Fundamental Analysis of Banking Sectors

A PROJECT REPORT REPORT ON FUNDAMENTAL ANALYSIS OF BANKING SECTORS

(FOR THE PARTIAL FULLFILLMENT OF MBA DEGREE) Academic Session 2013-14

SHRI RAM INSTITUTE OF MANAGEMENT & TECHNOLOGY (Affiliated to Kumaun University, Nainital)

SUBMITTED BY:

SUPERVISOR:

Deepak Kumar Kashyap

Mr. Neeraj Mishra

Roll No: 120630500005

1

PREFACE

Someone has rightly said that practical experience is for better and closer to the real world then mere theoretical exposure. The practical experience helps the students view the real world closely, which in turn widely influences their perceptions and argument their understanding of the real situation. Research work constitutes the backbone of any management education programme. A management student has to do research work quite frequently during his entire span. The research work entitle ― FUNDAMENTAL ANALYSIS OF BANKING SECTORS IN

INDIA‖ aims to analyze various services provided by private sector banks and public sector banks.

2

PREFACE

Someone has rightly said that practical experience is for better and closer to the real world then mere theoretical exposure. The practical experience helps the students view the real world closely, which in turn widely influences their perceptions and argument their understanding of the real situation. Research work constitutes the backbone of any management education programme. A management student has to do research work quite frequently during his entire span. The research work entitle ― FUNDAMENTAL ANALYSIS OF BANKING SECTORS IN

INDIA‖ aims to analyze various services provided by private sector banks and public sector banks.

2

ACKNOWLEDGEMENT

It is my pleasure to be indebted to various people, who directly or indirectly contributed in the development of this work and who influenced my thinking, behaviour and acts during the course of study. I express my sincere gratitude to Mr. Neeraj Mishra , for providing me an opportunity to undergo summer training at Reliance Securities. I am thankful to Dr. Yograj Singh , Director SIMT for his support, cooperation and motivation provided to me during the training for constant inspiration, presence and blessings. Lastly, I would like to thank the almighty and my parents for their moral support and my friends with whom I shared my day-to-day experience and received lots of suggestions that improved my quality of work.

Deepak Kashyap MBA IInd Year IIIrd Semester

3

INDEX CONTENTS

PAGES

Preface

:

Acknowledgement

:

1.1-

Introduction

:

1.2-

Objective of study

:

1.3-

Scope of study

:

1.4-

Research methodology

:

About the company

:

Findings & analysis

:

Conclusions & recommendation

:

Literature Review

:

Biblography

:

4

5

INTRODUCTION Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reason of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dials a pizza. Money has become the order of the day. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below: 



Early phase from 1786 to 1969 of Indian Banks Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms



New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991

:Defi ni tion of the Bank

Financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money. Banks are important players of the market and offer services as loans and funds. 

Banking was originated in 18th century



First bank were General Bank of India and Bank of Hindustan, now defunct.



Punjab National Bank and Bank of India was the only private bank in 1906.



Allahabad bank first fully India owned bank in 1865.

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Types Of Banking Commercial bank has two meanings: 1.

Commercial bank is the term used for a normal bank to distinguish it from an investment bank. (After the great depression, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital markets activities. This separation is no longer mandatory.)

2. Commercial bank can also refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses, as opposed to normal individual members of the public (retail banking). It is the most successful department of banking. 

Community development bank are regulated banks that provide financial services and

credit to underserved markets or populations. 

Private banks manage the assets of high net worth individuals.



Offshore banks

are banks located in jurisdictions with low taxation and regulation.

Many offshore banks are essentially private banks. 

Savings banks accept savings deposits.



Postal savings banks are savings banks associated with national postal systems.

There are some examples of banks in India: Private sector bank

•

HDFC, ICICI, Axis bank, Yes bank, Kotak Mahindra bank, Bank of Rajasthan

 Rural bank

•

United bank of India, Syndicate bank, National bank for agriculture and rural development (NABARD)

 Commercial bank

State Bank , Central Bank, Punjab National Bank, HSBC, ICICI, HDFC etc.  Retail bank 

•

BOB, PNB

 Universal bank

•

Deutsche bank

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CONSOLIDATION OF INDIAN BANKING SECTOR

As mentioned by Governor Jalan in his address to this forum in 2002, "In financial systems worldwide, today‘s buzzwords are competition, consolidation and stability". There has been

impressive stability and considerable competition in India but the process of consolidation in banking industry has just commenced. The issue of consolidation has been addressed by the Narasimham Committee Report on Banking Sector Reforms (1998) but the issue in regard to policy is yet to be pursued vigorously. There are three aspects to consolidation viz. 1. clear cut legal and regulatory regime governing consolidation, 2. enabling policy framework especially where several banks are owned by Government, 3. And market conditions that facilitate such consolidation. Recognizing that all mergers and acquisitions may not necessarily be in the interest of either the parties concerned or the system as a whole RBI's stated policy currently would permit acquisitions of any Indian private sector bank after 2009. As per the policy in 2009, a determined foreign player could acquire any Indian private sector bank, the best assets in the market place. Current banking sector can be divided in the following categories

Types of banks

Central Bank Banks

Development Banks

Specialized

(RBI, in India)

(EXIM Banks, SIDBI, NABARD)

Commercial Banks

Co-operative Banks

(i)

Public Sector Banks

(i)

Primary Credit Societies

(ii)

Private Sector Banks

(ii)

Central

(iii)

Stare co-operative Banks

Co-operative

Banks (iii)

Foreign Banks

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Development banks (i) Industrial finance Corporation of India (ii) Industrial development bank of India (iii)Industrial credit and Investment Corporation of India (ICICI) (iv)Industrial investment bank of India (IIBI) (v) Small industries development bank of India (SIDBI) (vi)SCICI ltd. (vii)

National bank for agriculture and rural development

(viii)

Export import bank of India

(ix) National housing bank

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OBJECTIVES OF STUDY 

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



To evaluate the current situation in the banking industry by fundamental analysis.



Comparative study of banking companies.



To determine the future direction of the stocks by technical analysis.



To learn about the reforms in the banking sector.

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SCOPE OF THE STUDY 

A healthy banking system is essential for any economy striving to achieve good growth and yet remain stable in an increasingly global business environment. The Indian banking system, with one of the largest banking networks in the world, has witnessed a series of reforms over the past few years like the deregulation of interest rates, dilution of the government stake in public sector banks (PSBs), and the increased participation of private sector banks. The growth of the retail financial services sector has been a key development on the market front. Indian banks (both public and private) have not only been keen to tap the domestic market but also to compete in the global market place.



Studying the increasing business scope of the bank.



Market segmentation to find the potential customers for the bank.

 Customers‘ perception on the various products of the bank. 

The corporate sector has stepped up its demand for credit to fund its expansion plans; there has also been a growth in retail banking.



The report seeks to present a comprehensive picture of the various types of bank. The banks can be broadly classified into two categories: 





Nationalize Bank Private Bank

Within each of these broad groups, an attempt has been made to cover as comprehensively as possible, under the various sub-groups.

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COMPANY PROFILE

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Reliance ADA Group The Reliance Group is among India‘s top three private sector business houses on all major

financial parameters, with assets in excess of Rs.180,000 crore, and net worth to the tune of Rs.89,000 crore. Across different companies, the group has a customer base of over 100 million, the largest in India, and a shareholder base of over 12 million, among the largest in the world. Through its products and services, the Reliance Group touches the life of 1 in 10 Indians every single day. It has a business presence that extends to over 20000 towns and 4.5 lakhs villages in India, and 5 continents across the world. The interests of the Group range from communications (Reliance Communications) and financial services (Reliance Capital Ltd), to generation, transmission and distribution of power (Reliance Energy), infrastructure and entertainment.

Vision To build a global enterprise for all our stakeholders, and A great future for our country, To give millions of young Indians the power to shape their destiny, The means to realize their full potential

Value Shareholder Interest

Value the trust of shareholders, and keep their interests paramount in every business decision they make, every choice they exercise People Care

Possess no greater asset than the quality of our human capital and no greater priority than the retention, growth and well-being of our vast pool of human talent Consumer Focus

Rethink every business process, product and service from the standpoint of the consumer – so as to exceed expectations at every touch point

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Excellence in Execution

We believe in excellence of execution – in large, complex projects as much as small everyday tasks. If something is worth doing, it is worth doing well. Team Work

The whole is greater than the sum of its parts; in our rapidly-changing knowledge economy, organizations can prosper only by mobilizing diverse competencies, skill sets and expertise; by imbibing the spirit of ―thinking together‖ -- integration is the rule, escalation is an exception Proactive Innovation

We nurture innovation by breaking silos, encouraging cross-fertilization of ideas & flexibility of roles and functions. We create an environment of accountability, ownership and problemsolving – based on participative work ethic and leading-edge research Leadership by Empowerment

We believe leadership in the new economy is about consensus building, about giving up control; about enabling and empowering people down the line to take decisions in their areas of operation and competence… Social Responsibility

We believe that organizations, like individuals, depend on the support of the community for their survival and sustenance, and must repay this generosity in the best way they can Respect for Competition

We respect competition – because there‘s more than one way of doing things right. We can learn as much from the success of others as from our own failures

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About Sh. Dhi r ubhai Ambani

Few men in history have made as dramatic a contribution to their country‘s economic fortunes

as did the founder of Reliance, Sh. Dhirubhai H Ambani. Fewer still have left behind a legacy that is more enduring and timeless. As with all great pioneers, there is more than one unique way of describing the true genius of Dhirubhai: The corporate visionary, the unmatched strategist, the proud patriot, the leader of men, the architect of India‘s capital markets, the champion of shareholder interest. But the role Dhirubhai cherished most was perhaps that of India‘s greatest wealth creator. In one lifetime, he built, starting from the proverbial scratch, India‘s largest private sector

enterprise. When Dhirubhai embarked on his first business venture, he had a seed capital of barely US$ 300 (around Rs 14,000). Over the next three and a half decades, he converted this fledgling enterprise into a Rs 60,000 crore colossus — an achievement which earned Reliance a place on the global Fortune 500 list, the first ever Indian private company to do so. Dhirubhai is widely regarded as the father of India‘s capital markets. In 1977, when Reliance

Textile Industries Limited first went public, the Indian stock market was a place patronised by a small club of elite investors which dabbled in a handful of stocks. Undaunted, Dhirubhai managed to convince a large number of first-time retail investors to participate in the unfolding Reliance story and put their hard-earned money in the Reliance Textile IPO, promising them, in exchange for their trust, substantial return on their investments. It was to be the start of one of great stories of mutual respect and reciprocal gain in the Indian markets. Under Dhirubhai‘s extraordinary vision and leadership, Reliance scripted one of the greatest growth stories in corporate history anywhere in the world, and went on to become India‘s

largest private sector enterprise. Through out this amazing journey, Dhirubhai always kept the interests of the ordinary shareholder uppermost in mind, in the process making millionaires out of many of the initial investors in the Reliance stock, and creating one of the world‘s largest shareholder families.

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Chairman's Profile Shri Anil D. Ambani, regarded as one of the foremost corporate leaders of contemporary India, Shri Anil D. Ambani, is the Chairman of Reliance Capital Limited, Reliance Infrastructure Limited, Reliance Communications Limited and Reliance Power Limited. He is also on the Board of Reliance Infratel Limited and Reliance Anil Dhirubhai Ambani Group Limited. He is the President of the Dhirubhai Ambani Institute of Information and Communication Technology, Gandhinagar, Gujarat. An MBA from the Wharton School of the University of Pennsylvania, Shri Ambani is credited with pioneering several path-breaking financial innovations in the Indian capital markets. He spearheaded the country‘s first forays into overseas capital markets with

international public offerings of global depositary receipts, convertibles and bonds. Under his Chairmanship, the constituent companies of the Reliance Group have raised nearly US$ 7 billion from global financial markets in a period of less than 3 years. Shri Ambani has been associated with a number of prestigious academic institutions in India and abroad. He is currently a member of : 

Wharton Board of Overseers, The Wharton School, USA



Board of Governors, Indian Institute of Management (IIM), Ahmedabad



Executive Board, Indian School of Business (ISB), Hyderabad

In June 2004, Shri Ambani was elected as an Independent member of the Rajya Sabha – Upper House, Parliament of India, a position he chose to resign voluntarily on March 29, 2006. Select Awards and Achievements 

Awarded by Light Readings as the Person of the Year – 2008 for outstanding achievements in the communication industry.



Voted 'the Businessman of the Year' in a poll conducted by The Times of India – TNS, December, 2006.



Voted the 'Best role model' among business leaders in the biannual Mood of the Nation poll conducted by India Today magazine, August 2006. 16



Conferred 'the CEO of the Year 2004' in the Platts Global Energy Awards.



Conferred ‗The Entrepreneur of the Decade Award‘ by the Bombay Management

Association, October 2002. 

Awarded the First Wharton Indian Alumni Award by the Wharton India Economic Forum (WIEF) in recognition of his contribution to the establishment of Reliance as a global leader in many of its business areas, December, 2001.

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Reliance Capital Reliance Capital, a constituent of CNX Nifty Junior and MSCI India, is a part of the Reliance Group. It is one of India's leading and amongst most valuable financial services companies in the private sector. Reliance Capital has interests in asset management, mutual funds, portfolio management services, pension funds, life and general insurance, private equity and proprietary investments, stock broking and depository services, investment banking, wealth management, home and commercial finance, financial products distribution, venture capital, exchanges, asset reconstruction and other activities in financial services. Reliance Mutual Fund is amongst top two Mutual Funds in India with over six million investor folios. Reliance Life Insurance and Reliance General Insurance are amongst the leading private sector insurers in India. Reliance Securities is one of India‘s leading retail broking houses. Reliance Money is one of India‘s leading distributors of financial products

and services. Reliance Capital has a net worth of Rs. 11,991 crore (US$ 2.2 billion) and total assets of Rs. 40,588 crore (US$ 7.5 billion) as on March 31, 2013. Business mix of Reliance Capital

Asset Management

Mutual Fund, Offshore Fund, Pension fund, Portfolio Management

Insurance

Life Insurance, General Insurance

Commercial Finance

Mortgages, Loans against Property , SME Loans, Loans for Vehicles, Loans for Construction Equipment, Business Loans, Infrastructure financing

Broking Distribution

and Equities, Commodities and Derivatives, Wealth Management Services, Portfolio Management Services, Investment Banking, Foreign Exchange, Third Party Products

Other Businesses Private Equity, Institutional Broking, Asset Reconstruction, Venture Capital

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Company History Reliance Capital Limited (RCL) was incorporated in year 1986 at Ahmedabad in Gujarat as Reliance Capital & Finance Trust Limited. The name RCL came into effect from January 5, 1995. In 2002, RCL shifted its registered office to Jamnagar in Gujarat before it finally moved to Mumbai in Maharashtra, in 2006. In 2006, Reliance Capital Ventures Limited merged with RCL and with this merger the shareholder base of RCL rose from 0.15 million shareholders to 1.3 million. RCL entered the Capital Market with a maiden public issue in 1990 and in subsequent years further tapped the capital market through rights issue and public issues. The equity shares were initially listed on the Ahmedabad Stock Exchange and The Stock Exchange Mumbai. Presently the shares are listed on The Stock Exchange Mumbai and the National Stock Exchange of India. RCL in the initial years engaged itself in steady annuity yielding businesses such as leasing, bill discounting, and inter-corporate deposits. Later, in 1993 diversified its business in the areas of portfolio investment, lending against securities, custodial services, money market operations, project finance advisory services, and investment banking. RCL was accredited a Category 1 Merchant banker by the Securities Exchange Board of India (SEBI). It had lead managed/co-managed 15 issues of an aggregate value of Rs. 400 crore and had underwritten 33 issues for an aggregate value of Rs. 550 crore. All these companies were listed on various exchanges. RCL obtained its registration as a Non-banking Finance Company (NBFC) in December 1998. In view of the regulatory requirements RCL surrendered its Merchant Banking License. RCL has since diversified its activities in the areas of asset management and mutual fund; life and general insurance; consumer finance and industrial finance; stock broking; depository services; private equity and proprietary investments; exchanges, asset reconstruction; distribution of financial products and other activities in financial services.

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Reliance Securities Introduction

Reliance Securities comes from the house of R eliance Capital, one of India‘s leading & prominent financial houses. Founded in 1986, Reliance Capital has come a long way from being into steady annuity yielding businesses such as leasing, bill discounting, and inter-corporate deposits to diversifying its activities in the areas of asset management and mutual fund; life and general insurance; consumer finance and industrial finance; stock broking; depository services; private equity and proprietary investments; exchanges, asset reconstruction; distribution of financial products and other activities in financial services. Reliance Capital has a net worth of Rs. 7,887 crore (US$ 2 billion) and total assets of Rs. 32,419 crore (US$ 7 billion) as on June 30, 2011. Reliance Securities

Reliance Securities Limited is a Reliance Capital company and part of the Reliance Group. Reliance Securities endeavours to change the way investors transact in equities markets and avails services. It provides customers with access to Equity, Derivatives, Mutual Funds and IPOs. It also offers secured online share trading platform and investment activities in secure, cost effective and convenient manner. To enable wider participation, it also provides the convenience of trading offline through variety of means, including Call & Trade, Branch dealing Desk and its network of affiliates. Reliance Securities has a pan India presence at more than 1,700 locations. Reliance Capital is one of India's leading and fastest growing private sector financial services companies, and ranks among the top 3 private sector financial services and banking groups, in terms of net worth.

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Awards & Achievements 

'Most Admired Service Provider in Financial Sector' by IPE BFSI, 2012



'Indian E-Retail Awards for Best Customer Experience Award' by Franchise India, 2012



'My FM Stars of the Industry 2012'for excellence in Online Demat (Broking category)



Reliance Securities Limited is now ISO 9001:2008 certified for Online Trading Platform



'Brand Leadership Legacy Award' at the Asian Leadership Awards - Dubai, 2011



'My FM Stars of the Industry 2011' for excellence in Online Demat / Broking



'Largest E-Broking House 2010' by Dun & Bradstreet



'Largest E-Broking House & Best Equity Broking House for the year 2009' by Dun & Bradstreet



'Best in category Service Franchise' at the 6th International Franchise & Retail show 2008



'Best E-Brokerage House 2008' (runner's up) by Outlook Money NDTV Profit Awards



'Debutant Franchisor of the Year' at the 5th International Franchisee & Retail Show 2007



Reliance Securities has been rated no. 1 by Starcom Worldwide for online security and cost effectiveness in 2007

Management Team

Reliance Securities is lead by a team of distinguished individuals dedicated towards scaling the company to greater heights through innovative products and services that create value for our customers & stake holders. Management Team 

Vikrant Gugnani - Executive director



Sanjay Wadhwa - Chief Financial Officer



Ganesh Pai - Head Compliance



Hitesh Agrawal - Head Research

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Product Profile

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EQUITY The Equities markets offers range of investment opportunities and Reliance Securities bring along with the added advantage of innovative products to suite client‘s investment profile and

help them to make the right decision.

Equity Financial Services DELIVERY CASH

Long-term investments are always beneficial, as they do not respond to daily volatility in the Stock Market and keep the investor safe. As an Investor, one can avail of delivery based buying / selling based on the stock fundamentals. TRADING INTRADAY

Active traders can take advantage of market movements by leveraging with our unique products. In addition, we also provide intraday live market calls that help the customer trade efficiently. EXPOSURE AGAINST STOCKS

This product provides trading opportunities to clients by accepting Demat shares as collateral. The client can pledge these share positions as collateral to gain additional margin. We provide an intraday limit on defined set of stocks based on a certain haircut percentage. COMPETITIVE TARIFFS

At Reliance Securities we not only offer customized services but also offer various tariff plans where you can pick one that best suits your profile. R-MODEL PORTFOLIO

Investing in any financial market has to have a good investment strategy. If you want to invest, you must deal with the ups and downs of the market. A good week in the market leaves an investor with good returns; a bad week may result in even bigger losses. In order to protect yourself from a market downturn, you must diversify. Effective diversification through a basket of stocks helps to build stable wealth over a period of time as individual stocks have different life cycle processes.

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R-Model Portfolio* is a tool as well as a service which combines the power of Securities Trading and Portfolio Allocation to invest in a portfolio of stocks created by the Reliance Securities Research Team. DERIVATIVES

The derivative segment is a market that gives you an opportunity to earn greater profits by paying a nominal amount of margin. Over past few years, Popularity and Dealings in Future & Options segment has grown incredibly. Future contracts are available on Equities, Indices, Currency and Commodities. IPO

IPOs have gained popularity owing to the fact that retail investors can become stake holders in the success of a company. From a company's perspective, IPOs help raise capital for growth or diversification as stipulated in the prospectus of the offer and the investors also get to become part owners of the company.

Mutual Fund A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. A Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

NRI OFFERINGS

Today, the Indian economy boasts a stable annual growth rate and booming capital markets. Top fund managers, investors and analyst are optimistic on long term, domestic demand driven growth story of India, supporting valuations and financial market outperformance.

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LITERATURE REVIEW

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INTRODUCTION TO FUNDAMENTAL ANALYSIS Fundamental Analysis involves examining the economic, financial and other qualitative and

quantitative factors related to a security in order to determine its intrinsic value. It attempts to study everything that can affect the security's value, including macroeconomic factors (like the overall economy and industry conditions) and individually specific factors (like the financial condition and management of companies). Fundamental analysis, which is also known as quantitative analysis, involves delving into a company‘s financial statements (such as profit and loss account and balance sheet) in order to

study various financial indicators (such as revenues, earnings, liabilities, expenses and assets). Such analysis is usually carried out by analysts, brokers and savvy investors. Many analysts and investors focus on a single number--net income (or earnings)--to evaluate performance. When investors attempt to forecast the market value of a firm, they frequently rely on earnings. Many institutional investors, analysts and regulators believe earnings are not as relevant as they once were. Due to nonrecurring events, disparities in measuring risk and management's ability to disguise fundamental earnings problems, other measures beyond net income can assist in predicting future firm earnings. Two Approaches of fundamental analysis

While carrying out fundamental analysis, investors can use either of the following approaches: 1 .Top-down approach: In this approach, an analyst investigates both international and national economic indicators, such as GDP growth rates, energy prices, inflation and interest rates. The search for the best security then trickles down to the analysis of total sales, price levels and foreign competition in a sector in order to identify the best business in the sector. 2. Bottom-up approach: In this approach, an analyst starts the search with specific businesses, irrespective of their industry/region.

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How Does fundamental analysis works ?

Fundamental analysis is carried out with the aim of predicting the future performance of a company. It is based on the theory that the market price of a security tends to move towards its 'real value' or 'intrinsic value.' Thus, the intrinsic value of a security being higher than the security‘s market value represents a time to buy. If the value of the security is lower than its

market price, investors should sell it. The steps involved in fundamental analysis are: 1. Macroeconomic analysis, which involves considering currencies, commodities and indices. 2. Industry sector analysis, which involves the analysis of companies that are a part of the sector. 3. Situational analysis of a company. 4. Financial analysis of the company. 5. Valuation The valuation of any security is done through the discounted cash flow (DCF) model, which takes into consideration: 1. Dividends received by investors 2. Earnings or cash flows of a company 3. Debt, which is calculated by using the debt to equity ratio and the current ratio (current assets/current liabilities)

Benefits of fundamental analysis

Fundamental analysis helps in: 1. Identifying the intrinsic value of a security. 2. Identifying long-term investment opportunities, since it involves real-time data. Drawbacks of fundamental analysis

The drawbacks of fundamental analysis are: 



Too many economic indicators and extensive macroeconomic data can confuse novice investors. The same set of information on macroeconomic indicators can have varied effects on the same currencies at different times.It is beneficial only for long-term investments 27

Fundamental Analysis Tools

These are the most popular tools of fundamental analysis. (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix)

Earnings per Share – EPS Price to Earnings Ratio – P/E Projected Earning Growth – PEG Price to Sales – P/S Price to Book – P/B Dividend Payout Ratio Dividend Yield Book Value Return on Equity

Ratio analysis

Financial ratios are tools for interpreting financial statements to provide a basis for valuing securities and appraising financial and management performance. A good financial analyst will build in financial ratio calculations extensively in a financial modeling exercise to enable robust analysis . Financial ratios allow a financial analyst to: 





Standardize information from financial statements across multiple financial years to allow comparison of a firm’s performance over time in a financial model. Standardize information from financial statements from different companies to allow an apples to apples comparison between firms of differing size in a financial model. Measure key relationships by relating inputs (costs) with outputs (benefits) and facilitates comparison of these relationships over time and across firms in a financial model.

In general, there are 4 kinds of financial ratios that a financial analyst will use most frequently, these are:    

Performance ratios Working capital ratios Liquidity ratios Solvency ratios

These 4 financial ratios allow a good financial analyst to quickly and efficiently address the following questions or concerns: Performance ratios 

What return is the company making on its capital investment?



What are its profit margins?

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Working capital ratios 

How quickly are debts paid?



How many times is inventory turned?

Liquidity ratios 

Can the company continue to pay its liabilities and debts?

Solvency ratios (Longer term) 

What is the level of debt in relation to other assets and to equity?



Is the level of interest payable out of profits?

Technical analysis is the practice of anticipating price changes of a financial instrument by

analyzing prior price changes and looking for patterns and relationships in price history.

Since all the investors in the stock market want to make the maximum profits possible, they just cannot afford to ignore either fundamental or technical analysis.

The price of a security represents a consensus. It is the price at which one person agrees to buy and another agrees to sell. The price at which an investor is willing to buy or sell depends primarily on his expectations. If he expects the security's price to rise, he will buy it; if the investor expects the price to fall, he will sell it. These simple statements are the cause of a major challenge in forecasting security prices, because they refer to human expectations. As we all know firsthand, humans expectations are neither easily quantifiable nor predictable.

If prices are based on investor expectations, then knowing what a security should sell for (i.e., fundamental analysis) becomes less important than knowing what other investors expect it to sell for. That's not to say that knowing what a security should sell for isn't important--it is. But there is usually a fairly strong consensus of a stock's future earnings that the average investor cannot disprove.

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RESEARCH METHODOLOGY

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RESEARCH Research comprises defining and redefining problems, formulating hypothesis or suggested solutions, collecting, organizing and evaluating data, making deductions and reaching conclusions and at last carefully testing the conclusions to determine whether they fit the formulating hypothesis.

RESEARCH METHODOLOGY Research methodology is a way to systematically solve the problems. It is a way of studying how research is done scientifically. It consists of various steps that are generally adopted by the researcher in studying his research problems along with the logic behind them.

RESEARCH DESIGN Research design is a framework or the blue print for conducting the research project. Research design is the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure. It includes an outline of what the researcher will do from writing the hypothesis and its operational implications to the final analysis of data.

TYPES OF RESEARCH DESIGN 

Exploratory research design



Descriptive research design



Experimental research design

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EXPLORATORY RESEARCH DESIGN It is also termed as formulate research design. The main purpose of the study is to formulate a problem for more precise investigation.

DESCRIPTIVE RESEARCH DESIGN In descriptive research design, those studies are taken which are concerned with describing the characteristics of a particular individual or a group.

EXPERIMENTAL RESEARCH DESIGN In this casual relationships between the variables are tested. It is also known as hypothesis testing research design.

Sampling design A Sample design is a definite plan for obtaining a sample from a given population. It is the procedure used by the researcher in selecting items for the sample.

PRIMARY DATA Primary data are those data, which is originally collected. It is of following type‘s

questionnaire, interview, observation etc.

SECONDARY DATA Secondary data are those data which are collected and which has been passed through statistical research. In this project, secondary data has been collected from following sources:

Annual Reports



Books



Internet



Other material and report published by company

32

Period of study

The period of the study is 5 year i.e. (2008-2012). 5 year data of banks has been taken for the analysis. Tools

These are the most popular tools of fundamental analysis. They focus on earnings, growth, and value in the market. (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii)

Earnings per Share – EPS Price to Earnings Ratio – P/E Projected Earning Growth – PEG Price to Sales – P/S Price to Book – P/B Dividend Payout Ratio Dividend Yield Book Value Ratio Analysis Liquid ratio Turnover ratio Valuation ratio

Techniques

The technique used in the analysis of the company is excel sheets, graphs and tables of financial statement for example balance sheet, profit loss a/c, cash flow statement, dividend per share, ratio analysis, valuation ratio etc.

33

Data ANALYSIS

34

FUNDAMENTAL ANALYSIS The fundamental analysis of the banking sector deals with: 

the effect of economy on the banking sector in the economic analysis,



the baking industry as a whole in industrial analysis,



the analysis of seven selected banking companies in company analysis.

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.



The global financial system is still far away from a full recovery on account of a slowdown in the US economy, the soft landing in China and the Euro debt crisis. The Indian banking sector has been relatively well shielded by the central bank and has managed to sail through most of the crisis. But, currently in light of slowing domestic GDP growth, persistent inflation, asset quality concerns and elevated interest rates, the investment cycle has been wavering in the country.



The cost of borrowings was higher on account of the various monetary tightening measures undertaken by the central bank. People preferred to park their funds in higher yielding fixed deposits rather than current or savings account (CASA). CASA accretion slowed for most banks which led to a higher cost of funds. The savings bank account rate was deregulated by the RBI, however most banks continue to hold the rate at 4%.



Apart from streamlining their processes through technology initiatives such as ATMs, telephone banking, online banking and web based products, banks also resorted to cross selling of financial products such as credit cards, mutual funds and insurance policies to augment their fee based income. They are also looking at various financial inclusion initiatives in order to spread the use of financial services among India‘s large unbanked

population.

35

Financial Year '12 

The RBI had to revise its target for credit growth in FY12 a number of times given the external environment. From starting off with a prediction of 19% credit growth in May 2011, the central bank brought this estimate down to 16% in January 2012. Finally non-food credit growth came in at around 17% in FY12 compared to 21.5% in FY11. Against a backdrop of GDP growth deceleration, weak IIP data and persistent inflation banks became more risk averse to lending credit. This decelerat ion also reflects banks‘

risk aversion in face of rising NPAs and increased leverage of corporate balance sheets. 

Credit growth decelerated across all bank groups during 2011-12 ranging between 16.3% in the case of public sector banks and 19.7% for private sector banks. The comparable figures for the previous year were 21% and 24.7% respectively.



The RBI‘s has not yet rolled ba ck its aggressive interest rate policy and rates continue

to be elevated. The repo rate currently stands at 8%, with the reverse repo rate at 7%. While inflation continues to remain high the RBI has refrained from any further hikes in order to address the slowdown in growth. It may ease rates once inflation comes under control. 

Growth on the deposit front however remained relatively low coming in at around 13% YoY in FY12; this was as against an RBI target of 17%. Fixed deposits saw good growth, while demand deposits saw a deceleration on lower yields. The outstanding credit-deposit ratio rose from 74.5% FY11 to 76.7% in FY12.

36



In the retail portfolio, while home loans grew by 12% YoY, while vehicle loans grew by 20%. Overall Other personal loans enjoyed a much smaller growth of 8% YoY due to bank‘s reluctance towards uncollateralized credit. Credit card outstanding grew by

13% YoY. 

Indian banks, however, saw lower levels of money supply, and deposits as a percentage of GDP in FY12 as compared to that in FY11 on account of the uncertain economic environment. However credit as a % of GDP was higher as GDP growth slowed.



Most private sector banks had a relatively better outing in FY12. Increased pricing power helped some of these banks sustain their net interest margins. Plus they were also able to sustain their asset quality.



Net non performing assets (NPAs) in the system increased from 0.9% in FY11 to 1.2% in FY12. However for PSU banks this ratio increased from 1% in FY11 to 1.5% in FY12. Increased provisioning affected the profitability of the banks in question.

37

INDUSTRIAL ANALYSIS 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 62 scheduled commercial banks. Among these, 25 banks are public sector banks in which government has the major stake. There are 24 private and 13 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 MODEL 

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.



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.



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 Corporate have an option of raising their capital through public issues, than for taking debt from banking companies.



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 w ho wishes to start commercial banking

operations. 

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.

38

REACH

Reach 40000 35000 30000 s e h c25000 n a r B20000 f o . 15000 o N10000 5000 0 Reach

Rural 36356

Semi-Urban 25795

Urban 18381

Metropolitan 17396

India may be one of the most populous countries on earth, but a small proportion of its population has access to a bank branch. As the case for financial inclusion grows, lenders are clamouring to take advantage of what has been described as 'the largest banking opportunity in the world'.

Findings By the end of March 2012, near about 36000 banks reach rural areas, 26000 in semi urban areas, 18000 in urban area and 17000 banks in metropolitan area. 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.

39

GROWTH

Growth 40000 35000 30000 s e h c n a r B f o . o N

25000 20000 15000 10000 5000 0

Rural Semi-Urban Urban Metropolitan

2008 31076 17675 14391 12908

2009 31667 18969 15733 14178

2010 32624 20740 17003 15026

2011 33683 22843 17490 16247

2012 36356 25797 18781 17396

The figure shows the year on year growth average of banks in India. The banks included are; All Private and public sector banks.

Findings The figure clearly depicts the phenomenal growth rate that banking industry has achieved over the years. Growth rate 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.

40

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 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- fulfilment of concluded contracts in lending operations due to deterioration in 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: 1. Counterparty default risk: this refers to the possibility that the other party in contract in an agreement will default. 2. 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 types 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 41

purpose vehicle. Conversely, a ‗synthetic‘ securitiz ation 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. 3. 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: 1. 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 liquid in nature) and the banking book (i.e. assets that are usually held till maturity and rarely traded). 2. Equity Price Risk: the risk arising due to fluctuation in market prices of equity due to general-market related operations. 3. 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:

42

1. 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. 2. 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. 3. 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. 4. Contingent Liquidity Risk: it is the risk associated with funding additional funds or replacing maturing liabilities under potential, future stressed market conditions. 5. 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. OTHER RISKS

1. Strategic Risk: it refers to the negative impact on capital and earnings due to business policy

decisions,

changes

in

the

macroeconomic

environment,

insufficient

implementation of decisions or failure to adopt in the changing economic environmental conditions. 2. 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. 3. 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. 4. Earnings Risk: this risk arises due to inadequate diversification of bank‘s earnings or its inability to attain sufficient and lasting profitability.

43

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. Table IV.12: Capital to Risk-Weighted Assets Ratio under Basel I and II – Bank Group-wise

(As at end-March) (Per cent) Bank Group

Basel I

Basel II

2011

2012

2011

2012

2

3

4

5

1

Public sector banks

11.78

11.88

13.08

13.23

Nationalised banks*

12.15

11.84

13.47

13.03

SBI group

11.01

11.97

12.25

13.70

Private sector banks

15.15

14.47

16.46

16.21

Old private sector banks

13.29

12.47

14.55

14.12

New private sector banks

15.55

14.90

16.87

16.66

Foreign banks

17.71

17.31

16.97

16.74

Scheduled commercial banks

13.02

12.94

14.19

14.24

Note: *: Includes IDBI Bank Ltd. Source: Based on off-site returns submitted by banks.

The capital to risk-weighted assets ratio (CRAR) remained well above the stipulated 9 per cent for the system as a whole as well as for all bank groups during 2011-12, indicating that Indian banks remained well-capitalised. Also, the CRAR (Basel II) at the system-level improved marginally compared with the previous year .

44

COMPANY ANALYSIS For analysis of banking companies, five banks 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 six groups. These are Indian Promoters, Foreign collaborators, Indian inst/Mutual Fund, Foreign Institutional Investors, Global Depository Receipts (GDRs)/American Depository Receipts (ADRs), free float.

SHAREHOLDING PATTERN Shareholding pattern reveals how the shares of a company are divided among the various bodies that constitute its ownership. Before buying any stock, we research the company from all possible angles. We take into account the company‘s profit and loss, sales and debt, among other things a nd thus, try to

gather as much information as possible about the business into which we are going to invest our hard-earned money so as to avoid nasty surprises in the future. This is also important because when we buy a share, we are not just buying a piece of paper, but also becoming a part owner of the business to the extent of the shareholding percentage. Here, I am presenting the shareholding pattern of five banks i.e. State bank of India, Punjab National Bank, HDFC Bank, ICICI Bank and Bank of Baroda.

45

State Bank of India Name of the Holder

Equity Held (%)

Indian Promoters

61.6

Foreign Collaborators

0.0

Indian Inst/Mutual Funds

17.1

Foreign Institutional Investors

8.7

Global Depository Receipts (GDRs)/American Depository Receipts (ADRs)

2.5

Free float.

10.1

ADR/GDR, 2.5

Free float, 10.1

FIIs, 8.7

Indian inst/Mu t Fund, 17.1

Indian Promoters, 61.6

INTERPRETATION The Government of India owns 61.6% stake in SBI , 17.1% equity is held by the Indian

inst/mutual funds, 8.7% equity is held by the foreign institutional investors, 2.5% held by ADR/GDR and remaining 10.1 % equity is held by the free float. 

State Bank of India (SBI) is India’s largest and oldest commercial bank in terms of profits, assets, deposits, branches and employees. It has a market share of about 16.4% in deposits and advances.



SBI accounts for almost one-fifth of the nation's loans .

46

Punjab National Bank Name of the Holder

Equity Held (%)

Indian Promoters

56.1


0.0


21.8


17.4


0.0

Free float.

4.7

Free float, 10.1 FIIs, 17.4 Indian Promoters, 56.1

Indian inst/Mut Fund, 21.8

INTERPRETATION The Government of India owns 56.1%

equity, 21.8%

equity is held by the Indian

inst/mutual funds, 17.4% equity is held by the foreign institutional investors and remaining 4.7% equity is held by the free float. 

Punjab National Bank (PNB) is the second largest public bank in India after SBI in terms of branch, network and business.



The bank has 5.18% market share in deposits and 5.11% market share in credit.



Punjab National Bank provides services through a network of 5,874 branches and 6,313 ATMs in India spread over all states/union territories.

47

HDFC Bank Name of the Holder

Equity Held (%)

Indian Promoters

22.8


0.0


8.6


34.1


17.1

Free float.

17.4

Free float, 10.1 Indian Promoters, 22.8

ADR/GDR, 17.1


FIIs, 34.1

INTERPRETATION The Government of India owns 22.8% stake in HDFC , 8.6% equity is held by the Indian

inst/mutual funds, 34.1% equity is held by the foreign institutional investors, 17.1% held by ADR/GDR and remaining 10.1 % equity is held by the free float. 

The Government of India owns 22.8% stake in HDFC Bank.



Foreign Institutional Investors Investors owns 34.1% Stake in HDFC Bank.



The business philosophy of HDFC Bank is based on four core values - Customer Focus, Operational Excellence, Product Leadership and People. 48

ICICI Bank

Name of the Holder

Equity Held (%)

Indian Promoters

0.0


0.0


26.6


35.9


26.9

Free float.

10.6

Free float, 10.6 Indian inst/Mut Fund, 26.6 ADR/GDR, 26.9

FIIs, 35.9

INTERPRETATION

26.6% equity is held by the Indian inst/mutual funds, 35.9% equity is held by the foreign institutional investors, 26.9% held by ADR/GDR and remaining 10.6 % equity is held by the free float. 

ICICI Bank is India’s second largest bank and largest private sector bank, with total assets of Rs. 5367.95 billion as on March 31, 2013.



ICICI Bank provides services through a network of 3,121 branches and 10,486 ATMs in India spread over all states/union territories.



The Government of India owns 26.6% stake in ICICI .

49

Bank of Baroda Name of the Holder

Equity Held (%)

Indian Promoters

54.3


0.0


20.5


13.5


0.0

Free float.

11.7

Free float, 11.7 FIIs, 13.5


Indian Promoters, 54.3

INTERPRETATION The Government of India owns 54.3% stake in BOB , 20.5% equity is held by the Indian

inst/mutual funds, 13.5% equity is held by the foreign institutional investors and remaining 11.7 % equity is held by the free float. 

BoB provides services through a network of 3,904 branches and 2,012 ATMs in India spread over all states/union territories.



BoB's international business accounts for around 14.05% of bank's total business



It is one of the Indian banks with the most significant international presence

50

Comparison of Price of shares (2009-2013) Highest price of Shares 4000 3500 ) s R ( s e r a h s f o e c i r P

3000 2500 2000 1500 1000 500 0 SBI PNB HDFC ICICI BOB

2009 1840 580 1575 961 338

2010 2500 1017 1986 960 653

2011 3515 1268 2518 1270 1050

2012 2960 1234 540 1128 1007

2013 2961 943 705 1214 899

INTERPRETATION

The Chart shows highest price of the shares of five banks i.e. SBI, PNB, HDFC, ICICI and BOB in last five years. Among these, SBI and HDFC have touched the highest price i.e. ₹ 3515 and 2518 respectively in the year 2011. The price all the banks have increased rapidly from 2009-2011 but in 2013 their market price have not touch the highest level as compare to the year 2011. SBI and ICICI bank now have the highest price of share (1st Aug. 2013).

51

Comparison of Price of shares(2009-2013)

Lowest price of Shares 2500

2000 ₹

s e r a h s f o e c i r P

1500

1000

500

0 SBI PNB HDFC ICICI BOB

2009 894 286 774 253 181

2010 980 394 952 349 227

2011 2015 933 1785 809 616

2012 1576 751 427 652 630

2013 1640 659 482 782 899

INTERPRETATION

The Chart shows lowest price of the shares of five banks i.e. SBI, PNB, HDFC, ICICI and BOB in last five years.

52

EARNINGS PER SHARE

250

200

₹

n i s g n i n r a E

150

100

50


2008 141.9 101.4 52.9 32.1 68.5

2009 172.6 126 65.6 41.9 87.3

2010 184.8 144.4 85.8 52.9 113.2

2011 168.3 148.2 22.4 66.3 127.7

2012 228.6 140.2 28.9 83.2 114

INTERPRETATION ICICI Bank’s Profits have grown by 30% (QoQ i.e. last year same quarter vs current year

quarter) in Q2-FY13 and 25% (YoY) in FY12. EPS is growing year on year ₹ 32 in 2008 vs ₹ 83 in 2012. SBI‘s EPS is growing year on year ₹ 141 for FY2008 vs ₹ 228 in FY2012. Estimated EPS

for FY13 is ₹ 214 and FY14 is ₹ 248 which indicates that profits would grow in future. The EPS of HDFC bank and is decreased from ₹ 52.9 in 2008 vs. ₹ 22.4 in2011 but it has increase to ₹ 28.9 in 2012.

53

DEBT EQUITY RATIO 20 18 16 14 12 X

10 8 6 4 2 0 SBI PNB HDFC ICICI BOB

2008 13.8 14.1 10.1 7.6 15.5

2009 15.4 17.7 8.3 6.8 16.5

2010 14.9 15.5 8.7 7 15.3

2011 16.7 14.6 9 7.2 14.6

2012 14.8 12.9 9.2 7.1 15.3

A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity, it indicates what proportion of equity and debt the company is using to finance its assets. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.

INTERPRETATION

Banks in India has an average of Debt to Equity ratio of 11.86. Banks like HDFC, ICICI and can raise more capital when required as their ratio is less than 11.89. On the other hand SBI, PNB and BOB will have problem in borrowing the money as they are highly leveraged.

54

Net Non Performing Assets (NPA)

3

2.5

2

%

1.5

1

0.5


2008 1.8 0.2 0.6 2.1 0.3

2009 1.8 0.5 0.3 2.1 0.3

2010 1.7 0.9 0.2 1.1 0.4

2011 1.6 1.5 0.2 0.7 0.5

2012 1.8 2.4 0.2 0.8 1.3

INTERPRETATION

Net Non Performing Assets to total advances of each bank is well within the trigger level of RBI. HDFC Bank being most conservative player in the field is having the lowest value of the ratio. ICICI bank through large amount of provision has managed to lower the net Non Performing Assets to acceptable level. BOB‘s Net NPA ratio stood at 1.69 percent compared

to 0.65 percent during the same period last year. The bank‘s total deposits increased by 22 percent to Rs 4.67 lakh crore in June 2013.

55

FINDINGS State Bank Of India 

The revenue growth for FY13 and FY14 is expected at 14-15%.



SBI managed to maintain a six-year-average ROA (Return on assets) at 0.88% on a consolidated basis, which is significantly below the benchmark of 1.25%.



The non-performing assets to net advances ratio has decreased from 4.5% in FY03 to 1.82 in FY12 which shows the continuous improvement in its assets quality; but, it is still not up to the mark.



At the end of Financial Year 2012, its capital adequacy ratio was at 13.86% which is drastically improved as comparison to 12% for last year

Punjab National Bank 

PNB managed to maintain a six-year-average ROE (Return on Equity) in excess of 20%, with RoE as on Mar‘13 standing at 20.35%.



The non-performing assets to net advances ratio has increased from 0.2% to 2.4% in the last five years. This shows that the assets quality of the Bank has deteriorated.



PNB has a capital adequacy ratio of 12.72% as on Mar‘13.

HDFC Bank 

HDFC Bank increased its net interest income by 17.72% in FY12 on the stand-alone basis.



The Bank has increased its book value per share by 17.06% in FY12.



HDFC Bank managed to maintain a ten-year-average ROA (Return on assets) at 1.77% in FY12, which is significantly higher than the benchmark of 1.25%.



The non-performing assets to net advances ratio of the bank have been continuously below 0.6%, which shows its asset quality is very good.



Net non-performing assets remained at 0.2% of net advances as on March 31, 2013.

56

ICICI Bank 

ICICI Bank managed to attain ROE (Return on Equity) of 13.62% in FY12.



The net non-performing assets to net advances ratio of the bank have been continuously above 1% in the last five years, which shows its asset quality is not up to the mark.



This shows it is continuously improving its asset quality with a large focus on it.

Bank of Baroda 

The Bank has increased its book value per share by 16.81% in the last 10 years, from Rs.149.04 in FY03 to Rs.664.08 in FY12.



BoB managed to maintain a Five-year-average ROE (Return on Equity) in excess of 20%, with RoE as on Mar‘12 standing at 21.26%.



BoB has a capital adequacy ratio of 14.67% as on Mar‘12.

57

RECOMMENDATIONS State Bank of India 

Buy if the Stock price goes below Rs.1, 497.74, for an Aggressive Investor. Otherwise a good entry point for medium to long term Investment would be Rs.1, 331.32.



One can sell if the Stock price reaches Rs.1, 665.00, for an Aggressive Investor. Otherwise a good upside target for medium to long term Investment would be Rs.1, 774.00.



Based on Historical performance of this stock, a Stop Loss of Rs.53.61 below the CMP is recommended. A Trailing Stop Loss is even better, if available.

Punjab National Bank 

Buy if the Stock price goes below Rs.515.10, for an Aggressive Investor. Otherwise a good entry point for medium to long term Investment would be Rs.432.44.



One can sell if the Stock price reaches Rs.543.85, for an Aggressive Investor. Otherwise a good upside target for medium to long term Investment would be Rs.596.70.




HDFC Bank 




One can Sell if the Stock price reaches Rs.615.35, for an Aggressive Investor. Otherwise a good upside target for medium to long term Investment would be Rs.634.30.






Note: All the Technical Analysis above is with Swing Trading in Mind (few days delivery based trades ONLY). This may also be good for Intraday (Day Trade) though

58

ICICI Bank 

This is one of the best stocks to buy in India for long term objective.










Bank of Baroda 








59

LIMITATIONS 

All banks are not included.



Dynamic market leads to inaccurate data.



The project study is restricted to banking sector used in India only.



The project was constrained by time limit of two months.



Lack of source of information.



Since annual reports give the condition of the banks on an annual basis, these may not reflect the current positions of the bank.



Good time & effort were spent in analyzing the data.



The major limitation of this study shall be data availability as the data is proprietary and not readily shared for dissemination.

60

CONCLUSIONS 

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

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

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

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

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

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

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

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Banking companies in India differs in the shareholding pattern. Among the banks selected analysis and methodology adopted for the analysis, HDFC bank is the best bank followed by State Bank of India.

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BIBLIOGRAPHY

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Fundamental Analysis of Banking Sectors

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