CRAR 13.65 11.80 12.91
Net NPA ratio 0.87 0.60 0.47
76
ICICI Bank
Particular 2005-06 2006-07 2007-08
No. of offices 569 716 1268

No. of employees 25384 33321 40686

Deposits 165083 230510 244431
Borrowings 38522 51256 65648
Investments 71547 91258 111454
Advances 146163 195866 225616



CRAR 13.35 11.69 13.97
Net NPA ratio 0.72 1.02 1.55
77
HDFC Bank
Particular 2005-06 2006-07 2007-08
No. of offices 515 666 743

No. of employees 14878 21477 37836

Deposits 55797 68298 100769
Borrowings 2858 2815 4479
Investments 28394 30565 49394
Advances 35061 46945 63427



CRAR 11.41 13.08 13.60
Net NPA ratio 0.44 0.43 0.47
78

Economic Value Addition by Public and Private Sector Banks of India

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Economic Value Addition by Public and Private Sector Banks of India

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1

This report explains the concept of Economic Value Added that is

The report studies Indian bank’s profile to demonstrate a direct

The overriding message of this report is that banks must always

On the eve of completion and submission of grand project we

We are immensely thankful to our guide Mr. S. O. Junare

Moreover, we also declare that the said project is not submitted

Chapter 1 : Grand Project - An Introduction

• 1.1 Executive Summery

Chapter 2 : Research Design

• 2.1 Research Objectives

Chapter 3 : Overview Of Banking

• 3.1 Overview of SBI, BOB, ICICI Bank and HDFC Bank

Chapter 4 : Introduction to Economic Value Added

• 4.1 What is EVA ?

Chapter 5 : Data Analysis & Interpretation

• 5.1 Net Operating Profit After Tax

Chapter 6 : Conclusion and Findings

The purpose of report is to examine an appropriate way of

To fulfill the purpose of creating shareholders’ value, firstly NOPAT

The Cost of Capital useful for identification of Capital charge for

Finally, we met with a successful completion of our Grand Project

In order to help management understand their own economics

A bank’s management creates value when it takes decisions that

In the same context it is worth considering that the capital

The purpose of report is to examine an appropriate way of

 To study the shareholders value (in terms of Economic Value Added)

 To learn about the business policies and practices of increasing the

 To learn EVA and its applications to increase the shareholder’s

 To measure a bank’s historical success in creating values

 To study the determining factors which affects the future

 Rationale Of The Study

Being Finance Management Students, we have four decisive fields

We have prepared our comparative report on Banking. We have

 METHODS OF COLLECTION OF DATA

 TOOLS AND TECHNIQUES OF ANALYSIS

Incremental NOPAT NOPAT (t) – NOPAT (t-1)

Invested capital Total equity & Reserves + Total borrowings

Incremental Invested capital Invested capital (t) – Invested Capital (t-1)

Return on invested capital

Beta () nxy - (x) (y)  nx2 - (x)2

Cost of Equity (Ke) Rf +  ( Rm - Rf )

Cost of Debt (Kd) (Interest Expense - Interest on Deposit) / Total Borrowings

Weighted Average Cost of

Economic Value Added (EVA

Economic Value Added (EVA

Incremental EVA EVA (t)- EVA (t-1)

 LIMITATION OF THE STUDY

Bank of Hindustan, set up in 1870, was the earliest Indian Bank.

In 1955, RBI acquired control of the Imperial Bank of India, which

RBI was empowered in 1960, to force compulsory merger of weak

The Bank is forging ahead with cutting edge technology and

It is also focusing at the top end of the market, on whole sale

The Bank is changing outdated front and back end processes to

Bank of Baroda, a leading banking institution in India, has a wide

In its international expansion Bank of Baroda followed the Indian

ICICI Bank was originally promoted in 1994 by ICICI Limited, an

After consideration of various corporate structuring alternatives in

The Housing Development Finance Corporation Limited (HDFC)

The financial performance during the fiscal year 2007-08 remained

Chapter 4 : 4.3 Limitation of

4.5 EVA a superior

EVA is the invention of Stern Stewart & Co., a global consulting

What separates EVA from other performance metrics such as EPS,