1 AUTHORIZATION The report is submitted as partial fulfillment of the requirement of MBA program of IBS. The report is submitted to Prof. A Srikanth, faculty guide, IBS-Hyderabad. Submitted by Submitted to Name of Student Prof. A Srikanth Enroll No. Faculty Guide, IBS
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1
AUTHORIZATION
The report is submitted as partial fulfillment of the requirement of MBA program of IBS. The
report is submitted to Prof. A Srikanth, faculty guide, IBS-Hyderabad.
Submitted by Submitted to
Name of Student Prof. A Srikanth
Enroll No. Faculty Guide, IBS
2
ACKNOWLEDGEMENTS
I would like to recognize the contribution, guidance and encouragement of the City Manager of
Standard Chartered Wealth Managers, Mr. P Srinivas Reddy, and also my guide Mr.M.D.Javeed,
Sales Manager, for the constant encouragement and guidance.
I would also like to express my gratitude towards my faculty guide Prof. A Srikanth for his
continuous guidance and support.
3
ABSTRACT
The project undertaken for the Summer Internship Project (SIP) is Equity Research in Banking
Sector. The sound and well regulated banking sector in India has gone through a significant
change in past two decades with liberalization and regulatory changes happening in Indian
economy. Since liberalization of Indian economy, the number of banks nationalized has
increased. Constant changes in regulation and interest rates by the Reserve Bank of India have
created many trends in the banking sector. There are many international banks now entering the
Indian Market due to the immense scope for growth and lucrative business opportunities. As the
sub-prime mortgage crisis in US continues to threaten banks world-wide, Indian banks have been
observed to be less affected by this financial slowdown showing their robustness and firm
foundations.
The attempt in this project is to do equity analysis and valuation of three major private sector
banks in Indian Banking industry – HDFC Bank, ICICI Bank and Standard Chartered Bank with
the use of various equity valuation models like dividend discount models and CAMEL ratios
approach. Only secondary data is being used in the study. The basic approach to the project is to
do fundamental equity analysis. The analysis reveals the actual value of the equity stocks of
these banks and whether they are over or under valued. The price per share of each bank has
been estimated and the suggestion given to investors according to the results is that the share
prices of HDFC and ICICI banks are overvalued and hence must be sold as these stocks will
move towards equilibrium, i.e. they will decrease in future. Also, the CAMEL ratios suggest that
HDFC and Standard Chartered bank are overall better performers than ICICI and hence the
valuation of their equity is higher than ICICI bank.
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Table of Contents AUTHORIZATION ........................................................................................................................ 1
The objective of this project is to valuate equity of three private sector banks, i.e.
1) ICICI Bank
2) HDFC Bank
3) Standard Chartered Bank
The purpose is to estimate the equity share price of these banks and compare the current share
price of these banks as listed in NSE and also relate it to the fundamental business and growth of
these banks. For this, two equity valuation models have been used, i.e. Dividend Discount model
and CAMEL ratios. The attempt of this project is to analyze whether the share prices of these
banks are over-valued or under-valued, and suggest the investors whether the shares should be
purchased, held or sold.
This project has given the opportunity to understand the method to analyze and valuate banks
and financial institutions, which is unique and different from other sector firms like
manufacturing.
The limitations of the project are:
1. Only secondary data is considered for the project and not any primary data.
2. Only two models have been used, i.e. Dividend Discount model and CAMEL ratios. The
equity valuation can be done using other models which can help in validating the findings
of this project.
3. The various economic parameters like inflation have not been considered which influence
the value of equity in market.
4. The stock markets are influenced by investor confidence and sentiments which make a
significant impact on the share prices leading to a gap between the calculated values and
the actual values. This factor of investor confidence has not been considered in the
valuation.
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Banking in India:
Without a sound and effective banking system in India it cannot have a healthy economy. The
banking system of India should not only be hassle free but it should be able to meet new
challenges posed by the technology and any other external and internal factors.
For the past three decades India's banking system has several outstanding achievements to its
credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or
cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of
the country. This is one of the main reason of India's growth process.
The government's regular policy for Indian bank since 1969 has paid rich dividends with the
nationalisation of 14 major private banks of India.
Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or
for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient
bank transferred money from one branch to other in two days. Now it is simple as instant
messaging or dial a pizza. Money have become the order of the day.
The first bank in India, though conservative, was established in 1786. From 1786 till today, the
journey of Indian Banking System can be segregated into three distinct phases. They are as
mentioned below:
• Early phase from 1786 to 1969 of Indian Banks
• Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector Reforms.
• New phase of Indian Banking System with the advent of Indian Financial & Banking
Sector Reforms after 1991.
Banking Structure in India:
Banks in India can be categorized into non-scheduled banks and scheduled banks. Scheduled
banks constitute of commercial banks and co-operative banks. There are about 67,000 branches
of Scheduled banks spread across India. During the first phase of financial reforms, there was a
nationalization of 14 major banks in 1969. This crucial step led to a shift from Class banking to
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Mass banking. Since then the growth of the banking industry in India has been a continuous
process.
As far as the present scenario is concerned the banking industry is in a transition phase. The
Public Sector Banks (PSBs), which are the foundation of the Indian Banking system account for
more than 78 per cent of total banking industry assets. Unfortunately they are burdened with
excessive Non Performing assets (NPAs), massive manpower and lack of modern technology.
On the other hand the Private Sector Banks in India are witnessing immense progress. They are
leaders in Internet banking, mobile banking, phone banking, ATMs. On the other hand the Public
Sector Banks are still facing the problem of unhappy employees. There has been a decrease of 20
percent in the employee strength of the private sector in the wake of the Voluntary Retirement
Schemes (VRS). As far as foreign banks are concerned they are likely to succeed in India.
Indusland Bank was the first private bank to be set up in India. IDBI, ING Vyasa Bank, SBI
Commercial and International Bank Ltd, Dhanalakshmi Bank Ltd, Karur Vysya Bank Ltd, Bank
of Rajasthan Ltd etc are some Private Sector Banks. Banks from the Public Sector include
Punjab National bank, Vijaya Bank, UCO Bank, Oriental Bank, Allahabad Bank, Andhra Bank
etc.
ANZ Grindlays Bank, ABN-AMRO Bank, American Express Bank Ltd, Citibank etc are some
foreign banks operating in India.
Banks in India
• Allahabad Bank • American Express Bank Ltd • Andhra Bank • ABN AMRO Bank • Bank Muscat (S A O G) • Bank Of America • Bank Of India • Barclays Bank PLC
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• Centurion Bank Ltd • Citibank • Corporation Bank • Dhanlakshmi Bank Ltd • Deutsche Bank India • Export-Import Bank Of India • Global Trust Bank Ltd • Hongkong Shanghai Banking Corporation Ltd • ICICI Bank Ltd • IDBI Bank Ltd • IndusInd Bank Ltd • Syndicate Bank India • Industrial Development Bank Of India • ING Vysya Bank Ltd • JP Morgan Chase Bank • Punjab National Bank • Standard Chartered Bank • State Bank Of India • State Bank Of Indore • Canara Bank India • Reserve Bank Of India • SBI Commercial and International Bank • Bank Of Baroda India • Federal Bank India • HDFC Bank India • Union Bank Of India • YES BANK India • State Bank Of Bikaner And Jaipur • Ceylon Bank • Catholic Syrian Bank • Dena Bank • Mizuho Corporate Bank • Indian Overseas Bank • Karnataka Bank • Punjab and Sind Bank • Kotak Mahindra Bank • State Bank of Hyderabad • Karur vysya Bank Limited • State Bank of Patiala • Oriental Bank of Commerce
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• State Bank of Travancore • United Bank of India • State Bank of Mysore • Axis Bank • Vijaya Bank • Tamilnad Mercantile Bank • Ratnakar Bank • Jammu and Kashmir Bank • UCO Bank • DBS Bank Ltd. • Lakshmi Vilas Bank • The Nainital Bank Ltd.
The Reserve Bank of India (RBI), as the central bank of the country, closely monitors
developments in the whole financial sector.
The banking sector is dominated by Scheduled Commercial Banks (SCBs). As at end-March
2002, there were 296 Commercial banks operating in India. This included 27 Public Sector
Banks (PSBs), 31 Private, 42 Foreign and 196 Regional Rural Banks. Also, there were 67
scheduled co-operative banks consisting of 51 scheduled urban co-operative banks and 16
scheduled state co-operative banks.
Scheduled commercial banks touched, on the deposit front, a growth of 14% as against 18%
registered in the previous year. And on advances, the growth was 14.5% against 17.3 % of the
earlier year.
State Bank of India is still the largest bank in India with the market share of 20%. ICICI and its
two subsidiaries merged with ICICI Bank, leading creating the second largest bank in India with
a balance sheet size of Rs1040 bn.
Higher provisioning norms, tighter asset classification norms, dispensing with the concept of
‘past due’ for recognition of NPAs, lowering of ceiling on exposure to a single borrower and
group exposure etc., are among the important measures in order to improve the banking Sector.
A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the ability of
banks to absorb losses and the ratio has subsequently been raised from 8% to 9%. It is proposed
to hike the CAR to 12% by 2004 based on the Basel Committee recommendations.
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Retail Banking is the new mantra in the banking sector. The home loans alone account for nearly
two-third of the total retail portfolio of the bank. According to one estimate, the retail segment is
expected to grow at 30-40% in the coming years.
Net banking, phone banking, mobile banking, ATMs and bill payments are the new buzz words
that banks are using to lure customers.
With a view to provide an institutional mechanism for sharing of information on borrowers/
potential borrowers by banks and Financial Institutions, the Credit Information Bureau (India)
Ltd. (Cibil) was set up in August 2000. The Bureau provides a framework for collecting,
processing and sharing credit information on borrowers of credit institutions. SBI and HDFC are
the promoters of the Cibil.
The RBI is now planning to transfer of its stakes in the SBI, NHB and National Bank for
Agricultural and Rural Development to the private players. Also, the Government has sought to
lower its holding in PSBs to a minimum of 33 per cent of total capital by allowing them to raise
capital from the market.
Banks are free to acquire shares, convertible debentures of corporates and units of equity-
oriented mutual funds, subject to a ceiling of 5% of the total outstanding advances (including
Commercial Paper) as on March 31 of the previous year.
The finance ministry spelt out structure of the government-sponsored ARC called the Asset
Reconstruction Company (India) Limited (Arcil), this pilot project of the ministry would pave
way for smoother functioning of the credit market in the country. The Government will hold
49% stake and private players will hold the rest 51% - the majority being held by Icici Bank
(24.5%).
Growth in Banking Sector in India:
The growth in the Indian Banking Industry has been more qualitative than quantitative and it is
expected to remain the same in the coming years. Based on the projections made in the "India
Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the report forecasts
that the pace of expansion in the balance-sheets of banks is likely to decelerate. The total assets
of all scheduled commercial banks by end-March 2010 is estimated at Rs 40,90,000 crores. That
11
will comprise about 65 per cent of GDP at current market prices as compared to 67 per cent in
2002-03. Bank assets are expected to grow at an annual composite rate of 13.4 per cent during
the rest of the decade as against the growth rate of 16.7 per cent that existed between 1994-95
and 2002-03. It is expected that there will be large additions to the capital base and reserves on
the liability side.
The Indian Banking Industry can be categorized into non-scheduled banks and scheduled banks.
Scheduled banks constitute of commercial banks and co-operative banks. There are about 67,000
branches of Scheduled banks spread across India. As far as the present scenario is concerned the
Banking Industry in India is going through a transitional phase.
The Public Sector Banks(PSBs), which are the base of the Banking sector in India account for
more than 78 per cent of the total banking industry assets. Unfortunately they are burdened with
excessive Non Performing assets (NPAs), massive manpower and lack of modern technology.
On the other hand the Private Sector Banks are making tremendous progress. They are leaders in
Internet banking, mobile banking, phone banking, ATMs. As far as foreign banks are concerned
they are likely to succeed in the Indian Banking Industry.
In the Indian Banking Industry some of the Private Sector Banks operating are IDBI Bank, ING
Vyasa Bank, SBI Commercial and International Bank Ltd, Bank of Rajasthan Ltd. and banks
from the Public Sector include Punjab National bank, Vijaya Bank, UCO Bank, Oriental Bank,
Allahabad Bank among others. ANZ Grindlays Bank, ABN-AMRO Bank, American Express
Bank Ltd, Citibank are some of the foreign banks operating in the Indian Banking Industry.
Current Trends in Banking Sector in India:
The Indian banking industry is currently termed as strong, having weathered the global economic
slowdown and showing good numbers with strong support flowing in from the Reserve Bank of
India (RBI) measures.
Furthermore, a report "Opportunities in Indian Banking Sector", by market research company,
RNCOS, forecasts that the Indian banking sector will grow at a healthy compound annual growth
rate (CAGR) of around 23.3 per cent till 2011.
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Banking, financial services and insurance (BFSI), together account for 38 per cent of India's
outsourcing industry (worth US$ 47.8 billion in 2007). According to a report by McKinsey and
NASSCOM, India has the potential to process 30 per cent of the banking transactions in the US
by the year 2010. Outsourcing by the BFSI to India is expected to grow at an annual rate of 30–
35 per cent.
According to a study by Dun & Bradstreet (an international research body)—"India's Top Banks
2008"—there has been a significant growth in the banking infrastructure. Taking into account all
banks in India, there are overall 56,640 branches or offices, 893,356 employees and 27,088
ATMs. Public sector banks made up a large chunk of the infrastructure, with 87.7 per cent of all
offices, 82 per cent of staff and 60.3 per cent of all ATMs.
According to the RBI, Indian financial markets have generally remained orderly during 2008-09.
In view of the tight liquidity conditions in the domestic money markets in September 2008, the
Reserve Bank announced a series of measures beginning September 16, 2008. Thus, the average
call rate which was at 10.52 per cent declined to 7.57 per cent in November 2008 under the
impact of these measures.
Measures aimed at expanding the rupee liquidity, included significant reduction in the cash
reserve ratio (CRR), reduction of the statutory liquidity ratio (SLR), opening a special repo
window under the liquidity adjustment facility (LAF) for banks for on-lending to the non-
We can see that the cost per unit of money lent for ICICI has increased significantly from
13.46% in 2007 to 27.41% in 2008 while for HDFC, it has increased from 19.44% in 2007 to
23.93% in 2008 and for Standard Chartered, it has increased from 20.31% to 24.45%. Thus we
can say that operating and management efficiency of ICICI has deteriorated in 2008 and it is
better in case of HDFC.
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Assessing Earning Performance:
The quality and trend of earnings of a bank depend largely on how well the management
manages the assets and liabilities of the bank. A bank must earn reasonable profit to support
asset growth, build up adequate reserves and enhance shareholders' value. Good earnings
performance would inspire the confidence of depositors, investors, creditors, and the public at
large.
Return on Assets (%):
Return on assets = Net income after tax/Average total assets
Return on Assets (%):
HDFC Bank ICICI Bank Standard Chartered Bank
2008 2007 2008 2007 2008 2007 Net Income After Tax
15,901,800,000
11,414,500,000
41,577,279
31,102,200
3,511,000,000
2,989,000,000
Average Total Assets 1,331,766,000,000
912,356,100,000
3,997,950,762
3,446,581,126
435,068,000,000
329,871,000,000
Return on Assets (%) 1.19% 1.25% 1.04% 0.90% 0.81% 0.91% The return on assets is higher for HDFC as compared to ICICI and Standard Chartered.
Return on Equity (%):
Return on equity = Net income after tax/Average total equity funds
Return on Equity (%):
HDFC Bank ICICI Bank Standard Chartered Bank
2008 2007 2008 2007 2008 2007 Net Income After Tax
15,901,800,000
11,414,500,000
41,577,279
31,102,200
3,511,000,000
2,989,000,000
Average Total Equity Funds
114,972,300,000
64,331,500,000
468,202,095
246,632,644
22,695,000,000
21,452,000,000
Return on Equity (%)
13.83% 17.74% 8.88% 12.61% 15.47% 13.93%
29
The return on equity of ICICI has gone down in 2008 (12.61%) as compared to 2007 (8.88%),
for HDFC, it has gone down from 17.74% to 13.83%. But for Standard Chartered, the ROE has
gone up from 13.93% to 15.47%. This indicates that Standard Chartered bank has been very
profitable for its shareholders while ICICI has been least profitable. This can be seen in the
higher share prices of HDFC as compared to ICICI in recent times.
Interest-Spread Ratio (%):
Interest-spread ratio = (Income from loan portfolio/average loan portfolio) - (Interst Expenses
and other financial charges/ average borrowings)
Interest-Spread Ratio (%):
HDFC Bank ICICI Bank Standard Chartered Bank
2008 2007 2008 2007 2008 2007 Income from Loan Portfolio
118,295,000,000
79,403,100,000
307,883,429,000
219,955,876,000
16,378,000,000
16,176,000,000
Average Loan Portfolio 617,895,200,000
461,400,200,000
2,103,846,259,000
1,841,192,599,000
220,761,000,000
189,631,000,000
Interest Expenses and Other Financial Charges
48,871,200,000
31,794,500,000
234,842,423,000
163,584,984,000
8,991,000,000
9,911,000,000
Average Borrowings 1,052,474,600,000
711,133,300,000
3,100,794,840,000
2,817,662,126,000
372,617,000,000
273,297,000,000
Interest-Spread Ratio (%):
14.50% 12.74% 7.06% 6.14% 5.01% 4.90%
The interest spread ratio is highest for HDFC as compared to ICICI and Standard Chartered
indicating that HDFC has been utilizing its deposits to disburse profitable loans more efficiently
than ICICI and Standard Chartered.
Earning Spread ratio (%):
Earning spread ratio = (Total Income-Non Operating Income/Average total portfolio) - (Interest
Expenses & Other Financial charges/Average Total Resources)
30
Earning Spread ratio (%):
HDFC Bank ICICI Bank Standard Chartered Bank
2008 2007 2008 2007 2008 2007 Total Income - Non-Operating Income
118,295,000,000
79,403,100,000
307,883,429,000
219,955,876,000
19,798,000,000
19,365,000,000
Average Total Portfolio 1,220,209,600,000
818,768,500,000
3,751,115,531,000
3,242,447,660,000
290,614,000,000
245,174,000,000
Interest Expenses and Other Financial Charges
48,871,200,000
31,794,500,000
234,842,423,000
163,584,984,000
8,991,000,000
9,911,000,000
Average Total Resources
1,167,446,900,000
775,464,800,000
3,568,996,935,000
3,064,294,770,000
395,312,000,000
294,749,000,000
Earning Spread ratio (%)
5.51% 5.60% 1.63% 1.45% 4.54% 4.54%
The earning spread ratio for ICICI is very low as compared to HDFC (highest) and Standard
Chartered. This indicates the total operating income is highest for HDFC (5.51%) and very low
for ICICI (1.63%) and for Standard Chartered, it is 4.54%.
Assesing Liquidity:
A bank must always be liquid to meet depositors' and creditors' demand to maintain public
confidence. There needs to be an effective asset and liability management system to minimize
maturity mismatches between assets and liabilities and to optimize returns. As liquidity has
inverse relationship with profitability, a bank must strike a balance between liquidity and
profitability.
Current and quick ratios are inappropriate for measuring bank liquidity. A loan-to-deposit ratio is
more relevant. However, an bank's liquidity and solvency are directly affected by portfolio
quality. Consequently, financial analysts (investment officers) should carefully analyze the
bank's portfolio quality on the basis of collectability and loan-loss provisioning.
Loan to Deposit Ratio (%):
Loan deposit ratio = Loans/Deposits
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Loan to Deposit Ratio (%):
HDFC Bank ICICI Bank Standard Chartered Bank
2008 2007 2008 2007 2008 2007 Loans 617,895,2
00,000 461,400,200,000
2,103,846,259,000
1,841,192,599,000
220,761,000,000
189,631,000,000
Deposits 1,007,686,000,000
682,979,400,000
2,444,310,502,000
2,305,101,863,000
265,917,000,000
205,640,000,000
Loan to Deposit Ratio (%)
61.32% 67.56% 86.07% 79.87% 83.02% 92.22%
The loan to deposit ratio is lowest for HDFC (61.32%) while higher for ICICI (86.07%) and
Standard Chartered (83.02%). This means that liquidity for HDFC is much higher as compared
to ICICI and Standard Chartered. But on the other hand, the earning capability will be higher for
ICICI and Standard Chartered as compared to HDFC.
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Dividend Discount Model:
Dividend Discount Model is a method which helps in determing the value of the company. In
this method net income is taken into consideration and this method is apt as it tells the present
and future value of the firm. The method also tells whether the value of firm being over-valued
or under-valued. The firm value is over valued when the market price of the share is being more
than computed value and vice-versa.
Here, the value of equity per share can be calculated as follows:
Where,
DPSt = Expected dividend per share in period t
ke = Cost of equity
Value Per Share = value of a firm / No. of Shares
Where g = growth rate of the company
Inputs to this model are:
1. Cost of equity: the cost of equity for a financial service firm has to reflect the portion of
the risk in the equity that cannot be diversified away by the marginal investor in the
stock. This risk is estimated using a beta (in the capital asset pricing model). The cost of
equity can be found out by using regression betas if the regulatory restrictions have
remained unchanged over the period.
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2. Payout Ratios: The expected dividend per share in a future period can be written as the
product of the expected earnings per share in that period and the expected payout ratio.
3. Expected Growth: If dividends are based upon earnings, the expected growth rate that
will determine value is the expected growth rate in earnings.
Notes on following calculations:
1. The betas for the banks are obtained from National Stock Exchange (NSE) except
for Standard Chartered Bank, which is not listed in India. Hence, for Standard
Chartered, the assumption is that the risk it is same as that for the overall banking
sector. Thus the beta for Standard Chartered Bank is assumed to be 1.00.
2. The market risk premium is assumed to be 10% as the GDP of Indian economy is
expected to grow at around 9-10% in the coming years.
3. As the Standard Chartered Bank is not listed in India, the share price is obtained
assuming the bank will be listed in immediate future. Thus, the bank will not give
out dividends till it is in high growth period. The bank will start giving dividends
only when it approaches constant growth stage.
4. In the following calculations it is assumed that the banking sector is in high
growth phase with an expectation of further deregulation by the RBI as is the
trend from 1992. It is also assumed that the high scope of banking in rural sector
will fuel these private sector banks’ growth, who have predominantly been
targeting urban and higher end customers till date.
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For HDFC Bank:
Year 2009 2008 2007 2006 2005 2004 Dividend per share (Rs.)
10 8.5 7 5.5 4.5 3.5
Payout ratio 18.90% 18.39% 19.29% 19.70% 19.63% 19.50% Average payout ratio
19.24%
Growth in dividend per share
17.65% 21.43% 27.27% 22.22% 28.57%
Average growth 22.14% Cost of equity Risk free rate of return (T-bills rate) 4.60% Beta for HDFC Bank Ltd. 1.00 Risk premium (Market rate of return) 10% Required rate of return = RFR + Beta*Risk Premium, i.e. 4.6% + Beta*10%
For ICICI Bank: Year 2009 2008 2007 2006 2005 2004 Dividend per share (Rs.) 11 11 10 8.5 8.5 7.5 Payout ratio 32.58% 27.93% 28.70% 26.16% 30.85% 28.13% Average payout ratio 29.06% Growth in dividend per share 0.00% 10.00% 17.65% 0.00% 13.33% Average growth 8.20% Net Profit 37,581,
300,00041,577,279,000
31,102,200,000
25,400,747,000
20,052,016,000
16,371,063,000
Growth in net profit -9.61% 33.68% 22.45% 26.67% 22.48% Average growth in net profit 19.13% Cost of equity Risk free rate of return (T-bills rate) 4.60% Beta for HDFC Bank Ltd. 1.60 Risk premium (Market rate of return) 10% Required rate of return = RFR + Beta*Risk Premium, i.e. 4.6% + Beta*10%
For Standard Chartered Bank: Year 2008 2007 2006 2005 2004 Net profit 3,511,000,0
00 2,989,000,000 2,354,000,00
0 1,971,000,000
1,479,000,000
Growth in net profit 17.46% 26.98% 19.43% 33.27% Average growth in net profit
24.28%
Total Equity 22,140,000,000
20,851,000,000
17,397,000,000
12,333,000,000
8,435,000,000
Return on Equity 15.86% 14.34% 13.53% 15.98% 17.53% Average ROE 15.45% Cost of equity Risk free rate of return (T-bills rate) 4.60% Beta for Standard Chartered Bank Ltd. 1.00 Risk premium (Market rate of return) 10% Required rate of return = RFR + Beta*Risk Premium, i.e. 4.6% + Beta*10%
14.60%
Year period Expected
growth rate Earnings per share
Dividend per share
Cost of equity
Present value
2009 1 25% 2.53 0 14.60% 0.00 2010 2 25% 3.16 0 14.60% 0.00 2011 3 25% 3.95 0 14.60% 0.00 2012 4 20% 4.74 0 14.60% 0.00 2013 5 20% 5.69 0 14.60% 0.00 2014 6 20% 6.83 0 14.60% 0.00 2015 7 15% 7.86 0 14.60% 0.00 2016 8 15% 9.03 0 14.60% 0.00 2017 9 10% 9.94 3.50 14.60% 1.03 2018 10 10% 10.93 3.86 14.60% 0.99 2019 11 8% 11.81 4.16 14.60% 0.93 Divident payout ratio in 2017(1-growth rate/ROE) = 35.27% Dividend per share in 2017(EPS*payout ratio) = 3.50 For constant growth from 2019 onwards, the present value is = 63.08 Present value of equity ($ per share) = 66.03
37
Conclusion:
1) According to CAMEL ratios, we can see that HDFC Bank has performed the best out
of the three banks from the view of asset quality, management performance and
earning capability. Overall, Standard Chartered Bank is a better performer than ICICI
Bank and the performance of ICICI Bank is lowest of the three banks in the last two
years. Thus, we can say that the equity of HDFC Bank will be highest valued, next is
Standard Chartered Bank and the equity of ICICI is valued lowest.
2) From the dividend discount model, we can see that the value of each share of HDFC
Bank is Rs. 1032.31 which is overvalued as the recent value of share price of HDFC
Bank in NSE is Rs.1411.80. Hence, the shares of HDFC Bank should not be
purchased by investors and they should be sold.
3) Similarly, the share price of ICICI Bank is Rs.434.10 which is also overvalued as
compared to the recent share price of ICICI Bank in NSE, which is Rs.756.15. Hence,
the shares of ICICI Bank should also be sold and not purchased by investors.
References:
• www.hdfcbank.com
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• www.icicibank.com • www.standardchartered.co.in • www.nseindia.com • www.adb.org/documents/guidelines/financial/part060302 • www.standardchartered-wealthmanagers.co.in • www.moneycontrol.com • www.ibef.org • www.researchandmarkets.com • www.lankabusinessonline.com • http://www.lbo.lk • http://sundaytimes.lk • Osama K. Najjar, 2004-2006, Financial Analysis for Bank of Palestine & Jordan Ahli
Bank (CAMEL Analysis) • Damodaran, Aswath (2006). Damodaran on Valuation. New York: John Wiley & Sons.