Course: Treasury Management NIBM, Pune

FCC Bank and MM Bank

A Case on Financial Analysis and Valuation of Banks
Megallan, one of the most prominent fund managers in the country, is the CIO of AA
Mutual Fund. Over the last few months the banking stocks have been beaten down in
the market and he was wondering whether it would be the right time to invest in bank
stocks. He asked Satish, a senior analyst to find out the value of the shares of FCC Bank
and MM Bank. Satish has compiled the financial data of the two banks as under.
Table 1: Balance Sheet of FCC Bank as at December 31

2017 2016 2015 2014 2013 2012

Equity capital 512.51 505.64 501.30 479.81 475.88 469.34
Share warrants and outstanding 0.00 0.00 0.00 0.00 0.00 0.30
Reserves 88949.84 72172.13 61508.12 42998.82 35738.26 29455.04
Deposits: 643639.66 546424.19 450795.64 367337.48 296246.98 246706.45
- Current deposits 115573.86 88424.67 73565.44 61488.04 52310.28 45407.84
- Saving deposits 193578.63 147886.18 124926.61 103133.32 88211.25 73998.04
- Term deposits 334487.17 310113.34 252303.59 202716.11 155725.46 127300.57
Borrowings 74028.87 84968.98 45213.56 39438.99 33006.60 23846.51
Other liabilities and provisions 56709.32 36725.13 32484.46 41344.40 34864.17 37431.87
Total liabilities 863840.19 740796.07 590503.07 491599.50 400331.90 337909.50

Cash and balances with RBI 37896.88 30058.31 27510.45 25345.63 14627.40 14991.09
Balance with other banks and
money at call 11055.22 8860.53 8821.00 14238.01 12652.77 5946.63
Investments: 214463.34 195836.28 151641.75 120951.07 111613.60 97482.91
- GOI and other approved
securities 162418.70 157661.07 120390.30 94640.02 84902.32 76218.34
- Subsidiaries 3843.32 2782.96 2782.96 1541.39 754.82 754.82
- Other investments 48201.31 35392.25 28468.50 24769.66 25956.46 20509.75
Advances: 554568.20 464593.96 365495.03 303000.27 239720.64 195420.03
- Bills purchased and
discounted 28715.96 18513.69 17713.40 14646.91 12321.92 12212.44
- Cash credit, overdraft, etc. 133617.42 124277.41 99367.14 123278.16 94586.96 68627.19
- Term loans 392234.82 321802.86 248414.49 165075.21 132811.77 114580.40
Net Block 3626.74 3343.16 3121.73 2939.92 2703.08 2347.19
Other assets 42229.82 38103.84 33913.10 25124.60 19014.41 21721.64
Total assets 863840.19 740796.07 590503.07 491599.50 400331.90 337909.50
All figures are in INR Crore

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Course: Treasury Management NIBM, Pune

Table 2: Profit and Loss Account of FCC Bank

2017 2016 2015 2014 2013

Total Income: 81602.46 70973.17 57466.26 49055.18 41917.50
Interest Income: 69305.96 60221.45 48469.90 41135.53 35064.87
- Advances 52055.26 44827.86 37180.79 31686.92 26822.39
- Balances with RBI and Others 532.02 361.61 517.10 355.99 281.63
- Investments 15944.34 14120.03 9858.48 9036.85 7820.26
- Others 774.34 911.95 913.54 55.78 140.59
Other Income: 12296.50 10751.72 8996.35 7919.64 6852.62
- Fee income 8811.55 7759.04 6584.20 5734.95 5166.90
- Forex gains/losses 1263.39 1227.73 1027.95 1401.06 1010.13
- Gain/loss on sale of investments 1130.69 749.15 525.97 103.94 126.44
- Others 1090.86 1015.80 858.22 679.69 549.15
Total Expenses: 55870.08 49609.63 40061.78 34695.10 30489.87
Interest Expense: 36166.73 32629.93 26074.24 22652.90 19253.75
- Deposits 31331.46 29178.29 23513.83 19048.16 16320.62
- Borrowings 4672.78 3366.45 2478.54 3536.21 2888.97
- Others 162.50 85.19 81.86 68.53 44.16
Operating Expenses: 19703.34 16979.70 13987.54 12042.20 11236.12
- Employee cost 6483.66 5702.20 4750.96 4178.98 3965.38
- Rent, taxes, lighting 1337.36 1232.64 1052.09 923.30 840.66
- Other expenses 11882.31 10044.86 8184.50 6939.92 6430.07
Operating Profit 25732.38 21363.54 17404.48 14360.08 11427.63
Provisions and contingencies 3593.31 2725.61 2075.01 1587.27 1676.40
Profit before tax 22139.07 18637.92 15329.47 12772.81 9751.22
Taxes 7589.43 6341.71 5113.55 4294.43 3024.94
Profit after tax 14549.64 12296.21 10215.92 8478.38 6726.28
Dividend (%) 550.00 475.00 400.00 342.50 275.00

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Course: Treasury Management NIBM, Pune

Table 3: Balance Sheet of MM Bank as at December 31

2017 2016 2015 2014 2013 2012

Equity capital 920.45 917.19 386.18 385.16 373.30 370.34
Share warrants and outstandings 1.87 3.41 3.00 8.53 17.53 34.82
Reserves 26695.62 23041.87 13754.91 11889.93 9073.65 7575.59
Deposits: 157425.86 138643.02 74860.31 59072.33 51028.77 38536.52
- Current deposits 27760.78 23281.68 13181.34 8740.81 7650.15 7352.32
- Saving deposits 41503.93 29494.72 14036.11 10087.05 7268.13 5050.12
- Term deposits 88161.15 85866.62 47642.86 40244.47 36110.49 26134.09
Borrowings 21095.48 20975.34 12149.71 12895.58 20410.62 16595.52
Other liabilities and provisions 8450.68 8678.96 4857.97 3333.82 2789.81 2553.99
Total liabilities 214589.96 192259.79 106012.07 87585.34 83693.69 65666.79

Cash and balances with RBI 7492.43 6903.43 3928.30 2948.23 2207.90 2016.49
Balance with other banks and money at
call 15079.58 3976.28 2334.06 3031.66 1481.26 618.06
Investments: 45074.19 51260.22 28659.11 25484.55 28873.43 21566.81
- GOI and other approved securities 36157.54 40760.97 22881.72 17465.37 21562.06 16587.24
- Subsidiaries 835.91 747.01 538.15 459.20 385.05 328.99
- Other investments 8080.74 9752.24 5239.24 7559.98 6926.31 4650.58
Advances: 136082.13 118665.30 66160.71 53027.63 48468.98 39079.23
- Bills purchased and discounted 5783.57 3832.41 1972.38 1175.31 1371.87 1626.38
- Cash credit, overdraft, etc. 41979.55 40412.01 15045.46 12391.40 9770.97 7394.21
- Term loans 88319.01 74420.87 49142.87 39460.92 37326.14 30058.65
Net Block 1537.63 1551.59 1206.71 1106.94 464.42 449.97
Other assets 9324.00 9902.97 3723.19 1986.33 2197.69 1936.23
Total assets 214589.96 192259.79 106012.07 87585.34 83693.69 65666.79
All figures are in INR Crore

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Course: Treasury Management NIBM, Pune

Table 4: Profit and Loss Account of MM Bank

2017 2016 2015 2014 2013

Total Income: 21176.09 18996.42 11748.32 10166.83 9203.15
Interest Income: 17698.93 16384.18 9719.87 8767.12 8042.49
- Advances 13402.10 12470.37 7468.67 6674.82 6146.09
- Balances with RBI and Others 218.32 92.91 24.06 27.17 24.33
- Investments 3681.04 3456.01 2133.54 2050.04 1869.83
- Others 397.47 364.90 93.60 15.08 2.24
Other Income: 3477.16 2612.23 2028.45 1399.71 1160.66
- Fee income 2120.67 1764.36 1226.29 853.08 737.19
- Forex gains/losses 528.37 421.91 206.42 211.82 96.26
- Gain/loss on sale of investments 441.59 213.20 314.77 181.83 154.60
- Others 386.53 212.76 280.97 152.98 172.60
Total Expenses: 15191.28 14955.33 8750.87 7589.67 7046.55
Interest Expense: 9572.78 9483.81 5496.13 5047.07 4836.82
- Deposits 8236.01 7863.76 4579.49 3815.30 3346.11
- Borrowings 558.36 808.25 499.60 777.69 1055.26
- Others 778.41 811.80 417.05 454.07 435.45
Operating Expenses: 5618.50 5471.52 3254.73 2542.61 2209.73
- Employee cost 2768.53 2816.97 1466.68 1172.16 1075.14
- Rent, taxes, lighting 550.42 522.01 338.16 270.55 221.50
- Other expenses 2299.54 2132.54 1449.89 1099.91 913.09
Operating Profit 5984.81 4041.09 2997.45 2577.15 2156.61
Provisions and contingencies 836.74 917.37 164.50 304.70 184.55
Profit before tax 5148.07 3123.72 2832.96 2272.45 1972.06
Taxes 1736.57 1033.94 966.98 769.93 611.34
Profit after tax 3411.50 2089.78 1865.98 1502.52 1360.72
Dividend (%) 12.00 10.00 18.00 16.00 14.00

Satish has also collected other relevant data and the same are in Table 5. He wants to
use three stage DDM for valuation of banks and has decided on 5 years each for
abnormal growth period and transition period. He uses a market return of 15% and risk
free rate of 8%.

Table 5: Key financial data of FCC Bank and MM Bank

FCCBank MM Bank FCCBank MM Bank
No. of Shares (Crore) 256.2546 184.0898 CAR (Basel III) 14.55 16.77
Face Value (Rs.) 2 5 - Tier 1 12.79 15.90
Share price (onMar 29, 2018) 1670.85 967.95 - Tier 2 1.76 0.87
Market Capitalisation on Mar 29,
EPS
2017 (Crore INR) 453160.5 181902.4 56.78 18.53
Historical Beta 0.74 0.76 DPS 11.00 0.60
Stable period Beta 1.00 1.00 PE (x) 31.1 53.6
Gross NPA (%) (2017) 1.05 2.60 PB (x) 5.07 6.62
Net NPA (%) (2017) 0.33 1.26

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Course: Treasury Management NIBM, Pune