EXECUTIVE SUMMARY
“TODAY’S MONEY IS NOT EQUAL TO TOMORROW’S MONEY”, this says
that the money invested today does not have same value tomorrow, the time value of
money affects to a great extent. So, one has to consider time value of money when going
for investment especially in securities as equity shares etc. because the price fluctuations
are very rapid.
Every individual wants to save money and instead of keeping it idle he/she wants
to invest it further for its appreciation i.e., for the returns earned from it in the future.
There are many number of investment alternatives, it depends on the individual who
wants to invest as which alternative he has to choose i.e., it depends on the rate of return
or the amount of return and risk that the individual expect from the investment. Some
individuals want high returns and ready to take high risk, few don’t want to take risk and
they will be satisfied with the returns they get from the minimum risk.
The individuals or the investors who are willing to take risk will go for equity
investment, in which they can earn more returns and the other hand those who don’t want
to take risk or who wants to minimize the risk will go for bank deposits, investments in
mutual funds, debenture bonds, preference shares etc, where they can get a fixed amount
who don’t take risk or avoid risk are called as risk aversers.
Thus our study is mainly conducted to find out the risk and return that has been
associated with the banking stocks of the BSE BankEx and also to know the relationship
between Banks return and market returns.
My intention of choosing the topic “Risk Return Analysis of BSE BankEx at
Kotak Securities, Bangalore” is that, Banking sector is emerging sector now. India is now
opening up its economy for banking investments and any country can start Banking in
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India. Thus keeping in mind I took up the study to know how risky the investment in
Banking Sector is and the expected return that can get for the risk he has undertaken.
Objective of the study is Risk and Returns analysis of BSE BankEx securities and
to identify and analyze the correlation between Banks returns with BSE BankEx returns.
Scope of the study is limited to only Public Sector Banks, its regards calculation
of Returns, Standard Deviation, Beta, Alpha, Co variance and Correlation.
The method of data collection is primarily the data and views regarding the
Banking sector have been collected by interacting with the executives in the organization
as well with the internal guide. Secondary data regarding prices and regarding company
profile is collected through internet, news paper etc.
Limitations of the study are a good number of explanatory variables must be
taken into consideration in order to assess the share prices movement. But, due to time
constraints detailed analysis of each bank were now made. Confidently of data, then the
analysis carried out and suggestions offered are limited to the researcher’s ability to
understand complex financial aspects.
As far as findings are concerned Canara Bank leads in the aspects of Risk and
Returns. There exists a positive correlation between Banks returns and BSE BankEx
returns.
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GENERAL INTRODUCTION
INDUSTRY PROFILE
Introduction to Capital Market
Capital is an important factor of production, necessary for economic development.
It is a market for raising funds for capital formation and investment, which is referred to
as capital market. Investment comes from savings and the mobilization of savings is a
major function of the capital market.
Capital market is a wide term used to comprise all operations in the new issues
and stock market. New issues made by the companies constitute the primary market,
while trading in the existing securities relates to the secondary market. While we can only
buy in the primary market, we can buy and sell securities in the secondary market.
Capital market thus provides funds from public who are savers to investors. The
surpluses of the household sector and foreign sector are used to meet the deficits of the
Government and business sectors, who invest more than they save, or spend more than
their income.
Lending and borrowing of these surpluses and deficits and Bank credit and the
credit from financial institutions are all channelized through the capital market. Banks
commercial and co-operative as also all financial institutions intermediaries operating in
the capital market. This facilitates the project financing and growth of the corporate
sector on the one hand and there working in day-to-day operations on the other. Hence
the capital market is the market for financial assets that have long or indefinite maturity.
When a company wishes to raise capital by issuing securities or other entity intends to
raise funds through units, debt instrument, bonds, etc., it goes to the primary securities for
long-term funds. The primary market facilitates the formation of capital.
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There are three ways in which a company may raise capital in the primary market:
Public Issue: This involves sale of securities to members of the public, is the
most important mode of raising long-term funds.
Rights Issue: This is the method of raising further capital from existing
shareholders by offering additional securities to them on a pre-emptive basis.
Private Placements: Is a way of selling securities privately to a small group of
investors.
The Secondary market in India, where outstanding securities are traded, consists of
the stock exchanges which are self-regulatory bodies under the overall regulatory
purview of the government/ SEBI. Recently, SEBI has proposed the trading in futures
and options (Capital Market Derivatives). Accordingly, the definition of securities under
SCRA will have to be amended.
The government has accorded powers to the Securities and Exchange Board of India
(SEBI), as an autonomous body, to oversee the functioning of the securities market and
the operations of intermediaries like mutual funds and merchant bankers, underwriters,
portfolio managers, debenture trustee, bankers to an issue, registrars to an issue and share
transfer agents, stock brokers, sub-brokers, FII s (Foreign Institutional Investors)
plantation companies schemes including rating agencies and also to prohibit insider
trading.
Structure of the market
There are various sub-markets in the capital market in India. The structure has
undergone vast changes in recent years. New instruments and new institutions have
emerged on the scene.
The sub-markets are as follows:
1. Market of Corporate securities – for new issues and old securities.
2. Market for Government securities.
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3. Market for Debt instruments – debentures and bonds of private sector, bonds of
public sector undertakings, public financial institutions, etc.
4. Mutual fund schemes and UTI schemes, etc.
All these markets and submarkets have both Primary markets and Secondary markets.
The first one is for raising funds directly from the public and secondary market is for
trading and imparting liquidity to existing securities.
About BSE
The stock exchange, Mumbai, popularly known as “BSE” was established in
1875 as “The Native Share and Stock Brokers Association”. It is the oldest one in
Asia, even older than the Tokyo Stock Exchange, which was established in 1878. It is
voluntary non-profit making Association o persons (AOP) and is currently engaged in the
process of converting itself into demutualised and corporate entity. It has evolved over
the years into its present status as the premier stock exchange in the country. It is the first
stock exchange in the country to have obtained permanent recognition in 1956 from the
Govt. of India under the Securities Contracts (Regulation) Act, 1956.
The Exchange while providing an efficient market also upholds the interests of
the investors and ensures redressal of their grievances, whether against the companies or
its own member brokers. It also strives to educate and enlighten the investors by making
available necessary informative inputs.
A Governing Body comprises nine of elected directors ( one third of them retire
every year by rotation ), an Executive Director, three Government nominees, A Reserve
Bank of India nominee and five public representatives is the apex body, which regulates
the Exchange and decides its policies.
The Governing Board following the election of directors annually elects a
President, Vice-President and an honorary treasurer from among the elected directors.
The Executive Director as the Chief Executive Officer is responsible for the day-to-day
administration of the Exchange.
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About NSE
The National Stock Exchange (NSE) is India’s leading Stock Exchange covering
various cities and towns across the country. NSE was set up by leading institutions to
provide a modern, fully automated screen-based trading system with national reach. The
exchange has brought about unparalleled transparency, speed and efficiency, safety and
market integrity.
NSE has played a catalytic role in reforming the Indian securities market in terms
of microstructure, market practices and trading volumes. The market today uses state-of-
art information technology to provide an efficient and transparent trading, clearing and
settlement mechanism, and has witnessed several innovations in products & services viz.,
demutualization of stock exchange governance, screen based trading, compression of
settlement cycles, dematerialization and electronic transfer of securities, securities
lending and borrowing, professionalisation of trading members, fine-tuned risk
management systems, emergence of clearing corporations to assume counterparty risks,
market of debt and derivative instruments and intensive use of information technology.
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NSE Milestones
November 1992 Incorporation
April 1993 Recognition as a Stock exchange
May 1993 Formulation of business plan
June 1994 Wholesale Debt Market segment goes live
November 1994 Capital Market (Equities) segment goes live
March 1995 Establishment of Investor Grievance Cell
April 1995 Establishment of NSCCL, the first Clearing corporation
June 1995 Introduction of centralized insurance cover for all trading members
October 1995 Establishment of Investor Protection Fund
April 1996 Became largest stock exchange in the country
April 1996 Commencement of clearing and settlement by NSCCL
April 1996 Launch of S&P CNX Nifty
June 1996 Establishment of Settlement Guarantee Fund
November 1996 Setting up of National Securities Depository Limited, first
depository in India, co-promoted by NSE
November 1996 Best IT Usage award by Computer Society of India
December 1996 Commencement of trading/settlement in dematerialized securities
December 1996 Dataquest award for Top IT User
December 1996 Launch of CNX Nifty Junior
February 1997 Regional clearing facility goes live
November 1997 Best IT Usage award by Computer Society of India
May 1998 Promotion of Joint venture, India Index Services & Products
Limited (IISL)
May 1998 Launch of NSE’s Web-site: www.nse.co.in
July 1998 Launch of NSE’s Certification Programme in Financial Mkt
August 1998 CYBER CORPORATE OF THE YEAR 1998 launch of Automated
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Lending and Borrowing Mechanism
April 1999 CHIP Web Award by CHIP magazine
October 1999 Setting up of NSE.IT
January 2000 Launch of NSE Research Initiative
February 2000 Commencement of Internet Trading
June 2000 Commencement of Derivatives Trading (Index Futures)
September 2000 Launch of ‘Zero Coupon Yield Curve’
November 2000 Launch of Broker by Dotex International, a joint venture between
NSE.IT Ltd. and i-flex Solutions Ltd.
December 2000 Commencement of WAP trading
June 2001 Commencement of trading in Index Options
July 2001 Commencement of trading in Options on Individual Securities
November 2001 Commencement of trading in Futures on Individual Securities
December 2001 Launch of NSE VaR for Government Securities
January 2002 Launch of Exchange Traded Funds (ETFs)
May 2002 NSE wins the Wharton-Infosys Business Transformation Award in
the Organization-wide Transformation category
October 2002 Launch of NSE Government Securities Index
January 2003 Commencement of trading in Retail Debt Market
June 2003 Launch of Interest Rate Futures
August 2003 Launch of Futures & options in CNXIT Index
AT GLANCE:
CAPITAL MARKET (EQUITIES) SEGMENT
Number of VSATs August 31, 2004 2,869
Number of cities covered August 31, 2004 361
Settlement Guarantee Fund March 31,2004 1550.09 crores
Investor Protection Fund (CM and F&O) August 31, 2004 130.22 crores
Number of securities available for trading August 31, 2004 1,355
Record number of trades July 08, 2004 25,45,755
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Record daily turnover (quantity) August 19, 2003 6,493 lakhs
Record daily turnover (value) February 28, 2001 10,366.52 crores
Record market capitalisation January 08, 2004 12,42,778 crores
Record value of S&P CNX Nifty Index January 09, 2004 2,014.65
Record value of CNX Nifty Junior Index February 23, 2000 5,365.90
Record Pay-in/Pay-out (Rolling Settlement)
Funds Pay-in/Pay-out February 05, 2004* 685.76 crores
Securities Pay-in/Pay-out (value) January 13, 2004* 1884.09 crores
Securities Pay-in/Pay-out (Quantity) August 21, 2003* 1470.14 lakhs
* Settlement Date
DERIVATIVES (F&O) SEGMENT
No. of cities covered August 31, 2004 330
Settlement Guarantee Fund March 31, 2004 4,356.85 crores
Record daily turnover (value) January 28, 2004 21,921.34 crores
WHOLESALE DEBT SEGMENT
Number of securities available for trading August 31, 2004 2,888
Record daily turnover (value) August 25, 2003 13,911.57 crores
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Table showing Names of the Stock Exchanges in India
Sl.No. Name of the Stock
Exchange
Year of
Establishment
Recognition date
1 NSE 1992 Nov-1992
2 BSE 1875 31-08-1987
3 CALCUTTA 1908 10-10-1957
4 DELHI 1947 09-10-1957
5 AHMEDABAD 1984 16-10-1957
6 UTTAR PRADESH 1982 03-06-1982
7 LUDIANA 1983 29-04-1983
8 PUNE 1982 02-09-1982
9 BANGALORE 1957 16-02-1963
10 HYDERABAD 1943 02-09-1958
11 INTERCONNECTED SE 1999 1999
12 COCHIN 1978 10-05-1979
13 OTCEI 1989 Aug-1989
14 MADRAS 1908 15-10-1975
15 MADHYA PRADESH 1930 04-12-1958
16 MAGADH 1986 11-12-1986
17 VADODARA 1990 05-11-1990
18 GAUHATI 1984 01-05-1984
19 BHUVANESHVAR 1989 05-06-1989
20 COIMBATORE 1991 18-01-1991
21 JAIPUR 1984 09-11-1989
22 MANGALORE 1984 09-09-1985
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23 SKSE 1989 10-07-1989
Introduction to BSE BankEx
Indian banking is riding on a major recovery both in terms of strength and soundness
since from 2002. India is making sizeable gains in expanding into consumer credit with
tightening of credit administration procedures. Major policy actions that led to sharp fall
in the interest rates enabled banks to post significant rise in operational profits. For
instance trading profits of the public sector banks shot up by Rs. 3749 crores taking their
net profits to an all time high of Rs. 8301 crores in FY 02. These developments have
impacted the performance of bank stocks significantly. Since bank stocks are emerging as
a major segment in the equity markets, BSE considered it important to design an index
exclusively for bank stocks. Earlier BSE had launched its first free float index on TMT
stocks now popularly known as the BSE TECk Index.
Features
BANKEX will track the performance of the leading banking sector stocks listed
on the BSE
BANKEX is based on the free float methodology of index construction
The base date for BANKEX is 1st January 2002.
The base value for BANKEX is 1000 points
BSE has calculated the historical index values of BANKEX since 1st January
2002.
12 stocks which represent 90 percent of the total market capitalization of all
banking sector stocks listed on BSE are included in the Index
The Index will be disseminated on a real-time basis through BSE Online Trading
(BOLT) terminals from 23rd June, 2003
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Performance of the BANKEX:
During the period between 1 Jan 2002 and 13 June 2003, the total market capitalization
of BANKEX stocks has increased from 22970 cr. to 55283 cr. while the total market
capitalization of BSE TECk index stocks has fallen from 105956 cr. to 80787 cr. and that
of FMCG Index stocks from 87637 cr. to 75947 cr. During this period, BANKEX rose by
62 percent showing impressive gains among other major indices. The average daily
volatility of BANKEX from its inception to date has been 1.38% as compared to 2.24%
for BSE TECk and 1.06% for BSE FMCG Index for the same period.
BANKEX, is the new entrant in BSE’s current portfolio of 13 indices, and adds value to
BSE’s ability in reflecting both the broad market and specific sector movements in the
Indian Equity Markets.
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History of replacements in BANKEX
Date Outgoing Scrips Replaced by
09.02-2004 ING Vysya Bank UTI Bank Ltd.
Kotak Mahindra Bank
UCO Bank
Indian Overseas Bank
Jammu & Kashmir Bank
31.01-2005 Corporation Bank Allahabad Bank Ltd.
Jammu & Kashmir Bank Ltd.
UCO Bank
28.11.2005 Centurion Bank Ltd.
Indusind Bank Ltd
Karnataka Bank Limited
03.07.2006 Indusind Bank Ltd Federal Bank Ltd.
08.01.2007 Karnataka Bank
Vijaya Bank
09.07.2007 Karnataka Bank Ltd.
Yes Bank Ltd.
Scrip selection criteria for BSE BankEx:
Eligible universe:
Scrips classified under banking sector that are present constituents of BSE-500 index
would form the eligible universe.
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Trading Frequency:
Scrips should have a minimum of 90% trading frequency in preceding six months.
Market Capitalisation:
Scrips with a minimum of 90% market capitalisation coverage in each sector based on
free-float final rank will form the index.
Buffers
A buffer of 2% both for inclusion and exclusion in the index is considered so that
movements in and out of the index are minimized. E.g. A Company can be included in
the index only if it falls within 88% coverage and an existing index constituent cannot be
excluded unless it falls above 92% coverage. However, the above buffer criterion is
applied only after the minimum 90% market coverage is satisfied.
BANKEX Constituents
BSE BankEx was launched with an objective of measuring the performance of banking
sector stocks listed on the Bombay Stock Exchange. BankEx has a base date of 1st
January 2002 and base value of 1000 points. BankEx constituents represent 90% of the
total market capitalisation of the banking sector on BSE. The table below provides the list
of companies comprising BSE-PSU Index.
Code: Each stock listed on BSE is denoted a unique keyword that can be used to get
price and other stock related information.
Name: This column specifies the name of the company to which particular scrip is
denoted.
Adjusting Factor: Adjusting factor refers to the weightage of the constituent stocks in a
particular index. Stocks having a higher weightage are likely to have a stronger impact on
index movement as compared to stocks having a lower weightage.
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As on October 04, 2006
Sl. No. Code Name Adj. Factor
1 532480 Allahabad bank Ltd 0.452 532418 Andhra Bank 0.503 532134 Bank of Baroda 0.504 532149 Bank Of India 0.355 532483 Canara Bank 0.306 532273 Centurion Bank Ltd. 0.707 500469 Federal Bank Ltd. 1.008 500180 HDFC Bank Ltd. 0.809 532174 ICICI Bank Ltd. 1.0010 532388 Indian Overseas Bank 0.4011 532652 Karnataka Bank Limited 1.0012 500247 Kotak Mahindra Bank Ltd. 0.4513 500315 Oriental Bank of Commerce 0.5014 532461 Punjab National Bank 0.4515 500112 State Bank of India 0.4516 532477 Union Bank of India 0.4517 532215 UTI Bank Ltd. 0.7518 532401 Vijaya Bank 0.50
Calculation of Total and Average BSE BankEx ReturnsWeeks Open Close Price change Returns1st 10870.88 11377.96 507.08 4.66462nd 11377.96 11486.90 108.94 0.95753rd 11335.47 10738.59 -596.88 -5.26564th 10738.59 11386.35 647.76 6.03215th 11386.35 11905.06 518.71 4.55556th 11905.06 12215.84 310.78 2.6100
Total 13.5546Average 2.2591
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Introduction on Banking Sector:
Banking in one form or another, was in existence even in ancient times. The
writing of Manu (the maker of Old Hindu Law) and Kautilya (the minister of
Chandragupta Maurya) and the teaching of Christ contained references to banking
Existence of banking activities in Babylonia much before Christ.
However, modern banking (i.e., Joint Stock Banking) is of recent origin. After the
industrial revolution, with the increase in the size of industrial and business units, joint
stock company form of business organization came into existence. This form of
organization encouraged people with small means to become shareholders of big
industrial and business enterprises. Still, there were certain sections of the public who
were not prepared to invest their money on the share of joint stock companies. But they
were willing to part with their surplus money, it they were assured of the repayment of
their money with some interest there on. So, naturally, there arose the need for the
formation of financial institution that could collect the surplus funds of the people on
terms acceptable to them and make them available to the needy for productive purposes.
Accordingly, a large number of such financial institutions called joint stock banks were
set up. So, joint stock banks or modern banks are of recent development.
Nationalization of Banks:
In a free enterprise economy, commercial banks operate like any other business
and are mainly concerned with the maximization of their private gains. Lacking any
social purpose they often channel funds to business units in which the management has
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its interest and thus contribute in a big way to growth of monopolies and concentration of
economic and political power, while overall economic activity suffers because priority
sectors/industries fails to get adequate funds. The Hazari committee in its report on
‘Industrial Planning and Licensing Policy’ submitted to the planning commission in
September 14, 1967, clearly stated that, “it would be difficult to undertaken credit
planning unless the linked control of industry and banks in the same hands is snapped by
nationalization of banks”. The government however, decided in favor of social control.
The social control phase, however, turned out to be transitory. Expectations of the
government that the social control would remove objectionable banking practices of the
past and would give a new sense of purpose to the banks for future were believed. Having
realized that nothing short of nationalization would solve the mainly, the government
took a bold decision to bring under its direct control a substantial segment of the banking
system. On July 19, 1969 – fourteen commercial banks with deposits worth Rs. 50 crore
or more were nationalized. This was hailed as historic event by the people of the country.
GLOBAL TREND
Indian banking industry too has fallen in line with the global trend and has made a
beginning with small forays into such areas as selling mutual fund units or insurance
policies. Viewed thus, the decision to branch out into the business of offering an
electronic trading platform in stocks of listed companies for a fee is but a logical
extension of its desire to deepen the relationship with its customers.
Moreover, the fabric of customer loyalty is beginning to get frayed at the edges in
a world of increasing customer choice and changing cultural ethos that looks down upon
permanent relationships. So the more facets that a bank evolves to the relationship that it
has with the customer greater are the prospects of such a relationship enduring and
possibly even flourish in the future.
BASEL II NORMS
Meaning:
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Main feature of Basel – II is that its structure rests on a set of three “Mutually
reinforcing” pillars, namely, capital requirements, supervisory review and market
discipline. Through this approach, Basel – II aims to correct most of the deficiencies that
Basel – I has suffered from. To start with, the standards are now more risk-sensitive. In
other words, Banks which have a larger risk exposure will have to set apart more capital
to meet the unexpected losses that go with it.
The Three Pillars:
The capital framework, under the New Basel Capital Accord, rests on the following three
“Mutually reinforcing” pillars:
Pillar 1: Minimum Capital Requirements
Banks will be required to set apart capital for the credit market and operational
risks faced by them. A menu of approaches of increasing sophistication and lesser capital
requirement will be available to choose from for each of the three risks.
Pillar 2: Supervisory Review
This will involve a comprehensive review of the systems to calculate capital and
also risks not covered under pillar 1 to ensure required as a minimum. The supervisor
may, based on the review, adjust the capital requirement upward.
Pillar 3: Market Discipline
This is aimed at enhancing market discipline by ensuring that an adequate level of
transparency is maintained by banks in their disclosures to the market participants in
respect of various critical aspects of their functioning.
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Introduction to Banks under study
1. Allahabad Bank
Allahabad Bank was set up on 24th April, 1865 at Allahabad by a Group of Europeans
with subscribed capital of Rs.3 lakh. It is the oldest Bank in the country at present. The P
& O Banking Corporation took over the bank by acquiring its shares. In 1969 it was
nationalized. The Bank has entered into an MOU with the Small Industries Development
Bank of India (SIDBI) for financing small scale industrial units. The Bank has 5
International Branches and 4 International Divisions. The Allahabad Bank has become
one of the first banks in the country to draw up a credit management policy following the
dismantling of the Reserve Bank of India-prescribed Maximum Permissible Bank
Finance (MPBF) norms. Allahabad Bank becomes the first public sector bank to have an
exclusive Web site of its own, www.allbankcarloans.com, dedicated to sanctioning car
loans through the Internet.
2. Andhra Bank
The Bank came into existence on by consequent to the taking over of the undertaking of
Andhra Bank, Ltd. It is a Government of India undertaking. The Bank transacts general
banking business of all kinds including foreign exchange. The Bank has 974 full fledged
branches, 40 cluster branches, 76 extension counters. Andhra Bank has tied up with a real
estate portal indiaproperties.com, to provide housing loans through the Internet. Bank
started a new service called collection of Direct taxes which comprises corporate tax,
estate tax, gift tax etc. Andhra Bank has received Insurance Regulatory and Development
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Authority license to act as a corporate agent for procuring or soliciting business of the
United India Insurance Company Ltd. Andhra Bank has achieved 100% computerization
of all its branches and all of them are running on uniform application software.
3. Bank of Baroda
The Bank was brought into existence by an Ordinance issue, by the Central Government.
The Bank is a Government of India Undertaking and carries on all types of banking
business including foreign exchange. The bank had established a new department to act
as custodian of local shares issued by Indian companies who came out with Euro Issues
(GDRs/ADRs) to raise funds from abroad. With this in view, the bank entered into an
agreement with Bank of New York, who act as Depository for issue of GDRs by
companies. The bank was associated as lead manager/co-manager in respect of 142 issues
involving a sum of Rs 3411 crores. The Bank of Baroda has signed up to be a depository
participant with Central Depository Services (India) Ltd.
4. Bank of India
The Bank was brought into existence by an Ordinance issued, by the Central
Government. In terms of the Ordinance, the Undertaking of `The Bank of India Ltd.' was
transferred to and vested in the new bank. The Company became Depository Participate
of National Securities Depository Ltd., for the purpose of clearing and settlement of
trades in the dematerialized segment of BSE. Bank of India has introduced floating
interest rate on deposits for select customers, besides advancing on Mumbai Inter Bank
Offer Rate (MIBOR). The Bank has joined Central Depository Services as depository
participant. Four state-owned banks (Bank of India (BoI), Indian Bank, Syndicate Bank
and United Bank of India) enter into an agreement to share their respective ATM
(automated teller machine) networks.
5. Canara Bank
The Bank is a Government of India undertaking, and carries on all banking business. The
Bank was brought into existence by an ordinance, by the Central Government.Canara
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Bank became the first public sector bank to join the MasterCard ATM network. The
Public Sector Canara Bank has entered into an arrangement with the Infrastructure
Development Finance Company for financing core sector projects. Canara Bank, Central
Bank of India (CBI), Indian Overseas Bank (IOB), UCO Bank and Union Bank of India
(UBI) form an alliance to launch `Cash Online' ATM network Canara Bank has entered
into a franchise agreement with Western Union Financial Services for money transfer
facility.
6. Indian Overseas Bank
Indian overseas bank, had the distinction of three branches, at Chennai, Karaikudi and
Rangoon simultaneously commencing business on the inaugural day. When it was
nationalized, the bank had 208 branches and business mix of Rs.156 crores. Indian
Overseas Bank the first public sector bank in the country to introduce mobile banking
services using Wireless Application Protocol (WAP). Indian Overseas Bank (IOB) ties up
with Times Online Money to launch an Internet-based remittance product, e-Cash Home,
targeted at NRIs in the US wishing to transfer money to India.
7. Punjab National Bank
Punjab National Bank (PNB) has formed a strategic alliance with Infrastructure Leasing
and Financial Services Ltd (IL&FS) to set up a private equity fund for investing in
domestic companies. Punjab National Bank has informed that the Government of India,
Ministry of Finance, Department of Economic Affairs (Banking Division), New Delhi
vide Notification dated June 06, 2007 has appointed Shri. Jag Mohan Garg as a Whole-
time-Director (designated as Executive Director) on the Board of Punjab National Bank
from the date of his taking over charge of his post or until further orders or till the date of
his superannuation i.e. upto July 31, 2010 whichever is earlier. Punjab National Bank is
entering into a MoU with India Infrastructure Finance Co. (IIFC) on October 17, 2007
with an aim to extend its cooperation and support to IIFC in areas of creating a deal flow
of infrastructure projects.
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8. State Bank of India
In 1921, the Imperial Bank of India, the precursor to State Bank of India, was formed as
the result of amalgamation of the Bank of Bengal and two other presidency banks,
namely, Bank of Madras and Bank of Bombay. In 1955, it was abolished by an Act of
Parliament, which handed over its assets and operations to a new entity called State Bank
of India. As the government wanted more control over the credit delivery, it nationalized
14 largest commercial banks in India in 1969. The SBI has a sense of social responsibility
and caters to various sections of the society.
Current Issues Regarding Banking Sector
E-trading: A Strategic imperative for banks
The country’s leading public sector banks has recently said that its own broking arm
SBICAP securities would be offering an electronic trading platform in listed stocks for its
customers. This would supplement an arrangement it already has with a private stock
broking firm. Other banks such as Punjab National Bank, Union Bank, Bank of India etc.,
too have announced tie-ups with broking outfits to offer such a facility. It is just as well
that a number of public sector banks are taking to offering an online trading platform in
listed stocks for their customers.
The concept of a bank cross-selling its third-party financial products to supplement its
core business of accepting deposits and on-lending it to borrowers at a profit has come to
be well recognized within the industry as a key component of a successful business
strategy. It seeks to leverage a bank’s core strength of a customer network to generate
higher profits than may be inherent in the banking relationship that it may have with its
customers.
Improved confidence
As the 50 bps hike in CRR has already been expected by market men, it did not affect the
sentiment towards banking sector.
“People seem to have digested the 50 bps hike in CRR by the RBI, has reduced
uncertainty towards the banking sector now. Most banks are also reducing their interest
PG Department of Management Studies 22Atria Institute of Technology
rates, which will take care of the growth of this sector. Now, the overall confidence of
investors has increased,” said a banking analyst with a broking firm.
Economists have said the banking industry will reflect the growth of an economy. “FIIs
bet on India because of the growth of the economy, they also bet on the banking sector,
as it is performing quiet well”. Even though the interest rate has increased this hasn’t
deteriorated the asset quality as much, as most banks have updated their technical
platform.
Mr. P Chidambaram, Union Finance Minister, said
Public Sector Banks have largely driven the growth in the banking industry in spite of the
several constraints faced by them. He also says Tech adoption can quicken financial
inclusion and the Indian Banking industry was among the best in the world. “Our non-
performing assets are the smallest and the net interest margin and return on assets are of
substantial standards,” he said.
Emphasising the role of technology, he said that it was a key factor in bringing about
greater financial inclusion. “We must push the frontiers of technology in order to speed
up the process of financial inclusion,” he said. The technology centre would host the
bank’s data centre with high-end servers. The bank announced its plans to bring all its
2,400 branches under the core-banking platform by March 2008.
Banks with global ambition must have India presence: E&Y
“In the near future, banks will not be able to say they are global unless they have a
presence in China, India, because these emerging markets are going to be a major source
of financial sector revenue and profit growth,” the international consulting firm said in a
report. The report titled ‘Strategic Business Risk 2008 – the top 10 risks for business’,
noted that a late entry into Asia would make it difficult for foreign banks to keep up with
competition. For the Asian banks themselves, one of the main threats is the rapid
transformation from “Government bureaucracies into corporate governance and
transparency-driven organizations”.
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STATE BANK OF INDIA
State Bank of India plans to enter general insurance early this year. The
bank is likely to tie up with a foreign player to set up a joint venture for
general venture Mr. O.P.Bhatt its chairman said.
Higher non-interest income helped State Bank of India, to report a 36 per
cent rise in second quarter net profit at Rs.1611.4 crore against Rs.1,184.4
crore in the same quarter last year. The bank’s Capital Adequacy Ratio
was 12.85 per cent (12.63 percent).
The bank also has plenty of liquidity because it had opened a lot of
accounts, especially term deposits due to the smart products and
aggressive pricing. But Mr. Bhatt expects credit to pick up in the second
half. The bank has about Rs.1,000 crore of sanctions pending disbursals.
Canara Bank rejigs credit portfolio; Q2 net up 11%
Canara Bank rebalanced its credit portfolio and shifted focus to priority sector areas
during the second quarter of the current financial year. Canara Bank Chairman and
Managing Director, Mr. M.B.N. Rao said, “We have contained the growth of retail
advances.” Retail advances grew only 5.91 % on year-on-year basis to Rs. 17,187 crore.
Priority sector advances grew 25.08 % during the same period to Rs. 38,920 crore.
PG Department of Management Studies 24Atria Institute of Technology
Introduction to Company
The Kotak Mahindra Group
Kotak Mahindra is one of India's leading financial conglomerates, offering complete
financial solutions that encompass every sphere of life. From commercial banking, to
stock broking, to mutual funds, to life insurance, to investment banking, the group caters
to the financial needs of individuals and corporates.
The group has a net worth of over Rs. 5,230 crore, employs around 15,300 people in its
various businesses and has a distribution network of branches, franchisees, representative
offices and satellite offices across 340 cities and towns in India and offices in New York,
London, Dubai, Mauritius and Singapore. The Group services around 3.2 million
customer accounts.
MILESTONE
The Kotak Mahindra Group was born in 1985 as Kotak Capital Management Finance
Limited. This company was promoted by Uday Kotak, Sidney A. A. Pinto and Kotak &
Company. Industrialists Harish Mahindra and Anand Mahindra took a stake in 1986, and
that's when the company changed its name to Kotak Mahindra Finance Limited.
Since then it's been a steady and confident journey to growth and success.
First Phase (1986-1990)
PG Department of Management Studies 25Atria Institute of Technology
Kotak Mahindra Finance Limited starts the activity of Bill Discounting, Lease and
Hire Purchase market, and The Auto Finance division.
Second Phase (1991-1995)
The Investment Banking Division is started. Takes over FICOM, one of India's
largest financial retail marketing networks, Enters the Funds Syndication sector,
Brokerage and Distribution businesses incorporated into a separate company - Kotak
Securities. Investment banking division incorporated into a separate company - Kotak
Mahindra Capital Company
Third Phase (1996-2000)
The Auto Finance Business is hived off into a separate company - Kotak Mahindra
Prime Limited (formerly known as Kotak Mahindra Primus Limited). Kotak
Mahindra takes a significant stake in Ford Credit Kotak Mahindra Limited, for
financing Ford vehicles. Enters the mutual fund market with the launch of Kotak
Mahindra Asset Management Company. Kotak Mahindra ties up with Old Mutual plc
for the Life Insurance business; Kotak Securities launches its on-line broking site
(now www.kotaksecurities.com). Commencement of private equity activity through
setting up of Kotak Mahindra Venture Capital Fund.
Fourth Phase (2001-2006)
Kotak Mahindra Finance Ltd. converts to a commercial bank - the first Indian
company to do so. Launches India Growth Fund, a private equity fund, Kotak Group
realigns joint venture in Ford Credit; Buys Kotak Mahindra Prime (formerly known
as Kotak Mahindra Primus Limited) and sells Ford credit Kotak Mahindra.Launches a
real estate fund, Bought the 25% stake held by Goldman Sachs in Kotak Mahindra
Capital Company and Kotak Securities
MANAGEMENT CONTROL
Mr. Uday Kotak Executive Vice Chairman & Managing Director.
Mr. Shivaji Dam
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Mr. C. Jayaram
Mr. Dipak Gupta
CORPORATE IDENTITY
Kotak Group Product & Services:
Bank
Life Insurance
Mutual Fund
Car Finance
Securities
Institutional Equities
Investment Banking
Kotak Mahindra International
Kotak Private Equity
Kotak Realty Fund
Kotak Securities Ltd. is India's leading stock broking house with a market share of 8.5
percent as on 30th September, 2007. Kotak Securities Ltd. has been the largest in IPO
distribution.
The accolades that Kotak Securities has been graced with include:
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"Best Brokerage Firm in India" by Asiamoney in 2007
‘The Leading Equity House in India’ in Thomson Extel Surveys Awards for the
year 2007.
Euromoney Award (2006 & 2007) - Best Provider of Portfolio Management :
Equities
Avaya Customer Responsiveness Awards (2006) in Financial Institution Sector
Asiamoney Award (2006)- Best Broker In India
Euromoney Award (2005)-Best Equities House In India
Finance Asia Award (2005)-Best Broker In India
Finance Asia Award (2004)- India's best Equity House
Prime Ranking Award (2003-04)- Largest Distributor of IPO's
The company has a full-fledged research division involved in Macro Economic studies,
Sectoral research and Company Specific Equity Research combined with a strong and
well networked sales force which helps deliver current and up to date market information
and news.
Kotak Securities Ltd is also a depository participant with National Securities Depository
Limited (NSDL) and Central Depository Services Limited (CDSL), providing dual
benefit services wherein the investors can use the brokerage services of the company for
executing the transactions and the depository services for settling them.
Kotak Securities has 862 outlets servicing over 3,60,000 customers and a coverage of 310
PG Department of Management Studies 28Atria Institute of Technology
cities. Kotaksecurities.com, the online division of Kotak Securities Limited offers
Internet Broking services and also online IPO and Mutual Fund Investments.
Kotak Securities Limited has over Rs. 3490 crore of Assets Under Management (AUM)
as of 30th September, 2007. The portfolio Management Services provide top class
service, catering to the high end of the market. Portfolio Management from Kotak
Securities comes as an answer to those who would like to grow exponentially on the crest
of the stock market, with the backing of an expert.
Kotak Mahindra Old Mutual Life Insurance Ltd.
Kotak Mahindra Old Mutual Life Insurance is a 74:26 joint venture between Kotak
Mahindra Bank Ltd. and Old Mutual plc. Kotak Mahindra Old Mutual Life Insurance is
one of the fastest growing insurance companies in India and has shown remarkable
growth since its inception in 2001.
Old Mutual, a company with 160 years experience in life insurance, is an international
financial services group listed on the London Stock Exchange and included in the FTSE
100 list of companies, with assets under management worth $ 400 Billion as on 30th
June, 2006. For customers, this joint venture translates into a company that combines
international expertise with the understanding of the local market.
Kotak Mahindra Asset Management Company Limited (KMAMC)
Kotak Mahindra Asset Management Company Limited (KMAMC), a wholly owned
subsidiary of KMBL, is the Asset Manager for Kotak Mahindra Mutual Fund (KMMF).
KMAMC started operations in December 1998 and has over 4 Lac investors in various
schemes. KMMF offers schemes catering to investors with varying risk - return profiles
and was the first fund house in the country to launch a dedicated gilt scheme investing
only in government securities.
We are sponsored by Kotak Mahindra Bank Limited, one of India's fastest growing
banks, with a pedigree of over twenty years in the Indian Financial Markets. Kotak
Mahindra Asset Management Co. Ltd., a wholly owned subsidiary of the bank, is our
Investment Manager.
PG Department of Management Studies 29Atria Institute of Technology
We made a humble beginning in the Mutual Fund space with the launch of our first
scheme in December, 1998. Today we offer a complete bouquet of products and services
suiting the diverse and varying needs and risk-return profiles of our investors.
We are committed to offering innovative investment solutions and world-class services
and conveniences to facilitate wealth creation for our investors
Car Finance
Kotak Mahindra Prime Limited (KMPL) is a subsidiary of Kotak Mahindra Bank Limited
formed to finance all passenger vehicles. The company is dedicated to financing and
supporting automotive and automotive related manufacturers, dealers and retail
customers. The Company offers car financing in the form of loans for the entire range of
passenger cars and multi utility vehicles. The Company also offers Inventory funding to
car dealers and has entered into strategic arrangement with various car manufacturers in
India for being their preferred financier.
Kotak Securities Ltd - Institutional Equities
Kotak Securities, a subsidiary of Kotak Mahindra Bank, is the stock-broking and
distribution arm of the Kotak Mahindra Group. The institutional business division
primarily covers secondary market broking. It caters to the needs of foreign and Indian
institutional investors in Indian equities (both local shares and GDRs). The division also
has a comprehensive research cell with sectoral analysts covering all the major areas of
the Indian economy.
Kotak Mahindra Capital Company (KMCC)
Kotak Mahindra Capital Company (KMCC) helps leading Indian corporations, banks,
financial institutions and government companies’ access domestic and international
capital markets. KMCC has the most current understanding of investor appetite, having
been the leading book runner/lead manager in public equity offerings in the period FY
2002-06.
Kotak Private Equity:
"Partnering to Build Leaders of Tomorrow"
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Kotak Private Equity Group (KPEG) is a specialist Private Equity arm of Kotak
Mahindra Bank. We are a leading Private Equity Fund Manager focused on helping
emerging corporates and mid-size enterprises evolve into tomorrow's industry leaders.
KPEG provides these companies a combination of equity capital, strategic support and
other value added services, playing a pro-active role with the entrepreneur in building the
business.
Kotak Reality Fund
Kotak Realty Fund, established in May 2005, is one of India's first private equity funds
with a focus on real estate and real estate intensive businesses. Kotak Realty Fund
operates as a venture capital fund, under the SEBI Venture Capital Fund Regulations,
1996 in India. The fund's corpuses have been contributed by leading banks, domestic
corporates, family offices and high net worth individuals. The fund is closed ended and
has a life of seven years.
Investment Formats
The funds would seek equity investments in development projects, enterprise level
investments in real estate operating companies, and in real estate intensive businesses not
limited to hotels, healthcare, retailing, education and property management. Further, the
funds would also be investing in non-performing loans with underlying property
collateral.
Asset Class
The funds would invest in all the main property asset classes such as residential
(townships, luxury residential, low cost housing, golf communities), hospitality (hotels
and serviced apartments), office (core and business parks), shopping centers and
alternative asset classes such as logistics and warehousing.
Geographical Locations:
In order to achieve geographical diversity, the funds would invest in not just the Tier I
cities such as Mumbai, NCR and Bangalore but also in Tier II cities such as Pune,
PG Department of Management Studies 31Atria Institute of Technology
Kolkatta, Hyderabad and Chennai) and other Tier III cities, examples of which are
Nagpur, Coimbatore, Mysore and Ludhiana)
The Fund Manager believes that through diversification in geographies, asset class and
investment formats, the Funds should be well positioned to achieve superior risk adjusted
returns.
Fund Management Team:
Kotak Realty Fund is managed by its investment team located in Mumbai, India and
supported by an organization in which thought leadership, contrarian play, due diligence,
communication and collaborative partnerships take precedence. The Funds have a core
team of professionals dedicated to sourcing, analyzing, executing and managing the
investments. This unique team brings together profiles combining real estate corporate
finance advisory, investment banking, venture capital, infrastructure development and
finance, and REITS valuation experience.
Leading players:
In a competitive world the following emerging stock broking firms are leading the
industry.
Motilal Oswal Securities Ltd.
Kotak Securities Ltd.
Karvy Financials.
India Bulls.
Geojit Financial Services Limited.
Sharekhan.
IL&FS Investments Ltd.
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Motilal Oswal Securities Ltd:
One of the top-3 stock – broking houses in India, with a dominant position in both
institutional and retail broking. MOSL is amongst the best-capitalized firms in the
broking industry in terms of net worth.
MOSL was founded in 1987 as a small sub-broking unit, with just two people
running the show. Focus on customer-first-attitude, ethical and transparent business
practices, respect for professionalism, research-based value investing and implementation
of cutting-edge technology have enabled it to blossom into a thousand-member team.
The institutional business unit has relationships with several leading Foreign
Institutional Investors (FII’s) in the US, UK, Hong Kong and Singapore. In a recent
media report MOSL was rated as one of the top-10 brokers in terms of business
transacted for FII’s.
The retail business unit provides equity investment solutions to more than 74,000
investors through 400 outlets spanning 200 cities and 22 states.
MOSL provides,
Advice-Based Broking
Portfolio Management Services (PMS)
E-Broking Services, Depository Services,
Commodities Trading
IPO and Mutual Fund Investment Advisory Services.
One thing that sets MOSL apart is its time-tested and well-recognized equity research
capability. With value investing at the core of its investment philosophy, a strong
PG Department of Management Studies 33Atria Institute of Technology
research team consistently provides high-performance ideas. These are in turn converted
to sound, personalized investment strategies, keeping in view unique client needs. As a
result, the Capital Market now recognizes MOSL as synonymous to Solid Research and
Solid Advice.
Kotak Securities Ltd:
Kotak Securities Ltd., a strategic joint venture between Kotak Mahindra Bank and
Goldman Sachs (holding 25% - one of the world’s leading investment banks and
brokerage firms) is India’s leading stock broking house with a market share of 5 – 6%.
Kotak Securities Ltd has been the largest in IPO distribution – it was ranked number one
in 2003-04 as Book Running Lead Managers in public equity offerings by PRIME
Database. It has also won the Best Equity House Award from Finance Asia – April 2004.
The company has a full fledged research division involved in Macro Economic
Studies, Sectoral research and company specific equity research combined with a strong
and well networked sales force which helps deliver current and up to date market
information and news.
Kotak Securities Ltd is also a depository participant with National Securities
Depository Limited (NSDL) and Central Depository Services Limited (CDSL) providing
dual benefit services wherein the investors can use the brokerage services of the company
for executing the transactions and the depository services for settling them.
Kotak Securities has 862 outlets servicing over 3,60,000 customers and a
coverage of 310 cities. Kotaksecurities.com, the online division of Kotak Securities
Limited offers Internet Broking services and also online IPO and Mutual Fund
Investments.
Kotak Securities Limited has over Rs. 3490 crore of Assets Under Management
(AUM) as of 30th September, 2007. The portfolio Management Services provide top
class service, catering to the high end of the market. Portfolio Management from Kotak
PG Department of Management Studies 34Atria Institute of Technology
Securities comes as an answer to those who would like to grow exponentially on the crest
of the stock market, with the backing of an expert.
Karvy Financials:
Karvy is a premier integrated financial services provider, and ranked among the
top five in the country in all its business segments, services over 16 million individual
investors in various capacities, and provides investor services to over 300 corporates.
KARVY covers the entire spectrum of financial services such as Stock Broking,
Depository Participants, Distribution of Financial Products – Mutual funds, Bonds, Fixed
Deposit, Equities, Insurance Broking, Commodities Broking, Personal Finance Advisory
Services, Merchant banking and Corporate finance, Placement of Equity, IPO’s among
others. Karvy has a professional management team and ranks among the best in
technology, operations and research of various industrial segments.
India Bulls:
India bulls are India’s leading retail financial services company with 135
locations spread across 95 cities. Which its size and strong balance sheet allow us to
provide you with varied products and services at very attractive price, it’s over 750 Client
Relationship Managers are dedicated to serving your unique needs.
India bulls are lead by a highly regarded management team that has invested
crores of rupees into a world class Infrastructure that provides clients with real-time
service & 24/7 access to all information and products. Flagship India Bulls Professional
Network TM offers real-time prices detailed data and news, intelligent analytics, and
electronic trading capabilities, right at your fingertips. This powerful technology is
complemented by our knowledgeable and customer focused Relationship Managers. IB
are creating a world of Smart Investor.
India bulls offer a full range of financial services and products ranging from
Equities to Insurance to enhance your wealth and hence, achieve your financial goals.
PG Department of Management Studies 35Atria Institute of Technology
India bulls is a full service investment firm offering clients access to a tremendous
range of financial services from 135 locations across 95 cities. We have a strong team of
over 750 Client Relationship Managers focused on serving your unique needs.
Geojit Financial Services Limited:
Geojit Financial Services Limited was founded by Mr. George in 1987 as a
Partnership for doing Broking business in Cochin Stock Exchange. In 1994, the business
was taken over by Geojit’s Financial Services Ltd, a Joint Venture between Mr. George
and the Kerala State Industrial Development Corporation Ltd. In the following year, the
company came up with an IPO and the shares were listed in various stock exchanges in
India in 1995.
Geojit’s Business Plan is developed and implemented under the supervision of a
Board constituted by eminent professionals who are experts in varied fields. Mr. Kurian,
chairman of Geojit Financial Services Ltd, is a former executive trustee of Unit Trust of
India, India’s largest mutual fund. Mr. Kurian is presently the chairman of the
Association of Mutual Funds in India (AMFI) and is on the Board of National Stock
Exchange (NSE) and several of the country’s leading corporations.
Sharekhan:
Sharekhan is an Equities focused organization tracing its lineage to SSKI, a
veteran Equities solutions company with over 8 decades of experience in the Sharekhan
does not claim expertise in too many things. Sharekhan’s expertise lies in stocks and
that’s what he talks about with authority. So when he says that investing in stocks should
not be confused with trading in stocks or a portfolio based strategy is better than betting
on a single horse, it is something that is spoken with years of focused learning and
experience in the stock markets. And these beliefs are reflected in everything Sharekhan
does in fact Sharekhan runs India’s largest chain of share shops with around 250 outlets
in 113 cities.
IL&FS Investments Ltd:
PG Department of Management Studies 36Atria Institute of Technology
IL&FS Investsmart leverages on its pedigree of IL&FS, which has the core
competency of institutional and retail financial services.
Infrastructure Leasing and Financial Services Limited (IL&FS), the promoters of
IL&FS Investsmart Limited, is a multi-faceted organization providing a range of fund
and non-fund based financial services. IL&FS was incorporated in 1987 and is amongst
the few institutions in the country specifically mandated to implement infrastructure
projects on a commercial format.
To serve the investors of various kinds, the broking firms offer different types of
products and services to cater to the needs of all such customers. The following are the
main products offered by the brokering institutions:
Online securities trading
Offline securities trading
Portfolio Management Services
Commodities trading
Demat services
Apart from these trading products they provide some Research Products, i.e., the
Fundamental and Technical analysis Reports, Comprehensive Market Research Reports
etc for particular sectors and for individual companies also. These special services are
provided as daily, weekly, or on monthly basis.
a. STATEMENT OF PROBLEM
“Risk – Return Analysis of BSE BankEx at Kotak Securities, Bangalore”
b. OBJECTIVES OF THE STUDY
PG Department of Management Studies 37Atria Institute of Technology
1. The study will deal with Return and Risk analysis of BSE BankEx securities.
2. To identify and analyze the correlation between Banks returns with BSE BankEx
returns.
3. To examine and evaluate the growth prospects of BSE BankEx securities.
4. To identify profitable investment opportunities in Banking Sector Stocks.
5. To fulfill the requirement of award of MBA.
6. To offer suggestions.
c. SCOPE OF THE STUDY
1. The scope of the study limits to the Public Sector banks only.
2. To understand the causes, which leads to investment ideas.
3. To ascertain the technique for investing in banking sectors.
4. To calculate Returns, Standard Deviation, Beta, Alpha, Covariance and
Correlation.
d. METHODOLOGY
SOURCES OF DATA:
Primary Data
The primary data has been collected from discussions with the officials of the
company.
Secondary Data
The secondary data for this study was collected from News Papers, Magazines,
Internet, and Text Books etc.
LIMITATIONS OF THE STUDY
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1. A good number of explanatory variables must be taken into consideration in order
to assess the share price movement. But due to time constraints detailed analysis
of each bank were not made.
2. This is a one time study.
3. This being an academic study suffers from time and cost constraints
4. This is limited to BSE BANKEX.
5. This study is related to data collected from 3rd December, 2007 to 11th January,
2008.
6. During the study the Stock Market was Bullish.
7. Confidentiality of data – organizational constraints.
8. The analysis carried out and suggestions offered are limited to the researcher’s
ability to understand complex financial aspects.
9. Observations made and suggestions offered cannot be generalized.
PG Department of Management Studies 39Atria Institute of Technology
INTRODUCTION TO RISK AND RETURN
RISK
Risk and Uncertainty are an integral part of an investment decision. Technically
‘Risk’ can be defined as a situation where the possible consequences of the decision that
is to be taken are known. ‘Uncertainty’ is generally defined to apply to situation where
the probabilities cannot be estimated. However, Risk and Uncertainty are used
interchangeably.
Risk is composed of the demands that bring in variations in return of income. The
main forces contributing to risk are price and interest. Risk is also influenced by external
and internal considerations. External risks are uncontrollable and broadly affect
investments. These external risks are called systematic risk. Risk due to internal
environment of a firm or that affecting a particular industry is referred to as unsystematic
risk.
Systematic risk is non-diversifiable and is associated with the securities market as
well as the economic, sociological, political and legal considerations of the prices of all
securities in the economy. The effect of these factors is to put pressure on all securities in
such a way that the prices of stock will move in the same direction. For example, during a
boom period, prices of all securities will rise indicate that the economy is moving
towards prosperity.
Unsystematic risk is unique to a firm or industry. It does not affect an average
investor. Unsystematic risk is caused by factors like labor strike, irregular disorganized
management policies and consumer preferences. These factors are independent of the
price mechanism operating in the securities market. The problems of both systematic and
unsystematic risk are inherent in industries dealing with basic raw materials as well as in
consumer goods industries.
PG Department of Management Studies 40Atria Institute of Technology
SYSTEMATIC RISK
Market risk, Interest rate risk and Purchasing power risk are grouped under systematic
risk.
Market risk:
Market risk is referred to as stock variability due to changes in investor’s attitude and
expectations. The investor’s reaction towards tangible and intangible events in the
chief cause affecting ‘market risk’. Market risk triggers off through real events
comprising political, social and economic reasons.
Interest rate risk:
There are four types of movements in prices of stocks in the market. These may be
termed as (1) long-term, (2) cyclical (bull and bear markets), (3) intermediate or
within the cycle and (4) short-term. The prices of all securities rise or fall depending
on the change in interest rates.
Purchasing Power Risk:
Purchasing power risk is also known as inflation risk. This risk rises out of change in
the prices of goods and services and technically it covers both inflation and deflation
periods. During the last two decades, it has been seen that inflationary pressures have
been continuously affecting the Indian Economy.
UNSYSTEMATIC RISK
The importance of unsystematic risk arises out of uncertainty surrounding a
particular firm or industry due to facts like labor strike, consumer preferences and
management policies.
Business Risk
Business risk is also associated with risks directly affecting the internal environment
of the firm and those of circumstances beyond its control. The former is classified as
PG Department of Management Studies 41Atria Institute of Technology
internal business risk and the later as external business risk. Within these two broad
categories of risk the firm operates.
Financial Risk
Financial risk in a company is associated with the method through which it plans its
financial structure. If the capital structure of a company tends to make earnings
unstable, the company may fail financially.
BETA
An important measure of risk, the beta coefficient or simply ‘beta’ measure the
sensitivity of a stock price relative to the fluctuations of a particular stock market index.
Risk and Return are the two sides of the investment coin. Many investors are familiar
with techniques to calculate returns of investment; but they are not familiar with the
measure of risk of an investment. Beta is calculated by relating the relevant returns on a
security with the returns for the market. Market return is measured by the average returns
of a large sample of stocks such as BSE BankEx, S&P CNX Nifty etc., beta can be
positive or negative.
The risk in a share can be divided into two parts; one is market risk and other is
company specific risk. The market risk is also called systematic risk; affect all the stocks
in the market. E.g., a change of Government policy, revision of interest rates, exim polity
etc., will affect all the stocks in the market. The company specific risk is also known as
unsystematic risk and affects the specific company or industry.
The systematic portion of risk is practically impossible to reduce. So it is
important to quantify this market risk. This risk can be measured by the Scrips betas. If a
stock moves exactly in tandem with a market index such as the BSE BankEx, it is said to
have a beta of one. A stock with a beta higher than one is called a risky stock i.e., that is
Aggressive stock and its market price may move faster than the market. If beta is less
than one, the stock is called a Defensive stock.
PG Department of Management Studies 42Atria Institute of Technology
The concept of beta for measuring the riskiness of a stock is, if an investor selects
stocks with low betas (i.e., less than 1), then the investor will suffer less in a falling
market. Of course, at the same time investor will also stand to gain less than the market
average in rising market. In case an investor is prepared to take greater risk then he can
choose stock with higher betas (beta>1) in order to gain more than the market average in
a rising market. At the same time the investor should be prepared to lose more than the
market average, in case the market crashes. However, it is desirable to choose stocks with
betas varying between 0.5 and 1.5.
ALPHA
Alpha is commonly known as Unique Risk. This unique risk is mainly for a
particular organization and does not affect the whole industry. Lesser the value of Alpha
lesser is the risk.
VARIANCE
The variance is the sum of the squares of the deviations of actual returns from the
expected returns. Positive value of variance is considered unfavorable and negative
values as favorable.
STANDARD DEVIATION
It is the square root of averaged of squared deviations. Positive value of Standard
Deviation is considered unfavorable and negative values as favorable.
CORRELATION
It is simply the covariance divided by the product of Standard Deviations. The
Correlation co-efficient can vary between -1.0 and +1.0. A value of -1.0 means perfect
negative correlation or co movement in a opposite direction, a value of 0 means no
correlation or co movement. Whatsoever a value of +1.0 means perfect correlation or co
movement in the same direction.
PG Department of Management Studies 43Atria Institute of Technology
TOOLS OF ANALYSIS
Before calculating Beta and Correlation Coefficient for each of the securities we
have to calculate the Returns and Standard Deviation i.e., the risk factors for the
individual securities. The following tables show the Returns and Standard Deviation for
each of the securities based on the total observations and matched observations with BSE
BankEx. We are calculating returns based on opening and closing price of the securities
by collecting the prices weekly for 6 weeks. Thus the calculations wholly depend on the
data collected from internet.
1) Beta
2) Alpha
3) Variance
4) Standard Deviation
5) Correlation
PG Department of Management Studies 44Atria Institute of Technology
Use of Tools
Formulas used;
1. Computation of Rate of Return for Listed Banks.
The rate of return is calculated using opening and closing prices of each Bank on
weekly basis.
RA = Closing price of last day of a week – Opening price of the first day of a week
Opening price of the first day of a week
2. Computation of Rate of Return for BSE BANKEX.
The rate of return is calculated using opening and closing prices of each Bank on
weekly basis.
RM = Closing index of last day of a week – Closing index of the first day of a week
Closing index of the first day of a week
3. Computation of Covariance
COV (RA
, RM
) or σ
im = Σ(RA – RA/) (RM – RM/)
n - 1
4. Computation of variance of the Market Index
σm
2= Σ(RM – RM/) 2
n – 1
5. Computation of Beta
βeta = σ im
σm 2
6. Computation of Alpha
PG Department of Management Studies 45Atria Institute of Technology
άA = RA/ – β.RM/
7. Computation of Variance of the scrips
Variance or σA 2 = Σ(RA – RA/) 2
n – 1
8. Computation of standard deviation of the scrips
σA = variance or σA 2
9. Computation of standard deviation of the market
σM = variance of market or σm2
10. computation of Correlation
correlation = Cov(RA.RM)
σA.σM
Calculation part
1. Allahabad Bank
Calculation of Total and Average Returns
Weeks Open Close Price change Valid Returns
PG Department of Management Studies 46Atria Institute of Technology
1st 113.00 116.10 3.10 2.74342nd 116.50 121.30 4.80 4.12023rd 121.00 113.40 -7.60 -6.28104th 115.00 117.25 2.25 1.95655th 119.00 134.90 15.90 13.36136th 135.00 124.65 -10.35 -7.6667
Total 8.2337Average 1.3723
Weeks RA RM RA-RA/ RM-RM/RA-RA/*RM-RM/ (RA-RA/)2 (RM-RM/)2
1st 2.7434 4.6646 1.3711 2.4055 3.2982 1.8799 5.7864
2nd 4.1202 0.9575 2.7479 -1.3016 -3.5767 7.5510 1.6942
3rd -6.2810 -5.2656 -7.6533 -7.5247 57.5887 58.5727 56.6211
4th 1.9565 6.0321 0.5842 3.7730 2.2042 0.3413 14.2355
5th 13.3613 4.5555 11.9890 2.2964 27.5316 143.7365 5.2735
6th -7.6667 2.6105 -9.0390 0.3514 -3.1763 81.7032 0.1235Total 8.2337 13.5546 83.8697 293.7848 83.7342
1 RA/ 1.37232 RM/ 2.25913 COV(RA,RM) 16.77394 Variance of Scrips 58.75705 Variance of Market 16.74686 Beta 1.00167 Alpha -0.89058 SD of Scrips 7.66539 SD of Market 4.0923
10 Correlation 0.5347
2. Andhra Bank
Calculation of Total and Average Returns
PG Department of Management Studies 47Atria Institute of Technology
Weeks Open Close Price change Valid Returns1st 103.00 104.35 1.35 1.31072nd 106.50 110.40 3.90 3.66203rd 111.80 101.40 -10.40 -9.30234th 104.95 105.50 0.55 0.52415th 106.00 124.65 18.65 17.59436th 122.00 112.60 -9.40 -7.7049
Total 6.0839Average 1.0140
Weeks RA RM RA-RA/ RM-RM/RA-RA/*RM-RM/ (RA-RA/)2 (RM-RM/)2
1st 1.3107 4.6646 0.2967 2.4055 0.7138 0.0880 5.7864
2nd 3.6620 0.9575 2.6480 -1.3016 -3.4467 7.0120 1.6942
3rd -9.3023 -5.2656 -10.3163 -7.5247 77.6269 106.4257 56.6211
4th 0.5241 6.0321 -0.4899 3.7730 -1.8483 0.2399 14.2355
5th 17.5943 4.5555 16.5803 2.2964 38.0750 274.9069 5.2735
6th -7.7049 2.6105 -8.7189 0.3514 -3.0638 76.0189 0.1235Total 6.0839 13.5546 108.0569 464.6916 83.7342
1 RA/ 1.01402 RM/ 2.25913 COV(RA,RM) 21.61144 Variance of Scrips 92.93835 Variance of Market 16.74686 Beta 1.29057 Alpha -1.90138 SD of Scrips 9.64059 SD of Market 4.0923
10 Correlation 0.5478
3. Bank of Baroda
PG Department of Management Studies 48Atria Institute of Technology
Calculation of Total and Average Returns
Weeks Open Close Price change Valid Returns1st 382.10 391.40 9.30 2.43392nd 392.25 431.50 39.25 10.00643rd 426.00 403.90 -22.10 -5.18784th 406.00 456.70 50.70 12.48775th 454.05 481.60 27.55 6.06766th 472.00 444.15 -27.85 -5.9004
Total 19.9074Average 3.3179
Weeks RA RM RA-RA/ RM-RM/RA-RA/*RM-RM/ (RA-RA/)2 (RM-RM/)2
1st 2.4339 4.6646 -0.8840 2.4055 -2.1265 0.7815 5.7864
2nd 10.0064 0.9575 6.6885 -1.3016 -8.7058 44.7360 1.6942
3rd -5.1878 -5.2656 -8.5057 -7.5247 64.0028 72.3469 56.6211
4th 12.4877 6.0321 9.1698 3.7730 34.5977 84.0852 14.2355
5th 6.0676 4.5555 2.7497 2.2964 6.3144 7.5609 5.2735
6th -5.9004 2.6105 -9.2183 0.3514 -3.2393 84.9771 0.1235
Total 19.9074 13.5546 90.8434 294.4876 83.7342
1 RA/ 3.31792 RM/ 2.25913 COV(RA,RM) 18.16874 Variance of Scrips 58.89755 Variance of Market 16.74686 Beta 1.08497 Alpha 0.86708 SD of Scrips 7.67459 SD of Market 4.0923
10 Correlation 0.5785
4. Bank of India
PG Department of Management Studies 49Atria Institute of Technology
Calculation of Total and Average Returns
Weeks Open Close Price change Valid Returns1st 353.00 357.45 4.45 1.26062nd 355.00 370.60 15.60 4.39443rd 369.00 351.25 -17.75 -4.81034th 355.00 365.25 10.25 2.88735th 366.00 380.20 14.20 3.87986th 382.10 412.75 30.65 8.0215
Total 15.6333Average 2.6056
Weeks RA RM RA-RA/ RM-RM/RA-RA/*RM-RM/ (RA-RA/)2 (RM-RM/)2
1st 1.2606 4.6646 -1.3450 2.4055 -3.2353 1.8089 5.7864
2nd 4.3944 0.9575 1.7889 -1.3016 -2.3284 3.1999 1.6942
3rd -4.8103 -5.2656 -7.4159 -7.5247 55.8020 54.9948 56.6211
4th 2.8873 6.0321 0.2818 3.7730 1.0630 0.0794 14.2355
5th 3.8798 4.5555 1.2743 2.2964 2.9262 1.6237 5.2735
6th 8.0215 2.6105 5.4160 0.3514 1.9032 29.3325 0.1235
Total 15.6333 13.5546 56.1308 91.0393 83.7342
1 RA/ 2.60562 RM/ 2.25913 COV(RA,RM) 11.22624 Variance of Scrips 18.20795 Variance of Market 16.74686 Beta 0.67037 Alpha 1.09128 SD of Scrips 4.26719 SD of Market 4.0923
10 Correlation 0.6429
5. Canara Bank
PG Department of Management Studies 50Atria Institute of Technology
Calculation of Total and Average Returns
Weeks Open Close Price change Valid Returns1st 275.10 302.05 26.95 9.79642nd 308.00 313.85 5.85 1.89943rd 309.55 297.25 -12.30 -3.97354th 304.80 311.20 6.40 2.09975th 315.00 399.60 84.60 26.85716th 380.00 371.35 -8.65 -2.2763
Total 34.4028Average 5.7338
Weeks RA RM RA-RA/ RM-RM/RA-RA/*RM-RM/ (RA-RA/)2 (RM-RM/)2
1st 9.7964 4.6646 4.0626 2.4055 9.7726 16.5047 5.7864
2nd 1.8994 0.9575 -3.8344 -1.3016 4.9909 14.7026 1.6942
3rd -3.9735 -5.2656 -9.7073 -7.5247 73.0445 94.2317 56.6211
4th 2.0997 6.0321 -3.6341 3.773 -13.7115 13.2067 14.2355
5th 26.8571 4.5555 21.1233 2.2964 48.5075 446.1938 5.2735
6th -2.2763 2.6105 -8.0101 0.3514 -2.8147 64.1617 0.1235
Total 34.4028 13.5546 119.7893 649.0012 83.7342
1 RA/ 5.73382 RM/ 2.25913 COV(RA,RM) 23.95794 Variance of Scrips 129.80025 Variance of Market 16.74686 Beta 1.43067 Alpha 2.50208 SD of Scrips 11.3939 SD of Market 4.0923
10 Correlation 0.5139
6. Indian Overseas Bank
PG Department of Management Studies 51Atria Institute of Technology
Calculation of Total and Average Returns
Weeks Open Close Price change Valid Returns1st 166.00 174.85 8.85 5.33132nd 172.65 186.25 13.60 7.87723rd 185.00 165.20 -19.80 -10.70274th 178.90 177.30 -1.60 -0.89445th 180.70 201.85 21.15 11.70456th 202.00 186.20 -15.80 -7.8218
Total 5.4941Average 0.9157
Weeks RA RM RA-RA/ RM-RM/RA-RA/*RM-RM/ (RA-RA/)2 (RM-RM/)2
1st 5.3313 4.6646 4.4156 2.4055 10.6218 19.4977 5.7864
2nd 7.8772 0.9575 6.9615 -1.3016 -9.0611 48.4627 1.6942
3rd -10.7027 -5.2656 -11.6184 -7.5247 87.4248 134.9868 56.6211
4th -0.8944 6.0321 -1.8101 3.7730 -6.8294 3.2764 14.2355
5th 11.7045 4.5555 10.7888 2.2964 24.7754 116.3986 5.2735
6th -7.8218 2.6105 -8.7375 0.3514 -3.0704 76.3436 0.1235
Total 5.4941 13.5546 103.8611 398.9658 83.7342
1 RA/ 0.91572 RM/ 2.25913 COV(RA,RM) 20.77224 Variance of Scrips 79.79325 Variance of Market 16.74686 Beta 1.24047 Alpha -1.88648 SD of Scrips 8.93279 SD of Market 4.0923
10 Correlation 0.5682
7. Punjab National Bank
PG Department of Management Studies 52Atria Institute of Technology
Calculation of Total and Average Returns
Weeks Open Close Price change Valid Returns1st 606.50 631.30 24.80 4.08902nd 635.00 681.05 46.05 7.25203rd 678.00 621.20 -56.80 -8.37764th 630.00 671.25 41.25 6.54765th 680.00 699.10 19.10 2.80886th 669.10 653.85 -15.25 -2.2792
Total 10.0406Average 1.6734
Weeks RA RM RA-RA/ RM-RM/RA-RA/*RM-RM/ (RA-RA/)2 (RM-RM/)2
1st 4.0890 4.6646 2.4156 2.4055 5.8106 5.8350 5.7864
2nd 7.2520 0.9575 5.5786 -1.3016 -7.2611 31.1204 1.6942
3rd -8.3776 -5.2656 -10.0510 -7.5247 75.6310 101.0233 56.6211
4th 6.5476 6.0321 4.8742 3.7730 18.3902 23.7575 14.2355
5th 2.8088 4.5555 1.1354 2.2964 2.6073 1.2891 5.2735
6th -2.2792 2.6105 -3.9526 0.3514 -1.3890 15.6233 0.1235
Total 10.0406 13.5546 93.7891 178.6485 83.7342
1 RA/ 1.67342 RM/ 2.25913 COV(RA,RM) 18.75784 Variance of Scrips 35.72975 Variance of Market 16.74686 Beta 1.12017 Alpha -0.85698 SD of Scrips 5.97749 SD of Market 4.0923
10 Correlation 0.7668
8. State Bank of India
PG Department of Management Studies 53Atria Institute of Technology
Calculation of Total and Average Returns
Weeks Open Close Price change Valid Returns1st 2330.00 2436.60 106.60 4.57512nd 2445.00 2410.55 -34.45 -1.40903rd 2415.00 2265.20 -149.80 -6.20294th 2295.00 2384.45 89.45 3.89765th 2400.00 2390.75 -9.25 -0.38546th 2392.00 2437.25 45.25 1.8917
Total 2.3671Average 0.3945
Weeks RA RM RA-RA/ RM-RM/RA-RA/*RM-RM/ (RA-RA/)2 (RM-RM/)2
1st 4.5751 4.6646 4.180583 2.4055 10.0564 17.4773 5.7864
2nd -1.4090 0.9575 -1.803520 -1.3016 2.3475 3.2527 1.6942
3rd -6.2029 -5.2656 -6.59742 -7.5247 49.6436 43.5259 56.6211
4th 3.8976 6.0321 3.503083 3.7730 13.2171 12.2716 14.2355
5th -0.3854 4.5555 -0.77992 2.2964 -1.7910 0.6083 5.2735
6th 1.8917 2.6105 1.497183 0.3514 0.5261 2.2416 0.1235
Total 2.3671 13.5546 73.9997 79.3773 83.7342
1 RA/ 0.39452 RM/ 2.25913 COV(RA,RM) 14.79994 Variance of Scrips 15.87555 Variance of Market 16.74686 Beta 0.88377 Alpha -1.60208 SD of Scrips 3.98449 SD of Market 4.0922
10 Correlation 0.9077
(iv). Interpretation and Inference
Table showing Returns of Banks
PG Department of Management Studies 54Atria Institute of Technology
0
5
10
15
20
25
30
35
Values
Banks
Returns Chart
Valid Returns 8.23 6.08 19.91 15.63 34.4 5.49 10.04 2.37
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Canara Bank
Indian Overseas
Bank
Punjab National
Bank
State Bank of
India
PG Department of Management Studies 55Atria Institute of Technology
Sl.No Banks Valid Returns
1 Allahabad Bank 8.23
2 Andhra Bank 6.08
3 Bank of Baroda 19.91
4 Bank of India 15.63
5 Canara Bank 34.40
6 Indian Overseas Bank 5.49
7 Punjab National Bank 10.04
8 State Bank of India 2.37
Interpretation and Inference :
The above graph represents the Returns of Banks. The above table shows that, the
returns of Canara Bank are highest compared to any other banks. Therefore, Canara Bank
leads with highest returns of 34.40% and thus investor who are willing to get high return
can invest and gain in this securities. Followed by Bank of Baroda having next highest
returns of 19.91%. The State Bank of India has the least returns of 2.37%.
PG Department of Management Studies 56Atria Institute of Technology
Table showing Average weekly returns of Banks
Since the study is conducted for 6 weeks. The weekly average return of each bank is as
under
0
1
2
3
4
5
6
Values
Banks
Average weekly returns chart
Average weekly returns 1.37 1.01 3.32 2.61 5.73 0.92 1.67 0.39
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Canara Bank
Indian Overseas
Bank
Punjab National
Bank
State Bank of India
PG Department of Management Studies 57Atria Institute of Technology
Sl.No Banks Average weekly returns
1 Allahabad Bank 1.37
2 Andhra Bank 1.01
3 Bank of Baroda 3.32
4 Bank of India 2.61
5 Canara Bank 5.73
6 Indian Overseas Bank 0.92
7 Punjab National Bank 1.67
8 State Bank of India 0.39
Interpretation and Inference :
The above graph represents the average weekly Returns of Banks. The above
table shows that, the average weekly returns of Canara Bank are highest compared to any
other banks. Therefore, Canara Bank leads with highest average weekly returns of 5.73%
and thus investor who are willing to get high average weekly return can invest and gain in
these securities. Followed by Bank of Baroda having next highest average weekly returns
of 3.32%. The State Bank of India has the least average weekly returns of 0.39%.
PG Department of Management Studies 58Atria Institute of Technology
Table showing Standard Deviation of banks
0
2
4
6
8
10
12
Values
Banks
Standard Deviation chart
Standard Deviation 7.67 9.64 7.67 4.27 11.39 8.39 5.98 3.98
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Canara Bank
Indian Overseas
Bank
Punjab National
Bank
State Bank of
India
PG Department of Management Studies 59Atria Institute of Technology
Sl.No Banks Standard Deviation
1 Allahabad Bank 7.67
2 Andhra Bank 9.64
3 Bank of Baroda 7.67
4 Bank of India 4.27
5 Canara Bank 11.39
6 Indian Overseas Bank 8.39
7 Punjab National Bank 5.98
8 State Bank of India 3.98
Interpretation and Inference :
The most commonly used measures of risk in finance are variance or its square
root i.e. the Standard Deviation. Positive value of Standard Deviation is considered
unfavorable and negative values as favorable.
The above graph shows that, Canara Bank stocks have highest volatility though
the Canara Bank has the highest returns but when it comes to certainty investors are not
guaranteed about the returns, they may get even less than that also. From the Standard
Deviation one may infer that Canara Bank stocks have standard deviation of 11.39% and
followed by Andhra Bank with 9.64%. The State Bank of India has the least i.e. 3.98%.
PG Department of Management Studies 60Atria Institute of Technology
Table showing Beta of Banks
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
Values
Banks
Beta chart
Beta 1 1.29 1.08 0.67 1.43 1.24 1.12 0.88
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Canara Bank
Indian Overseas
Bank
Punjab National
Bank
State Bank of
India
PG Department of Management Studies 61Atria Institute of Technology
Sl.No Banks Beta
1 Allahabad Bank 1.00
2 Andhra Bank 1.29
3 Bank of Baroda 1.08
4 Bank of India 0.67
5 Canara Bank 1.43
6 Indian Overseas Bank 1.24
7 Punjab National Bank 1.12
8 State Bank of India 0.88
Beta values No. of Banks
0.00 – 0.50 0
0.50 – 1.00 2
1.00 – 1.50 6
1.50 – 2.00 0
Total 8
Interpretation and Inference :
Compared with BSE BankEx, Canara Bank with Beta of 1.43% is leading and
Bank of India with Beta 0.67% is least among the list.
Bank of India and State Bank of India having the Beta in the range of 0.50 to
below 1.00, when the market moves by 10%, the stocks of these companies will move up
by 5 to 10 % and if the market declines by 10%, the stocks price will decline an average
of 5 to 10%. Hence, these stocks are lesser sensitive to market risk, at the same time
investor will also stand to gain less than the market average in rising market.
Remaining banks are having Beta in the range of 1.00 to below 1.50, when the
market moves up by 10%, the stocks of these companies will move up by 10 to 15% and
if the market declines by 10%, the stock price will decline an average by 10 to 15%.
Though, the stocks of these banks are more sensitive, during bullish trend the holders will
get more than the market average. It is not sensible to invest when the market is bearish.
Hence, it is desirable to choose stocks with betas varying between 0.50 to 1.50.
PG Department of Management Studies 62Atria Institute of Technology
Table showing Alpha of Banks
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
Values
Banks
Alpha chart
Alpha -0.89 -1.9 0.87 1.09 2.5 -1.89 -0.86 -1.6
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Canara Bank
Indian Overseas
Bank
Punjab National
Bank
State Bank of
India
PG Department of Management Studies 63Atria Institute of Technology
Sl.No Banks Alpha
1 Allahabad Bank -0.89
2 Andhra Bank -1.90
3 Bank of Baroda 0.87
4 Bank of India 1.09
5 Canara Bank 2.50
6 Indian Overseas Bank -1.89
7 Punjab National Bank -0.86
8 State Bank of India -1.60
Interpretation and Inference :
The above graph represents the value of Alpha which is commonly known as
Unique Risk. This unique risk is mainly for a particular organization and does not affect
the whole industry. It is calculated and exhibited in the form of graph for banks. Lesser
the value of Alpha lesser is the risk.
From the above table, one can infer that Andhra Bank is having Alpha of -1.90
followed by Indian Overseas Bank with -1.89 which are lesser sensitive and thus have
less risk. In this respect, Canara Bank is having an Alpha of 2.50 i.e. its stocks being
highly sensitive and riskier.
PG Department of Management Studies 64Atria Institute of Technology
Table showing Variance of Banks
0
20
40
60
80
100
120
140
Values
Banks
Variance charts
Variance 58.76 92.94 58.9 18.2 129.8 79.79 35.73 15.88
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Canara Bank
Indian Overseas
Bank
Punjab National
Bank
State Bank of
India
PG Department of Management Studies 65Atria Institute of Technology
Sl.No Banks Variance
1 Allahabad Bank 58.76
2 Andhra Bank 92.94
3 Bank of Baroda 58.90
4 Bank of India 18.20
5 Canara Bank 129.80
6 Indian Overseas Bank 79.79
7 Punjab National Bank 35.73
8 State Bank of India 15.88
Interpretation and Inference :
The most commonly used measures of risk in finance are variance. Positive value
of variance is considered unfavorable and Negative values of variance are considered
favorable. Therefore from the above values and chart it is evident that State Bank of India
has least risk of 15.88% followed by Bank of India with 18.20%.
The above graph shows that, Canara Bank has highest variance of 129.80% and
followed by Andhra Bank with 92.94%. From the Variance one may infer that Canara
Bank and Andhra Bank securities have more risk of volatility.
PG Department of Management Studies 66Atria Institute of Technology
Table showing Correlation of Banks
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Values
Banks
Correlation chart
Correlation 0.53 0.55 0.58 0.64 0.51 0.57 0.77 0.91
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Canara Bank
Indian Overseas
Bank
Punjab National
Bank
State Bank of
India
PG Department of Management Studies 67Atria Institute of Technology
Sl.No Banks Correlation
1 Allahabad Bank 0.53
2 Andhra Bank 0.55
3 Bank of Baroda 0.58
4 Bank of India 0.64
5 Canara Bank 0.51
6 Indian Overseas Bank 0.57
7 Punjab National Bank 0.77
8 State Bank of India 0.91
Interpretation and Inference :
Correlation co-efficient is simply covariance divided by the product of Standard
Deviation. The Correlation co-efficient can vary between -1 to +1.
As the correlation values are positive, there is a perfect correlation or co-
movement in the same direction. Hence, there is a positive correlation a small increase in
BankEx will lead to change in Share prices and vice versa.
By the above graph we can infer that State Bank of India, Punjab National Bank
and Bank of India stocks are closely correlated with correlation of 0.91, 0.77 and 0.64
respectively, Whereas Canara Bank and Allahabad Bank stocks are lesser correlated with
correlation co-efficient of 0.53 and 0.51 respectively.
PG Department of Management Studies 68Atria Institute of Technology
(V) FINDINGS AND RECOMMENDATIONS
1. It is clearly evident that Canara Bank has the highest returns of 34.40% followed
by Bank of Baroda with 19.91%. Whereas, State Bank of India has the least
returns of 2.37%. It has been calculated by considering weekly values of stocks
for 6 weeks.
2. It is clearly evident that Canara Bank has the highest average weekly returns of
5.73% followed by Bank of Baroda with 3.32%. Whereas, State Bank of India has
the least average weekly returns of 0.39%. It has been calculated by dividing the
total returns by 6 weeks as the study is conducted for 6 weeks.
3. Positive values of Standard deviation are considered unfavorable and Negative
values as favorable. Therefore, as per the study Canara Bank is having standard
deviation of 11.39% followed by Andhra Bank with 9.64%. Whereas, State Bank
of India has the least standard deviation of 3.98%. Thus, it is less volatile.
4. Bank of India and State Bank of India is having Beta ranging from 0.50 to 1.00
therefore, they are lesser sensitive. Whereas, remaining 6 Banks have Beta
ranging from 1.00 to 1.50, hence, they are much volatile at the same time holders
will get more than the market average.
5. Andhra Bank and Indian Overseas Bank are having less risk i.e. Alpha value of
-1.90 and -1.89 respectively. Whereas, Canara Bank is having an Alpha of 2.50,
which clearly states that these stocks are highly sensitive and riskier.
6. Positive values of Variance are considered unfavorable and Negative values as
favorable. Therefore, it is evident that State Bank of India and Bank of India are
having least risk i.e. 15.88% and 18.20% respectively. Whereas, Canara Bank and
Andhra Bank are having highest risk of 129.80% and 92.94% respectively.
7. As far as our study to find out the relationship between BankEx returns and Bank
returns is considered there is a positive correlation between them, as it is evident
PG Department of Management Studies 69Atria Institute of Technology
through the values or correlation calculated. State Bank of India, Punjab National
Bank and Bank of India are having correlation co-efficient of 0.91, 0.77 and 0.64
respectively. Whereas, Allahabad Bank and Canara Bank are having correlation
co-efficient of 0.53 and 0.51 respectively.
(VI) CONCLUSION
As far as our study is concerned Canara Bank is giving highest returns with
moderate risk i.e. 34.40% of returns, for the risk of 11.39%. Thus, as the returns are
double an investor can think of investment in these shares. It is suitable to risk taking
investors.
Even Bank of Baroda is giving moderate returns for moderate risk i.e. 19.91% of
returns, for the risk of 7.68%. Thus, as the returns are more than one and half percent
investment in these shares are also recommended. It is suitable for risk averse investors.
Even the Bank of India is giving high returns with least risk i.e. 15.63% of
returns, for the risk of 4.27%. Thus as the returns are more as compared to risk
investment in these shares are also recommended. It is suitable for risk averse investors.
PG Department of Management Studies 70Atria Institute of Technology
BIBLIOGRAPHY
WEBSITES
www.Kotaksecurities.com
www.Bseindia.com
www.Rediffmail.com
www.Moneycontrol.com
www.Google.com
www.Allahabadbank.com
www.Andhrabank.com
www.Bankofbaroda.com
www.Bankofindia.com
www.Canarabank.com
www.Indianoverseasbank.com
www.Punjabnationalbank.com
www.Statebankofindia.com
TEXT BOOKS
Sl. no Title Author Publication and Edition
1 Investment Analysis and
Portfolio Management
Prasanna Chandra Tata McGraw-Hill
Publishing co. ltd, Second
Edition
2 Financial Management M.Y. Khan and P.K. Jain Tata McGraw-Hill
Publishing co. ltd, Fifth
Edition
PG Department of Management Studies 71Atria Institute of Technology
PG Department of Management Studies 72Atria Institute of Technology