A PROJECT REPORT

ON

(CHANGING TRENDS IN THE BANKING SECTOR AND ITS FUTURE

PROSPECTS)

By

KUMAR SHREYAS

Enrollment No: 10BSPHH011075

IBS HYDERABAD

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 A PROJECT REPORT ON
(CHANGING TRENDS IN THE BANKING SECTOR AND ITS FUTURE
PROSPECTS)

By

KUMAR SHREYAS

Enrollment No 10BSPHH011075

A project report submitted in partial fulfillment of

the requirements of
MBA Program of
IBS Hyderabad
Distribution List:
Faculty Guide Company Guide
Prof. Archana Pillai Mr. O. P. Singh
IBS Hyderabad Regional Manager
Sharekhan Ltd.
Sector 14

Gurgaon

Name of the Organization

SHAREKHAN Ltd.

Date of Submission: 20.05.2011

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 “Growth should not be, and is not, a strategy; it’s a tactic” – Howard Schultz

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 AUTHORIZATION

This is to certify that this report is submitted in partial fulfillment of the requirements of MBA
program of ICFAI Business School (IBS), Hyderabad. This report document titled: “Changing
Trends in the Banking Sector and its Future Prospects” is done by Kumar Shreyas as part of the
completion of the study at Sharekhan Ltd during his Internship program under the guidance of
Mr. O. P. Singh, Regional Manager, Sharekhan Ltd, Sector 14, Gurgaon.

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 ACKNOWLEDGMENT

I would like to express my profound gratitude to all those who have been instrumental in the
preparation of my project report. To start with, I would like to thank the organization Sharekhan
Ltd for providing me the chance to undertake this internship study and allowing me to explore
the area of finance which was totally new to me and which would prove out to be very beneficial
to me in my future assignments, my studies and my career ahead. I wish to place on records, my
deep sense of gratitude and sincere appreciation to my company guide and mentor, Mr. O. P.
Singh, Regional Manager, Sharekhan Ltd, who suggested and prepared the frame work of the
project. I would also like to thank him for his continuous support, advice and encouragement,
without which this report could never have been completed. I am deeply grateful, to my faculty
guide, Prof Archana Pillai who took pain to come allover from Hyderabad to Gurgaon to give
her invaluable suggestions, comments and feedback on the project.

Lastly, I wish to thank my family and friends for their valuable help and support .

Kumar Shreyas

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 EXECUTIVE SUMMARY

This report titled “Changing Trends in the Banking Sector and its Future Prospects” is a
document to be used by Sharekhan Ltd, to provide its customer an in depth knowledge about
Banking Sector in India.

Over the years Banking Sector has seen many changes. Once dumped as a sector which has
reached its maturity has completely revamped itself and is growing like never before. This report
explains in detail about each phase Banking Industry has gone through.

A section has also been dedicated to the international Basel II Accord, prepared by the Basel
Committee which was established by the central-bank Governors of the group of ten countries in
1974. The section explains the pillars of the Basel II accord on which it is made.

CAMELS model is one of the most popular model being used for the analysis of the banking
sector. A section of this report is devoted on explaining the factors involved in the CAMELS
analysis and parameters describing those factors.

Banking sector is heart of any economy. Major factors affecting economy also affects the
banking sector. The economic analysis section of this report deals with some of the major
economical factors affecting the banking sector. The report also provides an insight of the
condition of the Indian Banking Industry in its Industrial analysis section.

Based on the difference in shareholding pattern of different banks, six banking companies have
been selected and analyzed on CAMELS model. Juggling through many ratios may confuse a
customer, so a simple ranking method has been devised, which ultimately decides which banking
company is the best.

Ultimate goal of Sharekhan Ltd is to provide information to its customers on the available
investment opportunities. This report uses four different technical analysis tools to analyze the
investment opportunities in the selected banking companies. Different tools may suggest
different strategy to follow, which might be contradictory in nature. Therefore a “Weighted
score” method, which gives equal weight to all the tools, has been adopted to decide on the
strategy to be followed. The methodology formulated assumes that the investor is risk averse.

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 Abstract

The project undertaken for the Summer Internship Project (SIP) is “Changing trends in the
Banking Sector and its Future Prospects”. Banking systems have always been the backbone of
any economy. A good banking system is essential for the growth of the economy. To mobilize
saving and direct it to finance small businesses, working capital of big industries, studies of
students etc, not only increases bank profitability but also helps in the growth of economy. With
Indian GDP poised to grow in double digit figures, a robust banking system is essential. Constant
changes in regulation and interest rates by the Reserve Bank of India have created many trends in
the banking sector. There are many international banks now entering the Indian Market due to
the immense scope for growth and lucrative business opportunities. In the present environment
understanding the future of banking industry is very important. The growth of this sector will
portray the growth of all other sectors in the country. This study examines the changes that have
taken in the banking sector. The analysis is done by fundamental and technical analysis. In
fundamental analysis economy, industry and company analysis is done. Technical analysis is
done by using four tools on the selected companies and a strategy for each company is selected
using a “Weighted Score” method.

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 TABLE OF CONTENTS

1. INTRODUCTION
1.1 OBJECTIVE OF THE PROJECT……………………………………….………...14
1.2 LIMITATIONS……………………………………………….……………............14
1.3 HISTORY OF BANKING SYSTEM IN INDIA………………………..………...15
1.4 BASEL II ACCORD………………………………………………………............19
1.5 CAMELS FRAMEWORK……………………………………………...…………21
2. FUNDAMENTAL ANALYSIS
2.1 ECONOMIC ANALYSIS…………………………………………………………27
2.2 INDUSTRIAL ANALYSIS……………………………………………………….30
2.3 COMPANY ANALYSIS………………………………………………....………..38
3. TECHNICAL ANALYSIS
3.1 MOVING AVERAGE………...……………………………………………...........49
3.2 BOLLINGER BAND…………….…………………………………………….….50
3.3 RELATIVE STRENGTH INDEX………..……………………………...………..51
3.4 RATE OF CHANGE…………………...………………………..………………...52
3.5 ANALYSIS………………………………….…………………………………….53
4. CONCLUSIONS.……………………………………………………………..............…63
5. REFERENCES…………………………………………………………………..............64

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 LIST OF TABLES

Table 1: CRAR Requirement 23

Table 2: BETA 45
Table 3: Systematic Risk 45
Table 4: Unsystematic Risk 46
Table 5: Weightage 46
Table 6: Scores 48
Table 7: Score Distribution 61
Table 8: Weightage 61
Table 9: Weighted Score 62

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 LIST OF CHARTS

Chart 1: Deposit/GDP 27
Chart 2: Inflation, CRR, Repo Rate and Reverse Repo Rate 29
Chart 3: Reach 31
Chart 4: Growth 32
Chart 5: Return on Assets 33
Chart 6: CRAR 36
Chart 7: Net NPA Ratio 37
Chart 8: Shareholding Pattern 38
Chart 9: CRAR 39
Chart 10: DEBT EQUITY RATIO 39
Chart 11: Advances to Total Assets 40
Chart 12: Gross NPA to Total Loan 40
Chart 13: Net NPA TO Total Advances 41
Chart 14: Total Advances to Deposit Ratio 41
Chart 15: Profit per Employee 42
Chart 16: ROAA 42
Chart 17: Interest Income to Total Income 43
Chart 18: EPS 43
Chart 19: Credit Deposit Ratio 44
Chart 20: Cash to Deposit Ratio 44
Chart 21: BETA 45
Chart 22: Systematic Risk 46
Chart 23: Unsystematic Risk 46
Chart 24: EMA 50 and EMA 20- ICICI 53
Chart 25: Bollinger Band- ICICI 53
Chart 26: ROC- ICICI 54
Chart 27: RSI- ICICI 54
Chart 28: EMA 50 and EMA 20- Axis Bank 54
Chart 29: Bollinger Band- Axis Bank 55
Chart 30: ROC- Axis Bank 55

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Chart 31: RSI- Axis Bank 55
Chart 32: EMA 50 and EMA 20- Canara Bank 56
Chart 33: Bollinger Band- Canara Bank 56
Chart 34: ROC- Canara Bank 56
Chart 35: RSI- Canara Bank 57
Chart 36: EMA 50 and EMA 20- Standard Chartered 57
Chart 37: Bollinger Band- Standard Chartered 58
Chart 38: ROC- Standard Chartered 58
Chart 39: RSI- Standard Chartered 58
Chart 40: EMA 50 and EMA 20- HDFC 59
Chart 41: Bollinger Band- HDFC 59
Chart 42: ROC- HDFC 59
Chart 43: RSI- HDFC 59
Chart 44: EMA 50 and EMA 20- Yes Bank 60
Chart 45: Bollinger Band- Yes Bank 60
Chart 46: ROC- Yes Bank 60
Chart 47: RSI- Yes Bank 61

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 ABBREBIATIONS

ATM: Automated Teller Machine

BCBS: Basel Committee on Banking Supervision

BFS: Board of Financial Supervision

BIA: Basic Indicator Approach

BPR: Business Process Reengineering

BPSS: Board for Regulation and Supervision of Payment and Settlement Systems

CIBIL: Credit Information Bureau (India) Limited

CRAR: Capital to Risk-weighted Assets Ratio

DEMAT: De Materialize

EPS: Earning per Share

FDI: Foreign Direct Investments

GDP: Gross Domestic Product

HDFC: Housing Development and Financial Corporation

ICICI: Industrial Credit and Investment Corporation of India

IRB: Internal Rating Based

OOC: Office of the Comptroller of the Currency

ROAA: Return on Average Assets

ROC: Rate of Change

RSI: Relative Strength Index

SBI: State Bank of India

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SLR: Statutory Liquidity Ratio

VRS: Voluntary Retirement Schemes

WPI: Wholesale Price Index

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 1. INTRODUCTION

1.1 OBJECTIVE OF THE PROJECT:

 PRIMARY OBJECTIVES:

a) To study the changes in the banking system over the years.

b) To evaluate the current situation in the banking industry by fundamental analysis.
c) Comparative study of banking companies.
d) To determine the future direction of the stocks by technical analysis.

 SECONDARY OBJECTIVES:

a) To learn about the reforms in the banking sector.

b) To give better insight to the customers of Sharekhan Ltd in the banking sector.
c) To understand the working of Indian stock markets.

1.2 LIMITATIONS

a) The project depends entirely on the secondary data.

b) Fundamental analysis is done on the CAMELS framework only.
c) Technical analysis involves usage of four tools only.
d) Since annual reports give the condition of the banks on an annual basis, these may not
reflect the current positions of the bank.

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1.3 HISTORY OF BANKING SYSTEM IN INDIA

India has always been land of great economist and banking system in India is as old as its history
itself. From past to present Banking System in India has taken many forms. The phases in the
Indian Banking Sector can be divided in 4 parts:

PRE NATIONALIZATION PHASE

According to Kautalya‟s Arthshastra, the minimum interest on capital was set at 15% per annum.
Taking clue from Arthshastra, the Sahukari system evolved in India. Sahukars were a kind of
private bankers. In this system borrowers were known to Sahukars. Lending was done with very
little documentation, having exorbitant interest rates, which were compounded at short interval.
Lending process often involved hypothecation or mortgage of properties. Due to lack of
education, documents were tampered and peasants more often than not, have to surrender their
properties to the corrupt Sahukars.

With coming up of Britishers in India, commercial banks got established. The first bank to be
established was the Central Bank in 1786 1. After that came the Hindustan Bank and Bengal
Bank. The East India Company came up with some of its own banks. They include Bank of
Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843). Though these Banks
worked as independent units but together they were called as Presidency Bank. These three
banks were later amalgamated in 1920 to form Imperial Bank of India. Shareholders of this bank
were mainly Europeans.

1
http://www.gktoday.in/bank-po/brief-history-of-banking-in-india/

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When Swadeshi movement was on its peak, many Banks with Indian management got
established. These included the Punjab National Bank in 1894 with headquarters in Lahore. Bank
of Baroda, Canara Bank, Indian Bank, Bank of India, Central Bank of India, and Bank of Mysore
were set up. Apart from these banks many small, city level banks were also set up. With no
regulation to guide these banks, many banks met with failures. With economy under siege of
Britishers, growth of these banks was slow.

NATIONALIZATION

Government intervention with banks began in 1930‟s. The RBI act was passed in 1934 and
Reserve Bank of India was established in 1935. RBI acted as the central bank of India, issuing
banking notes and acting as supervisory body for all bank and exchange related activities. Before
1967 Indian banking sector used to consist of schedule commercial banks on which government
had very little influence. They were free to decide about their credit policies and used to provide
customized banking services to their client. It was an era of class banking. Many sectors, like
agriculture were profit was less, was neglected by these banks. For a balanced growth of country,
government felt need for having control over the policies of the commercial banks.

On December 1967 social control of banking sector took underway. This was done to align the
banking policy to the need of economic policy. On 22nd December 1967 National Credit Council
was set up to discuss and asses the credit priorities of the country2. To promote export, Export
credit (interest subsidy) scheme was introduced in 1968. To tighten its control over the banking
sector, government established the Banking commission in January 1969. This commission was
to look after:

a) Banking costs
b) Legislations affecting banking
c) Indigenous banking
d) Bank procedures
e) Non banking financial intermediaries.

2
http://www.rbi.org.in/scripts/chro_1968.aspx

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The most important turn in the history of Indian Banking industry came on 19th, July 1969 to
when the 14 major schedule commercial banks with deposits over 50 crore were nationalized.
With this, the era of mass banking emerged. In 1970 the SLR rate was increased from 25% to
28% and penalty for non compliance of CRR and SLR was introduced which gave teeth to RBI
to control the commercial banks. Six more banks were nationalized on 15 th April 1980 to further
control the heights of the economy.

By the end of 1990‟s nearly 80% of the banking sector was under the control of government. The
planned economic development required huge development expenditures. This expenditure was
met by automatic monetization of fiscal deficit and subjecting the banking sector to large pre-
emption – both in terms of the statutory holding of Government securities (statutory liquidity
ratio, or SLR) and administrative direction of credit to preferred sectors. Focus of development
was on sectors like agriculture, small scale industry, retail trade, small businesses and transport.
A part of the successes of green revolution could be attributed to these public banks.

There was other side of the nationalization too. Mass banking resulted in deterioration of
customer banker relationship. There was no healthy competition among the banks. A complex
structure of administered interest rates prevailed, guided more by social priorities, necessitating
cross-subsidization to sustain commercial viability of institutions. These not only distorted the
interest rate mechanism but also adversely affected financial market development. There were all
signs of `financial repressions‟ in the system.

LIBERALIZATION

Country faced a major humiliation, when it was forced to pledge its gold reserves for avoiding
the balance of payment crisis. Narasimha committee was formed to give recommendation on
banking sector reforms. On the basis of its report in 1991 CRR and SLR rates were reduced. The
SLR has been gradually reduced from a peak of 38.5% to 25%. The CRR was reduced from a
peak of 15% during 1989 to 1992 to 4.5% in June 2003. However it has been revised to 6%. The
interest rate was deregulated.

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There were some institutional reforms too. Board for Financial Supervision (BFS) 3, was formed
in 1994, to exercise the powers of supervision and inspection in relation to the banking
companies, financial institutions and non-banking companies. It was constituted to form an arms-
length relationship between regulation and supervision. On similar lines, a Board for Regulation
and Supervision of Payment and Settlement Systems (BPSS) prescribes policies relating to the
regulation and supervision of all types of payment and settlement systems, set standards for
existing and future systems, authorize the payment and settlement systems and determine criteria
for membership to these systems.

Banking sector was open to the private players in 1993. Private investors have been allowed to
invest upto 49% in public sector banks. Diversification of ownership, while retaining public
sector character of these banks has led to greater market accountability and improved efficiency
without loss of public confidence and safety. Since 1993, 12 private banks have been set up.

With increase in FDI limit in the banking sector to 74%4, it attracted many foreign investors.
Major shareholdings in ICICI and HDFC banks are of foreign investors only. With large amount
of foreign investment and foreign management coming to India, the structure of banking system
took a major turn. These private banks started giving services of international standards.
Suddenly Indian cities landscape was filled with ATMs.

POST 2000 CHANGES

To overcome the competitions from the private players the public sector bank started getting
structural changes. State Bank of India, the biggest public sector bank undertook business
process re-engineering. The business process reengineering (BPR) team was constituted in June
2003 with McKinsey & Company as consultants. The BPR's basic goal was to create an
operating architecture that would facilitate service delivery of international standards. The
project objectives were defined as "increasing customer satisfaction and convenience, freeing up
time for branch manager and branch staff to focus on sales and marketing, simplifying process

3
http://www.rbi.org.in/scripts/AboutusDisplay.aspx#FS
4
http://eravandi.blogspot.com/2009/12/fdi-in-banking.html

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for employees, enhancing SBI's competitiveness in the market, increasing the profitability
through higher market share and improved process efficiency..." After consultation the loan
granting process of SBI was centralized. Moreover the branches of the SBI were redesigned and
decorated to give its customer a better banking experience.

Other banks were not too far behind. To tap on better employees many bank introduced
Voluntary Retirement Schemes (VRS) and let away inefficient manpower in the banking in the
system. Many new services were added with the banking system. Insurance and DEMAT
account services were a boon more customers and bankers both.

1.4 BASEL II ACCORD

The Basel Committee was established by the central-bank Governors of the group of ten
countries in 19745. It meets regularly four times a year. The countries which are member to this
committee are Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong
Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia,
Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United
Kingdom and the United States. These countries are represented by their central bank and also by
the authority with formal responsibility for the prudential supervision of banking business where
this is not the central bank.

Though this Committee does not have any formal supervisory authority, and its conclusions do
not have legal force, yet it formulates broad supervisory standards and guidelines and
recommends statements of best practice. It expects that the individual country authorities will
take steps to implement them through detailed arrangements - statutory or otherwise - which are
best suited to their own national systems. In this way, the Committee encourages convergence
towards common approaches and common standard.

In 1988, the Committee decided to introduce a capital measurement system commonly referred
to as the Basel Capital Accord. The revised version of the guidelines was issued by the Basel

5
http://www.bis.org/bcbs/history.htm

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Committee of Banking Supervision in June 2006, which is being implemented by the banks all
over the world. This revised framework is known as Basel II Accord and it emphasizes more on
a risk sensitive approach for proving capital.

The revised framework is based on three important aspects called three pillars:

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 1ST PILLAR - CAPITAL ADEQUACY

The first pillar relates to minimum capital requirement for credit risk, operational risk
and trading book issues including market risk. There are two approaches for providing
capital against credit risk which include Standardized Approach and Internal Rating
Based (IRB) approach. For capital requirement in respect to operational risk, the risk can
be measured by adopting any of the three approaches, i.e. the Basic Indicator Approach
(BIA), Standardized Approach and Advanced Measurement Approach. For market risk
the Basel Committee has suggested two broad methodologies; Standardized method and
Bank‟s internal risk management model.

 2ND PILLAR- SUPERVISORY REVIEW

Supervisory review process is intended to ensure that banks have adequate capital to
support all the risk in their business and encourage them to develop and use better risk
management technique in monitoring and managing risk. Central banks are to evaluate
as to how well banks are assessing their capital needs considering their risk profile.
There are 4 key principles of supervisory review:
a) Banks should have a process for assessing their overall capital adequacy in relation to
their risk profile and a strategy for maintaining their capital levels.

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 b) Supervisors should review and evaluate bank‟s internal capital adequacy assessment and
strategies, as well as their ability to monitor and ensure their compliance with regulatory
capital ratios.
c) Supervisors should expect banks to operate above minimum regulatory capital ratios and
should have the ability to require banks to hold capital in excess of the minimum.
d) Supervisors should seek to intervene at an early stage to prevent capital to fall below the
minimum levels required to support the risk characteristics of a particular bank and
should require rapid remedial action if capital is not maintained or restored.

 3RD PILLAR- MARKET DISCIPLINE

Capital and risk management are of interest not only to supervisors, but also to all
stakeholders, including the banks owners, employee as well as banks depositors and
lenders. The objective of 3rd pillar is to complement the minimum capital requirement
and supervisory review process through disclosers such as:
a) Capital structure
b) Total amount of Tier 2 capital
c) Bank‟s approach to asses the capital adequacy to support its current and future activities
i.e. capital required for credit, market or operational risk.
d) Interest rate risk in the banking books.

1.5 CAMELS FRAMEWORK

Several foreign supervisory and regulating agencies; such as Office of the Comptroller of the
Currency (OOC) and Federal Deposit Insurance Corporation were used to rate the banks under
their authority on CAMELS framework. CAMELS framework gives a broader insight on the
position of a bank. In 1995 RBI had set up a working group headed by Sri. S. Padmanabhan to
take a fresh look at the banking supervision during 1995. It suggested measures for on-site and
off-site supervision and subsequent rating of banks by RBI. The committee suggested that
supervision of bank should focus on defined parameters of soundness, financial, managerial and

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operational efficiency. Accordingly it recommended that bank should be rated on a 5 point scale;
from A to E, widely on the lines of international CAMELS framework. It stands for:

C- CAPITAL ADEQUACY

A- ASSET QUALITY

M-MANAGEMENT

E- EARNINGS

L- LIQUIDITY

S- SENSITIVITY

CAPITAL ADEQUACY

Capital Adequacy is a measure of a bank's financial strength, in particular its ability to cushion
operational and abnormal losses. In the volatile economic environment the capital base is the
only safeguard that any financial institutions have with them. By using their capital base, banks
can honour their obligations even in a case of financial breakdown. Also capital base of any bank
helps depositors in forming their risk perception about the institutions. The parameters defining
the capital adequacy are:

 Capital to Risk Weighted Asset Ratio: The most widely used indicator of capital
adequacy is capital to risk-weighted assets ratio (CRAR). High value of CRAR means
higher level of safety for banks. It is calculated as

= (Total Capital Fund)/ (Risk Weighted Assts)

The capital taken into consideration for calculating the CRAR are the Tier 1 and Tier 2
capital. These are capital which is supposed to remain with the bank in most adverse
financial conditions.

The minimum level of CRAR required by the banks to maintain is:

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TABLE 1: CRAR REQUIREMENT

Minimum as per BASEL II recommendations 08%

Minimum in India as per RBI guidelines 09%
New Private Sector banks 10%
Banks undertaking Insurance business 10%
Local Area Banks 15%

 Debt Equity Ratio: The debt to equity ratio of a bank indicates, how much of bank‟s
business is financed through its own capital or through debt taken from others. It shows
the financial leverage of the bank. An increase in the ratio decreases bank‟s ability to
raise future funds and hence affects the capital adequacy of the banks. It is calculated as:

= (Borrowings)/ (Capital + Reserve and Surplus)

 Advances to Total Asset Ratio: This ratio show, what amount of assets has been given as
advances. Advances are directly responsible for the profit. An aggressive bank will try to
earn more profit by giving out more advances. Thus a higher ratio of advance to assets is
preferred than a lower one. It is calculated as:

= Advances/ Total Assets

ASSET QUALITY

Appreciation or depreciation of the value of assts that banks have is dependent on various
market conditions. Asset quality has direct impact on the performance of the bank. The quality of
assets particularly, loan assets and investments, would depend largely on the risk management
system of the bank. To increase profitability bank provide large amount of loans on which it
earns the interest. The nature and risk involved in each loan varies. Thus to measure the asset
quality, one have to look at the Non Performing Assets of the bank. The parameters describing
asset quality of a bank are:

 Gross NPA to Advances: As gross NPA gives the exact amount of non performing assets
in that year as provisions are not deducted form it, it provides the vital information of
how the assets performed in that year. It is calculated as

=Gross NPA/ Advances

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  Net NPA to Advances: Net NPA to advances ratio gives the information regarding the
performance of total assets combining the provisions also. Many banks operating
aggressively have large provisions for their Non Performing Assets. It is calculated as

= Net NPA/ Advances

MANAGEMENT

As important for any company, management plays a vital role in the functioning of banks. The
performance of the other five CAMELS components will depend on the vision, capability,
agility, integrity, and competence of the bank's management. In effect, management rating is just
an amalgam of performance in the above-mentioned areas. The parameters defining management
efficiency are:

 Advances to Deposit Ratio: This ratio tells how much deposit has been gives as advances
to others. Advances are necessary to earn profit and service the interest being paid to the
deposits. It is calculated as

=Total Advances/ Total Deposits

 Loan per unit Spent: It is the loan amount the bank is able to generate after spending a
unit amount on its operating activities. A good management will try to generate as much
creditors as it can by spending as little as it can on its operating activities. It is calculated
as = Term Loan/ Operating Expense

 Profit per Employee: This ratio indicates the average profit generated per person
employed. A good management will motivate employee to earn more profit for the bank.

EARNINGS

The ultimate aim of any financial institution is to increase its bottom line and bring profit to the
stakeholders. In addition, it also helps to support present and future operations of the institutions.
A bank must earn reasonable profit to support asset growth, build up adequate reserves and
enhance shareholder‟s value. Good earnings performance would inspire the confidence of
depositors, investors, creditors, and the public at large. The parameters defining earnings are:

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  ROAA gives an indication as to how much profit a bank is able to generate per unit
assets. An indicator used to assess the profitability of a firm's assets. It is most often used
by banks and other financial institutions as a means to gauge their performance. As return
on average assets (ROAA) is calculated at period ends (in this case year end), it does not
reflect all of the highs/lows but is merely an average of the period.

 Interest Income to Total Income: The core activity of any bank is to provide credit, on
which it earns interest. Thus interest income is the most important income any bank has.
The interest to total income shows the percentage of interest income to total income. It is
calculated as

= Interest Income/ Total Income

 Earning per Share: If a person invests in any company, it wishes to get return out of it.
Earning per share gives the gain a common stock holder earns. It is that portion of the
company profit that has been allocated to each outstanding share of common stock.

LIQUIDITY

To meet the demands of the customers; the depositors and the creditors, banks must maintain
liquidity in their asset. This is done by an effective mechanism called the Asset and Liability
Management. It minimizes maturity mismatches between assets and liabilities and to optimize
returns. The indicators used to determine the liquidity of a bank are the credit to deposit ratios
and cash to deposit ratio.

 Credit Deposit Ratio: This ratio gives the information of how much of the deposit has
been gives away as credit. Since not all depositors will take out all their many at a time,
banks give a large amount of credit from it. This in turn reduces the liquidity of the
banks.

 Cash Deposit Ratio: Cash being liquid of all the assets gives the direct picture of the
liquidity of the bank. But large volume of the cash in the system is harmful for the profit
of the bank.

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SENSITIVITY TO MARKET RISK

Over the years Indian banks have diversified the areas in which they operate. They are into
exchange of foreign currencies, insurance related operations etc. Some of the risks associated
with the banks are the interest rate risk, exchange rate risk, equity price risk, etc. Sensitivity
analysis reflects institution‟s exposure to interest rate risk, foreign exchange volatility and equity
price risks (these risks are summed in market risk). Risk sensitivity is mostly evaluated in terms
of management‟s ability to monitor and control market risk. The common methods of
quantifying risk are as follows:

 Beta: Beta is a measure of the volatility of a security or a portfolio of securities in

comparison to the market as a whole. It is a measure of the sensitivity of the assets return
to the market return. It measures the strength of the relationship between the market
return and the security return. The beta is calculated in the following way:
= Cov(s, m)/Var (m)
Where Cov(s, m) is the covariance between the market return and the security return and
Var (m) is the variance of the market return.
A positive beta will indicate that the securities return and the market return follow the
same trend whereas a negative beta will indicate that the securities return and the market
return follows the opposite trend i.e. if market moves up then the securities return will
move down.
 Systematic Risk: Systematic Risk also known as the Non-diversifiable risk is that portion
of an asset‟s risk that is attributable to risk factors that affect all firms in the entire
market. Systematic risk is beyond the control of investors and cannot be mitigated by
diversification, i.e. combination of the asset with other assets. The factors of risk are
changes in taxation, foreign investment policy change, shift in socio-economic
parameters, international incidents etc.
 Unsystematic Risk: Unsystematic risk also known as the Diversifiable risk is that portion
of an asset‟s risk that is inherent in each investment. It is attributable to industry specific
or firm specific events that can be eliminated by diversification. The risk is due to the
following factors strikes, lawsuits, regulatory actions etc

26 | P a g e
 2. FUNDAMENTAL ANALYSIS

The fundamental analysis of the banking sector deals with:

a) the effect of economy on the banking sector in the economic analysis,
b) the baking industry as a whole in industrial analysis,
c) the analysis of seven selected banking companies in company analysis.
2.1 ECONOMIC ANALYSIS

GDP

Economic analysis deals with forces operating in the economy which influences the banking
sector. Any economy is best described by its GDP. Indian economy is the second fastest growing
economy in the world. From 2004 until 2010, India's average quarterly GDP Growth was 8.40
percent reaching an historical high of 10.10 percent in September of 2006 and a record low of
5.50 percent in December of 2004. India's diverse economy encompasses traditional village
farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of
services. Services are the major source of economic growth, accounting for more than half of
India's output with less than one third of its labor force. This service industry is dependent on the
banking sector to provide capital. Banking industry is the heart of the economy which is
pumping the liquidity in the economy. Banking sector held an important position in India‟s
service sector. The growth of the economy directly affects the banking industry.

Chart 1: Deposit/GDP6

6
Source for Deposit value: http://rbi.org.in

27 | P a g e
Interpretation:

Deposits constitute a major source of funds for banks in India. As seen in the chart, the deposit of
private, public and foreign banks has grown as the GDP 7 has grown over the years. This figure
also shows the confidence of the customers in banking system of India as the deposit in the bank
is a considerable percentage of the GDP.

On running a regression between GDP at market price and deposits in banks (public, private and
foreign banks combined). Here Deposits in bank in considered as a dependent factor which
depends on the GDP at market prices. The period taken for analysis is after the reform; from
1991 to 2010.

INFLATION

Inflation refers a general increase in the prices measured against a general level of the power to
purchase. To control inflation, RBI uses tools like, CRR (Cash Reserve Ratio), Repo
(Repurchase) Rate and Reverse Repo Rate.

CRR is the amount of Cash that the banks have to keep with RBI. This Ratio is basically to
secure solvency of the bank and to drain out the excessive money from the banks. To control
increase in inflation rate RBI decides to increase the percent of this, so that the available amount
with the banks comes down.

Repo rate is the rate at which the RBI lends shot-term money to the banks. To control inflation
RBI increases repo rate, which makes borrowing form RBI more expensive. Reverse Repo rate is
the rate at which banks park their short-term excess liquidity with the RBI. The RBI uses this
tool when it feels there is too much money floating in the banking system. An increase in the
reverse repo rate means that the RBI will borrow money from the banks at a higher rate of
interest. As a result, banks would prefer to keep their money with the RBI.

7
Source for GDP value: http://mospi.nic.in/t1_1996_2003q2.htm

28 | P a g e
Note: in this analysis Wholesale Price Index (WPI) is taken as a proxy for inflation. The monthly
inflation rate in calculated by subtracting the current WPI from WPI of same month, a year
before and dividing by the current WPI.

Chart 2: Inflation, CRR, Repo Rate and Reverse Repo Rate:8

Interpretation:

Chart shows that the rates

under consideration have
been increased only when
the rate of inflation has
crossed the 7.5 mark. The
inflation rate crossed the 7.5
mark in April 2008 and
again in January 2010 and both the time first the CRR rate was increased, followed by Repo rate
and Reverse rate respectively. It is also observed that whenever there was rapid increase in the
inflation rate, CRR as a tool has been used by the RBI, to cool off the inflation. This is seen in
the way that CRR was increased considerably both between April till July 2008 and again in
January till April 2010. In 2009, when the inflation rate was under control and was decreasing
the CRR rate was fixed at 5, repo rate at 4.75 and reverse repo rate at 3.25. In 2010, the CRR was
increased to 6 in order to reduce the rapid increase in the inflation rate, whereas further
correction in the inflation rate was done by varying the repo and reverse repo rate.

8
Appendix I

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2.2 INDUSTRIAL ANALYSIS9

Banks in India can be categorized into non-scheduled banks and scheduled banks. Scheduled
banks constitute of commercial banks and co-operative banks. There are 88 scheduled
commercial banks. Among these, 27 banks are public sector banks in which government has the
major stake. There are 31 private and 38 foreign sector banks operating in India. The commercial
banks in India have an extensive network of branches all across the country. Nearly 78% of the
banking industry asset is with the public sector bank.

PORTER FIVE FORCES MODEL10

a) Bargaining power suppliers: It is high in the periods when there is tight liquidity. Being a
service sector, human capital is one of the most important supplies to the sector. Public
sector banks in India have big trade unions which are having high bargaining power.
Establishment of well functioning capital market in India has given a choice to the
depositors to invest instead of saving. Moreover, with the deregulation of the interest rate
suppliers bargaining power has considerably increased.

b) Bargaining power of customers: With large number of banks operating in India, the
bargaining power of creditworthy borrowers is high. Development of capital markets in
India has given an additional option to the businesses in India to source their funds.

c) Threat of substitute products: With development well functioning capital market in India,
investors have an opportunity to direct their savings into investment opportunities
whenever they decide so. Even Corporates have an option of raising their capital through
public issues, than for taking debt from banking companies.

9
All data for analysis is taken from
http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Basic%20Statistical%20Returns
10
http://www.equitymaster.com/research-it/sector-info/bank/

30 | P a g e
 d) Threat of new entrant: After changes made in the regulation of the banks, many new
private are coming up and foreign banks are considering entering India. Now RBI is
coming up with new guidelines for NBFC‟s who wishes to start commercial banking
operations.

e) Competition Rivalry: Competition in banking sector is high due to presence of public

sector, private sector banks and foreign banks along with non banking financial
companies.

REACH
Chart 3: Reach

Interpretation:

By the end of March 2010, in rural India,

the public sector banks were having
nearly 20000 branches, where as private
sector banks have only 1000 branches.
Foreign sector banks have yet to expand
in the rural areas. The number of branches
of foreign and private sector bank
increases as we move from rural to semi-
urban to urban and metropolitan areas.
This is because, private and public sector banks follow the class banking philosophy. They
provide quality services to people who do large transactions. Whereas the number of branches of
public sector banks depends on the population it covers. This is why, the number of branches of
public sector banks decreases as me move from rural to semi-urban to urban and metropolitan
areas.

Still large population of the country is still left to be covered by the banking sector. ICICI, a
private sector bank has extensively started its operation in the rural areas. Similarly foreign
sector banks are spending heavily to increase their operations in India.

31 | P a g e
GROWTH

Chart 4: Growth

Note: The figure shows the year on year

growth average of 28 banks in India. The
banks included are; Allahabad Bank,
Andhra Bank, Bank of Maharashtra, Bank
of Rajasthan, Bank of Baroda, Bank of
India, Canara Bank, Corporation Bank,
City Union Bank, Deena Bank, Dhan
Laxmi Bank, Federal Bank, State Bank of India, Punjab National Bank, HDFC, IDBI,
INDUSDIN, J&K Bank, Indian Oversees Bank, Karur Vasya Bank, Bank of Karnataka, Oriental
Bank, South India Bank, Syndicate Bank, Union Bank, Axis Bank, ING Vasya Bank and Yes
Bank.

Interpretation:

The figure clearly depicts the phenomenal growth rate that banking industry has achieved over
the years. Growth rate in PAT of nearly 30% shows that Banking Industry is still in its growth
phase of life cycle in India. It is opposed to what the general perception of the people had about
Indian Banking Industry to be in mature phase with very little opportunity of growth.

RETURN ON ASSETS

Return on Assets measures a bank‟s profits compared to its entire investment. It is an indicator
of how profitable a bank is relative to its total assets. ROA gives an idea as to how
efficient management is at using its assets to generate earnings. It is calculate as:

= Net Income/ Total Asset

32 | P a g e
Chart 5: Return on Assets

Interpretation:

Public and Foreign sector banks saw a fall

in their returns on assets in the financial
year ended March 31, 2010 as a decrease
in funding costs was unable to offset a fall
in the interest rates charged to customers.
The RBI has set the trigger point for RoA
if it goes below .25% mark. With RoA still
near 1% mark, it can be said that banks are
doing well inspite of tough competition over interest rates.

RISK INVOLVED IN THE BANKING SECTOR

The risks associated with providing banking services differ by the type of service rendered. Risk
is the danger of an adverse deviation in the actual result from an expected result. High returns are
said to also accompany high risk. So the risks involved in the banking sector are:

CREDIT RISK

MARKET RISK

OPERATIONAL RISK

LIQUIDITY RISK

OTHER RISKS

CREDIT RISK
Credit risk is defined as the potential that a bank borrower or counterparty will fail to meet its
obligations in accordance with agreed terms. It is the negative consequence associated with the
defaults or non- fulfillment of concluded contracts in lending operations due to deterioration in

33 | P a g e
the counterparty‟s credit quality. The goal of credit risk management is to maximize a bank's
risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters.
Banks need to manage the credit risk inherent in the entire portfolio as well as the risk in
individual credits or transactions. Banks should also consider the relationships between credit
risk and other risks. The effective management of credit risk is a critical component of a
comprehensive approach to risk management and essential to the long-term success of any
banking organization. It consists of:
a. Counterparty default risk: this refers to the possibility that the other party in contract in
an agreement will default.
b. Securitization risk: in recent world crisis that led to global recession was started due to
improper management of the securitization risks. Securitization is a process of
distributing risk by aggregating debt instruments in a pool and then issuing new securities
backed by the pool. There are two type of securitizations viz., „traditional‟ and „synthetic‟
securitizations. A „traditional‟ securitization is one in which an originating bank transfers
a pool of assets that it owns to an arm‟s length special purpose vehicle. Conversely, a
„synthetic‟ securitization is one in which an originating bank transfers only the credit risk
associated with underlying pool of assets through the use of credit-linked notes or credit
derivatives while retaining the legal ownership of the pool of assets.
c. Concentration risk: it is any single exposure or group of exposures with the potential to
produce losses large enough (relative to bank‟s capital, total assets, or overall risk level)
to threaten a bank‟s health or ability to maintain its core operations.

MARKET RISK
Market risk is the risk of possible losses in, on- balance sheet and off balance sheet positions,
due to movement in the market prices. The market risk positions, subject to capital charge
requirement, are:
a. Interest Rate Risk (IRR): The risks pertaining to interest rate related instruments and
equities in the trading book. IRR is defined as the change in bank‟s portfolio value due to
interest rate fluctuations. The IRR management in concerned with measurement and
control of risk exposures, both in trading book (i.e. assets that are regularly traded and are

34 | P a g e
 liquid in nature) and the banking book (i.e. assets that are usually held till maturity and
rarely traded).
b. Equity Price Risk: the risk arising due to fluctuation in market prices of equity due to
general-market related operations.
c. Foreign exchange risk throughout the bank. The risk arises due to fluctuation in the
exchange rate.

OPERATIONAL RISK
Operational risk is defined as the risk to loss resulting from inadequate or failed internal
processes, people and systems or external events. This does not include strategic and reputational
risk. Some of the factors for operational risk could be lack of competent management or proper
planning and controls, incompetent staff, indiscipline, involvement of staff in frauds, outdated
systems, non-compliance, programming errors, failure of computer systems, increased
competition, deficiency in loan documentation etc.

LIQUIDITY RISK
Liquidity risk arises from the bank‟s inability to meet its obligation when they come due. The
various types of liquidity risks are:
a. Term Liquidity Risk: this risk arises due to unexpected prolongation of the capital
commitment period in lending transactions. It is the unexpected delay in the repayment.
b. Withdrawal/Call Risk: it is the risk that more deposits will be withdrawn than expected.
When large amount of deposits are taken away from the bank in a relatively span of time,
it raises the risk that bank will not be able to meet all its obligations.
c. Structural Liquidity Risk: it is the risk that rises when the necessary funding transactions
cannot be carried out. The risk is sometime also called as funding liquidity risk.
d. Contingent Liquidity Risk: it is the risk associated with funding additional funds or
replacing maturing liabilities under potential, future stressed market conditions.
e. Market Liquidity Risk: this is a risk which arises when positions cannot be sold within
desired time period or could only be sold at a discount. This is especially the case with
securities/derivatives in illiquid markets, or when bank hold such a large positions that
they cannot be easily sold.

35 | P a g e
OTHER RISKS
a. Strategic Risk: it refers to the negative impact on capital and earnings due to business
policy decisions, changes in the macro economic environment, insufficient
implementation of decisions or failure to adopt in the changing economic environmental
conditions.
b. Reputation Risk: it is the potential adverse effect that a bank can have if its reputation
deviates negatively from its expected position. A bank‟s reputation refers to its image in
the eyes of interested public; the stakeholders.
c. Capital Risk: it is the imbalance in the internal capital structure in relation to the nature
and size of the bank, or from difficulties associated with raising additional risk coverage
capital quickly, if necessary.
d. Earnings Risk: this risk arises due to inadequate diversification of bank‟s earnings or its
inability to attain sufficient and lasting profitability.

CAPITAL TO RISK WEIGHTED ASSETS RATIO

To overcome the risk involved in the banking sector, banks have to maintain a minimum amount
of capital base. The ratio of this capital base with respect to the credit, market and operational
risk is known as Capital to Risk Weighted Assets Ratio and is calculated as follows: Total
Eligible Capital Fund/ Risk Weighted Asset

Chart 6: CRAR
Interpretation:

The minimum required CRAR for

public bank is 9% and for private
and foreign banks is 10%. If we
look at the CRAR of public, private
and foreign banks over the years we
see that the ratio has always been
above 12%, well above the
requirement. By 2010 the public and

36 | P a g e
private sector banks were having CRAR of more than 17% which shows that the banks in India
are very safe.

NET NON PERFORMING ASSETS RATIO

Talking about the risk involved in the banking sector, one need to measure it. One of the
indicators used to determine risk in the banking system is to look at the non performing assets of
the banks. Non performing assets are those assets of banks on investment of which banks are not
getting any returns. These are percentage of the loans distributed by banks, which have not been
returned back. Banks usually treat assets as non-performing if they are not serviced for some
time. If payments are late for a short time a loan is classified as past due. Once a payment
becomes really late (usually 90 days) the loan classified as non-performing.
Chart 7: Net NPA Ratio

Interpretation:

If we look at the average of the net non

performing assets of the 33 Indian banks,
we find the ratio is bellow 1.2% mark.
As per RBI guidelines the NPA of any
bank should be less than 10%. So the
NPA level of Indian banks is well below
danger level. This means that banks
operate at a very safe level.

37 | P a g e
2.3 COMPANY ANALYSIS11

For analysis of banking companies, six banking were selected. The selection of these companies
was on the basis of the unique shareholding pattern of those companies. The shareholders in a
banking company are divided into seven groups. These are Indian Government and RBI, Indian
Financial Institutions, Foreign Financial Institutions, Other Indian Corporate, Other Foreign
Corporate, Individual Indian Residents and Individual Foreign Residents.

Chart 8: Shareholding Pattern:

Interpretation:

The banking companies selected for

the analysis are; Canara Bank, Axis
Bank, HDFC Bank, ICICI Bank, Yes
Bank and Standard Chartered Bank.

The major shareholder of Canara Bank

is the Government and RBI, hence it
could be considered as a bank run by
Government.

ICICI bank can be said to be run by the

Foreign Financial Institutions as they have nearly 66% stake in the bank.

Axis Bank can be said to be a collaboration of Indian and Foreign Financial Institution. They are
having 46% and 42% stake in the bank respectively.

HDFC Bank can be said as bank run by Corporate. Both Indian and Foreign Corporates are
major shareholder of this bank.

Yes Bank is unique in a manner that a quarter of its shares are held by Indian individuals.
Standard Chartered is a foreign bank operating in India and hence taken for analysis.

11
Calculation in Appendix II

38 | P a g e
CAPITAL ADEQUACY RATIO

Chart 9: CRAR

Interpretation:
It can be seen that private banks such
as HDFC and ICICI have stored a
large amount of capital in 2009 and
2010 to safeguard them from any
financial shocks. Canara bank on the
other has maintained its CRAR to a
safe around 13.5% level. Axis bank
too is maintaining more than the
required CRAR. It has raised its reserve capital from 11.57% in 2007 to nearly 16% in 2010. Yes
Bank being a new entrant in the banking sector is maintaining the highest level of required
capital compared to its risk weighted assets. Standard Chartered bank being a foreign bank
operating in India is maintaining, just sufficient level of CRAR.

Chart 10: DEBT EQUITY RATIO

Interpretation:

Banks in India has an average of

Debt to Equity ratio of 1. Banks
like HDFC, Canara and Standard
Chartered can raise more capital
when required as their ratio is less
than 1. On the other hand ICICI,
Axis and Yes bank will have
problem in borrowing the money as they are highly leveraged.

39 | P a g e
Chart 11: Advances to Total Assets

Interpretation:

All the banks except Canara Bank

and Standard Chartered have
maintained their Advances to
Asset ratio to around 50%. Since
Canara Bank was very slow to
changes in the Banking sector it‟s
Advances to Asset ratio was very
less in 2007 and 2008. But from
2009 onwards it has increased the amount of advances with respect to the total assets. Standard
Chartered wholesale banking saw decrease in 2009 due to unfavorable economic conditions.
This greatly affected the advances of the bank and a decrease in the advances to total asset ratio.

ASSET QUALITY

Chart 12: Gross NPA to Total Loan

Interpretation:

Compared to the peers in the

banking sector the gross NPA to
advances ratio of Yes and AXIS
bank are very high. This is due to
the aggressive policies they adopt
while sanctioning the advances.
Axis bank gross NPA has reached
alarming level, but the bank has increased provisions for non performing assets. Standard
Chartered Bank has faced huge losses due to Non Performing Assets in India. Nearly 70% of all

40 | P a g e
the loans and advances by Standard Chartered bank are of short tenure (less than a year), which
has increased the probability of non performance of the loans and advances.

Chart 13: Net NPA TO Total Advances:

Interpretation:

Net Non Performing Assets to

total advances of each bank is
well within the trigger level of
RBI. Canara Bank being most
conservative player in the field is
having the lowest value of the
ratio. Axis bank through large
amount of provision has managed
to lower the net Non Performing Assets to total advances to acceptable level. Standard Chartered
credit policy of giving short term loan is mainly responsible for its high Net NPA to total
advances ratio.

MANAGEMENT EFFICIENCY

Chart 14: Total Advances to Deposit Ratio

Interpretation:

Advances to deposit ratio of nearly

all the banks in banking sector has
gradually increased from around
60% to 75%. ICIC Bank and
Standard Chartered Bank which
have aggressive management policy
from the beginning itself has given
large amount of advances with
respect to their deposits.

41 | P a g e
Chart 15: Profit per Employee

Interpretation:

Canara Bank being a public sector bank,

very resistive to changes has a very low
profit per employee ratio among its peers.
HDFC bank is yet to fully establish itself
also has a very low profit per employee
ratio. Axis bank is having a good profit
per employee ratio which shows good
management efficiency of the bank. Yes
Bank‟s management policy gives great importance to its human capital. Its HR policies involve
great precaution in selection process. Hence Yes Bank has the highest Profit per Employee ratio.

EARNING QUALITY

Chart 16: ROAA

Interpretation:

Return on average asset of Axis

bank and HDFC bank is very
high. Since ICICI bank is
expanding its base in the rural
areas, its return on average asset is
maintained around 1%. Canara
Bank too has managed to increase
its return on average asset to
around 1.3%. Standard Chartered
bank being a foreign bank, has
presence only in metropolitan cities, hence with small assets it has been able to generate
comparatively large profit.

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Chart 17: Interest Income to Total Income

Interpretation:

With Indian banks diversifying their

operation in many fields, yet interest
income is one the major source of
their revenue. The interest income
holds 70 to 80 percent weightage in
nearly all banks total income. HDFC
bank operating in many diverse fields
has a relatively less income from interest.

Chart 18: EPS

Interpretation:

Most of the banks in the banking sector

have earning per share of around Rs 30
to Rs 40. Yes bank being new in the
banking sector is still in its formative
years, hence earning per share of this
bank is low. HDFC has the best earning
per share value among its peers in the
banking sector.

43 | P a g e
LIQUIDITY

Chart 19: Credit Deposit Ratio (in %)

Interpretation:

With boom in the economy all the banks

has increased their credit to deposit ratio to
around 70%. ICICI again being an
aggressive bank has the highest value for
the credit deposit ratio. HDFC bank on the
other hand has not increased its credit
deposit ratio.

Chart 20: Cash to Deposit Ratio (in %)

Interpretation:

On an average Banks in India

maintains 0.50% cash in hand to
the deposit that they have. Canara,
Yes and Axis Bank are keeping
less cash compared to their
deposit compared to the industrial
average.
SENSITIVITY TO MARKET RISK
Note: For calculating the beta, systematic and unsystematic risk of the banking companies, share
price data of 8 banking companies are taken on a monthly basis from January 2006 to April
2011. All of these banks are listed in the National Stock Exchange. Their return is compared with
S&P CNX Nifty return, which is taken as a proxy for market return. It consists of stocks of 50
companies over 23 sectors, and hence is a diversified portfolio, reflecting the overall trend of the
market. The data for Yes Bank is taken from March 2008.

44 | P a g e
Table 2: BETA12
STAN'
NIFTY AXIS CANARA HDFC ICICI
CHART YES BANK
yearly return 0.1279 0.2681 0.1851 0.2071 0.0883 0.028 0.191294587
Beta 1.1241 0.85152 1.1528 1.4090 0.821 1.626209913

Chart 21: BETA

Interpretation:
Axis, HDFC, ICICI, Yes Bank shows greater fluctuation than the market and hence are more
risky than market portfolio. On the other hand Canara and Standard Chartered bank have less
volatility than the market portfolio and hence are less risky. If we compare the risk with the
return, we find that banks with high risk have also given high returns. But ICICI bank, though
being perceived risky has given comparatively small yearly return.

Table 3: Systematic Risk

STAN'
AXIS CANARA HDFC ICICI
CHART YES BANK
sys risk 0.0093 0.0053 0.0098 0.0147 0.0050 0.02463282

12
Calculation in Appendix IV

45 | P a g e
Chart 22: Systematic Risk
Interpretation:
Though Systematic Risk is that part of risk that
cannot be diversified and affects all the banking
companies, yet Yes bank is shown have more
systematic risk than its peers. This is due to the
fact that it is a small bank compared to others and
will face a bigger impact than others.

Table 4: Unsystematic risk:

STAN'
AXIS CANARA HDFC ICICI
CHART YES BANK
un sys risk 0.0089 0.0077 0.0059 0.0105 0.0054 0.011908274

Interpretation:

Again,Yes bank is having high value of

unsystematic risk also. Standard Chareterd
being a foreign bank is fully diversified is
having least unsystematic risk as it operates
many economies.

Chart 23: Unsystematic Risk

RANKING OF THE BANKING COMPANIES

To identify the best bank, taken in the analysis a ranking method is employed. In this, weightage
is given to each of the components and their parameters used in CAMELS analysis framework,
depending on their relative importance and the importance of the parameter contained within
them. The total weight of all the components is equal to 100. The weights given are as follows:

Table 4: Weightage13

13
Calculation and Marks Distribution in Appendix III

46 | P a g e
 Ratio Weightage Rationale:

Capital Adequacy 27 Capital Adequacy is considered “the” most

CRAR 9 important requirement for running a Bank
effectively. Hence capital adequacy component
Debt Equity Ratio 9
of the CAMELS ratio is given the highest
Advances to Assets 9
importance. Next liquidity is considered as an
Asset Quality 10 important aspect for running a bank smoothly.

Gross NPA to Advances 5 Thus it has been given the second highest
weighted in the CAMELS framework. The
Net NPA to Advances 5
importance of Capital Adequacy and Liquidity
Management Efficiency 15 in the banking sector can be seen in the way
Total Advances to Deposit 5 the new BASEL III guidelines being issued for

Loan per unit Spent 5 these two factors. All other parameter has been
given equal weightage of five each. Since the
Profit per Employee 5
model applies to all banks in same manner
Earning Quality 15 therefore the effect of weightage to all banks
ROAA 5 will be same.

Interest to Total Income 5 Process: A unit weight is taken as a unit mark.

EPS 5 Every mark is given a band of parameter value.

Mark is given to every bank depending on the
Liquidity 18
band in which they fall in. An average is taken
Credit Deposit Ratio 9 for the four years and score is obtained
Cash Deposit Ratio 9 separately for each parameter for each bank.

Sensitivity 15 A score is obtained out of 100 for each bank

Beta 5 and then compared.

Systematic Risk 5 The band of value set for each parameter for
Unsystematic Risk 5 each is given in Appendix III.

Total 100

47 | P a g e
Table 6: Scores
CAPITAL ADEQUACY
HDFC ICICI CANARA AXIS BANK YES BANK STANDARD CHARTERED

CRAR 6.5 6.55.25 5 6.75 2.75

D/E 8.5 3.75 8 5.75 3 7
Advances/Asssets 8.25 8.56.25 8.5 8.75 6.75
OUT OF 27 23.25 18.7519.5 19.25 18.5 16.5
ASSET QUALITY
HDFC ICICI CANARA BANK AXIS BANK YES BANK STANDARD CHARTERED
Gross NPA Ratio 3 4.75 5 4.75 4 1
Net NPA Ratio 4.75 5 3.75 4.75 5 3
OUT OF 10 7.75 9.75 8.75 9.5 9 4
MANAGEMENT EFFICIENCY
HDFC ICICI CANARA BANK AXIS BANK YES BANK STANDARD CHARTERED
Advances/Deposit 3.25 5 3.5 3.25 4.25 5
Loan per unit 2.25 4 3.5 4.5 4.75 1
Spent
Profit per 5 5 4.5 5 5 2.75
employee
OUT OF 15 10.5 14 11.5 12.75 14 8.75
EARNING
HDFC ICICI CANARA BANK AXIS BANK YES BANK STANDARD CHARTERED
ROAA 3.25 3 2.5 3 3.5 5
Interest/Total 1.75 5 4.25 4 5 4.25
Income
EPS 3.5 3 3.75 2 1.5 3
OUT OF 15 8.5 11 10.5 9 10 12.25
LIQUIDITY
HDFC ICICI CANARA BANK AXIS BANK YES BANK STANDARD CHARTERED
Credit/Deposit 5 5 8.25 4 2.25 8.75
Cash/Deposit 8.5 5.75 2 1 1 4.75
OUT OF 18 13.5 10.75 10.25 5 3.25 13.5
SENSITIVITY
HDFC ICICI CANARA BANK AXIS BANK YES BANK STANDARD CHARTERED
Beta 4 2 5 3 1 5
Systematic Risk 1 1 4 1 1 4
Unsystematic Risk 4 1 2 1 1 4
OUT OF 15 9 4 11 5 3 13
CAMELS FRAMEWORK
HDFC ICICI CANARA BANK AXIS BANK YES BANK STANDARD CHARTERED
TOTAL SCORE 71.75 68.25 71.5 57.75 57.75 68

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Interpretation:
The total score out of hundred shows that among the banks selected for the analysis and the
methodology adopted for the analysis, HDFC, a bank solely run by corporates is the best bank,
followed by Canara Bank, in which the majority shareholder is Government and RBI.

3. TECHNICAL ANALYSIS
Technical analysis is the study of market action, primarily through the use of charts, for the
purpose of forecasting future price trends. 14 It is a method of predicting price movements and
future market trends. Technical analysis proposes that all information about the market price and
its future fluctuation is contained in a price chain. All the factors that have some influence on the
price, be it economical, political or psychological has already been considered and included in
the price of that stock.

3.1 Moving Average

Moving average is an indicator which is used in technical analysis which shows the average
value of securities prices over a number of days. Moving averages smooth the price data and
filter out the fluctuations to form a trend following indicator.

Shorter length moving averages are more sensitive and it catches the trend earlier but is not much
reliable, whereas longer moving averages are more reliable, it catches up the big trend but are
less responsive.

There are basically two types of Moving Average-

 Simple Moving Average: It is formed by calculating the average price of a security of a

specific number of periods
 Exponential Moving Average: It is calculated by putting more weight to recent prices.

14
Technical Analysis of the Financial Markets by John J. Murphy

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Exponential Moving averages are more sensitive to recent prices and recent price changes.
Therefore Exponential Moving average will turn and change before Simple Moving Average.

Trend Indicators:

An upward momentum is considered when a short run moving average crosses over a long run
moving average predicting a bullish market. A downward momentum is considered when a short
run moving average crosses below a long run moving average predicting a bearish market.
Moreover for a bullish market there should be a plenty of space in between the moving average
and both the moving averages should be sloping upward. Moving Averages are also used to find
out the support and resistance level of a securities price over a specific period.

3.2 BOLLINGER BANDS:

Bollinger bands developed by John Bollinger are one of the important technical indicators in
measuring price action volatility. The major signals from the Bollinger Bands are:

 The squeeze
 The expansion

The bands automatically widens when the volatility increases and contracts when the volatility
decreases. Bollinger band limits indicate whether an individual stock is overbought or oversold.

Bollinger band consists of a middle band and two outer bands. The middle band is a Simple
Moving average usually set at 20 periods. The outer two bands are usually set at a standard
deviation of 2 above and below the middle band.

For determining the strength of the band two trends are to be identified:

 W-Bottoms

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  M-Tops

W-Bottoms: This is formed during a downtrend and it involves two reaction lows in which the
second low is lower than the lower band but it remains above the first low. The stages of
formation of W-Bottoms are-First a reaction low is formed then the prices shoots upward
towards the middle band and then the prices declines below the first low but it remains above the
lower band. This indicates that the weakness of the stock is reducing and then the prices shoots
upward and it generally breaks the resistance level.

M-Tops: An M-Top is formed during an up-trend. The stages of formation of it are Firstly the
price breaks the resistance level and overshoots the upper band then the price is pulled backward
towards the middle band again the price moves upward and it overshoots the previous high but it
fails to reach the upper band. The failure of the price to reach the upper band is usually a signal
that the trend is going to be reversed. Finally the price moves in a downward trend indicating a
bearish market sign.

3.3 Relative Strength Index

Relative strength index was developed by J.Welles Wilder. RSI is an extremely popular
momentum indicator. RSI is a momentum oscillator that measures the speed and change of price
movements. RSI oscillates between zero and 100. Here RSI is calculated on 14 days basis.
Traditionally the stock is considered to be overbought when RSI is above 70 and oversold when
RSI is below 30.

RSI Signals:

 When the RSI crosses over 70 marks the stock is considered to be oversold and hence it
is overvalued. So it is high time to sell the stock so as to make profits.
 When the RSI crosses below 30 marks the stock is overbought and hence it is
undervalued. So it is high time to buy the stock.

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  An RSI reading over 50 indicates a bullish signal and below 50 indicates a bearish signal

3.4 Rate of Change (ROC):

The Rate-of-Change (ROC) indicator, which is also referred to as simply Momentum, is a pure
momentum oscillator that measures the percent change in price from one period to the next. The
value of ROC oscillates around a central zero-point level. To calculate ROC 12 days period is
used to compare with today‟s price.

ROC Indicators:

 A movement toward the zero line indicates that the existing trend is losing momentum.
 ROC moving from above zero to below zero level is an indication of sell while ROC
moving from below zero to above zero level is an indication of buy.

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3.5 Analysis15: Charts taken under study are from 8th February to 6th May 2011.
ICICI BANK
Chart 24: EMA 50 and EMA 20
Interpretation:
EMA 20 was above EMA 50
from March till May 2 but
the two EMAs are coming
close together and is also
downward trend along with
the price so bearish trend is
indicative of that and hence
SELL signal is generated.

Chart 25: Bollinger Band

Interpretation:
From this it can be seen that
M-tops are formed during
March 28 when the prices
have overshot the upper band
again in April 4 the price has
crossed the previous high but
is unable to touch the upper
band which indicates that the share price is weakning and hence a downward trend prevails
thereafter. But a price have crossed the lower band in May 2-6 which indiactes the possibility of
formation of W-bottoms and rising of share prices in future but the bands have contracted
indicating a bearish market trend. For a long run, this indicates a HOLD signal.

15
Charts taken from http://in.finance.yahoo.com

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Chart 26: ROC
Interpretation:
The ROC line shows that it has
crossed below 0 point indicating
a bearish momentum and hence it is time to SELL the stock.But it is upward sloping at the end
indicating that the stock is gaining strength. The chance of upward movement of share generates
a HOLD signal.

Chart 27: RSI

Interpretation:
The RSI line shows that the trend
line has crossed below 30 mark
and hence it is overbought and reversal of trend is indicative of that and it has touched 50 mark
indicating a bullish market is on the way. This indicates a BUY signal.

AXIS BANK
Chart 28: EMA 50 and EMA 20

Interpretation:
From the graph it is seen that
EMA20 crossed below EMA
50 and both are downward
sloping and the share price is
also below the EMAs
indicating a bearish trend and
hence it is time to SELL the
stock.

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Chart 29: Bollinger Band
Interpretation:
W-bottom is formed during
April-May indicating that the
weakness of the stock is getting
reduced and the bands have also
expanded indicating that a
bullish market trend is on its
way. This gives a signal to
BUY.

Chart 30: ROC

Interpretation:
Since ROC line is below 0 point
and downward sloping so it is
time to SELL the stock.

Chart 31: RSI

Interpretation:
The RSI line indicates that the it
has touched 30 mark indicating
overbought and hence reversal of trend is indicative of that and also the line is upward sloping so
bullish market trend is on its way. So this generate a BUY signal.

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CANARA BANK
Chart 32: EMA 50 and EMA 20
Interpretation:
From the graph it is seen the
EMA 20 has crossed below
EMA 50 and share price is also
below the EMA‟s indicating a
bearish signal. Hence it is time
to SELL the stock.

Chart 33: Bollinger Band

Interpretation:
From the graph it is seen that M
top was formed in the month of
April. Again we can see that share
price has crossed below the lower
band, which indicates the
formation of W Bottom. This
indicates that the weakness of the
stock is getting reduced and the
bands have also expanded
indicating that a bullish market trend is on its way. This gives a signal to BUY.

Chart 34: ROC

Interpretation:
The ROC line shows that it has
crossed below 0 point indicating a

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bearish momentum and hence it is time to SELL the stock.But it is upward sloping at the end
indicating that the stock is gaining strength. The chance of upward movement of share generates
a HOLD signal.

Chart 35: RSI

Interpretation:
The RSI line indicates that the it
has touched 30 mark indicating
overbought and hence reversal of trend is indicative of that and also the line is upward sloping so
bullish market trend is on its way. So this generate a BUY signal.

STANDARD CHARTERED
Chart 36: EMA 50 and EMA 20

Interpretation:
The EMA 20 line is moving
below the EMA 50 line for the
past three months. Also the
current shareprice is below the
EMAs lines. This indicates a
bearish market and is time to
SELL the shares.

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Chart 37: Bollinger Band

Interpretation:
The graph shows the formation of a
M Top from April 4 to May 3. The
shareprice has crossed above the top
band on April 4 and came below the
middle band on April 18. Again we
can see that share price has crossed
below the lower band, which
indicates the formation of W
Bottom. This indicates that the weakness of the stock is getting reduced. The bands have started
to expand indicating a reversal in trend. For the moment this generates a HOLD signal.

Chart 38: ROC

Interpretation:
The ROC line shows that it has
crossed below 0 point indicating
a bearish momentum and hence it is time to SELL the stock.

Chart 39: RSI

Interpretation:
From the graph it is seen that RSI is
reaching between the 70 and 30
mark. This indicates that shares are nither overbought nor undersold. Therefore this generates a
signal to HOLD.

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HDFC
Chart 40: EMA 50 and EMA 20
Interpretation:
EMA 20 is below EMA 50 line.
Also the shareprice is below the
EMA 20 line. But the last share
price is above the EMA 20 line.
This sows that stock is gaining
strenght. Therefore it is a HOLD
signal.

Chart 41: Bollinger Band

Interpretation:
The price of the share has gone
below the lower band and the next
lower is above the lower band. This
indicates that stock will gain
strength and is bullish. Hence it is a
BUY signal.

Chart 42: ROC

Interpretation:
The ROC is above 0. This shows
that the share is bullish and the
price of share will increase. Hence it indicates a BUY signal.

Chart 43: RSI

Interpretation:
The RSI is reaching 50. This
indicates share to be bullish,
hence it is a BUY signal.

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Yes Bank
Chart 44: EMA 50 and EMA 20
Interpretation:
The graph shows that EMA
20 is above EMA 50 from
March 28. This is a bullish
signal. But the two EMAs are
converging, which is a sign of
trend reversal. At this
moment it is better to HOLD the shares.

Chart 45: Bollinger Band

Interpretation:
From the graph it is seen that
that share price has crossed
below the lower band, which
indicates the formation of W
Bottom. This indicates that
the weakness of the stock is
getting reduced and the bands have also expanded indicating that a bullish market trend is
expected. This gives a signal to BUY.

Chart 46: ROC

Interpretaion:
The ROC line shows that it has
crossed below 0 point and
reached -30 level. This indicates the stock is overbought. Thus this generates a BUY signal for
the investors.

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Chart 47: RSI
Interpretation:
The graph shows that RSI is
moving to 50. This is a bullish
signal. Hence this indicates a BUY
signal for the stock.

3.6 Strategy

Since each of the tool used in the Technical analysis gave different result for a particular share,
therefore to decide on the final strategy to follow, a “Weighted Score” method is followed.

Table 7: Score Distribution:

Strategy Buy Sell Hold

Score(X) 1 -2 1

The score given to each strategy is based on the assumption that investor is risk averse. As
carrying a stock has a risk of earning loss, therefore he is more willing to sell the shares than to
keep or buy it.

Table 8: Weightage

Indicator Weight Score Weighted Score Explanation:

As there are four tools used in
EMA .25 X X*.25 the technical analysis, each
Bollinger .25 X X*.25 tool is given equal weightage.
The score obtained is
ROC .25 X X*.25
multiplied with the weight and
RSI .25 X X*.25 weighted score is obtained.

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Table 9: Weighted Score
Rationale:
Action Weighted Score
As the investor is risk averse, he will buy
Buy S=1
the share only when all the tool indicates a
Sell S<=0
bullish market. On the other hand, he will
Hold 0<S<1 sell the shares if more than one tool in
indicating a bearish market for that stock.

The Scores obtained are:

ICICI Canara Bank Axis Bank Yes Bank Standard HDFC

Chartered

0.25 0.25 -0.5 1 -0.5 1

Therefore it is concluded that the final strategy to be followed is to HOLD the shares of ICICI
and Canara Bank. SELL the shares of Axis and Standard Chartered Bank and BUY the shares of
HDFC and Yes Bank.

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 4. CONCLUSIONS

 Indian Banking Industry has gone throgh various phases of development in history.

 The present growth in the banking sector can be attributed to the various financial
reforms undertaken by the government.

 Bankning companies are having more than sufficient capital to shield itself from risk
weighted assets.

 The deposits of banking companies is increasing with increase in GDP at market price.

 Statutary requirement is being used as tool by RBI to keep inflation under check.

 Past five year has seen an average gerowth of nearly 30% in Profit after Tax of the
banking companies

 Non Performing Assets Ratio of Indian banking companies is around 1.2%, well below
the RBI set danger level of 10%.

 Banking companies in India differs in the shareholding pattern.

 Among the banks selected for the CAMELS analysis and the ranking methodology
adopted for the analysis, HDFC bank is the best bank followed by Canara Bank.

 The Technical Analysis suggests, holding the shares of ICICI and Canara Bank. Selling
the shares of Axis and Standard Chartered Bank and Buying the shares of HDFC and Yes
Bank.

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 5. REFERENCES

1. DON U.A. GALAGEDERA and PIYADASA EDIRISURIYA., 2003. Performance of

Indian Commercial Bank (1995-2002): an application of data envelopment analysis and
Malamquist Productivity Index, pp. 1-5
2. JOHN. J. MURPHY., 1999. Technical Analysis of the Financial Market, pp. 234-245
3. N.S. TOOR., 2009. Handbook Of Banking Information, pp. 1-28
4. McKinsey & Company., 2010. Indian Banking 2010
5. Reserve Bank Of India., 2009. The Banking Sector in India: Emerging Issues and
Challenge, Volume: 1, pp. 1-12
6. Reserve Bank Of India., 2009. The Banking Sector in India: Emerging Issues and
Challenge, Volume: 2, pp. 433-439
7. Case Study, ICMR., 2004. State Bank of India: Competitive Strategy of a Market Leader.
8. Annual Report 2007 to 2010 of HDFC
9. Annual Report 2007 to 2010 of ICICI
10. Annual Report 2007 to 2010 of Canara Bank
11. Annual Report 2007 to 2010 of Axis Bank
12. Annual Report 2007 to 2010 of Yes Bank
13. Annual Report 2007 to 2010 of Standard Chartered Bank

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