mba project

PROJECT REPORT A STUDY ON PERFORMANCE PERFORM ANCE EVALUA EVALUATION TION OF ICICI AND SBI USING FUNDAMENTAL AND TECHNICAL TE CHNICAL ANALYSIS ANALYSIS Report submitted in partial fulfillment of the requirement for the award of the degree of 

MASTER OF BUSINESS ADMINISTRATION OF ANNA UNIVERSITY

Submitted by

KARTHIGAINATHAN.A Reg. No. 91005631030 Under Guidance of Mr.M.SIVA KUMAR  M.B.A.,M.Phil., Lecturer

Department of Management Studies

P.S.N.A. COLLEGE OF ENGINEERING & TECHNOLOGY DINDIGUL-624 622, TAMILNADU JULY-2007

Department of management studies 1

P.S.N.A. College of engineering & technology Dindigul-624 622, Tamilnadu.

This is certify that is a bonafide record of summer project By A.KARTHIGAINATHAN

Reg.no.91005631030 Submitted in partial fulfillment of the requirement for the award of degree of the

MASTER OF BUSINESS ADMINISTRATION OF ANNAUNIVERSITY, CHENNAI

Place: Dindigul Date :

HOD Department of management m anagement Studies

Signature of  Faculty Guide:

Examiner:

2

CERTIFICATE

I hereby certify that the project (BA1770) report submitted to the Anna University in   part partial ial fulfi fulfill llme ment nt of the requir requirem ement ent for the awar award d of the the degre degreee of Maste Masterr of busine business ss administration is based on project undertaken by A.KARTHIGAINATHAN under my guidance.

Name of the Guide Mr.M.SIVA KUMAR MBA,M.Phil., Lecturer  Department of Management Studies, P.S.N.A. College of o f Engineering Engineerin g & Technology, Dindigul-624 622, Tamilnadu. Place: Dindigul Date :

3

DECLARATION BY STUDENT

I A.KARTHIGAINATHAN the undersigned hereby declare that this summer project titl titled ed “A STUD STUDY Y ON PERF PERFOR ORMA MANC NCE E EVAL EVALUA UATI TION ON OF ICIC ICICII AND AND SBI SBI USIN USING G FUNDAMENTAL AND TECHNICAL ANALYSIS” is submitted in partial fulfillment of the requirements for the award of Master of business administration, Anna University, Chennai.

Place: Dindigul Date :

A.KARTHIGAINATHAN Reg.no:91005631030

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ACKNOWLEDGEMENT

My very special gratitude and heart felt thanks to our beloved Chairperson, for her   blessings and best wishes to carry out my project work. I would like to express my deep gratitude to our Director and principle Dr.K.Thyagarajah who is responsible for moulding our thinking to complete this project. It is my great pleasure to express my sincere gratitude and thanks to my heads of the department Dr. M. Renganathan, for his valuable guidance and help. I am extr extrem emel ely y than thankf kful ul to my proj projec ectt guid guidee Mr.M.Siva Mr.M.Siva Kumar, Kumar, MBA.,M.Phil., Department of management studies for imitating keen interest and giving valuable guidance at every stage of this project. I wish to express my sincere thanks to the company guide Mr.S.Anand, Investment Advisor, Advisor, Kotak Securities, Madurai, who is my external guide for his kind support and guidance

to complete my project. I wish wish to expr expres esss my sinc sincer eree than thanks ks to Mr.Madhavan, Professor Professor,, Manonmaniam Sundharanar University, Thirunelveli, who is my external guide for his kind support and

guidance to complete my project. I am also thankful to all the faculty members of the Department Department of management studies for their kind and valuable cooperation during the course of the project. I would also like to thank  my parents, Friends and well wishers who encourage me to complete this project successfully.

Date:

Signature of the Candidate

(A.KARTHIGAINATHAN)

Sl.

Title 5

Page

No.

No

1.

Chapter – 1

2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

1.1 1.2 1.3 1.3.1 1.3.2 1.3.3. 1.3.4 1.3.5 1.3.6 1.3.7

13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31.

2.1 2.2 2.3 2.4 2.5 2.6 2.6.1 2.6.2 2.6.3 2.7 2.8 2.9 2.10 2.11 2.12 2.13 2.13.1 2.13.2

32. 33. 34. 35. 36. 37. 38. 39. 40.

3.1 3.1.a 3.1.b 3.2 3.3 3.3.1 3.3.2 3.4 3.5

Introduction Company Profile Product Profile The Industry Growth Background Management Shareholding & Liquidity Key area of Operation Strategy & New Developments ICICI Profile

1 2 3 4 4 5 5 6 8 8

Chapter - 2 Scope of the study Objective of the study Period of the study Limitation of the study Methodology Fundamental analysis Economical analysis Industrial analysis Banking Industrial analysis Monitory Policy CRR Liquidity Management Indian Financial Sector SWOT analysis Budget 2007 -2008 overview Secure Banking Key Ratio Interpretation (SBI) Interpretation (ICICI)

11 11 11 11 12 13 13 21 22 22 23 26 27 29 34 35 35 36

Chapter – 3 Technical analysis ICICI Bank Outlook SBIN Outlook Finding Suggestion ICICI Bank SBI Bank Conclusion Bibliography

39 39 40 41 42 42 43 46 47

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CHAPTER 1 1.1 INTRODUC INTRODUCTION TION

With the economy surging, things are getting better in the Banking Industry. There are  plenty of changes occurs daily. According According to Reserve bank of India’s India’s banking review of 2004 – 2005 there was a notable  pick up in demand from industry for investments and a surge in exports. Evidently, the industry’s focus now is on scaling up both domestically and in markets abroad, widening the product and services port folio, and better using technology to make banking more accessible and efficient. Most of researcher’s conclusion is, Whether or not the sectors actually opens up in 2009,  banks should use that as an opportunity to get their growth strategies in place. Not Just through organic growth, but growth through mergers and acquisition. What India need is not a large number of small banks, but a small number of large banks. As the RBI’s deputy Governor, V.Leeladhar, said at Indian Banking Associations Jan 31 Seminar on “Indian Banks and the Global change” there is growing realization that the ability to cope with possible downside risks would depend among others on the soundness of the financial system and the strength of Individual participation”. India India is still still cagey cagey about about foreig foreign n invest investme ment ntss in banks. banks. Th Thoug ough h a drama dramati ticc change changess sweeping through the industry for some years now in the rise of India’s Public sector bank and  private sector still it should fuel its grow to open up eyes towards open market. In this scenario, While we look at the sensex breach the 10,000 level for the first time it was yet another sign the India India as a market for global liquidity had had arrived. When, When, We start corelating the Gross Domestic product (GDP) growth of emerging markets are supposed to reflect the health of the economy where India emerges as a key player, player, India is arguably arguably the best placed amongst the entire emerging market lot. Form the Investors point of view earning growth, price-earning multiplies and of course the performance of the economy matters. 7

1.2 COMPANY PROFILE

The Kotak Mahindra Group Kotak Mahindra is one of India's leading financial institutions, offering complete financial solutions that encompass every sphere of life. From commercial banking, to stock broking, to mutual funds, to life insurance, to investment banking, the group caters to the financial needs of  individuals and corporates. As on December 31, 2006, the group has a net worth of over Rs.3,100 crore, and the AUM across the group is around Rs. 225 billion and employs over 9,600 employees in its various  businesses. With a presence in 282 cities in India and offices in New York, London, Dubai and Mauritius, it services a customer base of over around 2.2 million. The group specializes in offering top class financial services, catering to every segment of  the industry.The various group companies include: Kotak Mahindra Capital Company Limited Kotak Mahindra Securities Limited Kotak Mahindra Inc Kotak Mahindra (International) Limited Global Investments Opportunities Fund Limited Kotak Mahindra (UK) Limited Kotak Securities Limited Kotak Mahindra Old Mutual Life Insurance Company Limited Kotak Mahindra Asset Management Company Limited Kotak Mahindra Trustee Company Limited Kotak Mahindra Investments Limited Kotak Forex Brokerage Limited Kotak Mahindra Private-Equity Trustee Limited Kotak Mahindra Prime Limited Kotak Securities Securities Ltd. is India's leading stock broking house with a market share of around 8.5 % as on 31st March. Kotak Securities Ltd. has been the largest in IPO distribution. 8

The accolades that Kotak Securities has been graced with include: Prime Ranking Award (2003-04)- Largest Distributor of IPO's Finance Asia Award Award (2004)- India's best Equity House Finance Asia Award Award (2005)-Best (2005)- Best Broker In India Euromoney Award (2005)-Best Equities House In India Finance Asia Award Award (2006)- Best Broker In India Euromoney Award (2006) - Best Provider of Portfolio Management: Equities The company has a full-fledged research division involved in Macro Economic studies, Sectoral research and Company Specific Equity Research combined with a strong and well networked sale saless forc forcee whic which h help helpss deli delive verr curr curren entt and and up to date date mark market et info inform rmat atio ion n and and news news..

Kotak Securities Ltd is also a depository participant participant with National Securities Depository Limited Limited (NSDL) (NSDL) and Central Central Deposito Depository ry Service Servicess Limited Limited (CDSL) (CDSL),, providin providing g dual benefit benefit service servicess where wherein in the inves investor torss can use the the broker brokerage age servi services ces of the the compa company ny for execut executing ing the the transactions and the depository services for settling them.

Kotak Securities Securities has 195 branches servicing servicing more than 2,20,000 customers and a coverage of 231 Cities. Cities. Kotakse Kotaksecuri curities ties.com .com,, the online online division division of Kotak Kotak Securit Securities ies Limite Limited d offers offers Internet Internet Broking services and also online IPO and Mutual Fund Investments.

Kotak Securities Limited manages assets over 2500 crores of Assets Under Management (AUM) .The portfolio Management Services provide top class service , catering to the high end of the market. Portfolio Management from Kotak Securities comes as an answer to those who would like to grow exponentially on the crest of the stock market ,with the backing of an expert.

1.3 PRODUCT PROFILE State Bank of India (SBI) has history of more than 200 years of existence. SBI is the largest

commercial bank in India and accounts for approximately 18% of the total Indian banking  business and the group account for 25% of the total Indian banking business. The central bank, Reserve Bank of India (RBI) is the largest shareholder shareholder in the bank with 59.7% stake followed by overseas investors including including GDRs with 19.78% shareholding as on September 06. RBIs stake in the bank is likely to be transferred to the Government of India (GOI).

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SBI has the largest distribution network in India spread across every nook and corner of  India. As on September 06, the bank has 14,061 branches which include 4,755 branches of its associated banks. The bank also has the largest network of 5,624 ATMs. Since the last 5 years the  bank has showed continued growth in its core business. The total asset size of the bank reported a CAGR of 9.4% during the period FY01 –FY06 and stood at Rs. 4,938.69 bn as of September  2006. In HIFY07, the bank reported net interest income (NII) of Rs. 182.14bn, representing a growth fo 2.74% over HIFY06 while the bank reported a net profit of Rs.19.8bn, registering a decline of 18.67% during the same period. Credit off take of the bank has been lower than the Indian Indian banking industry industry during the past few years. years. The total total credit credit book of the bank grew at a CAGR of 18.2% over the past years stood at Rs. 2,832.68bn at the end of September 2006. 1.3.1 THE INDUSTRY GROWTH

The industry growth during the same period was around 28% •

The bank’s asset quality has improved over the past few years. Gross NPL of gross loans stood at 3.57% as of Sep-end 2006 while net NPLs stood at 1.67% The bank has  provided for 54.06% of its NPLs as on Sep- end 2006, which is below the industry average of around 68%

•

Total deposits of the bank grew grew at a CAGR of 94% over the last. ve years years to reach Rs3,800.5bn, with low cost deposits registering an impressive GAGR of 15.4% during the same period. Contribution of low cost deposit to total deposit during the period too has moved up sharply from 36.3% in FY 01 to over 47.6% in FY06. However, currentand saving account (CASA ) contribution in HIFY07 has declined to 43.65% thereby, signi.cantly increasing cost of funds and hensce margin contraction. On a sequential basis, margins of the bank declined by 8bps to 3.32

•

The capital adepuacy ratio of the bank stood at 12.63% (Tier (Tier –I of 8.74% and Tier Tier –II of 3.89 %) at the end of HIFY07. To augment its CAR to provide a stable platform for  further growth, the bank the plans to raise upto Rs.100bn as subordinate debt during the next few months. The bank also has cushion to raise RS40bn in the form of hybrid.

1.3.2 BACKGROUND

State Bank of India is the largest and one of the oldest commercial bank in India, in existenxe for more than 200 years. The bank provides a full range of corporate, commercial and retail banking services in India. Indian central bank namely Reserve Bank of India (RBI) 10

is the major share holder of the bank with 59.7% 59.7% stake. The The bank is capitalized to the extend of Rs.646bn with the public holding (other than promoters) at 40.3%. SBI has the largest branch and ATM network of over 14,000 branches (including subsidiaries) Apart form Indian network it also has a network of 73 overses of. ces in 30 countries in all time zones, correspondent relationship with 520 International banks in 123 countries. In recent past, SBI has acquired banks in Mauritius, Kenya and Indonesia. The bank had total staff  strength of 198,774 as on 31 st March, 2006. Of this, 29.51% are of.cers, 45.19% clerical staff  and the remaining 25.30% 25.30% were sub-staff. sub-staff. The bank is listed on the Bombay stock Exchange, Exchange, Kolkata stock Exchange, Chennai Stock Exchange and Ahmedaoad Ahmedaoad stockeExchange stockeExchange while its GDRs are listed on the London stock Exchange. SBI group accounts for around 25% of the total business of the banking industry while it accounts for 35% of the total foreign exchange in India. With this type of strong base, SBI has displayed a continued performance in the last few years in scaling up its ef. ciencly levels. Net Interest Income of the bank has witnessed a CAGR of 13.3% during the last years. During the same period, net interest margin (NIM) of the bank has gone up from as low as as2.9% in FY02 to 3.40% in FY06 FY06 and currently is at 3.32% 1.3.3 MANAGEMENT

The bank has 14 directors on the Board and is responsible for the management of the  bank’s business. The board in addition to monitoring corporate performance also carries out functions such as approving the business plan, reviewing and approving the annual budgets and borrowing limits and axing exposure limits. Mr.O.P.Bhatt is the Chairman of the bank. Prior Prior to this this appoi appointm ntment ent,, Mr.B Mr.Bhat hattt was was Managi Managing ng Direc Director tor at State State Bank Bank of  Travancore Mr.T.S. Bhattacharya is the managing Director of the bank and known for hisvast experience in the banking industry. Recently, the senior management of the bank has been  broadened considerably. The Positions of CFO and the head of treasury have been segregated, and new heads for rural banking and for corporate development and new business banking have been appointed. The management’s thrust on growth of the bank in terms of network and size would also ensure encouraging prospects in time to come. 1.3.4 SHAREHOLDING & LIQUIDITY

Reser Reserve ve Bank Bank of

India India is the the larg largest est shareh sharehold older er in the bank bank with with 59.7% 59.7% stake stake

followed by overseas investors including GDRs with 19.78% stake as on September 06. 11

Indian financial financial institutions institutions held 12.3% while Indian public public held Just 8.2% of the stock. RBI is the monetary authority authority and having majority shareholding shareholding re.ects re.ects con.ict of interest. interest. Now the government is rectifying the above error by transferring RBI’s RBI’s holding to inself. Post this, SBI will have afurther headroom to dilute the GOl’s stake from 59.7% to 51.0% Which will further improve its CAR and Tier I ratio.

Shareholding Pattern of the Bank as on 30 th September 2006 Source : SBI

As of Sep 2006, SBI the 526.3 mm shares outstanding and going by the actual trading volume, the Stock’s liquidity seems to have decreased in the past two years. In the first half of  FY2007, 93mm shares exchanged hasnds. The daily share turnover during the year 2006 was 0.22% down from 0.39% witnessed in 2005. But the sentiment in the sock market improved in the first six months of the current. Scale with the bank clocking further gains. as of January 12,2007 bank’s market capitalization stood at Rs.643.6bn. 1.3.5 KEY AREAS OF OPERATIONS

The business operations of SBI can be broadly classed into the key income generating areas areas such as Nationa Nationall Banking, Banking, Internat Internationa ionall Banking, Banking, Corpora Corporate te Banking Banking,, & Treasury reasury operations. Key Business Areas of the Bank  a) Corp Corpor orat atee Ban Banki king ng

The corporate banking segment of the bank has total business of around Rs.1,93bn. SBI has created various Strategic Business Units (SBU) in order to streamline its operations. a. Leasing  b.  b. Proje roject ct Fin Finan ance ce c. Mid Mid Corp Corpor orat atee Grou Group p

b.

National Banking

The national banking group has 14 administrative circles encompassing a vast network  of 9,177 branches, 4 Sub-of.ces, 12 exchange bureaus, 104 satellite of.ces and 679 12

extension counters, to reach out to customers, even it. the remotest corners of the country. Out of the total branches, 809 are specialized branches. This group consists of  four business group which are enumerated below: b.1. Personal Banking SBU b.2. Small & Medium Enterprises b.3. Agricultural Banking c.

International Ba Banking

SBI has a network of 73 overseas of.ces in 30 countries in all time zones and correspondent relationship with 520 international banks in 123 countries. The bank is keen to implement core banking solution to its international branches also. During FY06, 25 foreign offices were successfully switched over to Finacle software. SBI has installed ATMs at Male Muscat and Colombo of.ces. In recent years. SBI has installed ATMs at Male, Muscat and Colombo Of.cex. In recent years, SBI acquired 76% shareholding in Giro Commercial Bank Limited in Kenya and PT Indomonex Bank  Ltd. In Indonesia. The bank incorporated a company SBI Botswana Lte. at Gaborone. d.

Treasury

The bank manages an integrated treasury covering both domestic and foreign exchange markets. In recent years, the treasury operation of the bank has become more active amidst rising interest rate scenario, robust credit growth and liquidity constraints. The The  bank diversified it operations more actively into alternative revenue streams in order to offset the losses in.xed income portfolio. Reorganisation of the treasury processes at domestic and global levels is also being undertaken to leverage on the operational synergy between business units and network, The reoganization seeks to enhance the efficiencies in use of manpower resources an increase maneuverability of banks operations in the markets both domestic as well as international. e.

Associates & Subsidiaries

The State Bank Group with a network of 14,061 branches including 4,755 branches of  its seven Associate Banks dominates the banking industry in India. In addition to   banki banking, ng, the the Group Group,, throu through gh its variou variouss subsi subsidia diari ries, es, provid provides es a whole whole range range of 

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financial services which includes life Insurance, Merchant Banking, Mutual Funds, Credit card, Factoring, Security trading and primary dealership in the Money Market.

e.1. Associates Banks e.2. Non – Banking Subsidiaries/ Joint Ventures i.

SBI life

ii.

SBI Ca Capital Ma Markets Li Limited (S (SBICAP)

iii.

SBI DFHI LTD

iv. iv.

SBII Car SB Cards ds & Pay Payme ment ntss Ser Servi vice cess Pvt Pvt.L .Ltd td.. (SB (SBIC ICSP SPL) L)

v.

SBI Fund Fundss Man Manag ageement ment (P) Ltd. (SBI (SBIFM FMP PL)_  L)_ 

f.

Human Resources

1.3.6 STRATEGY AND NEW DEVELOPMENTS

Though a publis sector bank, it has set in motion a series of steps to transform itself into a modern, technology enabled customer-centric, world-class banking organiztation, meeting best global practices and standards in bankings and service delivery. The bank has maintained its record record of profit profitabi abilit lity y, while while adjus adjustin ting g to the changi changing ng circu circums mstan tances ces and inter interest est rate rate environment. Despite intense competition and pressure on spreads it has maintained and Improved its NIM. Major innovations and initiatives are in the arena of technology, banking products and  processes, service delivery channels and human resource to efficiently serve bank customers across the globe The bank maintains its drive on the technology front to enhance customer  service, increase productivity, and manage risk better. After having computerized all its branches, it has been moving swiftly to implement real time on-line banking. As a part of its strategy to stay ahead of the competition, SBI had increased its benchmark lending rates by 50 basis points to 11.5  percent; this lending rate increase is dure to the rising cost of funds for banks, which are paying more for deposits as a way of encouraging investors to save.

1.3.7 ICICI BANK PROFILE

ICICI Bank is India’s second-largest bank. It has a network of about 614 branches and extension counters and over 2,200 ATMs. ICICI Bank offers a wide range of banking products 14

and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries subsidiaries and affiliates affiliates in the areas of investment banking, life and nonlife insurance, venture capital and asset management. ICICI Bank set up its international banking group in fiscal 2002 to cater to the cross border needs of clients and leverage on its domestic  banking strengths to offer products internationally. ICIC ICICII Bank Bank curren currently tly has subsi subsidia diarie riess in the Unite United d Kingd Kingdom om,, Russi Russiaa and Canad Canada, a,  branches in Singapore, Bahrain, Hong Kong, Sri Lanka and Dubai International Finance Centre and representative offices in the United States, United Arab Emirates, China, South Africa and Bangladesh. Our UK Subsidiary has established a branch in Belgium. ICICI Bank is the most valuable bank in India in terms of market capitalization. ICICI Bank’s equity shares are listed in India on the Bombay stock Exchange and the  National Stock Exchange of India Limited and its American Depositary Receipts ((ADRs) are listed on the New York Stock Exchange (NYSE). ICICI Bank has formulated a Code of Business Conduct and Ethics for its directors and employees. At June 5, ICICI Bank, with free float market capitalization* of about Rs. 480.00  billion ranked third amongst all the companies listed on the Indian Stock exchanges. ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institut institution, ion, and was its wholly wholly-own -owned ed subsidia subsidiary ry.. ICICI’ ICICI’ss sharehol shareholding ding in ICICI ICICI Bank was reduced to 46% through a public offering of shares in Indian fiscal 1998, an equity offering in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank’s acquisition of Bank of Madura Limited in all-stock, amalgamation in fiscal 2001, and secondary market sales by ICICI to institutional investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at the initiative of the World Bank, the Government of India and representa representativ tives es of Indian Indian industry industry. The principal principal objectiv objectivee was to create create a developm development ent financia financiall institut institution ion for providin providing g medium-t medium-term erm and long-ter long-term m project project financin financing g to Indian Indian  businesses. In the 1990s, ICICI transformed its business from a development financial institution offering only project finance to a diversified financial services group offering a wide variety of   products and services, both directly and through a number of subsidiaries an affiliates affiliates like ICICI Bank. In 1999, ICICI become become the first Indian company and and the first bank or financial institution, institution, from non-Japan Asia to be listed on the NYSE.

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After consideration of various corporate structuring alternatives in the context of the emerging competitive scenario in the Indian banking industry, and the move towards universal  banking, the managements of ICII and ICICI Bank formed the view that the merger of ICICI with ICICI ICICI Bank would would be the optimal optimal strategic strategic alternati alternative ve for both entities entities,, and would create create the optimal legal structure for the ICICI group’s universal banking strategy. The merger would enhance value for ICICI shareholders through the merged entitty’s access to low-cost deposits, greater opportunities for earning fee-based income and the ability to  participate  participate in the payments payments system and provide provide transaction-banking transaction-banking services. The merger merger would enhance value for ICICI Bank shareholders through a large capital base and scale of operations, seamless access to ICICI’s strong corporate relationships built up over five decades, entry into new business segments, hither market share in various business segments, particularly fee-based services, and and access to the vast talent pool of ICICI ICICI hand its subsidiaries. subsidiaries. In October 2001, the the Boards of Directors of ICICI and ICICI Bank approved the merger of ICICI Personal Financial Services Limited and ICICI Capital Services Limited, with ICICI Bank  The merger was approved by shareholders of ICICI and ICICI Bank in January 2002, and   by the High Court of Judicature at Mumbai and the Reserve Bank of India in April 2002. Consequent to the merger, the ICICI group’s financing and banking operations, both wholesale and retail, have been integrated in a single entity. *Free *Free float float holding holding excludes excludes all promoter promoter holdings, holdings, strategi strategicc investm investments ents and cross cross holdings among public sector entities. entities. ICICI Bank disseminates disseminates information information on its operation and initiatives on a regular basis. The ICICI Bank website serves as a key investor awareness facility, facility, a’ lowing lowing stake holders to access information on ICICI Bank at their convenience. convenience. ICICI Bank’s Bank’s dedicated investor relations personal play a proactive role in disseminating information to both analysts and investors and respond to specific queries.

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CHAPTER 2

2.1 SCOPE OF THE STUDY :

The project entitled “A Study on the performance evaluation of SBI and ICICI based and fundamental and technical analysis” will enable from the investors point of view to refer the  performance of the Banks, their relative growth and thereby decide on to buy or sell the particular  slab. This study will also help to identify the bank that is lagging behind in its performane.

2.2 OBJECTIVES OF THE STUDY: PRIMERY OBJECTIVE •

To analyse the various factors which influence the share price of SBI and ICICI bank 

SECONDREY OBJECTIVE •

To analyze the market value of SBI and ICICI bank 

•

To offer suggestions and recommendations based on the findings.

•

To study the performance of ICICI and SBI

2.3 PERIOD OF THE STUDY:

For the purpose of the study 5 years period starting from the financial year mar 2002 to march 2006 in considered. The year 2005-2006 is chosen as a terminal year since only upto this  period reliable time series data were available for the variables dealt in the study. 2.4 LIMITATIONS OF THE STUDY: •

This study is based on the secondary data collected form the kotak securities. com no other  efforts have been made to verify their correctness.

•

Due to paucity of time important factors has been analysed and discussed.

•

The approach to behavior of share price is based on long time view.

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•

There limitations do not undermine either the scope of the study on the analysis and inference.

2.5 METHODOLOGY DATA COLLECTION Secondary data:

All secondary data has been collected from the kotak securities. The required information information are also collected form respective bulletins of RBI, website of government of India, website of  stockcharts.com, Global research study is also adhered. Analysis Overlook:

Fundamental analysis and technical analysis are taken into consideration. Ration analysis

The ratio analysis expresses the relationship of the financial ratios in percentages which are collected form the Balance sheet and profit and loss account. The key ratios considered of SBI and ICICI Bank considered includes 1. Invest Investme ment nt/de /depos posit it (%) (%) 2. Cash Cash / dep depos osit it (%) (%) 3. Interest Interest expended expended / intere interest st earne earned d (%) (%) 4. Other Other incom incomee / total total incom incomee (%) (%) 5.

Operati Operating ng expen expenses ses / total total income income (%)

6. Intere Interest st incom incomee / total total funds funds (%) (%) 7. Intere Interest st expen expended ded / tota totall funds funds (%) (%) 8. Net interest interest income income / total total funds funds (%) (%) 9. Non interest interest income income / total total funds funds (%) (%) 10. Operating expenses expenses / total total funds (%) 11. Profit before before provision provision / total funds (%) (%) 12. Net profit profit / total funds funds (%) 18

Technical Analysis

It is the process of identifying trend reversal at an earlier stage to formulate the buying and selling strategy. strategy. With the help of several indicators they analysis the relationship relationship between price –  volume and supply-demand for the overall market and the individual stock. Volume is favorable on the upswing, the number of shares traded is greater than before and on the downside the number of shares traded dwindles. If it is the other way round, trend reversals can be expected.

2.6 FUNDAMENT FUNDAMEN TAL ANALYSIS ANALYSIS INTRODUCTION

Fundamental analysis is the study of economic factor industrial environment and the factor related to the company. This chapter of fundamental analysis consists of  Economic analysis Banking industry analysis Profile of SBI Profile of ICICI Ratio analysis of SBI Ratio analysis of ICICI

Economic analysis with favorable GDP with savings, investment, stable prices, balance of   payment, and infrastructure facilities which provides a best environment for common stock  investment

Industrial analysis growth follow a pattern. This replicates the banking industry monitory policy, CPR, SLR, and the flow of the industry.

Company analysis explains of the profile of SBI and ICICI bank and then deals with the ratio analysis of both the banks

2.6.1 ECONOMIC ANALYSIS

19

The level of economy has an impact on investment investment in many ways. If the economic growth rapidly, rapidly, the industry can also be expected to show rapid growth and vice versa. When the level of economic activity is low, low, stock price are low, and when the level of economic activity is high, the stock price are high reflecting the prosperous outlook for sales and profit of the firms. Vigorous growth with strong macroeconomic fundamentals has characterized developments in the Indian economy in 2006-2007 so far. far. However, However, there are some genuine concerns on the inflation front. Growth of 9.0% and 9.2% in2005-2006 and 2006-2007 shows a positive sign, the surging  pattern in agriculture continued with growth estimated at 6.0% and 2.7% in the two resent year, and services maintained on the industrial segment. The higher growth trends, particularly in manufacturing boosted sentiments with in the country and abroad. The overall macro economic fundamentals are robust, particularly with tangible progress towards fiscal consolidation and a strong balance of payment position. With an up surge in investment, the outlook is distinctly up  beat. The ratcheting up of growth observed in recent years in reflected in the eleventh five year target of an average annual growth of 9.0% relative to 8.0% targeted by the tenth plan (2002-2003 to 2006-2007). Services Services contributed as much as 68.6% of the overall average growth in GDP in the last five years. The entire residual contribution came from industry. As a result, in 2006-2007, while the share of agriculture in GDP decline to 18.5%, the share of industry and service improved to 26.4% and 55.1%, respectively.

SAVINGS SAVINGS AND INVESTMENT IN VESTMENT

The gross domestic savings as a proportion of GDP shows an increasing trend with the saving ration rising from 26.4 per cent in 2002-03 to 29.7 per cent in 2003-04, 31.1 per cent in 2004-05 and 32.4 percent in 2005 – 06. The rise in the savings rate in 2005-06 was due to private corporate and the household sector, which as proportion of GDP, increased by 1.0 percentage  point and 0.7 percentage points, and made a negative contribution to the overall saving rate. However, a redeeming feature of recent years is that the savings of the public sector, which had  been negative until 2002-03, was positive for the third successive year in 2005-06. The positive saving of Rs. 71,262 crore in 2005-06 (QE) is largely attributable to the higher savings of nondepartmental as well as departmental enterprises. The Indian economy has shown a sharp rise in the savings rate of the private corporate sector for tour years. The savings rate for 2005-06, as per  the quick estimates, has been placed at 8.1 per cent. The private corporate sector has financed a 20

large part of its investment in the on-going long capex cycle from such retained earnings or  savings.

As much as 0.7 percentage point of the 1.3 percentage points increase in gross domestic savings rate between 2004-05 and 2005 – 06 has come from the household sector. sector. a construction construction  boom with residential buildings financed from housing loans form banks and the progressive maturing of the domestic financial markets. While Housing loans from banks has tended to increase household savings in physical form and depress financial savings, Progressive maturing of the domestic financial markets has provided shift in the household portfolio in the three years ending in 2005-06. Physical savings as a proportion GDP has declined steadily from a high of  12.4 percent in 2003-04 to 10.7 per cent in 2005-06. Financial savings, on the other hand, after  declining from 11.3 per cent to 10.2 per cent between 2003-04 and 2004-05, more than recovered recovered to 11.7 per cent in 2005-06. The increase in savings rate is what is to be expected with higher growth rate of the economy and a declining declining dependency ratio. with the proportion of population in the working age group of 15-64 years increasing steadily from 62.9 per cent in 2006 to 68.4 per cent in 2026, the demographic demographic dividend in the form of high savings savings rate is likely to continue. continue. As As the savings rate has gone up, private final consumption expenditure (PFCE) at current prices as a proportion of  GDP, has shown a declining trend particularly from 2001-02. PFCE as a proportion of GDP declined from 63.1 per cent in 2002-03 to 62.1 per cent in 2003-04, 60.0 per cent in 2004-05, and further to 58.7 per cent in 2005-06. This decline has also been accompanied by substantial changes in terms of the shares of different commodity groups. In PFCE, the share of food,  beverages and tobacco came down from 43.3 per cent in 2002-03 to 39.4 per cent in 2005-06. The The other major items of importance, namely, transport and communication, as a proportion of PFCE, rose from 15.8 per cent in 2002-03 to 19.1 per cent in 2004-05. Government final consumption expenditure GFCE), after declining from 11.9 per cent in 2002-03 to 11.0 per cent in 2004-05, increased to 11.5 per cent of GDP in 2005-2006. with the rise in the rate of gross domestic savings between 2003- 04 and 2004-05, there was a step up in the rate of gross domestic capital formation (GDCF) or investment from 28 per  cent of GDP to 31.5 per cent of GDP leading leading to a savings savings investment investment gap or a current current account account deficit deficit of 0.4 percent percent of GDP GDP in 2004 2004 – 05 . GDCF GDCF at constant constant prices prices base: base: 1999-200 1999-200)) as a  proportion  proportion of GDP is consistently lower than the corresponding corresponding proportion at current prices. This differential may reflect the greater increase in the prices of capital goods relative to the general 21

 price level, with growing technological sophistication of the production processes in the economy in general and manufacturing in particular. But, irrespective of the choice of constant or current  prices as the weights, the direction of change from year to year remains unaltered. This may indicate a recent pick up in fresh investment for creating additional capacity through fixed capital formation, particularly in the private sector. GDP GDP growt growth h in India India in the the post post-re -refor form m period period was was driven driven most mostly ly by Priva Private te final final consumption expenditure or PFCE growth. PFCE Contributed more than one half of the growth every year until 2001-02. After falling below one half in 2002-03, it had again dominated GDP Grow Growth th in 20032003-04. 04. But But this this appear appearss to have have und under ergon gonee a virtuo virtuous us Transf ransform ormati ation on with with investment rather than private consumption being he Main source of GDP growth in the latest two years of 2004-05 and and 2005- 06 .. Data on consumption consumption and investment investment in the national accounts accounts available until 2005-05 show that the 6.8 percentage point contribution contribution of investment investment to 13.1 per  cent growth in GDP at current market prices in 2004-05 exceeded the corresponding corresponding contribution of private final consumption expenditure at 6.1 percentage point for the first time in recent years. In terms of contribution to growth of GDP at current market prices, from the demand side, investment continued to provided the lead during 2004-05 and 2005-6. The percentage point contribution of investment in the growth of GDP at current market prices of 13.1 per cent and 14.1 14.1 per cent cent in 200 2004-0 4-05 5 and 200 2005-0 5-06, 6, respec respectiv tively ely,, were were 7.6 7.6 per cent cent and 7.0 7.0 per cent, cent, respectively. With imports growing faster than exports, the external balance continued to have a negative contribution to GDP growth in recent years.

AGRICULTURE

After After an annual average average of 3.0 per cent in the first five years years of the New millenn millennium ium starting 2001-02, growth growth of agriculture at only 2.7 per Cent in 2006-07, on a base of 6.0 per cent growth in the previous year, year, is a Cause of concern. Low investment, investment, imbalance imbalance in fertilizer fertilizer use, low seeds Replacement rate, a distorted incentive system and low post-harvest value Addition continued to be a drag on the sector’s performance. . with more Than half the population directly depending on this sector, low Agricultural growth has serious implications for the ‘inclusiveness’ of Growth. Furthermore, Furthermore, poor agricultural agricultural performance, performance, as the current year Has demonstrated, demonstrated, can complicate maintenance of price stability with Supply-side problems in essential commodities of day-to-day Consumption. The recent spurt of activity in food processing and Integration of the supply chain from the farm gate to the consumer’s plate Has the potential of redressing some of  the root causes such as low Investment, poor quality seeds, and little post-harvest processing. 22

Prices of primary commodities, mainly food, have been on the rise In 2006-07 so for. Wheat, pulses, edible oils, fruits and vegetables, an Condiments and spices have been the major  contributors to the higher Inflation rate of primary articles. Within the primary group, the mineral Subgroup recorded the highest year-on-year inflation at 18.2 per cent, Followed by food articles at 12.2 per cent and non-food articles articles at 12.0Per cent. cent. Food articles articles have a high weight of 15.4 per  cent in the WPI Basket. Including manufactured products such as sugar and edibleoils, Food articles contributed as much as 27.2 per cent to overall inflation of6.7 per cent on February 3,2007. Starting with a rate of 3.98 per cent, the in flation rate in 2006-07 has been on a general upward trend with intermittent intermittent decreases. decreases. However, However, average inflation in the 2 weeks ending on February 3, 2007 remained at 5 per cent. Government closely monitored prices every week and initiated Measures to enhance domestic availability of wheat, pulses, sugar and Edible oils by a combination of enhanced imports, export export restrictions restrictions and Fiscal concessions. concessions. In wheat, State State Trading Trading Corporation, Corporation, the   parastatal, parastatal,

tendered overseas for 55 lakh tonnes tonnes of wheat; wheat; private private trade as permitted permitted to to import import

wheat at zero duty from September 9; and exports were banned from February 9, 2007. The minimum support price (MSP) of wheat raised by Rs.50 Per quintal and announced well in advance of the sowing season to bring additional acreage under wheat. In pulses, imports were allowed at zero duty from June 8, 2006; export was banned from June 22, 2006; and National Agricultural Cooperative Marketing Federation (NAFED) purchased urad and moong overseas. Regulation Regulation of commodity futures futures markets was strengthened for wheat, sugar and pulses; and as a matter of abundant precaution, futures trading trading was banned in urad and tur from January 24, 2007. Duty on palm group of oils, which meets more than a half of the domestic demand –supply shortfall in edible oils, was reduced by 20-22.5 percentage points in a phased sequence, first in August 2006 and later in January 2007. Further, tariff values of these oils for import duty assessment were frozen. On January 22. 2007, further duty cuts were announced for Portland cement, various metals and machinery items. With a firming up of international prices, the impact of duty-free import of wheat and pulses in rolling the domestic domestic prices back was limited. But such imports unproved domestic market discipline. INFLATION

with a shortfall in domestic production vis-à-vis domestic demand and hardening of  international prices, prices of primary commodities, mainly food, have been on the rise in 200607 so far. Wheat, pluses, edible oils, fruits and vegetables, and condiments and spices have been the major contributors to the higher inflation rate of primary articles.. Within the primary group, 23

the mineral subgroup recorded the highest year-on-year inflation at 18.2 per cent, followed by food articles at 12.2 per cent and and non-food articles at 12.0 per cent. cent. Food articles articles have a high weight of 15.4 per cent in the WPI basket. Including manufactured products such as sugar and edible oils, food articles contributed as much as 27.2 per cent to overall inflation of 6.7 per cent on February 3, 2007. Starting with with a rate of 3.98 per cent, the inflation inflation rate in 2006-07 has been on a general general upward upward trend trend with with intermi intermitten ttentt decrease decreases. s. However However,, average inflatio inflation n in the 52 weeks ending on February 3, 2007 remained at 5 per cent. A spurt in inflation like in the current year has been observed in the recent past in 1997-98, 2000-01, 2003-04, and 2004-05. FOREIGN IMPACT oil prices

The international international annual average price of the Indian basket of crude (about 60 per cent of  Oman/Dubai and 40 per cent of Brent), after remaining more or less stable in 2002-04 at around US$27 US$27-- 28 per per barre barrel, l,

on Augus Augustt 8, 2006. To To stop stop the hemorrh hemorrhagi aging ng of public public secto sectorr oil

companies’ companies’ finances, finances, there was an unavoidable upward upward revision of retail selling prices of petro products on June 6, 2006. The pass –through to consumers was restricted to just 12.5 per cent in a three three way burden burden shari sharing ng arrang arrangeme ement nt among among consum consumer ers, s, Gover Governme nment nt and oil marke marketin ting g companies. With the softening of international petroleum prices, domestic prices of petrol (motor  spirit) and high diesel were reduced by Rs. 2 and Re.1, respectively with effect from November  30, 2006, and again by the same amounts with effect from February 16, 2007 . Balance of payment

In the balance of payments, in 2005-06 and in the first half of 2006-07, capital flows more than made up for the current account deficits of US$9.2 billion and US$11.7 billion, respectively, and resulted in reserve accretion. The current account deficit reflected the large and growing trade deficit in the last two years. Exports grew fast, but imports grew even faster, reflecting in part the ongoing investment boom and the high international petroleum petroleum price. In 2005-06, imports (in US dollar terms and customs basis) had grown by 33.8 per cent. In the first nine months of the current year, year, imports grew by 36.3 per cent. While petroleum imports continued to grow rapidly, rapidly, non-oil import growth decelerated to a moderate 18.7 per cent in the first nine months of the current year,  primarily  primarily because of high bullion prices leading to a decline in import balance, after remaining remaining in surplus till 2003-04, has turned negative since 2004-05. India’s exports (in US dollar terms and customs basis) have been growing at a high rate of more than 20 per cent since 2002-03. During 205-06, growth growth of 23.4 per cent, India’s India’s exports crossed the US$100 billion mark. mark. During 200624

07, after a slow start, exports gained momentum to grow by an estimated 36.3 per cent in the first nine months to reach US$89.5 billion. Buovancy of exports was driven from major trading  partners.

FDI and FII

Capital flows into India remained strong. The composition of flows, however, fluctuated from year to year. In the three-year period, 2002-05, there were large ‘other flows’ (delayed export receipts and others) accounting for a sizeable proportion of net capital flows. After being outflows in the previous two years, external assistance and external commercial borrowing (ECBs) –two major debt-creating flows- picked up in 2004-05. These debt flows, as a proportion of total capital flows, flows, were were 25 per cent in in 2004-05 2004-05 and 18 per cent cent in 2005-06. 2005-06. Foreig Foreign n investme investment, nt, as a  proportion  proportion of capital flows, has remained in the range of 39.1 per cent to 79.3 per cent in the last four years ending in 2005-06. There was strong growth in foreign direct investment (FDI) flows (net), with with three-quarters three-quarters of such flows in the form of equity equity.. The growth growth rate was 27.4 per cent in 2005-06 followed by 98.4 per cent in April –September 2006. This was even after gross outflows under FDI with domestic corporate entities seeking a global presence to harness scale, technology and market access advantages through acquisitions acquisitions overseas. FII flows, the dominant variety of portfolio flows, after remaining buoyant until 2005-06, turned into net outflows in the first half of 2006-07. Fill flows are reported to have turned positive again in the second half of the current year. THE CAPITAL MARKET

Bullish sentiments in the domestic capital market is foreseen. The BSE sensex, stockindex of the Bombay Stock Exchange (BSE), rallied from a low 8,929 on June 14, 2006 to an alltime intra-day high of 14,724 on February 9. 2007. The rally from the 13,000 mark to the 1400 mark in only 26 trading from the fastest ever climb of 1,000 points. India with a market capitalization capitalization of 91.5 per cent of GDP on on January 12, 2007 the strength strength of the market microstructure from large retail participation continued. The positive sentiments were manifest also in most indicators such as resource mobilized mobilized through the primary market. market. Aggregate Aggregate mobilization, mobilization, especially through private placements and Initial Public Offerings (IPOs), grew by 30.5 per cent to RS. 161,769 crore in calendar year 2006, with about 6 IPOs every month, on average. Net mobilization of resources by mutual funds increased by more than four-fold from Rs. 25,454 crore in 2005 to Rs. 1,04,950 crore in 2006. The sharp rise in mobilization by mutual funds was due to 25

 buoyant inflows under both income/debt-oriented schemes and growth/equity oriented schemes. The negative inflows in 2004 turned positive for the public sector mutual funds in 2005 and accel accelera erated ted in 200 2006. 6.

other other indic indicato ators rs of marke markett sentim sentiment ents, s, such as equit equity y return returnss and

 price/earnings ratio also continued to be strong and supportive of growth.

The upbeat mood of the capital markets. Reflecting Reflecting the improved growth prospects of the economy was partly partly also a result of steady progress progress made on the infrastructure infrastructure front. Overall index of six core industries – electricity, coal, crude oil, petroleum refinery products, and cement, registered a growth of 8.3 per cent.

INFRASTRUCTURE

On the transport and communication front, railways maintained its nearly double-light growth in the first nine months of the current year. There was, however, a growth declaration in cargo handled handled at major maritime ports ports (both exports and imports) imports) and airports (exports). (exports). The news news of gas discov discoveri eries es in the Krish Krishna na Godav Godavari ari (KG) (KG) basin basin und under er New New explor explorat ation ion and Licensing Policy (NELP) in recent months was an encouraging development in the country’s  pursuit of reduced impot dependence in hydrocarbons. hydrocarbons. Investment requirements for infrastructure during the Eleventh Five Year Year plan are estimated to be around US$ 320 billion. While nearly 60   percent of these resources would come from the public sector and/or through public-private   partnership partnership (PPP). (PPP). The potential potential benefits benefits expected expected from PPP PPP are are : cost-effectiv cost-effectiveness, eness, higher  higher   productivity  productivity,, accelerated accelerated delivery, delivery, clear customer focus, enhanced social service, and recovery of  user charges. Further, the additionally of resources that PPP would bring, along with the ‘value for  money’ continues to remain critical. Based on the number of projects that have been approved or  are under consideration, it is estimated that a leveraging of nearly six times could be achieved through this route. Services sector sector growth has continued continued to be broad-based. Among the three sub-sector sub-sector of  services, ‘trade, hotels, transport and communication services’ has continued to boost the sector   by growing at double-digit double-digit rates for the forth successive successive year (table 1.2). impressive impressive progress in information information technology (IT) and IT-enabled IT-enabled services, services, both rail and road traffic, and fast addition to existing stock of telephone connections, connections, particularly particularly mobile, played played a key role in such growth. Growth in financial services (comprising banking, insurance, real estate and business services), after dipping to 5.6 percent in 2003-2004 bounced back to 8.7 percent in 2004-05 and 10.9 26

 percent in 2005-2006. the momentum has been maintained with a growth of 11.1 percent in 20062007.

2.6.2 INDUSTRY ANALYSIS ANALYSIS

The lower contribution of industry to GDP growth relative to services in recent year is partly because of its lower share in GDP, and does not adequately capture the signs of  industrial resurgence. Growth on industrial sector, sector, from a low of 2.7% in 2001-2002, revived revived to 7.1% and 7.4% in 2002-2003 and 2003-2004, respectively, and after accelerating to over 9.5% in the next two years, touched 10.0% in 2006-2007. The growth of industry, as a proportion of the corresponding growth in services, which was78.9% on the average between 1991-1992 and 1999-2000, improved to 88.7 % in the last seven years. Within Within industry, industry, the growth impulses in the sector seem to have spread to manufacturing. manufacturing. Industrial growth would have been even higher, had it not been for a relatively disappointing  performance of the other two sub-sector, namely mining and quarrying, and electricity, gas and water supply su pply.. Since 1951-1952, industry has never consistently grown at over 7.0% per year for more than three years in a row before 2004-2005. YoY, manufacturing, accounting to the monthly index of industrial production (IIP) available until 2006, has been growing at double digit rates every month since march 2006, with the solitary exception of the festive month of October. The current growth phase shows a sharp rise in the rate of investment in the economy. Investment reflect a high degree of business optimism. The revival in gross domestic capital formation (GDCF) (GDCF) that commenced in 2002-2003 has been followed by a sharp rise in the rate of  investment in the for four consecutive years. The earlier statement of GDCF for 2004-2005 of  30.1%, released by CSO in their advance estimates,  Now stand upgraded to 31.5% in the quick estimates. This sharp increase in the investment rate has sustained the industrial performance and reinforces the outlook for growth

27

2.6.3 BANKING INDUSTRY ANALY ANALYAIS

Bank Bank credit has continu continued ed to grow at a pace. pace. Sustained Sustained Growth Growth of bank credit credit was accommo accommodate dated d by accelera acceleration tion in deposit deposit

Growth Growth.. Concomi Concomitant tantly ly,, broad broad many growth growth has

remained above the Indicative trajectory , reflecting strong demand conditions. Banks’ SLR  Investments, as a proportion of their net demand and time liabilities (NDTL), have declined further from their end-March 2006 levels. The Reserve Bank continued to modulate market liquidity with with the help ofLAF repo and reverse repos and issuance of securities under the Market Stabilisation Stabilisation Scheme (MSS). Furthermore, Furthermore, the Reserve Bank raised cash Reserve ratio (CRR) by 50 basis points in two phases with effect from the Fortnight beginning December 23, 2006

2.7 MONETARY POLICY

Broad money (M3) growth, year-on-year (Y-o-Y), accelerated to 20.4 per cent as on January 5, 2007 from 17.0 17.0 per cent cent t end-march end-march 2006 and and 16.0 per cent a year ago. On a fiscal year basis too, M3 growth during 2006-07 so far (January 5, 2007 over March 31, 2006), at 11.9  per cent, was higher than that of 8.8 per cent in the corresponding period of 2005- 06 (January 6, 2006 over Apirl1, Apirl1, 2005). Taking Taking into account, inter alia, these trends trends in monetary aggregates, aggregates, sustained growth in credit offtake, and additional absorption of liquidity under the MSS, the Reserve Bank, on December 8, 2006, decided to increase the CRR by 50 basis points in two stages – 25 basis points each effective the fortnights, beginning December 23, 2006 and January 6, 2007. Other development in the Domestic economy impacting upon the decision to increase the CRR Included growth in real GDP, acceleration in inflation, expectations of the Private corporate sector of higher increase in prices of both inputs and Outputs, reports of growing strains on domesti domesticc capacity capacity utilizat utilization, ion, and Challen Challenges ges emanatin emanating g from capital capital flows flows and conseque consequent nt impact on Increasing liquidity.

The increase in the CRR is estimated estimated to have absorbed banks’ resources to the extent of  Rs. 13,500 crore. Expansion in the residency- based new monetary aggregate (NM3) – which, inter inter alia alia does does not direc directly tly recko reckon n non non-re -resid sident ent forei foreign gn curren currency cy depos deposits its such such as India India Millenn Millennium ium Deposits Deposits (IMDs) (IMDs) and FCNR FCNR

(B)-was (B)-was lower lower than M3, partly partly Reflecting Reflecting lower  lower 

recourse to call/term funding from financial institutions. Growth in liquidity aggregate L 1 was lower that that in NM3 on account Of decline in postal deposits.

28

2.8 CRR 

The Reserve Bank in its Mid-Term Review of Annual Policy Statement for the year 200607 (October 31, 2006) noted, inter alia, that: “Furthermore, containing inflation expectations in the current current environm environment ent and consolidati consolidating ng gains achieved achieved so far in regard to stabilit stability y would warrant appropriate, immediate measures and willingness to take recourse to all possible measures in respo respons nsee to evolvi evolving ng circum circumst stanc ances es promp promptly tly.. Th Thee object objective ive is to contin continue ue to maint maintain ain conditions of stability that contribute to sustaining the momentum of growth on an enduring basis. Towards this objective, the monetary policy stance and measures will need to be in a process of  careful rebalancing and timely adjustment”. Subsequent to the announcement of the Mid-term Review, there were a Number of significant developments, particularly on the domestic front. These included:

1.Real GDP growth at 9.2 per cent during July-September 2006 and 9.1 per cent in the first half of 2006-07. 2. Continued high growth growth in non-food bank, acceleration acceleration in money supply supply (M3 ) growth and reserve money growth and absorption of additional liquidity under the market stabilization scheme(MSS) 3. Increase in WPI inflation, with inflation based on the various consumer price indices being higher than WPI. 4. As per the RBI s Industrial Outlook survey, a majority of respondents from the private corporate sector expect higher increase in prices of both inputs and outputs.

There were reports of growing strains on domestic capacity Utilization. There were also reports that expansion expansion of capacity is Underway but but the realization could be constrained constrained over the next two years. A seasonal decline in prices of food articles could moderate the inflation Pressures  but the WPI inflation excluding food articles remains at Elevated levels. The reduction in prices of    petrol and diesel in end- November 2006 will moderate inflation, but the overall impact on Inflation expectations requires to be monitored and moderated. The External sector continues to  be strong and current account deficit is likely To be close to the trend, and will continue to be accommo accommodate dated d by net Capital Capital flows. flows. However However,, it is necessary necessary to recogniz recognizee the challeng challenges es Emanating from capital flows and consequent impact on increasing Liquidity. Liquidity.

In view of the above, the Reserve Bank, on December 8, 2006, Decided to increase the cash reserve ratio (CRR) of the scheduled Commercial banks, regional rural banks (RRBs), scheduled state co- Operative Operative banks and scheduled primary (urban) (urban) co-operative banking banking System 29

 by 50 basis points of their net demand and time liabilities liabilities NDTL ) In two stages-25 basis points each effective from fortnights beginning December 23, 2006 and January 6, 2007. As a result of  the ncreases in CRR on liabilities to banking system, an amount of about Rs. 13,500 crore Of  resources of banks would be absorbed,

Among Amongst st its its major major compon component ents, s, both both curren currency cy and and time time depos deposits its Cont Contrib ribute uted d to acceleration in growth in M3 year-year basis growth in Currency with the public increased from 15.4 per cent as on January 6,2006 to a peak of 19.4 per cent as on October 27, 2006 before moderating moderating to 16.8 per cent as on January 5, 2007. Acceleration Acceleration in growth in October 2006 could  be partly attributed to the early onset of festival Season currency demand during the current year. year.

Growth in aggregate deposits accelerated to 21.1 per cent, y-o-y, as On January 5, 2007 from 16.2 per cent a year ago, on the back of higher Accretion Accretion to time deposits. On a y-o-y basis, growth in demand deposits (19.2 per cent) as on January 5, 2007 was of a lower order than a year  ago (28.7 per cent). Accertion to time deposits was, however, significantly higher than that in the  previous year. Growth in time deposits of scheduled commercial banks accelerated to 22.9 per  cent (y-o-y) as on January 5, 2007 from 15.0 per cent a year ago. This, apart from Acceleration in economic activity, activity, could be attributed attributed to higher interest Rates on deposits as well as tax benefits. Interest rates on time deposits of 1-3 years maturity offered by public sector banks increased from a range of 5.75-6.75 5.75-6.75 per cent in March 2006 to 6.75-8.25 6.75-8.25 per cent in January 2007. Rates offered  by private sector sector banks on deposits of similar similar maturity increased increased from a range of 5.50-7.75 5.50-7.75 per  cent to 6.75-9.75 per cent over the same period.

Growth in time deposits also appears to have benefited from the Recently introduced tax  benefits under section 80C for deposits with Maturity of five years and above. Concomitantly, with unchanged interest Rates, postal deposits have witnessed a significant decline since end march 2006. Commercial sector’s demand for bank credit has continued To remainstrong during 2006-07 so far. On a year-on-year asis, non-food Credit of scheduled commercial banks (SCBs) registered a growth of 31.2 Per cent as on January 5, 2007- the same rate as a year ago. On a fiscal Year basis, growth in non-food credit decelerated decelerated marginally marginally to 16.9 per Cent as on January 5, 2007 from 7.5 per cent a year ago. In view of the Acceleration Acceleration in deposits, the ncremental ncremental credit deposit deposit ratio ratio of

SCBs, SCBs, After After remai remaining ning above/ above/arou around nd 100 per cent cent for the most most part since since

October 2004, has exhibited some moderation in recent months. As on January 5, 2007, the incremental redit-deposit ratio was around 93 per Cent (y-o-y) as compared with 108 per cent a 30

year year ago scheduled scheduled Commer Commercial cial banks’ banks’ food food credit credit has recorded recorded a modest modest rise (5.9 per cent) cent) During 2006-07 (up to January 5, 2007) reflecting lower order of Procurement of food grains.

Disaggregated data available up to October 2006 show that credit Growth has been largely broad-based. About 34 per cent of incremental Non-food credit was absorbed by industry, industry, 12 per cent by ‘other Retail loans’. Loans to commercial real estate, which increased by 84 per Cent, y-o-y, y-o-y, absorbed 5 per cent of incremental non-food credit. credit. Apart Apart From  bank credit, the corporate sector continued to rely on non-bank. Sources Sources of funds funds financin financing g their their requirem requirement. ent.

Resourc Resources es raised thorough thorough domesti domesticc equity equity

issuances during the first nine months of 2006-2007 (Rs. 23, 843 crore) were more than double of  that in the correspond corresponding ing period of 2005-200 2005-2006. 6. After After remaining remaining subdued subdued during during the second second quarter, amounts raised from the primary market picked up during the third quarter of 2006-2007. Mobilisation of resources through equity issuances abroad ADRs /DGRs ) during April-December  2006 (Rs. 8,019 8,019 crore) were were 55 percent higher than that that in the same same period of 2005. 2005. recouse to external commercial commercial borrowings borrowings (ECBs) during the first half of 2006-2007 was almost double double of  that in the corresponding period of 2005-2006, with net disbursement under ECBs increasing from Rs. 17,551 crore during April-September 2005 to Rs. 34,031 crore during April-September  2006. Mogbilisation Mogbilisation theough issuances issuances of commercial papers during April-December April-December 2006 was more than three times of that a year ago, now withstanding some sluggishness in the third quarter. Finally, internal sources of funds continued to provide large financing support to the domestic corporat corporatee sector during during the first half of 2006-200 2006-2007. 7. Profits Profits after after tax of select select non-financ non-financial ial nongovernment nongovernment companies during during April-Sept April-September ember 2006 were almost 40 percent higher higher than those in the first half of 2005-2006. Profits after tax during the second quarter of 2006-2007 were higher than those in each of the five preceding quarters.

In the fiscal year 2006-2007 (up to January 5, 2007), commercial bank’s investments in gifts witnessed a large expansion of Rs. 43,222 crore in contrast to a decline of Rs. 15,580 crore a year ago, reflecting the need to meet statutory requirements. On a y-o-y y-o-y basis, commercial banks’ investments investments in gilts increased by 5.6 percent as against a decline of 0.1 percent a year ago. Over  the same period, growth in commercial banks’ NDLT accelerated to 20.7 percent from 18.3  percent a year ago. With incremental investment in gilts not keeping pace with the high growth in  NDLT, commercial bank’s holdings of Government securities declined to 28.6 percent of their   NDLT as on January 5, 2007 fron 31.3 percent at the end o-March 2006 and 32.6 percent a year  ago. Excess SLR investments investments of SCBs SCBs fell to Rs. 96.407 crore as on January 5, 2007 from Rs. 31

1,68,029 crore a year ago. Funds raised through equity issuances in the primary market as well as higher internal reserves also enabled banks to fund strong credit demand.

Reserve Money

Reserve money expanded by 20.0 percent, y-o-y, as on January 19, 2007 as compared with 14.9 percent a year ago. Adjusted for the first round effect of the hike in the CRR, CRR, reserve money growth was 17.4 percent percent as on Janurary 29, 2007. 2007. Reserve money movements movements over the course of  the year reflected reflected the Reserve Reserve Bank’s Bank’s market operations. operations. The Reserve Reserve Bank’s Bank’s foreign currency assets (net of revaluation) increased by Rs. 80,166 crore during the fiscal year 2006-2007 (up to January 19, 19, 2007) as compared compared with an increase increase of Rs. 11,185 11,185 crore crore during the correspondi corresponding ng  period of the previous year Mirroring the liquidity management operations through LAF, the Reserve Bank’s holdings of Government securities increased by Rs. 10,615 crore during 20062007 (up to January 19, 2007) as against an increase of Rs. 27,435 crore in the corresponding   period of 2005-2006. 2005-2006. During 2006-2007 2006-2007 so far Central Central Government Government deposits with with te Reserve Bank have increase increased d by Rs. 3,615 crore. crore. The Reserve Reserve Bank’s Bank’s net credit credit to the Centre, Centre, thus, increased by Rs. 6,963 crore during the fiscal year 2006-2007 ( up to January 19, 2007) as against an increase of Rs. Rs. 50, 622 crore during the corresponding period of 2005 –206 2.9 LIQUIDITY MANAGEMENT

The Reserve Bank continued to ensure the appropriate liquidity is maintained in the system so that all legitimate requirements requirements of credit are met, particularly particularly for productive purposes, purposes, consistent with the objective of price and financial stability. Towards this end, the Reserve Bank  continued with its policy of active demand management of liquidity through OMO including MSS, LAF LAF and CRR, CRR, and and using all the policy instruments instruments as its disposal disposal flexibly flexibly.. However. However. Liquidity management emerged to be more complex during the past year, with greater variation in market liquidity, largely reflecting variations in cash balances of the Governments and capital flows. flows. During During the first first quarter quarter,, unwindin unwinding g of the Center’ Center’ss surplus surplus balances balances with the Reserve Reserve Bank’s purchase of foreign exchange from authorized dealers led to ample liquidity into the  banking system. This was mirrored in an increase in the LAF reverse repo balances. However, in view of some build-up of Centre’s cash balances with the Reserve Bank  during August August 2006, the absorption under LAF reverse repose witnessed some decline during the second quarter. quarter. Beginning Beginning mid September 2006, liquidity liquidity conditions turned tight on account of  32

advance tax outflows and festival season season currency demand. The Reserve Bank injected injected liquidity through repo on eight occasions between between mid September 2006 and end-October end-October 2006. however, however, net injection of liquidity was witnessed only on two occasions (October 20 and October 23, 2006). Liquidity pressures eased by end-October 2006 following soje decline in Centre’s Centre’s surplus cash balances. balances.

Liquidi Liquidity ty conditions conditions eased during November November 2006, partly partly reflecting reflecting market market

 purchases  purchases of foreign exchange by the Reserve Reserve Bank. This was mirrored mirrored in balances under LAF LAF revers reversee repos, repos, which which increase increased d to Rs. 34.255 34.255 crore crore as on Decemb December er 6, 200 2006. 6.

liquid liquidity ity

conditi8ons, however, turned tight from the second week of December 2006 largely due to  payments for auctioned Central Government securities, advance tax outflows (with concomitant increase in the Centre’s surplus cash balances with the Reserve Bank from Rs. 42, 716 crore as on December 15, 2006 to Rs. 73,634 crore on December 22, 2006), and the increase in the CRR by 501 basis points in two phases. In view of the prevailing liquidity liquidity conditions, conditions, the Reserve Bank  injected liquidity into the system through repo operations from December 12, 2006. Average daily net injection of liquidity by the Reserve Bank increased from Rs. 5,615 crore during December 13-21, 2006 to Rs. 25,585 crore during December 22-29, 2006 in contrast to the average daily absorption of Rs. 1,262 crore and Rs. 9,937 crore during October 2006 and   Novemb November er 2006, 2006, respecti respectively vely.. Average verage daily daily net injectio injection n of liquidit liquidity y by the Reserve Reserve Bank  moderate moderated d to Rs. 10, 814 crore crore during during January January 2007 (up to January January 20, 2007), 2007), as liquidity liquidity   pressures pressures eased partly on account of reduction reduction in the Centre’s Centre’s balance with the Reserve Bank  from Rs. 65,682 65,682 crore as on December 29,2006 29,2006 to Rs. 48,528 crore as on January 19, 2007. 2007. Net outstanding balance under LAF repos was Rs. 10,190 crore as on January 24, 2007.

2.10 INIDAN FINANCIAL SECTOR SWOT ANALYSIS Strengths

1. proven proven asses asses quality quality resilien resilience ce in past past downtur downturns. ns. 2. Prove Prove manage management ment teams, teams, track track record record 3. Stabl Stablee indu indust stry ry dynam dynamic icss 4. Well – estab establish lished ed regula regulatory tory frame frame work  work  5. Stable Stable / low low NPL NPL formatio formation n rates. rates.

33

Opportunities

1. Improvin Improving g secular secular GDP GDP growth growth prospe prospectus ctus 2. Establishment Establishment of special economic zone likely likely to promote further industrialization industrialization 3. Years, if not decades, decades, of catch-up catch-up economics economics – low per per capita income, income, educated work  work  force. 4. Rapid financial financial deepening, i.e. loan growth growth as multiple of nominal nominal GDP GDP growth. 5. Rising Rising consume consumerr spending spending,, consumer consumer credi creditt business. business. 6. Rising Rising corporat corporatee capex capex,, investm investments ents 7. M&A M&A opti optima mali lity ty..

Key issues/swing factors 1. Liquidity : Deposit growth sustaining sustaining momentum momentum and loan loan growth growth moderating moderating to 25% 25% from the current level of 30% 2. Policy risks: Moderating Moderating in inflation inflation outlook. outlook. Potential Potential for further further tightening tightening in the short term. Our echonomist believes that the risk is less. 3. Interest rate rate outlook outlook some headwind headwind from policy rate rate hike but won,t be be a shock factor factor.. 4. Loan growth : Moderation Moderation needed needed more for maintaining maintaining industry dynamics. dynamics. 5. Reduction in reserve reserve requiremen requirements: ts: key swing swing factor factor for for liquidity liquidity and hence hence for sustaining sustaining growth momentum.

Key risk factors 1. “Runnin “Running g on empty empty’’ in terms terms of of liquidi liquidity ty 2. Tightenin ightening g in global global liquidi liquidity ty may trick trickle le down down to Inida 3. Potenti Potentially ally hawki hawkish sh RBI stant stant on inflatio inflation/mo n/moneta netary ry policy policy 4. potentia potentiall rise in in long bond bond yields yields,, MTM risk for for banks banks 5. potential for valuation valuation pullback, pullback, should earnings delivery disappoint expectations. expectations.

Weakness, Key challenges challenge s 1. Continued crowding out effect effect form Govt. budget deficit, deficit, combained with acceleratin accelerating g  private credit demands 2. Owner Ownershi ship p restr restrict ictio ions ns 3. Constraints Constraints on statestate- owned banks banks micro micro including HR, staff staff cut, branch cut constraints. constraints.

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2.11 2.1 1 BUDGET 2007-2008 OVERVIEW

BUDGET 2007-2008

Improvement in GDP growth rate from 7.5% in 2004-2005 to 9% in 2006-2007; average growth rate in the three ears of the UPA UPA Government Government at 8.6% growth target for the Tenth Tenth Plan of  8% will be nearly achieved; during three year period, acceleration in growth rate inmanufacturing from 8.7% to 9.1% and further to 11.3% and in services sector from 9.6% to 9.8% and further to 11.2%. average growth in agriculture during Tenth Tenth Plan estimated at 2.3% Income and Savings :

 per capita income in 2005-2006, in real terms, increased by 7.4%,

savings rate estimated at 32.4% and investment rate at 33.8%. Inflation : Growth in bank credit, year on year, by 29.6% expansion in money supply (M3) by

21.3% foreign exchange reserves at US$ 180 billion; pressure on domestic pri8ces by global commodity prices; and supply constraints in some essential commodities – consequently, average inflation in 2006-2007 estimated at between 5.2 and 5.4% vis-à-vis 4.4% last year. In 2006-2007, additional irrigation potential of 2,400,000 hectares to be created; until December  2006 drinking water provided to 55,512 habitation, 12,198 kilometers of rural roads completed and 783,000 rural houses constructed with 914,000 houses under construction; 19,758 villages covered so far under the Rajiv Gandhi Grameen Vidyutikaran Yojana; 15,054 villages provided with telephone against target of 20, 000 villages, and balance to be covered by the end of the year. ELEVENTH FIVE YEAR PLAN

“Faster and more Inclusive Growth”, Growth”, growth rate of approximately approximately 10% by the end Objectives : “Faster of plan period; growth of 4% in the agriculture sector, faster employment creation, reducing disparities across regions and ensuring access to basic physical infrastructure and health and education services to all. AGRICULTURE

Farm credit : Target of Rs. 225,000 crore for 2007-2008 with an addition of 50 lakh new farmers

to the banking system; provision of Rs. 1,677 crore for 2% interest subvention for short-tem crop loans; a special plan being implemented over a period of three years in 31 especially distressed districts in four states involving a total amount of Rs. 16,979 crore; of this, about Rs. 12,400 crore to be on water related schemes; special plan includes a scheme with proposed provision of Rs. 153 crore for induction of high yielding milch animals and related activities. 35

Mission for Pulses : Integrated Oilseeds, oil palm, Pulses and Maize Development programme to

 be expanded with sharper focus on scaling up the production of breeder, breeder, foundation and certified seeds; Government to fund the expansion of Indian Institute of Pulses Research, Kanpur, and offer  the other producers a capital grant or concessional financing to double production of certified seeds within a period of three years. Plantation Sector :

Financial Financial mechanisms for re-plantation and rejuvenation rejuvenation to be put in place

for coffee, rubber, spices, cashew and coconut.

Accelerated Irrigation Benefit Programme : 35 projects likely to be completed in 2006-2007

and additional irrigation potential of 900,000 hectares to be created; outlay to be increased from Rs. 7,121 crore to Rs. 11,000 crore including grant component to State Governments of Rs. 3,580 crore, an increase from Rs. 2,350 crore. Rainfed Area

Development Programme:

Proposed allocation of Rs. 100 crore for the new Rainfed Area

Development Programme.

Water Resources Management : Restoring Water Bodies : World Bank loan agreement signed

with TamilNadu for Rs. 2,182 crore to resore 5,763 water bodies having a command area of  400,000 hectares; agreement for Andhra Pradesh expected to be concluded in March 2007 to cover 3000 water bodies with a command area of 250,000 hectares.

Extension System :  New programme to be drawn up that will replicate earlier Training and Visit

(T&V) programme; Agriculture Agriculture Technology Technology Management Agency (ATMA) (ATMA) now in place in 262 districts to be extended to another 300 districts; provision for ATMA to increase from Rs. 50 crore to Rs. 230 crore.

Fertiliser Subsidies : Based on study to be conducted, a pilot programme to be implemented for 

delivering subsidy directly to farmer.

Agricultural Insurance :  National Agricultural Insurance Scheme to be continued for Kharif 

and Rabi 2007-2008 with a provision of Rs. 500 crore; a weather based crop insurance scheme to   be started by Agricultural Insurance Corporation on a pilot basis as an alternative to NAIS allocation of Rs. 100 crore to be made in 2007-2008 36

INVESTMENT :

Gross domestic capital formation in 2005-2006 grew by 23.7 percent in April-January, 2006-2007, foreign direct investment amounted to US $ 12.5 billion and outpaced portfolio investment of  US$ 6.8 billion; Central Public Sector  To invest invest Rs. 165,053 crore through through internal internal and extra extra budgeta budgetary ry resource resourcess in 2007-200 2007-2008; 8; Government to provide equity support of Rs. 16,361 crore and loans of Rs. 2,970 crore.

INFRASTRUCTURE : Power : Seven more Ultra Mega Power Projects under process and at least two to be awarded by

July, 2007; other initiatives include facilitating setting up of merchant power plants by private developers and private participation in transmission projects; Accelerated Power Development and Reforms being restructured to cover all district headquarters and town with a population of  more than 501,000; budgetary support for APDRP to increase from Rs. 650 crore to Rs. 800 crore; Rajiv Gandhi Grameen Vidyutikaran Yojana; allocation to increase from Rs. 3,000 crore to Rs. 3,983 crore.

Coal :

26 coal blocks with reserves of 8,581million 8,581million tones and four lignite blocks with reserves

of 755 million tones allotted allotted to Government Government companies and approved approved end users; definition definition of  specific end use to be enlarged to include underground coal gasification and coal liquefaction.

National Highways ; Provision for National Highway Development Programme to increase from

Rs. 9,945 crore to Rs. 10,667 crore; road-cum rail bridge at Bogibee, Assam, over Brahmaputra, to be taken up as an national project.

Public Private Partnership Partnership and Vialibility Gap Gap Funding :

Revolving fund with a corpus of Rs. 100 crore to be set up to quicken project preparation; fund to contribute upto 75% of preparatory expenditure in the form of interest free loan to be recovered from the successful bidder. INDUSTRY Petroleum and Naural Gas :162 production contracts awarded; investment of Rs. 97,000 crore

made in exploration; 23 coal bed methane blocks awarded for exploration.

37

Textiles :

Provision Provision for Scheme for Integrated Textiles Textiles Parks to increase from Rs. 189 crore to

Rs. 425 crore; echnology Upgradation Fund scheme to continue with provision of Rs. 911 crore.

Additional 100-150 clusters clusters to be taken up in 2007-2008; health health insurance scheme Handlooms : Additional to be extended to more weavers and also to be enlarge to include ancillary workers; allocation allocation for  the sector to be enhanced from Rs. 241 crore to Rs 321 crore.

Small & Medium Enterprises : Increase in outstanding credit from Rs. 135,200 crore to Rs.

173, 460 crore at end December 2006. Coir Industry :Scheme for modernization and technology upgradation with special emphasis to

major coir producing States announced with a proposed provision of Rs. 22.50 crore.

SERVICE SECTOR  Foreign Trade : Merchandise exports expected to cross US $ 125 billion by the end of the

current fiscal. Tourism ; Provision for tourist infrastructure to increase from Rs. 423 crore to Rs. 520 crore.

FINANCIAL SECTOR  Banking : Under Differential Rate of Interest scheme providing finance at a rate of 4% to weaker 

sections of the community community engaged in gainful gainful occupations, occupations, limit of loan to be raised from Rs. Rs. 6,500 6,500 to Rs. 15,000 15,000 and limit of housing housing loan to be raised raised from Rs. 5,000 5,000 to Rs. 20,000 per   beneficiary.

Regional Rural Banks : To open at least one branch in 80 uncovered districts in 2007-2008 \;

Securit Securitisat isation ion and Reconst Reconstruct ruction ion of Financi Financial al Assets Assets and Enforcem Enforcement ent of Securit Securitisat isation ion of  Interest (SARFAESH) Act to be extended to loans advanced by RRBs; to be permitted to accept  NRE/FCNR deposits; and those which have a negative net worth to be recapitalized.

Housing Loans :

National Housing Bank to introduce ‘reverse mortgage’ mortgage’ under which a senior 

citizen who is owner of a hose can avail of a monthly stream of income against mortgage of  his/her house, while while remaining remaining the owner and occupying the house throughout throughout his/her lifetime, lifetime, without repayment or servicing of the loan; regulations to be put in place to allow creation of  mortgage guarantee companies. 38

Insurance : Exclusive health insurance scheme for senior citizens offered by National Insurance

Company; other three public sector insurance companies to offer a similar product to senior  citizens; Micro Financial Financial Sector (Development (Development and Regulation) Regulation) Bill and a comprehensive Bill to amen insurance laws to be introduced in Budget Session.

Financial Inclusion Inclusion Fund to be established established with NABARD NABARD for meeting Financial Inclusion: A Financial cost of development development and promotional promotional interventions; a Financial Inclusion Technology Technology Fund to be also established to meet costs of technology adoption; each fund to have an overall corpus of Rs. 500 crore, with initial funding to be contributed by Government. RBI and NABARD.

Capital Markets : PAN to be made sole identification number for all participants in securities

market with an alpha-numeric prefix or suffix to distinguish a particular kind of account; idea of  self Regulating Organisations (SRO) to be taken forward for different market participants under  regulations to be made by SEBI; mutual funds to be permitted to launch and operate dedicated infrastructure funds; individuals to be permitted to invest in overseas securities through Indian mutual funds; short selling settled by delivery, and securities lending and borrowing to facilitate deliver, by institutions to be allowed; enabling mechanism to be put in place to permit Indian companie companiess to unlock unlock a part of their holdings holdings in group group compani companies es for meeting meeting their their financin financing g requirements by issue of Exchangable Bonds

Innovative Financing for Infrastructure : Funds from National Small Savings Fund may also

now be borrowed by India Infrastructure Finance Company Limited; suggestions of Deepak  Parekh Committee to be examined for establishment of two wholly owned overseas subsidiaries of IIFC IIFCL L with with obje object ctiv ives es to (i) (i) borr borrow ow fund fundss form form RBI RBI and and lend lend to Indi Indian an comp compan anie iess implementing infrastructure projects in India, or to co-finance their ECBs for such projects, solely for capital expenditure outside India; and (ii) borrow funds from the RBI, invest such funds in highly reated collateral securities and provide ‘credit wrap’ insurance to infrastructure projects in India for raising resources in international markets.

SOLUTION OVERVIEW

One of the biggest challenges for Financial was ensuring straight through  process  processing ing (STP) (STP) of most of the financial financial transact transactions ions.. With the ICICI group having several several 39

companies under its umbrella, Financial needed to seamlessly integrate with multiple applications such as credit cards, mutual mutual funds, brokerage, call center and data were housing systems. Another  key challenge was managing transaction volumes. ICICI Bank, underwent a phase of organic and inorganic growth, first by acquiring Bank  of Madura followed by a reverse merger of the bank with its parent organization, organization, ICICI Limited. The Scalable and open systems based architecture, enable Finance to successfully manage the resultant increase increase in transaction transaction levels from 400,000 400,000 transactions transactions a day in 2000 to nearly 201 million by 2005 with with an associated growth in peak volumes volumes by 5.5 times. With With Financial, the the   bank bank curren currently tly has the abilit ability y to proce process ss 0.27 0.27 milli million on cheque chequess per day and manag managee 700 7000 0 concurrent users. Over the years, the strategic partnership between ICICI Bank and Infosys that started in 1994 has grown stronger stronger and the close collaborat collaboration ion has resulted resulted in many innovat innovations ions.. For  instantance, in 1997, it was the first bank in India to offer Internet Banking with Finacle’s e banking solution and established itself as a leader in the Internet and eCommerce space. The bank  followed it up with offering several e-Commerce services like Bill Payments, Funds Transfers and Corporate Banking over the net. The Internet is a critical element of ICICI Bank’s Bank’s award winning multi-channel multi-channel strategy that is one of the main engines of growth growth for the bank. Between 2000 and 2004, the bank has been able to successfully move over 70 percent of routine banking transactions from the branch to the other delivery channels, thus increasing overall efficiency. efficiency. Currently, Currently, only 25 percent of all transactions transactions take place through through branches and 75 percent through through other deliver  channels. This reduction reduction in routine transactions transactions through the the branch has enable ICICI ICICI Bank to aggressively aggressively use its branch network network as customer acquisition acquisition units. On an average, ICICI ICICI Bank  adds 300,000 customers as month, which is among the highest in the world.

2.12 SECURE BANKING

ICICI Secure online banking experience •

It strives provide a secure banking environment, provided the customers.

•

Do not share their User Ids, passwords, cards, card numbers on PINs with anyone, NOR  from their consequent unauthorized use.

•

ICICI Bank employs a range of security features for its Online Banking services.

40

•

Firewall (Virtual electronic fence that prevents unauthorized access to the ICICI Bank  server)

•

Verisign Digital Certificate

•

Two levels of passwords for executing Financial Transactions

•

Secured Funds Transfer & Bill Payment.

2.13 KEY RATIOS RATIO ANALYSIS ANALYSIS [SBI]

The financial statements statements of the company reveal the needed information information for the investor to make investment decision. The ratio analysis analysis helps the investor to study the individual individual parameters like profitability profitability,, liquidity leverage and the value of the stock.

2.13.1 (A) INTERPRETATION  SBI-RATIO ANALYSIS  •

  Net interest incoming growth is due to Low cost deposits which helped the bank in containi containing ng its costs of funds. During During 2006, 2006, low cost deposit deposit grew by 19.3% on a year  year   basis which helped contain the cost of funds.

•

Interest expenses, to the interest income ratio declined consistently from 63.29% in 2004 to 57% in 2005.

•

The bank would sustain Net interest income ratio and can marginally improve on it  because of its resource mobilization power and cost control measure..

•

•

•

Credit off take of the bank has been lower than the Indian banking industry.  Not interest income’s key contributor is the other income. Other income includes includes the fees and commission commission income. Incomes from foreign foreign exchange transactions are also recorded.

•

The ratio of non-interest non-interest income is is on the decline trend trend excepting excepting the year 2004. 2004. because its growth was not adequate enough to work the increase in the total funds. 41

•

Durin During g 200 20055-200 2006, 6, there there has been been a signi signifi fican cantt decli decline ne in profit profitss from from tradi trading ng in investments to Rs. 5.9 bn compared to Rs. 17.75 bn in the previous.

•

Investment/deposit Investment/depo sit ratio was on the declining trend excepting the year Mar 2004.

•

The reduction in investment ratio was mainly due to deployment of funds under advances. The increase in investment during Mar 2004 was at 18.62% while increase in deposit was at 9.6%

•

SBI group is continuously losing their market share in deposits since the opening up of the  banking sector to their private counterparts.

•

Operating expenses by 6% over the previous years (Mar 2005) which shows a decline (69%).

•

Employee expenses, which always contributed substantial chunk of the total operating expenses expenses,, also grew. grew.

It is also note worthy worthy that the bank has total staff staff strength strength of 

1,98,774 as on 31st Mar 2006. As of SBI launched VRS scheme, natural retirement, which shows reduction in, staff accounts nearly 5000 employees. •

A sizeable increase of operating expenses is being notices.

•

RONW is very much declined to an extent of (12.3%) from March 2005-March 2005March 2006, because of the stagnant net profit ratio.

•

•

High investment is made in core banking facilities  New technology products coupled with quick turn around time (TAT) have enabled midcorporate group to increase its business substantially.

•

  New New depa depart rtme ment nt grow growth th in ever every y bran branch ch by intr introd oduc ucin ing g new new tech techno nolo logi gies es with with computerized improvement.

2.13.2 (A) INTERPRETATION ICICI – RATIO ANALYSIS ANALYSIS

•

  Net Interest Income Income / Total Total funds has increased primarily primarily reflecting reflecting an increase of the average volume of Interest learning assets. 42

•

In Feb 2006, In accordance with RBI guidelines for Accounting for securitization of  standard assets, ICICI accounts for any loss arising on Securitization immediately at the time of sale and the profit/premium profit/premium arising on account of securitization securitization is amortized over  the life of the asset.

•

All direct marketing agency expenses, on automobile loans and other retail loans are reported separately separately under “Not interest interest expense”. These commissions commissions are expended and not amortized over the live of the loan.

•

Interest income/total funds have increased from 6.39% to 6.56% in the end, 2006 is   primarily primarily due due to an Increase Increase in the average Interest earning assets. This is due to the increase in allowances allowances (626) in spite of prime leading rate increase by 225 basic points in the period of 2005-2006, 2005-2006, benchmark rate rate for floating home loans loans has increased by 150 150  points in the same period.

•

Interest expenses has increase during 2005-2006 is primarily due to an increase of 55.2% in average interest-bearing interest-bearing liabilities to Rs. 2354.7 billion in the six-months period ended sep 30, 2006.

•

Cost of funds to 6.3% from 1511.3 billion in 2005 and an increase of 50 basic points in the six month period ended sep 30, 2006 from 5.8% in the six month period ended sep 30, 2006.

•

Total deposits increased consequence to the general increases in interest rates reflecting a tight systemic liquidity scenario and increase in deposit rates for retail and other customers in Fiscal 2006.

•

 Non interest has increased and is stable during 2005-2006 due to increase in commission, exchange and brokerage and a 12.5% increase in other income, offset, in part by a 22.5% decline in house income, due to growth in retail banking fee income arising form retail assets like home loans and credit cards and retail liability product income like account servicing charges, increase in transaction banking fee and fee income.

•

Other income decreased comparatively [25.41(2004) 27.33 (2005) 26.72 (2006)] which includes the unrealized unrealized gain/loss on certain derivative derivative transaction. The lower capital gain is a result of the sharp fall in the equity markets in May 2006 and adverse conditions in the debt markets.

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•

Operating expenses increases are primarily due to the increased volume of business,   prim primari arily ly in retai retaill bankin banking g and inclu includes des maint maintena enance nce of ATM TMs, s, credi creditt card card relat related ed expenses; call centre expenses and technology expenses.

•

The number of branches excluding foreign branch and OBVSL and extension counter  increased to 614 at March 31, 2006 from 562 at March 31,2005.

•

The number of savings deposit and deposits from outside India has increased to a good extent.

•

Provisions and contingencies (excluding provisions for tax) increases in primarily due to the significantly higher level of amortization of premium on government securities in fiscal 2006, investments in government securities and lower level of writ backs in fiscal 2006.

•

With effect from the quarter ended Dec 31, 2005 RBI increased the requirement of general   provisi provisionin oning g on standard standard loans (excludi (excluding ng loans loans to agricult agriculture ure sector sector and small small and medicines enterprises) to 0.40% compared to 0.25% applicable till September 30, 2005. in accordance with with this, the bank has made general provision provision of Rs. 3.39 billion in fiscal 2006.

•

Operating profit before provision and tax ratio increase of 2.23% form 2.09% (2005) is  primarily due to increase in net interest income, increase in fee income increase in treasury income and of operating expenses.

•

Employee Employee expenses have been increased increased primarily due to the number of employees. employees. But her profit per employee is being decreased (1,99,853) March 2006 to (1,115,157) March 2005 to the extent 10.52% decreasing trend is foreseen.

44

CHAPTER 3

3.1 TECHINICAL ANALYSIS OF ICICI AND SBIN 3.1.a. ICICI BANK 

Outlook  I would recommend a buy only above 830 on close basis. The level of 920 is crucial since the short term Bullish Bullish trend trend will be confirm confirmed, ed, only if the price sustains sustains above 920. Major  Major  support support for the stock is at 800. If the stock slips below below this support support level, we can see further  further  levels of 730 – 630 – 597. The continuation pattern negates immediate bearish momentum on the stock and it’s advisable to buy at declines. Short term investor can initiate a buy above 920 with a target target of 995  – 1055. At present the stock trades in the Indecisive zone on intraday basis. The above targets are fixed based on leading Indicator Analysis and the trend following.

Indicator Analysis:

Moving Average (14 Day) is on positive note and RSI started moving towards North. Since Moving averages being a lagging indicator, it has considered secondary in Analysis.

The above chart is the weekly chart for ICICI BANK. 45

4.2 SBIN

Outlook 

The weekly pattern pattern suggest a short term bullishness bullishness on the stock with a price target of 1300. The current level is crucial for the stock to hold the support of 885. A close below 885 could drag the stock towards south to the target zone of 660.

At current levels, levels, there could be greater chances chances of bounce back from 885. This could become become a complet completee head and shoulder shoulder pattern pattern in coming months. months. If that proves to be successful, successful, it is advisable to unwind all long positions at the right shoulder top (1330-1350)

Indicator Analysis:

Moving Average (14 Day) is on positive note and RSI started moving towards North. Since Moving averages being a lagging indicator, it has considered secondary in Analysis.

46

3.2. FINDINGS •

ICICI and SBI credit deposit ratio is on the side though ICICI banks shows a little decreasing trend to the exten of 2.24 % Over mar2005 _ mar 2006

•

Both the bank investment deposit ratio is on the declining trend

•

Both the banks has shown better utilization of cash portfolio

•

ICICI bank Interest expences to interest earned remains the same Over 2 Years whereas SBI shows reduction

•

Other Income ratio remains fluctuation in both the banks

•

Operating expences to total income shows a decresing trend in ICICI bank whereas it was on the rising side in SBI

•

Interest income income to total total funds shows shows rising mode in ICICI ICICI whereas whereas In SBI more more or less it remains at the level;

•

The ratio of interest expences to total funds shows an increase in

•

Value in ICICI Bank whereas in SBI interest expences shows a

•

Rising mode

•

The ratio of Non Interest income remains the same for ICICI for The past 2 Years whereas in SBI at shows a decline

•

The stock witness some selling pressure in the coming days in

•

ICICI Bank whereas the stock witnessed a huge selling pressure

•

From the top and bounced back from the major support of 800

•

The continuation pattern negates immediate bearish momentum on the stock and it’s advisable to buy at declines. Short term investor can initiate a buy above 920 with a target of 995 – 1055.

47

3.3. SUGGESTIONS 3.3.a. ICICI BANK:

1. Best Best play in a buoya buoyant nt environm environment ent – Favorab Favorable le macro, macro, buoya buoyant nt Market – related revenues and a benign environment for asset quality. •

ICICI –as a player focused on maintaining and /or improving Market share in key business segments, particularly retail lending- Will, in our view, benefit immensely form a positive operating Environment.

•

ICICI is viewed as it is benefited from the procyclicality effect of The economic cycle as its borrowers in the legacy project financing Activity Activity witnessed their debt servicing ability increasing considerably. It is believed that the profitability of this segment has improved as a Result of lower loan loss provisions and lower taxable rates of Income from this source. Expectations is on the procyclical benefit To continue and hence profitability of  legacy lending to be sustained At levels seen earlier.

•

Market related revenues is believed to contribute 14% - 15% to ICICIB’s operating revenues and have boosted its preprovision RoAA. Buoyant environment to sustain the cont contri ribu buti tion on from from mark market et -rel -relat ated ed reve revenu nues es is expe expect cted ed and and henc hencee the the oper operat atin ing g  profitability.

2. Pricing power in in consumer consumer financing financing segment segment profitability profitability Against potential shocks.

•

ICICIB enjoys enjoys a dominant market position position across customer Categories Categories in retail lending. The strong market market position and robust Demand Demand for consumer consumer financing vests significant significant   prici pricing ng powe powerr With ICIC ICICIB IB is belie believed ved either either by allow allowing ing a hike hike in lendi lending ng rats, rats,  Negotiating higher subvention form manufacturers of cutting Distribution costs.

•

Strong Strong pricing pricing

power power and a balance balance sheet that is significant significantly ly Biased Biased towards towards retail retail

lending buffers ICICB’s profitability from Potential shocks in the bank’s funding cost. •

ICICB has an adverse mismatch profile between assets and Liabilities. High volatility in interest rates could adversely effect Profitability in the short term; however, as the back   book gets Reprised at new lending rates upon maturity, maturity, the bank’s bank’s NIM will Likely show improvement. This phenomenon to play out through FY1002E and FY2009E is expected. 48

3. In line with with consensus, consensus, but we recommend recommend buy ICICIB for growth growth Reasons and not for for the relative valuation appeal. It is not so much about ICICIB versus HSFC or HDFCB, but about Their respective operating metrics and growth conditions. Market Has rewarded both strategies: ICICIB’s broad-based strategy allows capturing value across the Value chain in a customer  segment; and ICICIB, like other large players in the private sector, enjoys Favorable conditions arising from a restrictive restrictive regulatory/policy regulatory/policy Environment towards new entrants and foreign banks and slow Pace of reforms for state-owned banks is believed.

4. Increasing contribution contribution from strategic investments investments – Yet another another driver  •

The value accruing from subsidiaries to be 17% of ICICIB’s Current market capitization. This to rise to 20% of ICICIB’s target Price over the next 12 months is expected with banking and life Insurance being the key drivers.

•

Thee life Th life insur insuran ance ce busi busine ness ss of of

ICIC ICICIB IB has been been incur incurrin ring g

losses losses On an an

accounting basis due to continued continued investment investment in expznding The sacle and scope of the business. The life insurance business is Believed in creating wealth for its shareholders through market Share gains, increasing penetration of life insurance and improving operating efficiency. •

The asset management and venture capital fund of ICICB makes A negligible contribution currently; however, these businesses is Believed to hold significant upside potential as they achieve scale Economies.

3.3.b. SBI

1. Potential headwind to price performance performance from loss of market share and and weaker RoAA •

SBI’ has been losing market share, both in terms of loans and Deposits, for  quite some time. But , the extent of loss over the Past 18 months has been staggering, particularly for deposits (2.2%)

•

In a bid to protect its profitability profitability,, SBI has embarked on a Selective Selective growth strategy. strategy. But given the bank’s bank’s spread and size, would be difficult difficult to pursue a

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selective growth strategy unless It reconciles to a significant loss a market share over time.

•

Challenges are compounded by weaker profitability. The Expectoration is the core core operat operating ing profi profits ts to rebou rebound nd past past Y2004 Y2004 level levelss in FY200 FY2008 8 E. Non Non recurring revenues and costs masked this condition in FY2005 and FY2006.

•

SBI’s size and potential to improve efficiency may sway Consensus opinion; the deep deep value inhere inherent nt makes makes the Investm Investment ent case case compelli compelling ng . Althoug Although h there is potential to Improve

performance, performance, it remains unrealized unrealized thus far. far.

Convinced Size and potential is convincing. 2.limited upside to growth expectations in the medium term Believe SBI’s growth will remain volatile. Lack of exceptional Income/cost elements and need to raise loan loss provisions from Very low levels will likely cause volatility in earnings earnings growth Through FY2009E, FY2009E, in our  view. The forecast says12% CAGR in net profit through FY2009E, However, on YoY basis, significant volati volatilit lity y in net profit profit Grow Growth th is expec expecte ted d

Thee estim Th estimat ates es are below below that that of cons consens ensus us for 

FY2009E and FY2009E by 10%. Consensus is overestimating revenues by Either assuming higher loan growth or NIM. The latter is more Likely that the former, in research view. view. Significant downward revision to consensus estimates for Operating revenues and profits over the  past 12 months. Consensu Consensuss appears

to be positive positive about about excess liquidity liquidity that that SBI Has reserve reserve holding holding are

significantly higher than minimum Required level. SBI would likely utilize the excess liquidity over The next 12 months. Excess liquidity provides upside only in the Short term is viewed.

3. Value inherent, but catalysts limited Investors will maintain a growth bias in the Indian market. Growth expectations for  SBI are below that of consensus (21% CAGR through FY2009E versus consensus 15% CAGR) is Believed

 News flow about reduction of government holding in SBI to 15% And amendment to the SBI subsidiary act could be potential short- Term catalysts. However, the focus of the market will be on Earnings is believed., there are no catalysts to drive earnings Strongly is viewed.

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4. Reforms Reforms could could be a triggertrigger-assi assignin gning g a low probabili probability ty.. •

SBI is viewed as it will need flexibility in reorganizing its Distribution network and human resources. As long as the

•

Constraints remain, it will be at a disadvantage to peers in the Private sector is believed

•

There have a few incremental changes such as introduction of Voluntary retirement scheme for employees. However, there Changes tend to drain the productive resources rather than Eliminating redundancy is viewed.

•

The RBI has chalked out a roadmap for opening up the sector to Foreign banks in 2009. Shoul Should d this this come come to fruit fruition ion,, it will will leave leave State State-ow -owne ned d banks banks,, includ includin ing g SBIS SBIS,, significantly disadvantages as We except to see consolidation within the private sector.

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3.4. CONCLUSION This study on investment investment decision is conducted by analyzing and Comparing ICICI Bank  and SBI based on fundamental analysis and Technical Analysis.

This Th is indicat indicates es that, that, the the key driver driver of stock stock perform performan ance ce of ICIC ICICII

Bank Bank shows shows an

Increasing trend where as underperformance of SBIS hows a decreasing trend besides its high  potential.

The initial investment summary cover with a Buy rating to ICICI Bank and a sell rating to SBI based on strategic investment using the Analysis.

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3.5. BIBLIOGRAPHY

Books •

Punithiavathy pandian, “Security Analysis and portfolio Management” Vikas Vikas Publishing House Pvt. Ltd

•

Book of Readings, “Security Analysis”, ICFAI university

Reports

•

Report on Kotak Securities research on the ICICI Bank and SBI

•

Report on “Indian Economic Survey 2006-2007”

•

Goldmen sachs Global Investment Reasearch

Journal

•

Ernst and Young, “India’s Best Banks”, The financial express

•

Sanjoy Narayan Narayan “Indian’s Best Banks – KPMG Survey”

Website:

www.rbi.org.in www.gov.in www.stockcharts.com www.nseindia.com

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