PROJECT REPORT on -Equity Research on Indian Banking Sector

EQUITY RESEARCH ON THE INDIAN BANKING SECTOR

Equity Research on the Indian Banking Sector

EXECUTIVE SUMMARY

The field of equity research is very vast and one has to look into various aspects of the functioning of the company to get to any conclusion about the possible performance of the company in the market. Investors like warren buffet made a fortune out of investments in the stock market, which is quiet impossible without proper research about the companies. The field of equity research is full of challenges. It is your door to fame, fortune and, above all, professional challenge. In a world that is shrinking in size due to information technology and blurring boundaries between nations, the stock market (or the equities market), which is considered to be in its infant stage, is all set to grow in size.The project on Equity Research was carried out by self study. This is limited learning and devoting time towards equity research but it also provided an insight on what various services such broking houses provide and what efforts are required to manage such organizations.The reason behind choosing this project is that it provides hands on experience with what goes on in the stock market on a day-to-day basis. Some value investors only look at present assets/earnings and don't place any value on future growth. Other value investors base strategies completely around the estimation of future growth and cash flows. Despite the different methodologies, it all comes back to trying to buy something for less than its worth.The project initiated with understanding the mannerisms of the stock market trading followed by the dynamics of the banking sector. Some of the major players in Banking sector were then chosen for further analysis. These companies were further studied in detail with respect to their financials and the managements future plans regarding the functioning of the company, their expansion plans, and various news about these companies and their global forays.Based on the complete study of the companies and sector wise analysis of banks, leading banks in private and public sector AXIS Bank ,HDFC Bank ,ICICI Bank ,Bank of Baroda ,Panjab National Bank &State Bank of India and also giving recommendation on the for Buy or Sell or Hold by analyzing the fundamental and technicals of the company.

CHAPTER- 1INTRODUCTION

1.1 INTRODUCTIONInvesting, like marriage, isn't something that should be entered into lightly. Investing in equities gives high returns but they correspondingly have higher risk also. Before we invest in a company, there are more than a few things we need to know about it.Securities Analysis An analysis of securities and the organization and operation of their markets. The determination of the risk reward structure of equity and debt securities and their valuation. Special emphasis on common stocks. Other topics include options, mutual fluids and technical analysis. Technical analysis is a method of predicting price movements and future market trends by studying charts of past market action which take into account price of instruments, volume of trading and, where applicable, open interest in the instruments.Fundamental analysis is a method of forecasting the future price movements of a financial instrument based on economic, political, environmental and other relevant factors and statistics that will affect the basic supply and demand of whatever underlies the financial instrument. Main differences between the two types of analysis:Fundamental analysisTechnical analysis

Focuses on what ought to happen in a market Focuses on what actually happens in a market

Factors involved in price analysis: 1.Supply and demand 2.Seasonalcycles 3.Weather 4.Government policy Charts are based on market action involving: 1.Price2.Volume3.Open interest (futures only)

1.2 RATIONALE FOR THE STUDYIn an industry plagued with skepticism and a stock market increasingly difficult to predict and contend with, if one looks hard enough there may still be a genuine aid for the Day Trader and Short Term Investor. The price of a security represents a consensus. It is the price at which one person agrees to buy and another agrees to sell. The price at which an investor is willing to buy or sell depends primarily on his expectations. If he expects the security's price to rise, he will buy it; if the investor expects the price to fall, he will sell it. These simple statements are the cause of a major challenge in forecasting security prices, because they refer to human expectations. As we all know firsthand, humans expectations are neither easily quantifiable nor predictable. If prices are based on investor expectations, then knowing what a security should sell for (i.e., fundamental analysis) becomes less important than knowing what other investors expect it to sell for. That's not to say that knowing what a security should sell for isn't important--it is. But there is usually a fairly strong consensus of a stock's future earnings that the average investor cannot disprove Fundamental analysis and technical analysis can co-exist in peace and complement each other. Since all the investors in the stock market want to make the maximum profits possible, they just cannot afford to ignore either fundamental or technical analysis.

1.3 INVESTMENT DECISION MAKING: APPROACHESAs investors we would have diverse investment strategies with the primary aim to achieve superior performance, which would also mean a higher rate of return on our investments. All investment strategies can be broadly classified under 4 approaches, which are explained below.Fundamental approach:In this approach the investor is concerned with the intrinsic value of the investment instrument. Given below are the basic rules followed by the fundamental investor.There is an intrinsic value of a security, which in turn is dependent on the underlying economic factors. This intrinsic value can be ascertained by an in-depth analysis of the fundamental or economic factors related to an economy, industry and company.At any point in time, many securities have current market prices, which are different from their intrinsic values. However, sometime in the future the current market price would become the same as its intrinsic value. We as fundamental investors can achieve superior results by buying undervalued securities and selling overvalued securities.Psychological approach:The psychological investor would base his investment decision on the premise that stock prices are guided by emotions and not reason. This would imply that the stock prices are influenced by the prevalent mood of the investors. This mood would swing and oscillate between the two extremes of greed and fear. When greed has the lead stock prices tend to achieve dizzy heights. And when fear takes over stock prices get depressed to lower than lower levels.As psychic values seem to be more important than intrinsic values, it is suggested that it would be more profitable to analyze investor behaviour as the market is swept by optimism and pessimism. Which seem to alternate one after the other. This approach is also called Castle-in-the-air theory. In this approach the investor uses some tools of technical analysis, with a view to study the internal market data, towards developing trading rules to make profits.In technical analysis the basic premise is that price movement of stocks have certain persistent and recurring patterns, which can be derived from market trading data. Technical analysts use many tools like bar charts, point and figure charts, moving average analysis, market breadth analysis amongst others.Academic approach:Over the years, the academics have studied many aspects of the securities market and have developed advanced methods of analysis. The basic rules are:The stock markets are efficient and react rationally and fast to the information flow over time. So, the current market price would reflect its intrinsic value at all times. This would mean"Current market price = Intrinsic value".Stock prices behave in a random fashion and successive price changes are independent of each other. Thus, present price behavior can not predict future price behavior.In the securities market there is a positive and linear relationship between risk and return. That is the expected return from a security has a linear relationship with the systemic or non-diversifiable risk of the market.Eclectic approach:This approach draws upon all the 3 approaches discussed above. The basic rules of this approach are:1. Fundamental analysis would help us in establishing standards and benchmarks.2. Technical analysis would help us gauge the current investor mood and the relative strength of demand and supply.3. The market is neither well ordered nor speculative. The market has imperfections, but reacts reasonably well to the flow of information. Although some securities would be mispriced, there is a positive correlation between risk and return.

1.4 ROLE OF AN EQUITY RESEARCH ANALYST

Equity research analysts study the movements of the stock market, especially specific business stocks.Companies constantly produce large amounts of information regarding their financial status, their success inbusinessmarkets and their current investments. Much of this information is required forlegalpurposes, but it also provides necessary data for the stock market. Most investors do not have the time or resources to follow this massive amount of company information. Equity research analysts work to compile this data, along with relevant market information, to provide investors with useful recommendations.DefinitionIn stock market terms, "equity" refers to ownership of a business, which a business can sell as shares to interested investors. An equity research analyst specializes in examining what shares are for sale, what shares are selling well and what companies appear to be growing and will be worthwhile investments. Equity research analysts also track which stocks are falling so they can point out trends and provide useful information to brokers and investors.ProcessAnalysts spend much of their time analyzing individual stocks, especially stocks that have earned a lot of interest due to changing value. They look at the company that issued the stock and its history, then analyze the company's industry as a whole and what major changes are influencing it. The analyst will then look atbusinessessimilar to the company they are studying to find information about overall value and average earnings for that kind of business.

Common TasksEquity research analysts have many different jobs. Once they have compiled information, many use basic formulas and programs to create financial models of specific companies and industries, or ratios that show important facts about a business's financial standing. Many follow up these models by writing reports for investors summarizing their findings. Some may tap into independent sources and contacts to keep up on recent events. All research analysts must ensure they use only publicly available knowledge and not illegal, insider information.Market InfluenceEquity research analysts tend to be influenced by current events, and many tend to make recommendations based on market activity. This means that as the market changes, analysts' attitudes also change to mirror current interest. This can create a tendency for some analysts to become myopic, only reporting on popular news and backing certain stocks because they are trendy in the short term.

OBJECTIVES OF THE STUDY

Primary Objective:

a) The main objective of equity research is to study companies, analyze financials, and look at quantitative and qualitative aspects mainly for decisions: whether to invest or not.

Sub-Objectives:

a) To justify the current investment in the chosen securities.b) To understand the movement and performance of stocks.c) To recommend increase/decrease of investment in a particular security.

SCOPE OF THE STUDY This study intends in getting known to various patterns used in the analysis which can help in making correct investment decisions (entry and exit).

In the current uncertainty and despite the surprising rally in the market, fundamental and technical analysis continues to forecast specific target level for stock and indices.

Fundamental analysis helps to conduct a company stock valuation and to make a projection on its business performance. It evaluates its management and makes internal business decisions and calculates its business risk.

Technical analysis determine the future level by examining the past price movement and trading volumes of stocks and indices.

The scope of this project is limited to only one sector i.e. Banking sector. This project is concerned with only one sector of companies in the stock market. The project does not extend its scope to any other sector of companies.

Also, the project is concerned with only three banks among the major players in the Banking sector i.e. AXIS Bank ,HDFC Bank ,ICICI Bank ,Bank of Baroda ,Punjab National Bank &State Bank of India

LITERATURE REVIEW

Best practises for equity research analyst covers the five primary areas of the equity research analysts role:Identifying and monitoring critical factors,Creating and updating financial forecast,Communication stock ideas,Making stock recommendation,Deriving price targets and range of targets-James J. Valentine, a former Morgan Stanley analyst, BOTTOM-UP STOCK-PICKING DRIVEN BY FUNDAMENTAL RESEARCH

Comprehensive research and a unique culture set the foundation for all that we do. As economic and market conditions change, we believe security-specific insight is integral to success in all environments. Depth and diversity of research perspectives and an open, honest, engaging culture facilitate better decision making and better results.-Jeanne Gilchrist equity research analyst pharmaceuticals and biotech

Obviously theres companies you had rather cover, but for me as CFA, the important thing is that I need a reasonable basis to put my name on buy recommendation -Randy Lewis, Equity net Research.

RESEARCH METHODOLOGY & DESIGN

TYPE OF STUDYThe research has been based on secondary data analysis. The study has been exploratory as it aims at examining the secondary data for analyzing the previous researches that have been done in the area of technical and fundamental analysis of stocks. The knowledge thus gained from this preliminary study forms the basis for the further detailed Descriptive research. In the exploratory study, the various technical indicators that are important for analyzing stock were actually identified and important ones short listed.

SAMPLE DESIGNThe sample of the stocks for the purpose of collecting secondary data has been selected on the basis of Random Sampling. The stocks are chosen in an unbiased manner and each stock is chosen independent of the other stocks chosen. The stocks are chosen from the Banking Sector.

SAMPLE SIZEThe sample size for the number of stocks is taken as 3 for technical analysis and fundamental analysis of stocks as fundamental analysis is very exhaustive and requires detailed study.

CHAPTER- 2

TECHNICAL ANALYSISA CONCEPTUAL OVERVIEW

TECHNICAL ANALYSIS2.1 INTRODUCTIONWhat Is Technical Analysis?Technical analysis is a method of evaluating securities by analyzing the statistics generated by market activity, such as past prices andvolume. Technical analysts do not attempt to measure a security'sintrinsic value, but instead use charts and other tools to identifypatternsthat can suggest future activity.

Just as there are many investment styles on the fundamental side, there are also many different types of technical traders. Some rely on chart patterns, others use technicalindicatorsandoscillators and most use some combination of the two. In any case, technical analysts' exclusive use of historical price and volume data is what separates them from their fundamental counterparts. Unlike fundamental analysts, technical analysts don't care whether a stock isundervalued- the only thing that matters is a security's past trading data and what information this data can provide about where the security might move in the future.The field of technical analysis is based on three assumptions:1. The market discounts everything.2. Price moves in trends.3. History tends to repeat itself.

1. The Market Discounts Everything :

A major criticism of technical analysis is that it only considers price movement, ignoring the fundamental factors of the company. However, technical analysis assumes that, at any given time, a stock's price reflects everything that has or could affect the company - includingfundamental factors. Technical analysts believe that the company's fundamentals, along with broader economic factors andmarket psychology, are all priced into the stock, removing the need to actually consider these factors separately. This only leaves the analysis of price movement, which technical theory views as a product of the supply and demand for a particular stock in the market.

2. Price Moves in Trends:

In technical analysis, price movements are believed to follow trends. This means that after a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it. Most technical trading strategies are based on this assumption.

3. History Tends To Repeat Itself:

Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of price movement. The repetitive nature of price movements is attributed to market psychology; in other words, market participants tend to provide a consistent reaction to similar market stimuli over time. Technical analysis uses chart patterns to analyze market movements and understand trends. Although many of these charts have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves.

Now, we see different tools of Technical Analysis.

2.2 CHARTS

What is Chart?

In technical analysis, charts are similar to the charts that you see in any business setting. A chart is simply a graphical representation of a series of prices over a set time frame. For example, a chart may show a stock's price movement over a one-year period, where each point on the graph represents theclosing pricefor each day the stock is traded.

What are the different Charts used in Technical Analysis?1. Line Chart:The most basic of the four charts is theline chartbecause it represents only the closing prices over a set period of time. The line is formed by connecting the closing prices over the time frame. Line charts do not provide visual information of the trading range for the individual points such as the high, low and opening prices. However, the closing price is often considered to be the most important price in stock data compared to the high and low for the day and this is why it is the only value used in line charts.

2. Bar Charts:Thebar chartexpands on the line chart by adding several more key pieces of information to each data point. The chart is made up of a series of vertical lines that represent each data point. This vertical line represents the high and low for the trading period, along with the closing price. The close and open are represented on the vertical line by a horizontal dash. The opening price on a bar chart is illustrated by the dash that is located on the left side of the vertical bar. Conversely, the close is represented by the dash on the right. Generally, if the left dash (open) is lower than the right dash (close) then the bar will be shaded black, representing an up period for the stock, which means it has gained value. A bar that is colored red signals that the stock has gone down in value over that period. When this is the case, the dash on the right (close) is lower than the dash on the left (open).It is also called as OHLC ( open, high, low,close) chart.

3. Candlestick Charts:Thecandlestickchart is similar to a bar chart, but it differs in the way that it is visually constructed. Similar to the bar chart, the candlestick also has a thin vertical line showing the period's trading range. The difference comes in the formation of a wide bar on the vertical line, which illustrates the difference between the open and close. And, like bar charts, candlesticks also rely heavily on the use of colors to explain what has happened during the trading period. There are two color constructs for days up and one for days that the price falls. When the price of the stock is up and closes above the opening trade, the candlestick will usually be white or clear. If the stock has traded down for the period, then the candlestick will usually be red or black, depending on the site. If the stock's price has closed above the previous days close but below the day's open, the candlestick will be black or filled with the color that is used to indicate an up day.

TRENDLINE:INTRODUCTION TO TRENDLINE:Atrend lineis a simple charting technique that adds a line to a chart to represent the trend in the market or a stock. Drawing a trend line is as simple as drawing a straight line that follows a general trend. These lines are used to clearly show the trend and are also used in the identification of trend reversals.Breakout in downtrend line give bullish signal and it is the time to buy that particular stock whereas breakout in uptrend line give bearish signal, it is advisable to sell the stock as the trend in the stock has changed and the stock may further fall in price.

2.3 INTRODUCTION TO SUPPORT AND RESISTANCE

Support and resistance represent key junctures where the forces of supply and demand meet. In the financial markets, prices are driven by excessive supply (down) and demand (up). Supply is synonymous with bearish, bears and selling. As demand increases, prices advance and as supply increases, prices decline. When supply and demand are equal, prices move sideways as bulls and bears slug it out for control.

What is Support?Asupport levelis a price level where the price tends to find support as it is going down. This means the price is more likely to "bounce" off this level rather than break through it. However, once the price has passed this level, by an amount exceeding some noise, it is likely to continue dropping until it finds another support level.

What is Resistance?Aresistance levelis the opposite of a support level. It is where the price tends to find resistance as it is going up. This means the price is more likely to "bounce" off this level rather than break through it. However, once the price has passed this level, by an amount exceeding some noise, it is likely that it will continue rising until it finds another resistance level.

2.4 INTRODUCTION TO INDICATORS

Indicatorsare calculations based on the price and the volume of a security that measure such things as money flow, trends, volatility and momentum. Indicators are used as a secondary measure to the actual price movements and add additional information to the analysis of securities. Indicators are used in two main ways: to confirm price movement and the quality of chart patterns, and to form buy and sell signals.

There are two main types of indicators:leadingandlagging. A leading indicator precedes price movements, giving them a predictive quality, while a lagging indicator is a confirmation tool because it follows price movement. A leading indicator is thought to be the strongest during periods of sideways or non-trending trading ranges, while the lagging indicators are still useful during trending periods.

Why use indicators?Indicators serve three broad functions: to alert, to confirm and to predict. An indicator can act as an alert to study price action a little more closely. If momentum is waning, it may be a signal to watch for a break of support. Or, if there is a large positive divergence building, it may serve as an alert to watch for a resistance breakout. Indicators can be used to confirm other technical analysis tools. If there is a breakout on the price chart, a corresponding moving average crossover could serve to confirm the breakout. Or, if a stock breaks support, a corresponding low in the On-Balance-Volume (OBV) could serve to confirm the weakness. Some investors and traders use indicators to predict the direction of future prices.

Following are various indicators used in Technical Analysis Average Directional Index (ADX) Average True Range (ATR) Bollinger Bands Commodity Channel Index (CCI) Moving Average Moving Average Convergence Divergence (MACD) Relative Strength Index(RSI) Stochastic Oscillator

2.4 MOVING AVERAGES Most chart patterns show a lot of variation in price movement. This can make it difficult for traders to get an idea of a security's overall trend. One simple method traders use to combat this is to applymoving averages. A moving average is the average price of a security over a set amount of time. By plotting a security's average price, the price movement is smoothed out. Once the day-to-day fluctuations are removed, traders are better able to identify the true trend and increase the probability that it will work in theirfavor

Types of Moving Averages:There are a number of different types of moving averages that vary in the way they are calculated, but how each average is interpreted remains the same. The calculations only differ in regards to the weighting that they place on the price data, shifting from equal weighting of each price point to more weight being placed on recent data. The three most common types of moving averages aresimple, linear andexponential.1Simple Moving Average (SMA):

This is the most common method used to calculate the moving average of prices. It simply takes the sum of all of the past closing prices over the time period and divides the result by the number of prices used in the calculation. For example, in a 10-day moving average, the last 10 closing prices are added together and then divided by 10. As you can see in Figure 1, a trader is able to make the average less responsive to changing prices by increasing the number of periods used in the calculation. Increasing the number of time periods in the calculation is one of the best ways to gauge the strength of the long-term trend and the likelihood that it will reverse.

2. Linear Weighted Average:This moving average indicator is the least common out of the three and is used to address the problem of the equal weighting. The linear weighted moving average is calculated by taking the sum of all the closing prices over a certain time period and multiplying them by the position of the data point and then dividing by the sum of the number of periods. For example, in a five-day linear weighted average, today's closing price is multiplied by five, yesterday's by four and so on until the first day in the period range is reached. These numbers are then added together and divided by the sum of the multipliers.

3. Exponential Moving Average (EMA):

This moving average calculation uses a smoothing factor to place a higher weight on recent data points and is regarded as much more efficient than the linear weighted average. Having an understanding of the calculation is not generally required for most traders because most charting packages do the calculation for you. The most important thing to remember about the exponential moving average is that it is more responsive to new information relative to the simple moving average. This responsiveness is one of the key factors of why this is the moving average of choice among many technical traders. As you can see in Figure 2, a 15-period EMA rises and falls faster than a 15-period SMA. This slight difference doesnt seem like much, but it is an important factor to be aware of since it can affect returns.

CHAPTER- 3FUNDAMENTAL ANALYSISA CONCEPTUAL OVERVIEW

3.1 INTRODUCTION OF FUNDAMENTALANALYSISFundamental analysis is a technique that attempts to determine the securitys value by focusing on underlying factor that affects a companys actual business and its future prospects. Fundamental analyst attempts to study everything that can affect the securitys value, including macro economic factors (like the overall economy & industry conditions) and company specific factors (like financial conditions and management).

Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages and its competitors and markets. Fundamental analysis is performed on historical & present data, but with the goal of making financial forecasts. A fundamental analyst believes analyzing strategy, management, product, financial statistics and many other readily and not-so-readily quantifiable numbers will help choose stocks that will outperform the market.

There are several possible objectives:1. To conduct a company stock valuation and predict its probable price evolution 1. To make a projection on its business performance. 1. To evaluate its management and make internal business decisions. 1. To calculate its credit risk.

Fundamental analysis serves to answer questions such as

1. Is the companys revenue growing? 1. Is it actually making a profit? 1. Is it in a strong-enough position to bet out its competitors in the future? 1. Is it able to repay its debts? 1. Is the management trying to cook the books?

Fundamental analysis involve

1. Qualitative analysis 1. Quantitative analysis

3.2. QUALITATIVE ANALYSIS

The qualitative analysis process must involve three basic steps:

1. Analysis of the Economy

2. Analysis of the Sector

3. Analysis of the Company

1. ANALYSIS OF THE ECONOMY Economic cycles

Economic cycles refer to the rise and fall of economic health that most economies go through every few years. In an economic downturn, valuations tend to be negatively impacted as the uncertainties get magnified. There are different ways in which an economic trough can affect the valuation of the company.

When there is a decrease in demand of products

When export markets dry up

When prices of raw materials are volatile

Macro economic factors

Macro economic factors play a very important role in the fortunes of any industry or company. Each company operates within the realms of the broader economy. Hence, it is very important to understand these factors and how they affect the performance of a company, and its stock.

Key economic factors

a. GDP: Gross Domestic Product (GDP) is a measure of the countrys overall output in a given year. The output that is produced by each industry, including agriculture and services is added together. That gives the GDP of the country.

b. Industrial production: This measures the output of industries in the country and compares it to the same period in the previous year.

c. Inflation: Inflation is defined as the general rise in prices over a given period. Analysts must look at CPI, as that is what affects consumer demand. WPI and CPI are measured by the rise in price of a defined basket of goods and services.

d. Unemployment: An increasing unemployment rates implies lesser jobs and thus lesser output. If more people are unemployed, then the overall spending power of the consumers goes down. This also reduces production.

e. Businesses and consumer confidence: businesses and consumer confidence indicate what business and the consumers feel about the present state of the economy.

f. Oil prices: an increase in oil prices, affect the input costs of all the industry linked to oil and consequently the output prices.

g. FIIs: FIIs brings in large amounts of money into the stock market, propelling the market upwards. On the other hand, when FIIs withdraw from these markets, they can also fall dramatically. Hence, the role of FIIs, especially in emerging markets is very significant.

Customers

Some companies serve only a handful of customers, while others serve millions. In general, its negative if a business relies on a small number of customers for a large portion of its sales because the loss of each customer could dramatically affect the revenues. For example, think of a military supplier who has 100% sales with the Indian government. For this reason, companies will always disclose in their annual report if any one customer accounts for a majority of revenues.

Market share

Understanding a companys present market share can tell volumes about the companys business. The fact that a company possesses an 85% market share tells you that it is the largest player in its market by far. Furthermore, this could also suggest that the company possesses some sort of economic moat, in other words, a competitive barrier serving to protect its current and future earnings, along with its market share. Market share is important because of economies of scale. When the firm is bigger than the rest of its rivals, it is in a better position to absorb the high fixed costs of a capital-intensive industry.

Industry growth

One way of examining a companys growth potential is to first examine whether the amount of customers in the overall market will grow. This is crucial because without new customers, a company has to steal the market share in order to grow. In some markets, there is zero or negative growth, a factor demanding careful consideration. For example, a manufacturing company dedicated solely to creating audio compact cassettes might have been very successful in the 70s, 80sand early 90s. However, that the same company would probably have a rough time now due to the advent of newer technologies, such as CDs and MP3s. the current market for audio compact cassettes is only a fraction of what it was during the peak of its popularity.

Competition

Simply looking at the number of competitors goes on a long way in understanding the competitive landscape of a company. Industries that have limited barriers to entry and a large number of competing firms create a difficult operating environment for firms. One of the biggest risks within a highly competitive industry is pricing power. This refers to the ability of a supplier to increase prices and pass on those costs on to their customers. Companies operating in industries with few alternatives have the ability to pass on costs to their customers. A great example of this is Wal-Mart. They are so dominant in the retailing business, that Wal-Mart practically sets the price for any of the suppliers wanting to do business with them. If you want to sell to Wal-Mart, you have little, if any, pricing power.

Regulation

Certain industries are heavily regulated due to the importance or severity of the industrys products and/or services. As important as some of these regulations are to the public, they can drastically affect the attractiveness of a company for investment purposes. In industries where one or two companies represent the entire industry for a region (such as utility companies), governments usually specify how much profit each company can make. In these instances, while there is the potential for the sizable profits, they are limited due to regulation. In other industries, regulation can play a less direct role in affecting the industry pricing. For example, the drug industry is the most regulated industries. And for good reason no one wants an ineffective drug that causes deaths to reach the market. As a result, the food and Drug Administration (FDA) requires that new drugs must pass a series of clinical trials before they can be sold and distributed to the general public. However, the consequence of all this testing is that it usually several years and millions of dollars before a drug is approved. Keep in mind that all these costs are above and beyond the millions that the drug company has spent on research and development.

All in all, investors should always be on the lookout for regulations that could potentially have a material impact upon a business bottom line. Investors shouldkeep these regulatory costs in mind as they assess the potential risks and rewards of investing.

3. Analysis of the Company

Before diving into a companys financial statements, lets take a look at some of the qualitative aspects of a company. Following are the qualitative factors of the company that investor should be aware of

Business Model

One of the most important questions that should be asked is what exactly does the company do ? This is referred to as companys business model. Its how a company makes money. You can get a good overview of a companys business model by checking out its website or annual report.

Competitive Advantage

Another business consideration for investors is competitive advantage. A companys long term success is driven largely by its ability to maintain a competitive advantage and sustain it. Powerful competitive advantages, such as Reliances brand name and Microsofts domination over personal computer operating system, create a moat around a business allowing it to keep competitors at bay and enjoy growth and profits. When a company can achieve competitive advantage, its shareholders can be well rewarded for decades.

Management

A company relies upon its management to steer it towards financial success. Some believe that management is the most important aspect for investing in a company. It makes sense even the best business model is doomed if the leaders of the company fail to properly execute the plan.

Every public company has a corporate information section on its website. Usually there will be a quick biography on each executive with their employment history, educational background and any applicable achievements. Dont expect to find anything useful here. Lets be honest: We are looking for dirt, and no company is going to put negative information on its corporate website. Instead, here are a few ways for you to get a feel for management:

a. Management Discussion and Analysis (MD & A)

The Management Discussion and Analysis is found at the beginning of the annual report. In theory, the MD & A is supposed to be frank commentary on the managements outlook. Sometimes the content is worthwhile, other times its boilerplate. One tip is to compare what management said in the past years with what they are saying now. Is it the same material rehashed? Have strategies actually been implemented? If possible, sit down and read the last five years of MD & As.

b. Ownership and Insider Sales

Just about any large company will compensate executives with a combination of cash, restricted stock and options. It is a positive sign that members of management are also shareholders. The ideal situation is when the founder of the company is still in charge. Examples include Mukesh Ambani & Azim Premji when you know that a majority of managements wealth is in the stock, you can have confidence that they will do the right thing. As well, its worth checking out if the management has been selling its stock. This has to be filed with Securities and Exchange Board of India (SEBI), so its publicly available information. Talk is cheap think twice if you see management unloading all of its shares while saying something else in the media.

c. Past Performance

Another good way to get a feel for management capability is to check and see how executives have done at their companies in the past. You can normally find biographies of top executives on company websites. Identify the companies they worked at I the past and do a search on those companies and their performance.

d. Conference Calls

Some of the big market capitalization companies have conference calls to do that management can address critical issues such as performance review, critical developments etc. the excerpts of these are later displayed on the companys websites so as to enable investors to access these.

3.3. QUANTITATIVE ANALYSIS

Now as we know the qualitative factor of fundamental analysis, lets proceed to the quantitative factor of fundamental analysis. Quantitative analysis include analysis of financial statement of the company.

RATIO ANALYSIS

Financial ratios are tools for interpreting financial statements to provide a basis for valuing securities and appraising financial and management performance.

Now lets look at some of the key ratios that determine a banks performance.

Ratios for evaluating operating performance

Net Interest Margin (NIM) : For banks, interest expenses are their main costs (similar to manufacturing costs of the companies) and interest income is their main revenue source. The difference between interest income and expense is known as Net Interest Income. It is the income, which the bank earns from its core business of lending. Net Interest Margin is the net interest income earned by the bank on its average earning assets. These assets comprises of advances, investments, balance with RBI and money at call.

The proportion of low cost deposits (on which the bank pays interest) has a lot to do with this ratio. Particularly because banks that have been able to sustain or improve the proportion of low costs deposits would be able to garner higher NIMs. Low cost deposits are deposits in the form of current accounts and savings accounts (CASA).

Interest income InterestNIM = _____________________________

Average earning assets

Operating profit margins (OPM): Banks operating profit is calculated after deducting administrative expenses, which mainly include salary cost and network expansion cost. Operating margins are profits earned by the bank on its total interest income. For some private sector banks the ratio is negative on account of their large IT and network expansion spending. Also known as operating margin or net profit margin.

Net Interest income (NII) Operating expensesOPM = ______________________________________

Total Interest income

Cost to income ratio: Controlling overheads are critical for enhancing the banks return on equity. Branch rationalization and technology up gradation account for a major part of operating expenses for new generation banks. Even though, these expenses result in higher cost to income ratio, in long term they help the bank in improving its return on equity. The ratio is calculated as a proportion of operating profit including non-interest income (fee based income). The ratio gives investors a clear view of how efficiently the firm is being run the lower it is, the more profitable the bank will be. Changes in the ratio can also highlight potential problems: if the ratio rises from one period to the next, it means that costs are rising at a higher rate than income, which could suggest that the company has taken its eye off the ball in the drive to attract more business.

Operating expensesCost to income ratio = ______________________

NII + Non Interest income

Other income to total income ratio: Other income largely constitutes of fee income such as commission, exchanges and brokerage fees. Fee based income account for a major portion of the banks other income. The bank generates higher fee income through innovative products and adapting the technology for sustained service levels. This stream of revenues is not depended on the banks capital adequacy and consequently, potential to generate the income is immense. The higher ratio indicates increasing proportion of fee-based income. The ratio is also influenced by gains on government securities, which fluctuates depending on interest rate movement in the economy. Banks in developed countries derive nearly 50% of revenues from this stream. For Indian banks, such fees contribute only about 15% - 25% of the overall revenues.

Other income also includes profit on exchange transactions, profit from sale of investments, and other miscellaneous income, amongst others.

Other key financial ratios

Credit to deposit ratio: This ratio indicates how much of the advances lent by banks is done through deposits. It is a proportion of loan-assets created by banks from the deposits received. The higher the ratio, the higher the loan-assets created from deposits. Higher ratio reflects ability of the bank to make optimal use of the available resources. Deposits would be in the form of current and saving account as well as term deposits. The outcome of this ratio reflects the ability of the bank to make optimal use of available resources. The point to note here is that loans given by bank would also include its investments in debentures, bonds and commercial papers of the companies (these are generally included as part of investments in the balance sheet)

Capital adequacy ratio: A banks capital adequacy ratio is the ratio of qualifying capital to risk adjusted (or weighted) assets. The RBI has set minimum capital adequacy ratio at 9% for all banks. A ratio below the minimum indicates that the bank is not adequately capitalized to expand its operations. The ratio ensures that the bank do not expand their business without having adequate capital. It must be noted that it would be difficult for an investor to calculate this ratio as banks do not disclose the details required for calculating the denominator (risk weighted average) of this ratio in detail. As such banks provide their CAR from time to time.

Tier I capital + Tier II capitalCAR = ____________________________

Risk weighted assets

Non-performing asset ratio: The net NPA to loans (advances) ratio is used as a measure of the overall quality of the banks loan book. An NPA are those assets for which interest is overdue for more than 90 days (or 3 months). Net NPA are calculated by reducing cumulative balance of provisions outstanding at a period end from gross NPAs. Higher ratio reflects rising bad quality of loans. The NPA ratio is one of the most important ratios in the banking sector. It helps identify the quality of assets that a bank possesses.

Net Non-performing assetNPA ratio = ___________________________

Loans given

Provision coverage ratio: The key relationship in analyzing asset quality of the bank is between the cumulative provision balances of the bank as on a particular date to gross NPAs. It is a measure that indicates the extent to which the bank has provided against the troubled part of its loan portfolio. A high ratio suggests that additional provisions to be made by the bank in the coming years would be relatively low ( if gross non-performing assets do not rise at a faster clip). Minimum 70% required by RBI)

Cumulative provisionsProvision coverage ratio = _____________________________

Gross NPAs

Return on assets ratio: Returns on asset (ROA) ratio is the net income (Profits) generated by the bank on its total assets (including fixed assets). The higher the proportion of average earnings assets, the better would be the resulting returns on total assets.

Net profitsROA = ____________________

Avg. total assets

Valuation parameters

1. Price to book value

Unlike other manufacturing/ services company, a banks market valuations cannot be only measured from its price to earnings (P/E ratio). This is due to the reason that a banks net earnings are influenced by the amount of non-performing assets provision, which again depends on the banks internal policy. Consequently, the bank could make low provisions to show a better picture. Therefore its prudent to remove non-performing assets for which no provisions are made from the net worth of the bank to arrive at the adjusted book value.

2. Market cap to total income

This ratio helps in judging the market valuations of the banks total income. It is similar to the market cap to sales ratio for a manufacturing company. It indicates valuations accorded by the market to the total income of the bank.

3.3 ECONOMY ANALYSIS 2011-12

The Indian economy faced many headwinds in fiscal 2011-12 leading to GDP growth coming off from 8.6% in fiscal 2010-11 to levels of around 7%. The economy in fiscal 2011-12 faced headwinds in the form of inflation, high interest rates, tight liquidity conditions and global economic uncertainty. The headwinds have been well documented in previous issues of economic analysis. The question is are the headwinds weakening and can the economy look up in fiscal 2012-13?

The headwinds do appear to be weakening as seen by the trends in the first two months of calendar year 2012. Inflation as measured by the WPI (Wholesale Price Index), which had been trending at over 9% levels for a major part of fiscal 2011-12 is looking to trend at below 7% levels for the fiscal 2012-13. Inflation for the months of January and February 2012 has printed at below 7% levels and given the slowdown in GDP growth seen in 2011-12, inflation outlook is not highly negative. The fact that the base is high, as prices have been trending up over the last two years, inflation to go back to high levels of over 9% will require a shock in the form of oil prices shooting up.

Oil prices have gone up by over 15% calendar year 2012 to data, largely on the back of geo political tensions over Iran. The outlook for the global economy especially the Eurozone and China is not robust enough to drive up oil prices substantially. The Eurozone is on the brink of a recession as it contracted in the fourth quarter of 2011 while Chinas GDP forecast for 2012 at 7.5% is the lowest since 1999.

RBI has cut CRR (Cash Reserve Ratio) by 125bps over the last two months to release around Rs 80,000 crores into the system. The CRR cut will keep liquidity stable in fiscal 2012-13 leading to more lendable resources for the banking system. Other drivers of liquidity include RBI bond purchase of Rs 125,000 crores in fiscal 2011-12 and FII inflows of USD 8 billion in the first three months of calendar year 2012. The liquidity impact of RBI bond purchases and FII inflows will be felt starting April 2012. Falling GDP growth and falling inflation will prompt the RBI to cut its key policy rate the Repo rate. RBI cutting policy rates will lower interest rates in the economy leading to improving investment and consumption sentiments.

Global economy can pick up leading to a positive effect on the domestic economy

The job numbers coming out of the US is positive with 277,000 jobs added in February 2012 taking the last six months job additions to 1.2 million, the best streak seen since 2006. Manufacturing and retail sales numbers have been positive for the US in February with both showing growth for the month. The easy monetary policy stance adopted by the US Federal Reserve will continue well into 2014 leading to low rates and good liquidity in the US economy. US economy may well show higher than forecast growth in 2012 if economic factors continue to be positive.

The Eurozone economy is unlikely to look up in 2012 given austerity measures adopted by major economies of Italy, Spain and France. However the liquidity infusion of over Euro 1 trillion by the European Central Bank (ECB) through the LTRO (Long Term Refinancing Operation) will keep European banks liquid and that could filter down into the Eurozone economy as banks gain confidence on lending.

Chinas inflation for February 2012 came in at 3.2%, the lowest over the last 20 months. Chinas highest trade deficit over almost a decade in February coupled with its low GDP growth forecast of 7.5% will prompt the central bank to loosen bank reserve ratios and lower interest rates. Higher liquidity for Chinese banks is positive for the economy as bank lending could trend up.

CHAPTER- 4BANKING SECTOR

4.1. INTRODUCTION

A bank is a financial institution that provides banking and other financial services to their customers. A bank is generally understood as an institution which provides fundamental banking services such as accepting deposits and providing loans. There are also nonbanking institutions that provide certain banking services without meeting the legal definition of a bank. Banks are a subset of the financial services industry.

4.2. HISTORY

The first bank in India, called The General Bank of India was established in the year 1786. The East India Company established The Bank of Bengal/Calcutta (1809), Bank of Bombay (1840) and Bank of Madras (1843). The next bank was Bank of Hindustan which was established in 1870. These three individual units (Bank of Calcutta, Bank of Bombay, and Bank of Madras) were called as Presidency Banks. Allahabad Bank which was established in 1865, was for the first time completely run by Indians. Punjab National Bank Ltd. was set up in 1894 with head quarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. In 1921, all presidency banks were amalgamated to form the Imperial Bank of India which was run by European Shareholders. After that the Reserve Bank of India was established in April 1935. At the time of first phase the growth of banking sector was very slow. Between 1913 and 1948 there were approximately 1100 small banks in India. To streamline the functioning and activities of commercial banks, the Government of India came up with the Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No.23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as a Central Banking Authority. After independence, Government has taken most important steps in regard of Indian Banking Sector reforms. In 1955, the Imperial Bank of India was nationalized and was given the name "State Bank of India", to act as the principal agent of RBI and to handle banking transactions all over the country. It was established under State Bank of India Act, 1955. Seven banks forming subsidiary of State Bank of India was nationalized in 1960. On 19th July, 1969, major process of nationalization was carried out. At the same time 14 major Indian commercial banks of the country were nationalized. In 1980, another six banks were nationalized, and thus raising the number of nationalized banks to 20. Seven more banks were nationalized with deposits over 200 Crores. Till the year 1980 approximately 80% of the banking segment in India was under governments ownership. On the suggestions of Narsimhan Committee, the Banking Regulation Act was amended in 1993 and thus the gates for the new private sector banks were opened.

4.3. BANKING STRUCTURE IN INDIA

The banking institutions in the organized sector, commercial banks are the oldest institutions, some them having their genesis in the nineteenth century. Initially they were set up in large numbers, mostly as corporate bodies with shareholding with private individuals. In the sixties of the 20th century a large number of smaller and weaker banks emerged in the country. Subsequently there has been a drift towards state ownership and control. Today 27 banks constitute a strong Public Sector in Indian Commercial Banking.

Commercial Banks operating in India fall under the different sub categories on the basis of their ownership and control over management.

1. Public Sector Banks: Public Sector Banks emerged in India in three stages. First the conversion of the then existing Imperial Bank of India into State Bank of India in 1955, followed by the taking over of the seven associated banks as its subsidiary. Second the nationalization of 14 major commercial banks in 1969and last the nationalization of 6 more commercial Bank in 1980. Thus 27 banks constitute the Public Sector Banks.

2. New Private Sector Banks: after the nationalization of the major banks in the private sector in 1969 and 1980, no new bank could be setup in India for about two decades, though there was no legal bar to that effect. The Narasimham Committee on financial sector reforms recommended the establishment of new banks of India. RBI thereafter issued guidelines for setting up of new private sector banks in India in January 1993.

These guidelines aim at ensuring that new banks are financially viable and technologically up to date from the start. They have to work in a professional manner, so as to improve the image of commercial banking system and to win the confidence of the public.

Eight private sector banks have been established including banks sector by financially institutions like IDBI, ICICI, and UTI etc.

3. Local Area Banks: Such Banks can be established as public limited companies in the private sector and can be promoted by individuals, companies, trusts and societies. The minimum paid up capital of such banks would be 5 crores with promoters contribution at least Rs. 2 crores. They are to be set up in district towns and the area of their operations would be limited to a maximum of 3 districts. At present, four local area banks are functional, one each in Punjab, Gujarat, Maharashtra and Andhra Pradesh.

4. Foreign Banks: foreign commercial banks are the branches in India of the joint stock banks incorporated abroad. .

5. Cooperative Banks: Besides the commercial banks, there exists in India another set of banking institutions called cooperative credit institutions. These have been made in existence in India since long. They undertake the business of banking both in urban and rural areas on the principle of cooperation. They have served a useful role in spreading the banking habit throughout the country. Yet, there financial position is not sound and a majority of cooperative banks has yet to achieve financial viability on a sustainable basis.

The cooperative banks have been set up under various Cooperative Societies Acts enacted by State Governments. Hence the State Governments regulate these banks. In 1966, need was felt to regulate their activities to ensure their soundness and to protect the interests of depositors. Consequently, certain provisions of the Banking Regulation Act 1949 were made applicable to the cooperative Banks as well. These Banks have thus fallen under dual control viz., that of the State Government and tat of the RBI which exercises control over them so far as their banking Operations are concerned.

4.4.BANKING SECTOR ANALYSIS

The global financial system is still far away from a full recovery on account of a slowdown in the US economy, the soft landing in China and the Euro debt crisis. The Indian banking sector has been relatively well shielded by the central bank and has managed to sail through most of the crisis. But, currently in light of slowing domestic GDP growth, persistent inflation, asset quality concerns and elevated interest rates, the investment cycle has been wavering in the country. The cost of borrowings was higher on account of the various monetary tightening measures undertaken by the central bank. People preferred to park their funds in higher yielding fixed deposits rather than current or savings account (CASA).CASA accretionslowed for most banks which led to a higher cost of funds. The savings bank account rate was deregulated by the RBI, however most banks continue to hold the rate at 4%. Apart from streamlining their processes through technology initiatives such as ATMs, telephone banking, online banking and web based products, banks also resorted to cross selling of financial products such as credit cards, mutual funds and insurance policies to augment their fee based income. They are also looking at various financial inclusion initiatives in order to spread the use of financial services among Indias large unbanked population.

Key Points

SupplyLiquidity is controlled by theReserve Bank of India(RBI).

DemandIndia is a growing economy and demand for credit is high though it could be cyclical.

Barriers to entryLicensing requirement, investment in technology and branch network, capital and regulatory requirements.

Bargaining power of suppliersHigh during periods of tight liquidity. Trade unions in public sector banks can be anti reforms and orchestrate strikes. Depositors may invest elsewhere if interest rates fall.

Bargaining power of customersFor good creditworthy borrowers bargaining power is high due to the availability of large number of banks.

CompetitionHigh- There are public sector banks, private sector and foreign banks along with non banking finance companies competing in similar business segments. Plus the RBI is planning to issue new banking licenses.

Financial year12

The RBI had to revise its target for credit growth in FY12 a number of times given the external environment. From starting off with a prediction of 19% credit growth in May 2011, the central bank brought this estimate down to 16% in January 2012. Finally non-food credit growth came in at around 17% in FY12 compared to 21.5% in FY11. Against a backdrop of GDP growth deceleration, weak IIP data and persistent inflation banks became more risk averse to lending credit. This deceleration also reflects banks risk aversion in face of rising NPAs and increased leverage of corporate balance sheets. Credit growth decelerated across all bank groups during 2011-12 ranging between 16.3% in the case of public sector banks and 19.7% for private sector banks. The comparable figures for the previous year were 21% and 24.7% respectively. The RBIs has not yet rolled back its aggressive interest rate policy and rates continue to be elevated. The repo rate currently stands at 8%, with the reverse repo rate at 7%. While inflation continues to remain high the RBI has refrained from any further hikes in order to address the slowdown in growth. It may ease rates once inflation comes under control. Growth on the deposit front however remained relatively low coming in at around 13% YoY in FY12; this was as against an RBI target of 17%. Fixed deposits saw good growth, while demand deposits saw a deceleration on lower yields. The outstanding credit-deposit ratio rose from 74.5% FY11 to 76.7% in FY12.

In the retail portfolio, whilehome loansgrew by 12% YoY, while vehicle loans grew by 20%. Overall Other personal loans enjoyed a much smaller growth of 8% YoY due to banks reluctance towards uncollateralized credit. Credit card outstanding grew by 13% YoY. Indian banks, however, saw lower levels of money supply, and deposits as a percentage of GDP in FY12 as compared to that in FY11 on account of the uncertain economic environment. However credit as a % of GDP was higher as GDP growth slowed.

Most private sector banks had a relatively better outing in FY12. Increased pricing power helped some of these banks sustain their net interest margins. Plus they were also able to sustain their asset quality. Net non performing assets (NPAs) in the system increased from 0.9% in FY11 to 1.2% in FY12. However for PSU banks this ratio increased from 1% in FY11 to 1.5% in FY12. Increased provisioning affected the profitability of the banks in question.

Prospects

Basel III is a new challengethat banks in India and overseas will have to surmount. It will be a challenge to deploy the same safely and profitably in the event of persistence of economic slowdown. The government was able to re-capitalize a few PSU banks in FY12, including the much needed infusion for State Bank of India. According to RBI estimates, Indian banks would require additional capital of Rs 5 trillion to meet Basel-III norms by March 31, 2018 In 2011-12, agriculture loan target was Rs 4.5 trillion, and Rs 4.8 trillion was disbursed. For 2012-13, the target has been set at Rs 5.8 trillion. Financial inclusion initiatives also need to be taken care of as India fares very poorly on this regard as half the population does not have access to banking services. New banking licenses are expected to be issued by the RBI to private sector players. However, these licenses will only be awarded to certain players meeting strict requirements on the capital, exposures, and corporate governance front. Lots of players including NBFCs, industrial houses, microfinance companies etc are all vying for this coveted license. There has so far been no progress on this issue since the RBI issued draft guidelines in August 2011. However, growth is still a concern for the banking sector in FY12 on account of a sustained slowdown in the economy as well as reduced demand for credit on account of the current high interest rate environment. The central bank expects credit growth to come in at 17%, with deposit growth at 16% for FY13. Asset quality concerns are also an issue especially in the power, textile, and mining space. In the year 2012-13 so far, there has been a easing of liquidity and monetary conditions. The policy rate was cut by 0.5% in April. In addition there has been liquidity infusions through open market operations export credit refinance. The 1% Statutory Liquidity Ratio (SLR) reduction in August and thefurther 25 bps cut in the CRRis expected to further ease liquidity and encourage banks to increase loans and advances. The SLR and CRR stand at 23% and 4.25% respectively currently.

4.5.SWOT ANALYSIS OF BANKING SECTOR

STRENGTH

Indian banks have compared favorably on growth, asset quality and profitability with other regional banks over the last few years. The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index for the same period. Policy makers have made some notable changes in policy and regulation to help strengthen the sector. These changes include strengthening prudential norms, enhancing the payments system and integrating regulations between commercial and co-operative banks.

Bank lending has been a significant driver of GDP growth and employment. Extensive reach: the vast networking & growing number of branches & ATMs. Indian banking system has reached even to the remote corners of the country.

In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region.

WEAKNESS

Public Sector Banks need to fundamentally strengthen institutional skill levels especially in sales and marketing, service operations, risk management and the overall organisational performance ethic & strengthen human capital. Old private sector banks also have the need to fundamentally strengthen skill levels. The cost of intermediation remains high and bank penetration is limited to only a few customer segments and geographies. Structural weaknesses such as a fragmented industry structure, restrictions on capital availability and deployment, lack of institutional support infrastructure, restrictive labour laws, weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs), unless industry utilities and service bureaus. Refusal to dilute stake in PSU banks: The government has refused to dilute its stake in PSU banks below 51% thus choking the headroom available to these banks for raining equity capital. Impediments in sectoral reforms: Opposition from Left and resultant cautious approach from the North Block in terms of approving merger of PSU banks may hamper their growth prospects in the medium term.

OPPORTUNITY

The market is seeing discontinuous growth driven by new products and services that include opportunities in credit cards, consumer finance and wealth management on the retail side, and in fee-based income and investment banking on the wholesale banking side. These require new skills in sales & marketing, credit and operations. With increased interest in India, competition from foreign banks will only intensify. Given the demographic shifts resulting from changes in age profile and household income, consumers will increasingly demand enhanced institutional capabilities and service levels from banks. New private banks could reach the next level of their growth in the Indian banking sector by continuing to innovate and develop differentiated business models to profitably serve segments like the rural/low income and affluent/HNI segments; actively adopting acquisitions as a means to grow and reaching the next level of performance in their service platforms. Attracting, developing and retaining more leadership capacity Reach in rural India for the private sector and foreign banks.

THREATS

Threat of stability of the system: failure of some weak banks has often threatened the stability of the system. Rise in inflation figures which would lead to increase in interest rates. Increase in the number of foreign players would pose a threat to the Public Sector Bank as well as the private players.

4.6. Major Players in the Indian Banking Sector

4.7. DEPOSITS & CREDITS OF BANK

CHAPTER- 4

ANALYSIS OF BANKS & TECHNICAL INTERPRETATION

Brief Company Profile: BANK OF BARODA

Bank of Baroda (BoB) was founded by Maharaja Sayajirao Gaekwad in July 1908. It started with a paid up capital of Rs10 lakh. Bank of Baroda is a pioneer in various customer centric initiatives in the Indian banking sector. Bank is amongst first in the industry to complete an all-inclusive rebranding exercise wherein various novel customer centric initiatives were undertaken along with the change of logo. The initiatives include setting up of specialized NRI Branches, Gen-Next Branches and Retail Loan Factories/ SME Loan Factories with an assembly line approach of processing loans for speedy disbursal of loans.Presently it has a network of 3454 branches across India and 86 branches overseas, spread at Australia, Bahamas,Bahrain, Belgium, Botswana, China, Fiji islands, Ghana, Guyan a, HongKong, Kenya, Mauritius, Malaysia, Seychelles, SouthAfrica, Singapore, Oman, Tanzania, Thailand, Trinidad, Uganda, UAE, UK, US and Zambia.

Business

Retail banking: It offers products and services such as deposits, loans, credit and debit cards, demat services, remittances, ECS (electronic clearing services, government business, etc.

Rural and agri banking: It offers products and services such as deposits, agricultural loans, lockers services, etc to rural customers and agricultural sector.

Corporate banking: It provides project finance, film finance, foreign currency loans, working capital finance, treasury products, etc to the corporate sector.

SME BoB also offers products and services to SME sector.

Wealth Management : It provides wealth management services to companies in areas of insurance and mutual funds. In insurance it offers services to HDFC and National Insurance Company. In mutual funds it provides services to UTI, Birla Sun Life, Reliance Mutual Fund, Sundaram BNP Paribas, Franklin Templeton Investments and Baroda Pioneer Asset Management Company.

Its subsidiaries are

Domestic

BOBCARDS Ltd. BOB Capital Markets Ltd. Nainital Bank Ltd.

Overseas

Bank of Baroda (Botswana) Ltd. Bank of Baroda (Kenya) Ltd. Bank of Baroda (Uganda) Ltd. Bank of Baroda (Guyana) Ltd. Bank of Baroda (New Zealand) Ltd Bank of Baroda (Tanzania) Ltd Bank of Baroda (Trinidad & Tobago) Ltd. Bank of Baroda (Ghana) Ltd.

Bank of Baroda

Industry :Banks - Public Sector

Business Group Govt.of India - Pub.Sect.Banks

Sector Banks

Incorporation Year 1908

Chairman S S Mundra

Company SecretaryVinay A Shah

AuditorNBS & Co/Brahmayya & Co/S K Mittal & Co

Registered OfficeBaroda House,Mandvi,Vadodara,390006,Gujarat

Telephone 91-265-2563932

Fax 91-265-2562445

E-mail [email protected]

Website http://www.bankofbaroda.com

Face Value (Rs) 10

BSE Code 532134

BSE Group A

NSE Code BANKBARODA

Bloomberg BOB IN

Reuters BOB.BO

ISIN Demat INE028A01013

Market Lot 1

Listing MCX-SX,Mumbai,NSE

Financial Year End 03

Book Closure Month Jun

AGM Month Jun

NIC Activity Monetary intermediation of commercial banks, savin

NIC_CODE

Tot.Employees 42175

Registrar's Name & AddressKarvy Computershare Pvt Ltd, Plot No 17-24, Vittal Rao Nagar, Madhapur, Hyderabad-500081.91-040-4465500 & 91-040-23420814/2342

SHAREHOLDER PATTERN:

BALANCE SHEET:Balance Sheet (Rs.In 000's)

Mar, 2012Mar, 2011Mar, 2010Mar, 2009Mar, 2008

Rs.Rs.Rs.Rs.Rs.

CAPITAL & LIABILITIES

Capital412,38,46392,80,73365,52,77365,52,77365,52,77

Reserves & Surplus27064,46,6120650,72,5814740,85,5012470013510678,39,91

Deposits384871,10,59305439,48,19241261,92,521923969517152034,12,72

Borrowings23573,05,1222307,85,4813350,08,505636,08,593927,04,80

Other Liabilities & Provisions11400,45,929606,30,568598,30,9916538,14,6612594,41,42

T O T A L447321,46,70358397,17,54278316,70,28227406,72,54179599,51,62

ASSETS

Cash and Balances with Reserve Bank of India21651,45,9619868,17,8913539,96,9110596,34,359369,72,34

Balances with Banks and Money at Call and Short Notice42517,08,1630065,88,8921927,08,8513490,77,3512929,56,33

Investments83209,40,0171396,59,2161182,37,5452445,87,5843870,06,78

Advances287377,29,35228676,36,09175035,28,59143985,89,61106701,32,41

Fixed Assets2341,50,202299,71,832284,76,482309,71,932427,00,81

Other Assets10224,73,026090,43,634347,21,914578,11,724301,82,95

T O T A L447321,46,70358397,17,54278316,70,28227406,72,54179599,51,62

Contingent Liabilities152502,81,31127163,87,0387836,07,9973386,09,8382362,32,83

Bills for Collection22766,99,3718844,71,9418185,57,8113963,99,048315,01,73

PROFIT & LOSS A/C STATEMENT:Profit & Loss Account for the year

Rs.(000's Omitted)

Mar-12Mar-11Mar-10Mar-09Mar-08

I. INCOME

Interest Earned29673,72,4221885,91,5616698,34,2415091,57,7411813,47,67

Other Income3422,32,822809,18,602806,35,652757,65,802051,03,61

T O T A L33096,05,2424695,10,1619504,69,8917849,23,5413864,51,28

II. EXPENDITURE

Interest Expended19356,71,2313083,65,7710758,85,669968,16,767901,67,06

Operating Expenses5158,71,734629,83,493810,58,133576,06,173034,29,21

Provisions and Contingencies3573,66,662739,92,931876,93,002077,80,431493,02,86

T O T A L28089,09,6220453,42,1916446,36,7915622,03,3612428,99,13

III. PROFIT

Net Profit for the year5006,95,624241,67,973058,33,102227,20,181435,52,15

Available for Appropriation5006,95,624241,67,973058,33,102227,20,181435,52,15

Appropriations

Transfer to :

a) Statutory Reserve1251,73,911060,41,99764,58,28556,80,05358,88,04

b) Capital Reserve22,39,8620,99,56126,58,95358,25,5884,64,85

c) Revenue and Other

Reserves

I) General Reserve2453,86,082100,45,56--650,35,08

II) Special Reserve u/s 36 (1) (viii)533,84,66335,39,001256,99,61707,41,44-

III) Statutory Reserve (Foreign)1,55,802,46,92270,00,00220,00,0070,30

d) Proposed Dividend (including Dividend Tax)812,29,04753,35,2090,221,17,48340,93,88

e) Investment Reserve Account(68,73,73)(31,40,26)639,26,04383,55,631435,52,15

T O T A L5006,95,624241,67,973058,33,102227,20,1839.41

Basic & Diluted Earnings per Share (Rs)127.84116.3783.9661.14

Significant Accounting Policies (Nominal value per share Rs. 10)

Notes on Accounts

KEY RATIOS :PARTICULARMar '12Mar '11Mar '10Mar '09Mar '08

Key Ratios

Credit-Deposit(%)74.7673.8573.472.5768.72

Investment / Deposit (%)22.424.2526.227.9628.46

Cash / Deposit (%)6.016.115.575.85.7

Interest Expended / Interest Earned (%)65.2359.7864.4366.0566.89

Other Income / Total Income (%)10.3411.3814.3915.5814.96

Operating Expenses / Total Income (%)15.5918.7519.5420.1421.99

Interest Income / Total Funds (%)7.376.876.617.437.32

Interest Expended / Total Funds (%)4.84.114.264.914.9

Net Interest Income / Total Funds (%)2.562.762.352.522.42

Non Interest Income / Total Funds (%)0.850.881.111.371.29

Operating Expenses / Total Funds (%)1.281.451.511.771.89

Profit before Provisions / Total Funds (%)2.132.191.952.121.82

Net Profit / Total funds (%)1.241.331.211.10.89

RONW (%)20.6423.4721.8618.6214.58

Technical Chart:

Brief Company Profile: PANJAB NATIONAL BANK

With over 72 million satisfied customers and 5937 domestic branches, PNB has continued to retain its leadership position amongst the nationalized banks. The Bank enjoys strong fundamentals, large franchise value and good brand image. Over the years PNB has remained fully committed to its guiding principles of sound and prudent banking irrespective of conditions. Some of the major awards won by the Bank are theBest Bank Award,Most Socially Responsive Bankby Business World-PwC,Most Productive Public Sector Bank,Golden Peacock Awardsby Institute of Directors, etc. Besides, the Bank is ranked 26th amongst FE 500 Indias Finest Companies, 26th amongst the Top 500 India's Largest Corporations by Fortune 500 India. The Banker ranked PNB on 186th position in 2011, improving from 257th position a year before. PNB ranked 668th amongst 2000 Global Giants as per the Forbes and 170th in 2012 improving from 195th in 2011 in Top 500 Most Valuable Banking Brands by Brand Finance Banking 500. India Inc Top 100 Most Powerful CEOs for the year 2012, Shri K.R. Kamath, CMD, PNB, adjudged Most Powerful amongst the Nationalised Banks in India, with overall rank at 50 by Economic Times. Bank has also been ranked 26th amongst India Top Companies as per ET 500 and25th amongst the Top 50 most valuable corporate brand by Brand Finance-ET.Since its humble beginning in 1895 with the distinction of being the first Swadeshi Bank to have been started with Indian capital, Punjab National Bank has continuously strived for growth in business which at the end of June 2012 amounted toRs.6,79,823 crore.PNB is the largest nationalised Bank in the country in terms of Branch Network, Total Business, Advances, Operating Profit and Low Cost CASA Deposits.

Business Group Government of India PNB

Sector Banks

Incorporation Year 1895

Incorporation Date -

Chairman K R Kamath

Managing Director

Company Secretary A Gopinathan

Auditor Phillipos & Co/K N Gutgutia & Co

Registered Office 7 Bhikhaiji Cama Place,

New Delhi,110607,New Delhi

Telephone 91-11-26102303/26108205/26196487

Fax 91-11-26160149/26196462/26196456

E-mail [email protected]/[email protected]

Website http://www.pnbindia.in

Face Value (Rs) 10

BSE Code 532461

BSE Group A

NSE Code PNB

Bloomberg PNB IN

Reuters PNBK.BO

ISIN Demat INE160A01014

Market Lot 1

Listing MCX-SX,Mumbai,NSE

Financial Year End 03

Book Closure Month Jun

AGM Month Jun

NIC Activity Monetary intermediation of commercial banks, savin

NIC_CODE

Tot.Employees 62127

Registrar's Name & Address Beetal Fin.&Computer Ser.P Ltd, Beetal House 3rd Flr, 99 Madangir, , New Delhi - 110062.

91-11-29961281-82

91-11-29961284

BALANCE SHEET

(Rs in Crs)

Top of FormBottom of FormPARTICULARSMar-12Mar-11Mar-10Mar-09Mar-08

SOURCES OF FUNDS :

Capital 339.18316.81315.3315.3315.3

Reserves Total 27,477.8921,191.7417,407.6214,338.3312,003.04

Equity Share Warrants00000

Equity Application Money00000

Deposits 3,79,588.483,12,898.732,49,329.802,09,760.501,66,457.23

Borrowings 37,264.2731,589.6919,262.3712,459.665,446.56

Other Liabilities & Provisions 13,552.3012,357.1510,342.8510,065.8514,826.64

Others00000

TOTAL LIABILITIES4,58,222.123,78,354.122,96,657.942,46,939.641,99,048.77

APPLICATION OF FUNDS :

Cash & Balances with RBI18,492.9023,776.8918,327.5717,058.2515,258.15

Balances with Banks & money at Call10,335.145,914.315,145.994,354.893,572.57

Investments 122629.4695162.3577724.4763385.1853991.71

Advances 293774.76242106.67186601.21154702.99119501.57

Fixed Assets 3168.863105.62513.472397.112315.52

Other Assets 98218288.36345.235041.224409.25

Miscellaneous Expenditure not written off00000

Others00000

TOTAL ASSETS458222.12378354.12296657.94246939.64199048.77

Contingent Liability208036.64126933.7291813.44103650.2696951.5

Bills for collection16713.4111981.549526.837561.847104.56

PROFIT & LOSS A/C STATEMENT:Top of FormBottom of FormYearMar-12Mar-11Mar-10Mar-09Mar-08

(In Crs).

I. INCOME :

Interest Earned 36,428.0326,986.4821,422.0919,326.1614,265.02

Other Income 4,202.603,612.583,610.132,919.691,997.56

Total40,630.6330,599.0625,032.2222,245.8516,262.58

II. Expenditure

Interest expended 23,013.5915,179.1412,944.0212,295.308,730.86

Payments to/Provisions for Employees4,723.484,461.103,121.132,924.382,461.54

Operating Expenses & Administrative Expenses 1,057.37909.74804.5663.75563.61

Depreciation 292.26255.85222.83191.06170.23

Other Expenses, Provisions & Contingencies4,506.893,229.502,034.951,407.941,043.88

Provision for Tax 2,107.792,106.092,111.361,701.321,264.75

Fringe Benefit tax000.6812.6810.45

Deferred Tax 45.0524.14-112.61-41.46-31.5

Total35,746.4326,165.5621,126.8619,154.9714,213.82

III. Profit & Loss

Reported Net Profit4,884.204,433.503,905.363,090.882,048.76

Extraordinary Items 2.952.04102.511.180.7

Adjusted Net Profit4,881.254,431.463,802.853,089.702,048.06

Prior Year Adjustments 7.880000

Profit brought forward007.64015.52

IV. Appropriations

Transfer to Statutory Reserve1,221.051,108.37976.34772.72512.19

Transfer to Other Reserves 2,803.792,515.072,126.571,572.741,072.54

Trans. to Government /Proposed Dividend 867.24810.06810.09737.78479.55

Balance carried forward to Balance Sheet0007.640

Equity Dividend %220220220200130

Earnings Per Share-Unit Curr140.43136.37120.1794.6362.77

Earnings Per Share(Adj)-Unit Curr

Book Value-Unit Curr777.39632.49514.78416.74341.98

KEY RATIOS:Key RatiosMar-12Mar-11Mar-10Mar-09Mar-08

Top of FormBottom of Form

Credit-Deposit(%)77.3976.2574.3472.8870.55

Investment / Deposit (%)31.4530.7530.7431.232.38

Cash / Deposit (%)6.17.497.718.599.02

Interest Expended / Interest Earned (%)63.1856.2560.4263.6261.2

Other Income / Total Income (%)10.3411.8114.4213.1212.28

Operating Expenses / Total Income (%)17.2420.819.0218.9121.68

Interest Income / Total Funds (%)8.748.037.938.737.93

Interest Expended / Total Funds (%)5.524.524.795.554.85

Net Interest Income / Total Funds (%)3.223.513.143.173.08

Non Interest Income / Total Funds (%)1.011.081.341.321.11

Operating Expenses / Total Funds (%)1.681.891.761.91.96

Profit before Provisions / Total Funds (%)2.552.692.712.592.23

Net Profit / Total funds (%)1.171.321.441.41.14

RONW (%)21.0524.4526.5925.8419.58

TECHNICAL CHART:

Brief Company Profile: STATE BANK OF INDIA

The State Bank of India, the countrys oldest Bank and a premier in terms of balance sheet size, number of branches, market capitalization and profits is today going through a momentous phase of Change and Transformation the two hundred year old Public sector behemoth is today stirring out of its Public Sector legacy and moving with an agility to give the Private and Foreign Banks a run for their money. The bank is entering into many new businesses with strategic tie ups Pension Funds, General Insurance, Custodial Services, Private Equity, Mobile Banking, Point of Sale Merchant Acquisition, Advisory Services, structured products etc each one of these initiatives having a huge potential for growth.With four national level Apex Training Colleges and 54 learning Centres spread all over the country the Bank is continuously engaged in skill enhancement of its employees. Some of the training programes are attended by bankers from banks in other countries. The bank is also looking at opportunities to grow in size inIndia as well as Internationally. It presently has 82 foreign offices in 32 countries across the globe. It has also 7 Subsidiaries in India SBI Capital Markets, SBICAP Securities, SBI DFHI, SBI Factors, SBI Life and SBI Cards - forming a formidable group in the Indian Banking scenario. It is in the process of raising capital for its growth and also consolidating its various holdings.Throughout all this change, the Bank is also attempting to change old mindsets, attitudes and take all employees together on this exciting road to Transformation. In a recently concluded mass internal communication programme termed Parivartan the Bank rolled out over 3300 two day workshops across the country and covered over 130,000 employees in a period of 100 days using about 400 Trainers, to drive home the message of Change and inclusiveness. The workshops fired the imagination of the employees with some other banks in India as well as other Public Sector Organizations seeking to emulate the programme.

Business Group Government of India SBI

Sector Banks

Incorporation Year 1955

Incorporation Date 1-Jul-1955

Chairman Pratip Chaudhuri

Managing Director Hemant G Contractor

Company Secretary -

Auditor Todi Tulsyan & Co / SCM Associates / Sighi & Co

Registered Office State Bank Bhavan 14th Floor,Madame Cama Road Nariman Point,Mumbai,400021,Maharashtra

Telephone 91-22-22883888/22022678

Fax 91-22-22855348

E-mail [email protected]

Website http://www.sbi.co.in/www.statebankofindia.com

Face Value (Rs) 10

BSE Code 500112

BSE Group A

NSE Code SBIN

Bloomberg SBIN IN

Reuters SBI.BO

ISIN Demat INE062A01012

Market Lot 1

Listing Ahmedabad,Chennai,Delhi,Kolkata,London,MCX-SX,

Mumbai,NSE

Financial Year End 03

Book Closure Month May

AGM Month Jun

NIC Activity Monetary intermediation of commercial banks, savin

NIC_CODE 65191

Tot.Employees 215481

Registrar's Name & Address Datamatics Financial Services, Plot No B-5 MIDC, Part B Cross Lane, Marol Andheri(E), Mumbai-400093.

SHAREHOLDER PATTERN

BALANCE SHEET :(Rs in Crs)

YearMar 12Mar 11Mar 10Mar 09Mar 08

SOURCES OF FUNDS :

Capital 671.04635634.88634.88631.47

Reserves Total 83,280.1664,351.0465,314.3257,312.8248,401.19

Equity Share Warrants00000

Equity Application Money00000

Deposits 10,43,647.369,33,932.818,04,116.237,42,073.135,37,403.94

Borrowings 1,27,005.571,19,568.961,03,011.6084,057.9351,727.41

Other Liabilities & Provisions 82,805.301,06,206.0080,879.5880,964.2083,961.07

Others00000

TOTAL LIABILITIES13,37,409.4312,24,693.8110,53,956.619,65,042.967,22,125.08

APPLICATION OF FUNDS :

Cash & Balances with RBI54,075.9494,395.5061,290.8655,546.1751,534.61

Balances with Banks & money at Call43,087.2228,478.6424,897.8548,857.6315,931.72

Investments 3,12,197.612,95,600.572,95,785.202,75,953.961,89,501.27

Advances 8,67,578.897,56,719.456,31,914.155,42,503.204,16,768.20

Fixed Assets 5,466.554,764.194,412.913,837.853,373.48

Other Assets 55,003.2244,735.4635,655.6438,344.1545,015.80

Miscellaneous Expenditure not written off00000

Others00000

TOTAL ASSETS13,37,409.4312,24,693.8110,53,956.619,65,042.967,22,125.08

Contingent Liability8,32,605.337,30,484.615,48,446.887,23,699.758,10,796.48

Bills for collection66,959.8559,904.9847,922.3343,870.5718,946.80

PROFIT & LOSS A/C :(Rs in Crs)

YearMar 12Mar 11Mar 10Mar 09Mar 08

I. INCOME :

Interest Earned 1,06,521.4581,394.3670,993.9263,788.4348,950.31

Other Income 14,351.4515,824.6014,968.1512,694.319,398.43

Total1,20,872.9097,218.9685,962.0776,482.7458,348.74

II. Expenditure

Interest expended 63,230.3748,867.9647,322.4842,915.2931,929.08

Payments to/Provisions for Employees16,974.0415,211.6212,754.659,747.317,785.87

Operating Expenses & Administrative Expenses 4,564.824,089.863,598.092,927.842,382.81

Depreciation 1,007.17990.49932.66763.14679.98

Other Expenses, Provisions & Contingencies16,613.1913,104.807,428.115,948.515,132.11

Provision for Tax 6,341.375,712.896,167.785,972.523,824.20

Fringe Benefit tax-21.2800142105

Deferred Tax 455.93976.82-1,407.75-1,055.10-219.43

Total1,09,165.6188,954.4476,796.0267,361.5151,619.62

I