CHAPTER - I

INTRODUCTION
Contents: 1.1 1.2 1.3 1.4 1.5 Introduction Risk Perspective in Banking Industry Review of Literature Statement of the Problem Objective of the Study

1.6 Methodology

1.1 Introduction: India is a developing country. Now a days many people are interested to invest in financial markets especially on equities to get high returns, and to save tax in honest way. Equities are playing a major role in contribution of capital to the business from the beginning. Since the introduction of shares concept, large numbers of investors are showing interest to invest in stock market. In an industry plagued with skepticism and a stock market increasingly difficult to predict and contend with, if one looks hard enough there may still be a genuine aid for the Day Trader and Short Term Investor. The price of a security represents a consensus. It is the price at which one person agrees to buy and another agrees to sell. The price at which an investor is willing to buy or sell depends primarily on his expectations. If he expects the security's price to rise, he will buy it; if the investor expects the price to fall, he will sell it. These simple statements are the cause of a major challenge in forecasting security prices, because they refer to human expectations. As we all know firsthand, humans expectations are neither easily quantifiable nor predictable. If prices are based on investor expectations, then knowing what a security should sell for; becomes less important than knowing what other investors expect it to sell for. That's not to say that knowing what a security should sell for isn't important--it is. But there is usually a fairly strong consensus of a stock's future earnings that the average investor cannot disprove. Angel Bookings tryst with excellence in customer relations began more than 20 years ago. Angel Group has emerged as one of the top 10 retail broking houses in India and incorporated in 1987. Today, Angel has emerged as a premium Indian stock-broking and wealth management house, with an absolute focus on retail business and a commitment to provide "Real Value for Money" to all its clients. I have been assigned to do the project on Investment AnalysisAn Investors Perspective with help of Mr. Srinivas Gattupalli, an MBA Graduate and Financial Research expert and currently working as stock broker in Angel Broking Ltd.

1.2 Risk Perspective in Banking Industry Decisions like whether we should buy or sell when trading in the share market is a difficult task to do. It requires split-hair analysis of the market. Rising global competition, increasing deregulation, introduction of innovative products and delivery channels have pushed risk management to the forefront of todays financial landscape. Ability to gauge the risks and take appropriate position will be the key to success. It can be said that risk takers will survive, effective risk managers will prosper and risk averse are likely to perish. In the regulated banking environment, banks had to primarily deal with credit or default risk. As we move into a perfect market economy, we have to deal with a whole range of market related risks like exchange risks, interest rate risk, etc. Operational risk, which had always existed in the system, would become more pronounced in the coming days as we have technology as a new factor in todays banking. Traditional risk

management techniques become obsolete with the growth of derivatives and off-balance sheet operations, coupled with diversifications. The expansion in E-banking will lead to continuous vigilance and revisions of regulations.

1.3 Review of Literature One of the major areas of the economy that has received renewed focus in recent times has been the financial sector. Within the broad ambit of the financial sector, the banking sector has been the cynosure of academia and policymakers alike. Therefore, the banking sector in most emerging economies, including India, is passing through challenging times. Process of liberalization of the economy initiated in India since 1991-92, aimed at raising the allocative efficiency of available savings, increasing the return on investments and promoting, accelerated growth and development of the real sector. Towards this end, wide-ranging reforms were undertaken across the entire gamut of the financial system in order to promote a diversified, efficient and competitive financial system. The thrust of the process has been to cut costs and raise the productive efficiency of the banking sector as a whole. Source: Risk and Productivity Change of Public Sector Banks, Author(s): Abhiman Das Economic and Political Weekly, Vol. 37, No. 5, Money, Banking and Finance

1.4 Statement of the Problem The Banking Sector, one of the core sectors, has undergone metamorphosis in the light of liberalization and globalization. The sector seems to be optimistic of posting strong growth in the couple of years in the view of a reasonable surge in demand. The rise of retail lending in emerging economies like India has been of recent origin. Asia Pacifics vast population, combined with high savings rates, explosive economic growth, and underdeveloped retail banking services, provide the most significant growth opportunities for banks. Banks will have to serve the retail banking segment effectively in order to utilize the growth opportunity. A detailed analysis of Banking Sector has been covered in respect of past growth and performance. Under this project to better understand the Industry I have used Fundamental tools to make it more authentic and meaningful. 1.5 Objective of the Study The objective of this project is to deeply analyze our Banking Sector for investment purpose by monitoring the growth rate and performance on the basis of historical data. The main objectives of the Project study are: To study the overall growth of Indian Economy which is growing at a fast pace. Detailed analysis of Banking Sector which is gearing towards international standards Analyze the impact of qualitative factors on industrys and companys prospects Comparative analysis of two main banks SBI, HDFC in the industry through fundamental analysis. Application various Technical tools to analyze Share Price movements, Simple Moving Average, Moving Average Crossover and M.A.C.D of selected companies

1.6 Methodology The value of common stock is determined in large measure by the performance of the firm that issued the stock. If the company is healthy and can demonstrate strength and growth, the value of the stock will increase. When values increase then prices follow and returns on an investment will increase. However, just to keep the savvy investor on their toes, the mix is complicated by the risk factors involved. Fundamental analysis examines all the dimensions of risk exposure and the probabilities of return, and merges them with broader economic analysis and greater industry analysis to formulate the valuation of a stock. 4

Fundamental Analysis: Fundamental analysis is a method of forecasting the future price movements of a financial instrument based on economic, political, environmental and other relevant factors and statistics that will affect the basic supply and demand of whatever underlies the financial instrument. It is the study of economic, industry and company conditions in an effort to determine the value of a companys stock. Fundamental analysis typically focuses on key statistics in companys financial statements to determine if the stock price is correctly valued. The term simply refers to the analysis of the economic well-being of a financial entity as opposed to only its price movements. The fundamental analysis is to appraise the intrinsic value of a security. It insists that no one should purchase or sell a share on the basis of tips and rumors. The fundamental approach calls upon the investors to make his buy or sell decision on the basis of a detailed analysis of the information about the company, about the industry, and the economy. It is also known as top-down approach. This approach attempts to study the economic scenario, industry position and the company expectations and is also known as Economic-Industry-Company approach (EIC approach). Thus the EIC approach involves three steps: 1. 2. 3. Economic analysis Industry analysis Company analysis

Technical Analysis: Technical analysis employs models and trading rules based on price and volume transformations, such as the relative strength index, moving averages, regressions, inter-market and intra-market price correlations, business cycles, stock market cycles or, classically, through recognition of chart patterns. Technical analysis stands in contrast to the fundamental analysis approach to security and stock analysis. Technical analysis analyzes price, volume and other market information, whereas fundamental analysis looks at the facts of the company, market, currency or commodity. Most large brokerage, trading group, or financial institutions will typically have both a technical analysis and fundamental analysis team. Technicians employ many techniques, one of which is the use of charts. Using charts, technical analysts seek to identify price patterns and market trends in financial markets and attempt to exploit those patterns. Technicians use various methods and tools, such as the head and shoulders or double top/bottom reversal patterns, study technical indicators, moving averages, and look for forms such as lines of support, resistance, channels, and more obscure formations such as flags, pennants, balance days and cup and handle patterns.

CHAPTER - II

AN OVERVIEW OF BANKING INDUSTRY IN INDIA

Contents: 2.1 Introduction of Indian Banking Industry 2.2 Growth and Performance of Banking Industry in India 2.3 Opportunities and Challenges for Players

2.1 Introduction of Indian Banking Industry: The last decade has seen many positive developments in the Indian banking sector. The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related government and financial sector regulatory entities, have made several notable efforts to improve regulation in the sector. The sector now compares favorably with banking sectors in the region on metrics like growth, profitability and non-performing assets (NPAs). A few banks have established an outstanding track record of innovation, growth and value creation. This is reflected in their market valuation. However, improved regulations, innovation, growth and value creation in the sector remain limited to a small part of it. The cost of banking intermediation in India is higher and bank penetration is far lower than in other markets. Indias banking industry must strengthen itself significantly if it has to support the modern and vibrant economy which India aspires to be. While the onus for this change lies mainly with bank managements, an enabling policy and regulatory framework will also be critical to their success. The failure to respond to changing market realities has stunted the development of the financial sector in many developing countries. A weak banking structure has been unable to fuel continued growth, which has harmed the long-term health of their economies. We emphasize the need to act both decisively and quickly to build an enabling, rather than a limiting, banking sector in India.

2.2 Growth and Performance of Banking Industry in India Indian banks have compared favorably on growth, asset quality and profitability with other regional banks over the last few years. The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index for the same period. Policy makers have made some notable changes in policy and regulation to help strengthen the sector. These changes include strengthening prudential norms, enhancing the payments system and integrating regulations between commercial and co-operative banks. However, the cost of intermediation remains high and bank penetration is limited to only a few customer segments and geographies. While bank lending has been a significant driver of GDP growth and employment, periodic instances of the failure of some weak banks have often threatened the stability of the system. Structural weaknesses such as a fragmented industry structure, restrictions on capital availability and deployment, lack of institutional support infrastructure, restrictive labor laws, weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs), unless addressed, could seriously weaken the health of the sector. Further, the inability of bank managements (with some notable exceptions) to improve capital 8

allocation, increase the productivity of their service platforms and improve the performance ethic in their organizations could seriously affect future performance.

2.3 Opportunities and Challenges for Players The bar for what it means to be a successful player in the sector has been raised. Four challenges must be addressed before success can be achieved. First, the market is seeing discontinuous growth driven by new products and services that include opportunities in credit cards, consumer finance and wealth management on the retail side, and in fee-based income and investment banking on the wholesale banking side. These require new skills in sales & marketing, credit and operations. Second, banks will no longer enjoy windfall treasury gains that the decade-long secular decline in interest rates provided. This will expose the weaker banks. Third, with increased interest in India, competition from foreign banks will only intensify. Fourth, given the demographic shifts resulting from changes in age profile and household income, consumers will increasingly demand enhanced institutional capabilities and service levels from banks.

CHAPTER - III INDUSTRY ANALYSIS AND INTERPRETATION

Contents: 3.1 Fundamental Analysis 3.2 Technical Analysis

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3.1 Fundamental Analysis: Fundamental analysis is a method of forecasting the future price movements of a financial instrument based on economic, political, environmental and other relevant factors and statistics that will affect the basic supply and demand of whatever underlies the financial instrument. It is the study of economic, industry and company conditions in an effort to determine the value of a companys stock. Fundamental analysis typically focuses on key statistics in companys financial statements to determine if the stock price is correctly valued. The fundamental analysis is to appraise the intrinsic value of a security. This approach attempts to study the economic scenario, industry position and the company expectations and is also known as Economic-Industry-Company approach (EIC approach). Thus the EIC approach involves three steps: a) Economic analysis b) Industry analysis c) Company analysis 3.1.1 ECONOMIC ANALYSIS: The level of economic activity has an impact on investment in many ways. If the economy grows rapidly, the industry can also be expected to show rapid growth and vice versa. When the level of economic activity is low, stock prices are low, and when the level of economic activity is high, stock prices are high reflecting the prosperous outlook for sales and profits of the firms. The analysis of macroeconomic environment is essential to understand the behavior of the stock prices. The commonly analyzed macro economic factors are as follows: Gross Domestic Product (GDP): India has recorded 7.8% GDP for this first quarter. From 2006 until 2010, India's average annual GDP Growth was 8.50 percent reaching an historical high of 9.7 percent in March of 2007 and a record low of 6.7 percent in March of 2009. The agriculture and allied sector is projected to grow by 3.3 percent, the industrial sector by 9.4 percent, and the services sector by 9.9 percent. The economy is expected to maintain the eight plus growth trajectory in fiscal 2011-12. The downside risks relate mainly to poor rainfall and to the performance of the global economy. The performance of India's economy is expected to be robust in 2011-12.The agriculture sector is estimated to have grown by 5.1 percent in 2010-11, the industrial sector by 9.5 percent and the services sector by 10.2 percent.

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Banking & Finance accounts for 6 percent of India's the GDP. This sector has shown remarkable growth over the past two decades. The banking and financial sector in India is growing at a steady rate of almost 10 percent annually. However this is one sector which still has a very long way to go. As per the latest statistics only 59 percent of adults hold bank accounts in India. Also just a meager 14 percent of the adult population has availed of bank loans.

15%

44%

Agriculture

42%

Industry Service

Figure: 3.1.1 Each Sector Contribution to GDP

Figure: 3.1.2 India GDP Annual Growth Rate

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Inflation: The inflation rate in India was last reported at 8.72 percent in May of 2011.Growth and inflation are expected to remain high in 2011-12. Both, however, are likely to be a shade lower than their respective levels of 2010-11.We believe that inflation will remain high in 2011-12. We project a 7.2 per cent increase in the Wholesale Price Index (WPI) and an equally high Consumer Price Index for Industrial Workers (CPI-IW). Both, however, would be a shade lower than their respective levels in 2010-11. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy.

Figure: 3.1.3 Indian Inflation Rate

Interest Rates: Unlike in the past, RBI's tight-money stance has been transmitted through the banking system this time. Banks have raised interest rates. However, these higher interest rates are unlikely to dampen growth in consumption or investment demand. Consumption expenditure is not leveraged enough and investment projects have progressed far into implementation for higher interest rates to have any adverse impact. The current increased Repo Rate and Reverse Rate by RBI are 7.50% and 6.50 respectively. Inflation is influenced much more by global commodity price trends and by higher employment caused by new capacities than by the levels of interest hikes announced by the Reserve Bank of India. Its corresponding new employment and higher wages is expected to drive capital formation

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and consumption growth in 2011-12. Private final consumption expenditure is projected to grow by a healthy 7.5 per cent and gross fixed capital formation by 14.6 per cent in 2011-12 in real terms. Economic survey 2011: The following are the key takeaways from the Economic Survey.

GDP growth expected at 7.2% in FY10: Economic Survey GDP growth in FY11 seen at 8.5% (+/-0.25%) On full recovery, GDP growth to exceed 9%, in FY12. Industry growth at 8.2% Major decline in consumption expenditure growth in FY10 High food prices a risk for general inflation Hike in fuel prices will impact inflation Panel recommends cap on Central Government debt at 45% of GDP by 2014-15 and for States it is under 25%

Panel recommends cap on consolidated government debt at 68% of GDP by 2014-15

3.1.2 INDUSTRY ANALYSIS: Industry analysis is a type of business research that focuses on the status of an industry or an industrial sector. Irrespective of specific economic situations, some industries might be expected to perform better, and share prices in these industries may not decline as much as in other industries. This identification of economic and industry specific factors influencing share prices will help investors to identify the shares that fit individual expectations a) SWOT analysis Banking strategies are presently undergoing various transformations, as the overall scenario has changed over the last couple of years. Till the recent past, most of the banks had adopted fierce cost cutting measures to sustain their competitiveness. This strategy however has become obsolete in the new light of immense growth opportunities for banking industry. Most bankers are now confident about their high performance in terms of organic growth and in realizing high returns. Nowadays, the growth strategies of banks revolve around customer satisfaction. Improved customer relationship management can only lead to fulfilment of long-term, as well as, short-term objectives of the bankers. This requires, efficient and accurate customer database management and development of well-trained sales force to develop and sustain long-term profitable customer relationship. 14

STRENGTH Indian banks have compared favorably on growth, asset quality and profitability with other regional banks over the last few years. The banking index has grown at a compounded annual rate of over 51 percent since April 2001 as compared to a 27 per cent growth in the market index for the same period.

Policy makers have made some notable changes in policy and regulation to help strengthen the sector. These changes include strengthening prudential norms, enhancing the payments system and integrating regulations between commercial and co-operative banks.

Bank lending has been a significant driver of GDP growth and employment.

Extensive reach: the vast networking & growing number of branches & ATMs. Indian banking system has reached even to the remote corners of the country.

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

India has 88 scheduled commercial banks (SCBs) - 27 public sector banks, 29 private banks and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs.

According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.

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WEAKNESS

PSBs need to fundamentally strengthen institutional skill levels especially in sales and marketing, service operations, risk management and the overall organizational performance ethic & strengthen human capital.

Old private sector banks also have the need to fundamentally strengthen skill levels. The cost of intermediation remains high and bank penetration is limited to only a few customer segments and geographies. Structural weaknesses such as a fragmented industry structure, restrictions on capital availability and deployment, lack of institutional support infrastructure, restrictive labor laws, weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs), unless industry utilities and service bureaus.

Refusal to dilute stake in PSU banks: The government has refused to dilute its stake in PSU banks below 51% thus choking the headroom available to these banks for raining equity capital.

OPPORTUNITY Opportunities in credit cards, consumer finance and wealth management on the retail side, and in fee-based income and investment banking on the wholesale banking side. These require new skills in sales & marketing, credit and operations. Given the demographic shifts resulting from changes in age profile and household income, consumers will increasingly demand enhanced institutional capabilities and service levels from banks. New private banks are continuing to innovate and develop differentiated business models to profitably serve segments like the rural/low income /HNI segments; actively adopting acquisitions as a means to grow and reaching the next level of performance in their service platforms. Foreign banks committed to making a play in India will need to adopt alternative approaches to win the race for the customer and build a value-creating customer franchise in advance of regulations potentially opening up post 2009. With the growth in the Indian economy expected to be strong for quite some time- especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong.

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The Reserve Bank of India (RBI) has approved a proposal from the government to amend the Banking Regulation Act to permit banks to trade in commodities and commodity derivatives. The government also liberalized the ECB norms to permit financial sector entities engaged in infrastructure funding to raise ECBs. This enabled banks and financial institutions, not only permitted to raise such funds but explore this route for raising cheaper funds in the overseas markets.

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

b) Industry Specific Index: Industry specific index also called as sectoral index are those indices, which represent a specific industry sector. All stocks in a sectoral index belong to that sector only. Hence an index like the BSE BANKEX is made of banking stocks. Sectoral Indices are very useful in tracking the movement and performance of particular sector. A few important features of the BSE Bank Index, which will be known as BANKEX, are given below:

BANKEX is based on the free float methodology of index construction The base date for BANKEX is 1st January 2002.The base value 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

BANKEX will track the performance of the leading banking sector stocks listed on the BSE 17

BANKEX comprises all the major Banking stocks in the BSE.

Figure: 3.1.4 List of Banking Stocks in BANKEX

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Comparing BANKEX with BSESN for last six months: The following figure indicates the performance of BANKEX, comprises of Banking stocks with overall BSESN, comprises of all sector stocks. This comparison is done for the last six months, starting from January to ending of June. This figure clearly reflects the growth of all banking stocks with respect to remaining sector stocks.

Figure: 3.1.5 Comparison of BANKEX with BSESN

3.1.3

COMPANY ANALYSIS: In the company analysis the investor assimilates the several bits of

information related to the company and evaluates the present and future values of the stock. The risk and return associated with the purchase of the stock is analyzed to take better investment decisions. The present and future values are affected by a number of factors. The company analysis shows the long term strength of the company that what is the financial Position of the company in the market where it stand among its competitors and who are the key drivers of the company, what is the future plans of the company, what are the policies of government towards the company and how the stake of the company divested among different groups of people.

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State Bank of India State Bank of India (SBI) is the largest Indian banking and financial services company (by turnover and total assets) with its headquarters in Mumbai, India. It is state-owned. Bank of Madras merged into the other two presidency banks, Bank of Calcutta and Bank of Bombay to form Imperial Bank of India, which in turn became State Bank of India. The government of India nationalized the Imperial Bank of India in 1955, with the Reserve Bank of India taking a 60% stake, and renamed it the State Bank of India. In 2008, the government took over the stake held by the Reserve Bank of India. SBI provides a range of banking products through its vast network of branches in India and overseas, including products aimed at non-resident Indians (NRIs). The State Bank Group, with over 16,000 branches, has the largest banking branch network in India. It also has around 130 branches overseas. With an asset base of $352 billion and $285 billion in deposits, it is one of the largest financial institutions in the world. It has a market share among Indian commercial banks of about 20% in deposits and loans. The State Bank of India is the 29th most reputed company in the world according to Forbes. Also SBI is the only bank featured in the coveted "top 10 brands of India" list in an annual survey conducted by Brand Finance and The Economic Times in 2010. HDFC BANK HDFC Bank Limited provides commercial banking products and services in India. It operates in three segments: Retail Banking, Wholesale Banking, and Treasury. The Retail Banking segment offers various deposit products, including savings accounts, current accounts, fixed deposits, recurring deposits, and demat accounts. It also provides auto, personal, commercial vehicle, home, gold, and educational loans; loans against gold, securities, property, and rental receivables; and health care finance, retail agri and tractor loans, working capital finance, construction equipment finance, and warehouse receipt loans, as well as credit cards, debit cards, depository, investment advisory, bill payments, and transactional services; and distributes life, health, and general insurance, and mutual fund products. In addition, this segment offers wealth advisory, tax planning, bonds, forex and trade services, and private banking services. The Wholesale Banking segment provides loans, non-fund facilities, and transaction services to large corporate, emerging corporate, small and medium enterprise, public sector units, government bodies, financial institutions, and medium scale enterprises. It offers commercial and transactional banking services, including working capital finance, trade services, 20

transactional services, cash management, and structured solutions to corporate customers, mutual funds, stock exchange members, and banks. The Treasury segment offers products in the areas of foreign exchange and derivatives, money market and debt securities, and equities. The company also offers NRI banking services. As of March 31, 2010, it operated a network of 1,725 branches in 779 cities, as well as 4,232 automated teller machines. The company was founded in 1994 and is based in Mumbai, India. Financial Analysis: The best source of financial information about a company is its own financial statements. This is a primary source of information for evaluating the investment prospects in the particular companys stock. Financial statement analysis is the study of a companys financial statement from various viewpoints. The statement gives the historical and current information about the companys operations. Historical financial statement helps to predict the future and the current information aids to analyze the present status of the company. The two main statements used in the analysis are Balance sheet and Profit and Loss Account. The balance sheet is one of the financial statements that companies prepare every year for their shareholders. It is like a financial snapshot, the company's financial situation at a moment in time. It is prepared at the year end, listing the company's current assets and liabilities. It helps to study the capital structure of the company. It is better for the investor to avoid a company with excessive debt component in its capital structure. From the balance sheet, liquidity position of the company can also be assessed with the information on current assets and current liabilities. Ratio analysis: Ratio is a relationship between two figures expressed mathematically. Financial ratios provide numerical relationship between two relevant financial data. Financial ratios are calculated from the balance sheet and profit and loss account. The relationship can be either expressed as a percent or as a quotient. Ratios summarize the data for easy understanding, comparison and interpretations. Ratios for investment purposes can be classified into profitability ratios, turnover ratios, and leverage ratios. Profitability ratios are the most popular ratios since investors prefer to measure the present profit performance and use this information to forecast the future strength of the company. The most often used profitability ratios are return on assets, price earnings multiplier, price to book value, price to cash flow, and price to sales, dividend yield, return on equity, present value of cash flows, and profit margins. 21

a) Return On Assets Ratio: Return on Assets gives an idea as to how efficient management is at using its assets to generate earnings. It is calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage.

The formula for return on assets = (Net Income/ Total Assets)*100.

Table: 3.1 Return on Assets of SBI and HDFC Year SBI HDFC 2006-07 0.8 1.51 2007-08 0.93 1.19 2008-09 0.94 1.22 2009-10 0.87 1.32 2010-11 0.6 1.41

1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2007 2008 2009 2010 2011 SBI HDFC

Figure: 3.1.6 Return on Assets of SBI and HDFC

Interpretation: The earnings of SBI registered considerable decrease from last two years, where as HDFC shows growth in earnings consistently from last four years.

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b) Debt to Equity Ratio: The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets.

Formula for calculating Debt-Equity ratio= Total Debt/ Total Equity.

Table: 3.2 Debt to Equity of SBI and HDFC Year SBI HDFC 2006-07 1518.35 1105.42 2007-08 1201.5 915.41 2008-09 1373.28 966.58 2009-10 1375.49 837.82 2010-11 1621.12 878.59

1800 1600 1400 1200 1000 800 600 400 200 0 2007 2008 2009 2010 2011 SBI HDFC

Figure: 3.1.7 Debt to Equity of SBI and HDFC

Interpretation: Increase in D/E ratio for SBI indicates increasing in leveraging position, where HDFC makes less leveraging and equity more in throughout the years.

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c) Return On Equity Ratio: The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

ROE is expressed as a percentage and calculated as: Return on Equity = Net Income/Shareholder's Equity

Table: 3.3 Return on Equity of SBI and HDFC Year SBI HDFC 2006-07 14.51 21.49 2007-08 13.72 13.83 2008-09 15.74 14.91 2009-10 13.90 13.70 2010-11 11.34 15.47

25 20 15 10 5 0 2007 2008 2009 2010 2011

SBI HDFC

Figure: 3.1.8 Return on Equity of SBI and HDFC

Interpretation: SBI profitability has been in decreasing position from last two years where as HDFC made fluctuations in profitability over the years.

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d) Profit: Profit is the financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity. Profit is the money a business makes after accounting for all the expenses. Profit can be calculated as: Profit= Total Income Total Expenses Table: 3.4 Profit of SBI and HDFC Year 2006-07 2007-08 2008-09 2009-10 2010-11 SBI 4,541.65 6,729.46 9,121.57 9,166.39 7,370.69 HDFC 2,837.21 3,522.15 4,818.98 6,403.34 8,456.54

10,000.00 9,000.00 8,000.00 7,000.00 6,000.00 5,000.00 4,000.00 3,000.00 2,000.00 1,000.00 0.00 2007 2008 2009 2010 2011 SBI HDFC

Figure: 3.1.9 Profit of SBI and HDFC Interpretation: SBI has registered a decrease in profit in 2011 due to increase of NPAs it was supposed to maintain extra provisioning compared to last year. HDFC bank showed a positive trend in net profits year by year. e) Earnings Per Share Ratio: This ratio determines what the company is earning for every share. For many investors, earnings are the most important tool. EPS is calculated by dividing the earnings (net profit) by the total number of equity shares. The computation of EPS is as follows: Earnings per share = Net profit/Number of shares outstanding 25

The EPS is a good measure of profitability and when compared with EPS of similar other companies, it gives a view of the comparative earnings or earnings power of a firm. EPS calculated for a number of years indicates whether or not earning power of the company has increased. Table: 3.5 Earnings per Share of SBI and HDFC Year SBI HDFC 2006-07 86.29 43.29 2007-08 106.56 44.87 2008-09 143.67 52.77 2009-10 144.37 64.42 2010-11 116.07 84.4

160 140 120 100 80 60 40 20 0 2007 2008 2009 2010 2011 SBI HDFC

Figure: 3.1.10 Earnings per Share of SBI and HDFC Interpretation: Due to decrease in profits SBI has registered a decrease in EPS for the year 2011, where as HDFC bank has registered steady growth in EPS year by year. f) Capital Adequacy Ratio: Capital adequacy ratio is the ratio which determines the capacity of the bank in terms of meeting the time liabilities and other risks such as credit risk, operational risk.In the most simple formulation, a bank's capital is the "cushion" for potential losses, which protects the bank's depositors or other lenders. Banking regulators in most countries define and monitor CAR to protect depositors, thereby maintaining confidence in the banking system. CAR is similar to leverage; in the most basic formulation, it is comparable to the inverse of debt-toequity leverage formulations (although CAR uses equity over assets instead of debt-to-equity; since assets are by definition equal to debt plus equity, a transformation is required). 26

Capital adequacy ratios ("CAR") are a measure of the amount of a bank's core capital expressed as a percentage of its assets weighted credit exposures. Capital adequacy ratio is defined as

Tier 1 Capital - a)Equity Capital, b) Disclosed Reserves Tier 2 Capital -a) Undisclosed Reserves, b) General Loss reserves, c) Subordinate Term Debts

Table: 3.6 Capital Adequacy Ratios of SBI and HDFC Year SBI HDFC 2006-07 12.34 13.08 2007-08 13.47 13.6 2008-09 14.25 15.69 2009-10 13.39 17.44 2010-11 11.98 16.22

18 16 14 12 10 8 6 4 2 0 2007 2008 2009 2010 2011 SBI HDFC

Figure: 3.1.11 Capital Adequacy of SBI and HDFC

Interpretation: As it seems decrease in CAR for SBI for last two years, this is due to increase in more number of NPAs insisted to keep more provisioning from profits obtained. So, SBI recorded a decrease in CAR level. Whereas HDFC also recorded a decrease in CAR level by the year 2011 due to increase of NPAs. This trend would not be longer as banks are implementing best practices in order to decrease their NPA levels.

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3.2 TECHNICAL ANALYSIS: Technical Analysis is the forecasting of future financial price movements based on an examination of past price movements. Like weather forecasting, technical analysis does not result in absolute predictions about the future. Instead, technical analysis can help investors anticipate what is "likely" to happen to prices over time. Technical analysis uses a wide variety of charts that show price over time. a) Simple Moving Average: The moving average can be obtained by first taking the average of the first subset. The fixed subset size is then shifted forward, creating a new subset of numbers, which is averaged. This process is repeated over the entire data series. The plot line connecting all the (fixed) averages is the moving average. A moving average is a set of numbers, each of which is the average of the corresponding subset of a larger set of data points. The Simple Moving Average is arguably the most popular technical analysis tool used by traders. The Simple Moving Average (SMA) is used mainly to identify trend direction, but is commonly used to generate buy and sell signals. Moving Average Acting as Support Buy Signal: When price is in an uptrend and subsequently, the moving average is in an uptrend, and the moving average has been tested by price and price has bounced off the moving average a few times (i.e. the moving average is serving as a support line), then buy on the next pullbacks back to the Simple Moving Average. Moving Average Acting as Resistance Sell Signal: At times when price is in a downtrend and the moving average is in a downtrend as well, and price tests the SMA above and is rejected a few consecutive times (i.e. the moving average is serving as a resistance line), then buy on the next rally up to the Simple Moving Average.

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a) State Bank of India: The following figure shows the closing share price trend with respect to fifty day Simple Moving Average.

Figure: 3.2.1 SBI share price movements with 50 day SMA The following table represents closing prices of SBI, taken in different intervals depending on fluctuations over that period and at the bottom of the table 52 week average range is shown.

Table: 3.2.1 SBI closing share prices with Simple Moving Average Date 07-Jan- 2011 26-Apr-2011 03-May-2011 30- Jun- 2011 Closing Share Price 2697.30 2934.30 2583.10 2405.95 Simple Moving Average 2963.54 2705.32 2717.24 2422.14

52WK Range: 2123.00 - 3515.00

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Interpretation: Simple Moving Average acts as in determine the support in uptrend and resistance in downtrend. Up to in the month of April we can observe Support and Resistance levels of SBI its resistance price is 2934.30 recorded at end of April where as Support level is in the middle of April and is approximately 2783.20.So comparing SMA with line chart SBI share buy position is maximum up to May and later it showed sell trend. b) HDFC Bank: The following figure shows the closing share price trend with respect to fifty days Simple Moving Average.

Figure: 3.2.2 HDFC share price movements with 50 day SMA The following table represents closing prices of HDFC, taken in different intervals depending on fluctuations over that period and at the bottom of the table 52 week average range is shown. Table: 3.2.2 HDFC closing share prices with Simple Moving Average Closing Share Simple Moving Price Average 5-Jan-2011 2306.39 2306.87 8-Feb-2011 2004.10 2196.92 30-Jun-2011 2502.60 2327.13 52WK Range: 1932.00 2572.00 Date

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Interpretation: The resistance level of HDFC is Rs 2400 recorded in April and support level is Rs 2285 recorded in starting of May. This share shown good trend for buying from March to May and later undergone some fluctuations and then recover its position to buy from middle of June. b) Relative Strength Index : The Relative Strength Index (RSI) is a technical indicator used in the technical analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period. The RSI is most typically used on a 14 day timeframe, measured on a scale from 0 to 100, with high and low levels marked at 70 and 30, respectively. Shorter or longer timeframes are used for alternately shorter or longer outlooks. More extreme high and low levels80 and 20, or 90 and 10occur less frequently but indicate stronger momentum. Calculation: A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. It is calculated using the following formula: RSI = 100 - 100/(1 + RS) Where RS = Average of x days' up closes / Average of x days' down closes.

a) State Bank of India The following figure represents the closing prices of SBI share movements taken for last six months, starting from January to June, the respective traded volumes of SBI shares also shown below the line chart. The Relative Strength of SBI shares are shown in bottom of the volume trades. This Relative Strength is based on 14 day level and also it consists of 60 and 30 as maximum and minimum levels of RSI. Depends upon the RSI levels one can estimate that the stock prices is overvalued or undervalued and also can estimates the Bullish and Bearish trends of the stock.

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Figure: 3.2.3 Relative Strength Index (RSI) of SBI Interpretation: SBI shows oversold position in may 26th and overbought position in march 28th.Shown bearish trend from march ending to April ending, bullish trend from may ending to middle of June. b) HDFC Bank The following figure represents the closing prices of HDFC share movements taken for last six months, starting from January to June, the respective traded volumes of HDFC shares also shown below the line chart. The Relative Strength of HDFC shares are shown in bottom of the volume trades. This Relative Strength is based on 14 day level and also it consists of 60 and 30 as maximum and minimum levels of RSI. Depends upon the RSI levels one can estimate that the stock prices is overvalued or undervalued and also can estimates the Bullish and Bearish trends of the stock.

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Figure: 3.2.4 Relative Strength Index (RSI) of HDFC Interpretation: Above RSI of HDFC stock movements shows oversold position in middle of January and overbought position in starting of April. No bearish and bullish trends.

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CHAPTER - IV SUMMARY OF FINDINGS AND CONCLUSION

Contents: 4.1 Findings 4.2 Conclusion

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4.1 FINDINGS: By analyzing the banking sector with the help of Fundamental and Technical analysis, it has been revealed that this sector has a lot of potential to grow. So recommending investing in banking sector with no doubt is going to be a good and smart option because this industry is booming like never before. The two giants of Indian Banking Sector viz. SBI and HDFC Banks have outperformed in the industry. SBI, the largest public sector bank in India seems to have reached its saturation point after a very good growth over the years. HDFC Bank has been performing consistently and stands next to SBI in terms of increase in its growth. The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index for the same period. Banking sector intermediation, as measured by total loans as a percentage of GDP, could grow marginally from its current levels of 30 per cent to 45 per cent or grow significantly to over 100 per cent of GDP. Banking becomes an even greater driver of GDP growth and employment and large sections of the population gain access to quality banking products. Indian banks have compared favorably on growth, asset quality and profitability with other regional banks over the last few years. Bank lending has been a significant driver of GDP growth and employment, periodic instances of the failure of some weak banks have often threatened the stability of the system. The interplay between policy and regulatory interventions and management strategies will determine the performance of Indian banking over the next few years. Foreign banks begin to be active in M&A, buying out some old private and newer private banks. Some M&A activity also begins to take place between private and public sector banks.

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 As a result, foreign and new private banks grow at rates of 50 per cent, while PSBs improve their growth rate to 15 per cent. The share of the private sector banks (including through mergers with PSBs) increases to 35 per cent and that of foreign banks increases to 20 per cent of total sector assets. The share of banking sector value add in GDP increases to over 7.7 per cent, from current levels of 2.5 % M&A activity is driven primarily by new private banks, which take over some old private banks and also merge among themselves. As a result, growth of these banks increases to 35 per cent. Foreign banks also grow faster at 30 per cent due to a relaxation of some regulations. The share of private sector banks increases to 30 per cent of total sector assets, from current levels of 18 per cent, while that of foreign banks increases to over 12 per cent of total assets. The share of banking sector value adds to GDP increases to over 4.7 per cent. Policy makers intervene to set restrictive conditions and management is unable to execute the Changes needed to enhance returns to shareholders and provide quality products and services to customers. As a result, growth and productivity levels are low and the banking sector is unable to support a fast-growing economy. Changes in regulations and bank capabilities reduce intermediation costs leading to increased growth, innovation and productivity.

4.2 CONCLUSION: Indian banks have compared favorably on growth, asset quality and profitability with other regional banks over the last few years. Policy makers have made some notable changes in policy and regulation to help strengthen the sector. These changes include strengthening prudential norms, enhancing the payments system and integrating regulations between commercial and co-operative banks. However, the cost of intermediation remains high and bank penetration is limited to only a few customer segments and geographies. While bank lending has been a significant driver of GDP growth and employment, periodic instances of the failure of some weak banks have often threatened the stability of the system. 36

Structural weaknesses such as a fragmented industry structure, restrictions on capital availability and deployment, lack of institutional support infrastructure, restrictive labour laws, weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs), unless addressed, could seriously weaken the health of the sector.

Further, the inability of bank managements (with some notable exceptions) to improve capital allocation, increase the productivity of their service platforms and improve the performance ethic in their organizations could seriously affect future performance.

PSBs need to fundamentally strengthen institutional skill levels especially in sales and marketing, service operations, risk management and the overall organizational performance ethic. The last, i.e., strengthening human capital will be the single biggest challenge.

Old private sector banks also have the need to fundamentally strengthen skill levels. However, even more imperative is their need to examine their participation in the Indian banking sector and their ability to remain independent in the light of the discontinuities in the sector.

New private banks could reach the next level of their growth in the Indian banking sector by continuing to innovate and develop differentiated business models to profitably serve segments like the rural/low income and affluent/ HNI segments; actively adopting acquisitions as a means to grow and reaching the next level of performance in their service platforms. Attracting, developing and retaining more leadership capacity would be key to achieving this and would pose the biggest challenge.

The extent to which Indian policy makers and bank managements develop and execute such a clear and complementary agenda to tackle emerging discontinuities will lay the foundations for a high-performing sector of Banking.

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BIBLIOGRAPHY

Web Links: www.angelbroking.com www.statebankofindia.com www.hdfcbank.com

www.bseindia.com www.yahoofinance.com www.moneycontrol.com www.rbi.org.in www.investopedia.com www.tradingeconomics.com Books: Investment Management: Security Analysis and Portfolio Management, by V.K Bhalla. Security Analysis and Portfolio Management, by Foresman, Scott.

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