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Analysis by CAMEL model and Hypothesis Testing. Submitted To: Submitted By:
2009-11
FundamentalAnalysisofBankingStocks
2011
Preface
Life makes demands from us. There is so much to include in and deal with at work or at home, with family, friends or self. Above all there is an inescapable truth that money is the means to many ends. A Timber Chalet in Aamby Valley City, good education and set of your four wheels to zip around, and early retirement. The ends might differ but the means to reach them is only money.
Investing in stock market includes inherent risks, but those can be managed with the help proper analysis. These analyses are supposed to be used mainly by the investors before investing in a certain stock to cover or reduce the risks in the stock market.
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Acknowledgement
Every successful endeavor has its share of problems and hurdles, but at the same times there are people who help to overcome these difficulties and thus we want to expirees our self heartfelt gratitude towards the people who have been of great help to us in achieving the purpose
Mostly importantly we would like to thank Prof. Dharmesh Shah for supporting in the preparation of project and providing the guidance during the training.
We are obliged to Dr. Hitesh Ruparel who has given us an opportunity to get practical knowledge in the field of finance and also for helping us to undergone this grand project. The learning during this project has been a great experience.
Finally, we would like to thank all those who directly and directly contributed to this project.
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Executive Summary
In India the bank are being segregated into different groups such as nationalized banks (Government owned), private banks and foreign banks. There are 27 Public Banks, 31 Private Banks, and 29 Foreign Banks. Each has their own dedicated target market. Few of them only work in rural sector while the other work in rural as well as urban. Many even are only catching in cities. Some are of Indian origin and some are foreign players. A CAMEL is basically a ratio-based model for evaluating the performance of banks. The evaluation factors are as follows; C -Capital adequacy A -Asset quality M -Management quality E -Earnings Quality L -Liquidity. Each of the five factors is scored from one to five, with one being the strongest rating. An overall composite CAMEL rating, also ranging from one to five, is then developed from this evaluation. As a whole, the CAMEL rating, which is determined after an on-site examination, provides a means to categorize banks based on their overall health, financial status, and management. As there are various emerging private and public sector banks in India it is useful to analyze their financial performance so as to rank them.
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Table of Content:
Name
4.
4.1 4.2
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Introduction to Banks
ICICI Bank HDFC Bank
21
21 22
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AXIS Bank Punjab National Bank Bank of India Bank of Baroda HSBC Bank CITI Bank ING Bank
23 24 25 27 28 30 31
5.
5.1 5.2 5.3 5.4 5.5
Fundamental Analysis
Introduction to Fundamental Analysis General Step to Fundamental Evaluation Economic Forecast Strength of Fundamental Analysis Weakness of Fundamental Analysis
33
33 33 33 38 40
6. 7.
7.1 7.2 7.3 7.4 7.5
43 52
51 57 63 69 75
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7.6 7.7
81 86
8.
8.1 8.2 8.3 8.4 8.5
Hypothesis Testing
Hypothesis Testing of Capital Adequacy Ratio Hypothesis Testing of Asset Quality Ratio Hypothesis Testing of Management Quality Hypothesis Testing of Earnings Quality Hypothesis Testing of Liquidity
88
88 89 90 91 92
94 95 96 97 98
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List of Tables:-
Table No. 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 7.11 7.12
Particulars Capital Risk Adequacy Ratio Score of Capital Risk Adequacy Ratio Advances to Asset Score of Advances to Asset G-SEC TO TOTAL INVESTMENT Score of G-Sec to Total Investment Net NPA to Total Assets Score of Net NPA to Total Assets Net NPAs to Total Advances Score of Net NPAs to Total Advances Total Investments to Total Assets Score of Total Investments to Total Assets Profit per Employee Score of Profit per Employee Business per Employee Score of Business per Employee
Page No. 51 52 53 53 55 56
57 58 59 60 61 62
63 64 65 66
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Return on Net Worth Score of Return on Net Worth Operating Profit by Average Working Funds Score of Operating Profit by Average Working Funds Return on Assets Score of Return on Assets Interest Income to Total Income Score of Interest Income to Total Income Liquid Assets to Total Deposits Score of Deposits Liquid Assets to Total
67 68 69
7.20
70
71 72 73 74
7.25 7.26
75 76
7.27 7.28
Liquid Assets to Demand Deposits Score of Liquid Assets to Demand Deposits Liquid Assets to Total Assets Score of Liquid Assets to Total Assets Year wise Analysis 2005-06 Year wise Analysis 2006-07
77 78
79 80 81 82
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Year wise Analysis 2007-08 Year wise Analysis 2008-09 Year wise Analysis 2009-10 Overall Analysis of 5 years Hypothesis Testing Adequacy Ratio of Capital
83 84 85 87 88
8.2
Hypothesis Testing of Asset Quality Ratio Hypothesis Testing of Quality Hypothesis Quality Testing of Management
89
8.3
90
8.4
Earnings
91
8.5 9.1
92 94
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List of Charts:-
Chart No. 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10
Particulars Capital Risk Adequacy Ratio Advances to Asset G-SEC TO TOTAL INVESTMENT Net NPA to Total Assets Net NPAs to Total Advances Total Investments to Total Assets Profit per Employee Business per Employee Return on Net Worth Operating Profit by Average Working Funds Return on Assets Interest Income to Total Income Liquid Assets to Total Deposits Liquid Assets to Demand Deposits Liquid Assets to Total Assets Year wise Analysis 2005-06
Page No. 52 54 56 58 60 62 64 66 68 70
72 74 76 78 80 81
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Year wise Analysis 2006-07 Year wise Analysis 2007-08 Year wise Analysis 2008-09 Year wise Analysis 2009-10 Overall Analysis of 5 years
82 83 84 85 87
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Objective:
To compare & evaluate the financial performances of the private, public and foreign sector banks using CAMEL RATING MODEL. To give the ranks among the banks on individual ratings.
Scope:Performance measure of banking stocks using CAMEL model. Evaluating using hypothesis testing.
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Data Collection:
Secondary Data: 2004-05 to 2009-2010 annual reports
Limitations:
Total project done is based on the secondary data; primary data is available at some extent. Time and resource constrains. The method discussed pertains only to banks.
Sampling Units: 9 Banks Time: 1/10/2010 to 28/02/2011 Sampling Variables: CAMEL & Formulas Sampling Method: convenience non probability method
HYPOTHESIS:
H0: Capital adequacy and liquidity are important variables among public, private, foreign banks H1: Capital adequacy and liquidity are not most important variables among public, private, foreign banks
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Chapter 3
Early phase from 1786 to 1969 of Indian Banks Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms. New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.
To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase III.
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Phase I
The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders. In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. During those days public has lesser confidence in the banks. As an aftermath deposit mobilization was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders.
Phase II
Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country.
Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July, 1969, major process of nationalization was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were
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Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country:
1949: Enactment of Banking Regulation Act. 1955: Nationalization of State Bank of India. 1959: Nationalization of SBI subsidiaries. 1961: Insurance cover extended to deposits. 1969: Nationalization of 14 major banks. 1971: Creation of credit guarantee corporation. 1975: Creation of regional rural banks. 1980: Nationalization of seven banks with deposits over 200 crore.
After the nationalization of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%. Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions.
Phase III
This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalization of banking practices. The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money. The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries
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suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure. Before the steps of nationalization of Indian banks, only State Act of 1955. Nationalization of Seven State Banks of Indias largest commercial bank and is ranked one of the top five banks worldwide. It serves 90 million customers through a network of 9000 branches and it offers-either directly or through subsidiaries. The second phase of nationalization of Indian banks took place in the year 1980. Seven more banks were nationalized with deposits over 200 crores. Till this year, approx 80% of the banking segment in India was under Government ownership.
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Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act. As on 30th June, 1999, there were 300 scheduled banks in India having a total network of 64,918 branches. The scheduled commercial banks in India comprise of State bank of India and its associates (8), nationalized banks (19), foreign banks (45), private sector banks (32), co-operative banks and regional rural banks. "Scheduled banks in India" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), but does not include a cooperative bank". "Non-scheduled bank in India" means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank".
State Bank of India Andhra Bank Allahabad Bank Bank of Baroda Bank of India Canara Bank
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Central Bank of India Corporation Bank Dena Bank Indian Overseas Bank Indian Bank Oriental Bank of Commerce
Punjab National Bank Punjab and Sind Bank Syndicate Bank Union Bank of India United Bank of India UCO Bank Vijaya Bank
ING Vysya Bank Ltd Axis Bank Ltd Indusind Bank Ltd ICICI Bank Ltd South Indian Bank HDFC Bank Ltd Centurion Bank Ltd Bank of Punjab Ltd IDBI Bank Ltd Jammu & Kashmir Bank Ltd.
American Express Bank Ltd. ANZ Gridlays Bank Plc. Bank of America NT & SA Bank of Tokyo Ltd. Banquc Nationale de Paris Barclays Bank Plc Citi Bank N.C. Deutsche Bank A.G. Page9
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Hongkong and Shanghai Banking Corporation Standard Chartered Bank. The Chase Manhattan Bank Ltd. Dresdner Bank AG.
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Self-employment Industries Small scale units Home finance Consumer finance Personal finance
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Some cooperative banks in India are more forward than many of the state and private sector banks.
According to NAFCUB the total deposits & lendings of Cooperative Banks in India is much more than Old Private Sector Banks & also the New Private Sector Banks.
This exponential growth of Co operative Banks in India is attributed mainly to their much better local reach, personal interaction with customers, their ability to catch the nerve of the local clientele.
NABARD
o National Bank for Agriculture and Rural Development (NABARD) is a development bank in the sector of Regional Rural Banks in India. It provides
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and regulates credit and gives service for the promotion and regulates credit and gives service for the promotion and development of rural sectors mainly agriculture, small-scale industries, cottage and village industries, handicrafts. It also finance rural crafts and other allied rural prosperity and its connected matters.
Syndicate Bank
o Syndicate Bank was firmly rooted in rural India as rural banking and has a clear vision of future India by understanding the grassroots realities. Its progress has been abreast of the phase of progressive banking in India especially in rural banks.
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subsidiaries. The policy conveys that foreign banks in India may not acquire India ones (except for weak banks identified by the RBI, on its terms) and their Indian subsidiaries will not be able to open branches freely. Currently there are 12 foreign banks in India. By the year 2009, the list of foreign banks in India is going to become more quantitative as numbers of foreign banks are still waiting with baggage to start business in India.
Bank of Issue
Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Originally, the assets of the Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Originally, the assets of the Issue Department were to consist of not less than two- fifths of gold coin, gold bullion or sterling securities provided the
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amount of gold was not less than Rs 40 crores in value. The remaining three- fifths of the asset might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India rupee securities, eligible bills of exchange and promissory notes payable in India. Due to the exigencies of the Second World War and the post-war period, these provisions were considerably modified. Since 1957, the Rese3rve Bank of India is required to maintain gold and foreign exchange reserves of Rs. 200 crores, of which at least Rs 115 croress should be in gold. The system as it exists today is known as the minimum reserve system.
Banker to Government
The second important function of the Reserve Bank of India is to act as Government banker, agent and adviser. The Reserve Bank is agent of Central Government and of all State Government in India excepting that of Jammu and Kashmir. The Reserve Bank has the obligation to transact Government business, via. To keep the cash balances as deposits free of interest, to receive and to make payments on behalf of the Government and to carry out their exchange remittances and other banking operations. The Reserve Bank of India helps the Government- both the Union and the States to float new loans and to manage publics debt. The Bank makes ways and means advances to the Governments for 90 days. It makes loans and advances to the States and local authorities. It acts as adviser to the Government on all monetary and banking matters
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The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible securities or get financial accommodation in times of need or stringency by rediscounting bills of exchange. Since commercial banks can always except the Reserve Bank of India to come to their help in times of banking crisis the Reserve Bank becomes not only the bankers bank but also the lender of the last resort.
Controller of Credit
The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume of credit created by banks in India. It can do so through changing the Bank rate or through open market operations. According to the Banking Regulation Act of 1949, the Reserve Bank of India can any particular bank or the whole banking system not to lend to particular groups or persons on the basis of certain types of securities. Since 1956, selective controls of credit are increasingly being used by the Reserve Bank.
The Reserve Bank of India is armed with many powers to control the Indian money market. Every bank has to get a license from the Reserve Bank of India to do banking business within India, the license can be cancelled by the Reserve Bank of certain stipulated conditions are not fulfilled. Every bank will have to get the permission of the Reserve Bank before it can open a new branch. Each scheduled bank must send weekly returns to the Reserve Bank showing, in detail, its assets and liabilities. This power of the Bank to call for information is also intended to give it effective control of the credit system. The Reserve Bank has also the power to inspect the accounts of any commercial bank As supreme banking authority in the country, the Reserve Bank of India, therefore, has the following powers: o It holds the cash reserves of all the scheduled banks o It controls the credit operations of banks through Quantitative and Qualitative controls
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o It controls the banking system through the system of licensing, inspection and calling for information o It acts as a lender of the last resort by providing rediscount facility to scheduled banks
Supervisory functions
In addition to its traditional central banking functions, the Reserve bank has certain non- monetary functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve Bank Act 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers of supervision and control over commercial and co-operative banks, relating to licensing and establishments, branch expansion. Liquidity of their assets, management and methods of working, amalgamation reconstruction, liquidation. The RBI is authorized to carry out periodical inspections of the banks and to call for returns and necessary information from them. The nationalization of 14 major Indian scheduled banks in July 1969 has imposed new responsibilities on the RBI for
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directing the growth of banking and credit policies towards more rapid development of the economy and realization of certain desired social objectives. The supervisory functions of the RBI have helped a great deal in improving the standard of banking in India to develop on sound lines and to improve the methods of their operation
Promotional functions
With economic growth assuming a new urgency since Independence, the range of the Reserve Banks functions has steadily widened. The Bank now performs a variety of developmental and promotional functions, which, at one time, were regarded as outside the normal scope of central banking. The Reserve Bank was asked to promote banking habit, extend banking facilities to rural and semi- urban areas, and establish and promote new specialized financing agencies. Accordingly, the Reserve Bank has helped in the setting up of the IFCI and the SFC; it set up the Deposit Insurance Corporation in 1962, the Unit Trust of India in 1964, the Industrial Development Bank of India also in 1964, the Agricultural Refinance Corporation of India in 1963 and the Industrial Reconstruction Corporate of India in 1972. These institutions were set up directly or indirectly by the Reserve Bank to promote saving habit and to mobilize savings, and to provide industrial finance as well as agricultural finance. As far back as 1935, the Reserve Bank of India set up the Agricultural Credit Department to provide agricultural credit. But only since 1951 the Banks role in this field has become extremely important. The Bank has developed the co-operative credit movement to encourage saving, to eliminate moneylenders from the villages and to route its short- term credit to agriculture. The RBI has set up the Agricultural Refinance and Development Corporation to provide long- term finance to farmers.
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Government and to the money market. Monetary functions of the RBI are significant as they control and regulate the volume of money and credit in the country.
Equally important, however, are the non- monetary functions of the RBI in the context of Indias economic backwardness. The supervisory function of the RBI may be regarded as a non- monetary function (though many consider this a monetary function) the promotion of sound banking in India is an important goal of the RBI, the RBI has been given wide and drastic powers, under the Banking Regulation Act 1949- these powers relate to licensing of banks, branch expansion, liquidity of their assets, management methods of working, inspection, amalgamation, reconstruction and liquidation. Under the RBIs supervision and inspection, the working of banks has greatly improved. Commercial banks have developed into financially and operationally sound and viable units. The RBIs powers of supervision have now been extended to non- banking financial intermediaries. Since independence, particularly after its nationalization 1949, the RBI has followed the promotional functions vigorously and has been responsible for strong financial support to industrial and agricultural development in the country.
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Chapter 4
Introduction to Banks
4.1 ICICI Bank
ICICI Bank is India's second-largest bank with total assets of Rs. 3,634.00 billion (US$ 81 billion) at March 31, 2010 and profit after tax Rs. 40.25 billion (US$ 896 million) for the year ended March 31, 2010. The Bank has a network of 2,528 branches and 6,000 ATMs in India, and has a presence in 19 countries, including India. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries in the areas of investment banking, life and non-life insurance, venture capital and asset management. The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices in United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has established branches in Belgium and Germany. ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE).
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HDFC India deals in varieties of products like home loan, standard life insurance, mutual fund, securities, credit cards, etc. HDFC has branch offices in all major cities in India like Calcutta, Chennai, Delhi, Bangalore, Hyderabad, Ahmedabad apart from HDFC Mumbai. Authorized capital: Rs. 450 crore Paid-up capital: Rs. 282 crore Equity: Holds 24.2% Listing: HDFC India has been listed on the Stock Exchange, Mumbai and the National Stock Exchange. The bank's American Depository Shares are listed on the New York Stock Exchange (NYSE) under the symbol "HDB".
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Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakh and 50 employees, the Bank has made a rapid growth over the years and blossomed into a mighty institution with a strong national presence and sizable international operations. In business volume, the Bank occupies a premier position among the nationalized banks.
The Bank has 3101 branches in India spread over all states/ union territories including 141 specialized branches. These branches are controlled through 48 Zonal Offices. There are 29 branches/ offices (including three representative offices) abroad
The Bank came out with its maiden public issue in 1997 and follow on Qualified Institutions Placement in February 2008. . Total number of shareholders as on 30/09/2009 is 2, 15,790. While firmly adhering to a policy of prudence and caution, the Bank has been in the forefront of introducing various innovative services and systems. Business has been conducted with the successful blend of traditional values and ethics and the most modern infrastructure. The Bank has been the first among the nationalized banks to establish a fully computerized branch and ATM facility at the Mahalaxmi Branch at Mumbai way back in 1989. The Bank is also a Founder Member of SWIFT in India. It pioneered the introduction of the Health Code System in 1982, for evaluating/ rating its credit portfolio.
The Bank's association with the capital market goes back to 1921 when it entered into an agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing House. It is an association that has blossomed into a joint venture with BSE, called the BOI Shareholding Ltd. to extend depository services to the stock broking community. Bank of India was the first Indian Bank to open a branch outside the country, at London, in 1946, and also the first
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to open a branch in Europe, Paris in 1974. The Bank has sizable presence abroad, with a network of 29 branches (including five representative offices) at key banking and financial centres viz. London, Newyork, Paris, Tokyo, Hong-Kong and Singapore. The international business accounts for around 17.82% of Bank's total business.
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It is a story scripted in corporate wisdom and social pride. It is a story crafted in private capital, princely patronage and state ownership. It is a story of ordinary bankers and their extraordinary contribution in the ascent of Bank of Baroda to the formidable heights of corporate glory. It is a story that needs to be shared with all those millions of people customers, stakeholders, employees & the public at large - who in ample measure, have contributed to the making of an institution.
Mission
To be a top ranking National Bank of International Standards committed to augmenting stake holders' value through concern, care and competence
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In India, the Bank offers a comprehensive suite of world-class products and services to its corporate and commercial banking clients as also to a fast growing personal banking customer base.
Commercial Banking
The Honking and Shanghai Banking Corporation Limited (HSBC)
Personal Banking
HSBC offers a wide range of personal financial services, including personal lending and deposit products, through its branch network in Ahmadabad, Bangalore, Chennai, Chandigarh, Coimbatore, Gurgaon, Hyderabad, Jaipur, Kochi, Kolkata, Ludhiana, Mumbai, New Delhi, Noida, Pune, Thane, Trivandrum and Visakhapatnam. Also offered branch-wide are international Gold and Classic credit cards from VISA and MasterCard and debit cards from Visa. Customers have access to 24-hour banking services through an extensive network of automated teller machines (ATMs), an integrated Call Centre, and internet banking online@hsbc
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Corporate Banking
HSBC has well-established, long-term corporate banking relationships with large domestic Indian corporations and foreign multinationals operating in India. Services include term and working capital finance, trade facilities, corporate deposits, syndications, payments and cash management services and factoring.
Business Banking
HSBC's Extra Mile Business Banking offers two types of account to small and medium-sized businesses - The Business Account and the Business Vantage Account. Services include Business Phone Banking, Business Doorstep Banking and Multi Branch Business Banking.
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The founding of ING as one company was started in 1990 when the legal restrictions on mergers between insurers and banks were lifted in the Netherlands. This prompted insurance company Nationale-Nederlanden and banking company NMB Postbank Group to enter into negotiations. The merger into International Nederlanden Group took place in 1991. The market soon abbreviated the name to I-N-G. The company followed suit by changing the statutory name to ING Group N.V. Since 1991, ING has developed from a Dutch company with some international business to a multinational with Dutch roots. This was achieved through a mixture of organic growth, such as the creation of ING Direct from scratch, as well as various large acquisitions.
The first large acquisition took place in 1995, when ING took over Barings Bank. This acquisition increased the brand recognition of ING around the world and strengthened its wholesale banking presence in the emerging markets. And then there was Life of Georgia. This insurance company was acquired by Nationale-Nederlanden in 1979, resulting in a significant increase in activities in the US. Via Life of Georgia, the activities in Asia expanded considerably. However in 2004, ING as a group had become well-established in both regions and Life of Georgia was sold. Other acquisitions, such as the Belgian Bank Brussels Lambert, strengthened the Groups presence in the Benelux. In addition, the activities in de United States were doubled as a result of organic growth and the acquisition of Equitable of Iowa, ReliaStar, Aetna Financial Services and merchant bank Furman Selz.
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ING is also active in other parts of the world. In 2001, ING acquired a majority interest in the Polish Bank lski and entered the Indian life insurance market through ING Vysya Life Insurance. Furthermore, ING participates in a number of financial institutions. An important example is the partnership with the Bank of Beijing.
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companies are like boats. When the economy expands, most industry groups and companies benefit and grow. When the economy declines, most sectors and companies usually suffer. Many economists link economic expansion and contraction to the level of interest rates. Interest rates are seen as a leading indicator for the stock market as well. Below is a chart of the S&P 500 and the yield on the 10-year note over the last 30 years. Although not exact, a correlation between stock prices and interest rates can be seen. Once a scenario for the overall economy has been developed, an investor can break down the economy into its various industry groups.
Group Selection
If the prognosis is for an expanding economy, then certain groups are likely to benefit more than others. An investor can narrow the field to those groups that are best suited to benefit from the current or future economic environment. If most companies are expected to benefit
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from an expansion, then risk in equities would be relatively low and an aggressive growthoriented strategy might be advisable. A growth strategy might involve the purchase of technology, biotech, semiconductor and cyclical stocks. If the economy is forecast to contract, an investor may opt for a more conservative strategy and seek out stable incomeoriented companies. A defensive strategy might involve the purchase of consumer staples, utilities and energy-related stocks. To assess a industry group's potential, an investor would want to consider the overall growth rate, market size, and importance to the economy. While the individual company is still important, its industry group is likely to exert just as much, or more, influence on the stock price. When stocks move, they usually move as groups; there are very few lone guns out there. Many times it is more important to be in the right industry than in the right stock! The chart below shows that relative performance of 5 sectors over a 7-month time frame. As the chart illustrates, being in the right sector can make all the difference.
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current leader and how will changes within the sector affect the current balance of power? What are the barriers to entry? Success depends on an edge, be it marketing, technology, market share or innovation. A comparative analysis of the competition within a sector will help identify those companies with an edge, and those most likely to keep it.
Company Analysis
With a shortlist of companies, an investor might analyze the resources and capabilities within each company to identify those companies that are capable of creating and maintaining a competitive advantage. The analysis could focus on selecting companies with a sensible business plan, solid management and sound financials.
Business Plan
The business plan, model or concept forms the bedrock upon which all else is built. If the plan, model or concepts stink, there is little hope for the business. For a new business, the questions may be these: Does its business make sense? Is it feasible? Is there a market? Can a profit be made? For an established business, the questions may be: Is the company's direction clearly defined? Is the company a leader in the market? Can the company maintain leadership?
Management
In order to execute a business plan, a company requires top-quality management. Investors might look at management to assess their capabilities, strengths and weaknesses. Even the best-laid plans in the most dynamic industries can go to waste with bad management (AMD in semiconductors). Alternatively, even strong management can make for extraordinary success in a mature industry (Alcoa in aluminum). Some of the questions to ask might include: How talented is the management team? Do they have a track record? How long have they worked together? Can management deliver on its promises? If management is a problem, it is sometimes best to move on.
Financial Analysis
The final step to this analysis process would be to take apart the financial statements and come up with a means of valuation. Below is a list of potential inputs into a financial analysis.
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FundamentalAnalysisofBankingStocks Good Will Gross Profit Margin Growth Industry Interest Cover International Investment Liabilities - Current Liabilities - Long-term Management Market Growth Market Share Net Profit Margin Pageview Growth Pageviews Patents Price/Book Value Price/Earnings PEG Price/Sales Product Product Placement Regulations R&D Revenues Sector Stock Options Strategy Subscriber Growth Subscribers Supplier Relationships Taxes Trademarks
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Accounts Payable Accounts Receivable Acid Ratio Amortization Assets - Current Assets - Fixed Book Value Brand Business Cycle Business Idea Business Model Business Plan Capital Expenses Cash Flow Cash on hand Current Ratio Customer Relationships Days Payable Days Receivable Debt Debt Structure Debt: Equity Ratio Depreciation Derivatives-Hedging Discounted Cash Flow Dividend Dividend Cover Earnings EBITDA Economic Growth Equity Equity Risk Premium Expenses
The list can seem quite long and intimidating. However, after a while, an investor will learn what works best and develop a set of preferred analysis techniques. There are many different valuation metrics and much depends on the industry and stage of the economic cycle. A complete financial model can be built to forecast future revenues, expenses and profits or an investor can rely on the forecast of other analysts and apply various multiples to arrive at a
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valuation. Some of the more popular ratios are found by dividing the stock price by a key value driver.
Ratio Price/Book Value Price/Earnings Price/Earnings/Growth Price/Sales Price/Subscribers Price/Lines Price/Page views Price/Promises
Company Type Oil Retail Networking B2B ISP or cable company Telecom Web site Biotech
This methodology assumes that a company will sell at a specific multiple of its earnings, revenues or growth. An investor may rank companies based on these valuation ratios. Those at the high end may be considered overvalued, while those at the low end may constitute relatively good value.
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Value Spotting
Sound fundamental analysis will help identify companies that represent a good value. Some of the most legendary investors think long-term and value. Graham and Dodd, Warren Buffett and John Neff are seen as the champions of value investing. Fundamental analysis can help uncover companies with valuable assets, a strong balance sheet, stable earnings, and staying power.
Business Acumen
One of the most obvious, but less tangible, rewards of fundamental analysis is the development of a thorough understanding of the business. After such painstaking research and analysis, an investor will be familiar with the key revenue and profit drivers behind a company. Earnings and earnings expectations can be potent drivers of equity prices. Even some technicians will agree to that. A good understanding can help investors avoid companies that are prone to shortfalls and identify those that continue to deliver. In addition to understanding the business, fundamental analysis allows investors to develop an understanding of the key value drivers and companies within an industry. A stock's price is heavily influenced by its industry group. By studying these groups, investors can better position themselves to identify opportunities that are high-risk (tech), low-risk (utilities), growth oriented (computer), value driven (oil), non-cyclical (consumer staples), cyclical (transportation) or income-oriented (high yield).
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Industry/Company Specific
Valuation techniques vary depending on the industry group and specifics of each company. For this reason, a different technique and model is required for different industries and different companies. This can get quite time-consuming, which can limit the amount of research that can be performed. A subscription-based model may work great for an Internet Service Provider (ISP), but is not likely to be the best model to value an oil company.
Subjectivity
Fair value is based on assumptions. Any changes to growth or multiplier assumptions can greatly alter the ultimate valuation. Fundamental analysts are generally aware of this and use sensitivity analysis to present a base-case valuation, an average-case valuation and a worstcase valuation. However, even on a worst-case valuation, most models are almost always bullish, the only question is how much so. The chart below shows how stubbornly bullish many fundamental analysts can be. s
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Analyst Bias
The majority of the information that goes into the analysis comes from the company itself. Companies employ investor relations managers specifically to handle the analyst community and release information. As Mark Twain said, "there are lies, damn lies, and statistics." When it comes to massaging the data or spinning the announcement, CFOs and investor relations managers are professionals. Only buy-side analysts tend to venture past the company statistics. Buy-side analysts work for mutual funds and money managers. They read the reports written by the sell-side analysts who work for the big brokers (CIBC, Merrill Lynch, Robertson Stephens, CS First Boston, Paine Weber, DLJ to name a few). These brokers are also involved in underwriting and investment banking for the companies. Even though there are restrictions in place to prevent a conflict of interest, brokers have an ongoing relationship with the company under analysis. When reading these reports, it is important to take into consideration any biases a sell-side analyst may have. The buy-side analyst, on the other hand, is analyzing the company purely from an investment standpoint for a portfolio manager. If there is a relationship with the company, it is usually on different terms. In some cases this may be as a large shareholder.
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Conclusions
Fundamental analysis can be valuable, but it should be approached with caution. If you are reading research written by a sell-side analyst, it is important to be familiar with the analyst behind the report. We all have personal biases, and every analyst has some sort of bias. There is nothing wrong with this, and the research can still be of great value. Learn what the ratings mean and the track record of an analyst before jumping off the deep end. Corporate statements and press releases offer good information, but they should be read with a healthy degree of skepticism to separate the facts from the spin. Press releases don't happen by accident; they are an important PR tool for companies. Investors should become skilled readers to weed out the important information and ignore the hype.
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C - Capital Adequacy:
Capital base of financial institutions facilitates depositors in forming their risk perception about the institutions. Also, it is the key parameter for financial managers to maintain adequate levels of capitalization. Moreover, besides absorbing unanticipated shocks, it signals that the institution will continue to honor its obligations. The most widely used indicator of capital adequacy is capital to risk-weighted assets ratio (CRWA). According to Bank Supervision Regulation Committee (The Basle Committee) of Bank for International Settlements, a minimum 9 percent CRWA is required. Capital adequacy ultimately determines how well financial institutions can cope with shocks to their balance sheets. Thus, it is useful to track capital-adequacy ratios that take into account the most important financial risksforeign exchange, credit, and interest rate risks by assigning risk weightings to the institutions assets. A sound capital base strengthens confidence of depositors. This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world. The following ratios measure capital adequacy Capital to risk weighted asset ratio Advances to assets ratio G-sec to total Investment
A Asset Quality:
Asset quality determines the healthiness of financial institutions against loss of value in the assets. The weakening value of assets, being prime source of banking problems, directly pour into other areas, as losses are eventually written-off against capital, which ultimately expose the earning capacity of the institution. With this backdrop, the asset quality is gauged in relation to the level and severity of non-performing assets, adequacy of provisions,
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recoveries, distribution of assets etc. Popular indicators include nonperforming assets to advances, non performing assets to total assets. The solvency of financial institutions typically is at risk when their assets become impaired, so it is important to monitor indicators of the quality of their assets in terms of overexposure to specific risks, trends in nonperforming assets, and the health and profitability of bank borrowers especially the corporate sector. Share of bank assets in the aggregate financial sector assets: In most emerging markets, banking sector assets comprise well over 80 per cent of total financial sector assets, whereas these figures are much lower in the developed economies. Furthermore, deposits as a share of total bank liabilities have declined since 1990 in many developed countries, while in developing countries public deposits continue to be dominant in banks. In India, the share of banking assets in total financial sector assets is around 75 per cent, as of end-March 2008. There is, no doubt, merit in recognizing the importance of diversification in the institutional and instrument-specific aspects of financial intermediation in the interests of wider choice, competition and stability. However, the dominant role of banks in financial intermediation in emerging economies and particularly in India will continue in the medium-term; and the banks will continue to be special for a long time. In this regard, it is useful to emphasize the dominance of banks in the developing countries in promoting non-bank financial intermediaries and services including in development of debt-markets. Even where role of banks is apparently diminishing in emerging markets, substantively, they continue to play a leading role in non-banking financing activities, including the development of financial markets.
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3. The bill remains overdue for a period of more than 90 days in case of bills purchased and discounted; 4. A loan granted for short duration crops will be treated as an NPA if the installments of principal or interest thereon remain overdue for two crop seasons; and 5. A loan granted for long duration crops will be treated as an NPA if the installments of principal or interest thereon remain overdue for one crop season. The Bank classifies an account as an NPA only if the interest imposed during any quarter is not fully repaid within 90 days from the end of the relevant quarter. This is a key to the stability of the banking sector. There should be no hesitation in stating that Indian banks have done a remarkable job in containment of non-performing loans (NPL) considering the overhang issues and overall difficult environment. The following ratios are necessary to assess the asset quality. Net NPAs to total Assets Net NPAs to total Advances Total Investments to Total Assets
M Management:
Management of financial institution is generally evaluated in terms of capital adequacy, asset quality, earnings and profitability, liquidity and risk sensitivity ratings. In addition, performance evaluation includes compliance with set norms, ability to plan and react to changing circumstances, technical competence, leadership and administrative ability. Sound management is one of the most important factors behind financial institutions performance. Indicators of quality of management, however, are primarily applicable to individual institutions, and cannot be easily aggregated across the sector. Furthermore, given the qualitative nature of management, it is difficult to judge its soundness just by looking at financial accounts of the banks. Nevertheless, total advance to total deposit, business per employee and profit per employee helps in gauging the management quality of the banking institutions. Several indicators, however, can jointly serveas, for instance, efficiency measures doas an indicator of management soundness. The ratios used to evaluate management efficiency are described as under:
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FundamentalAnalysisofBankingStocks Profit per employee Business per employee Return on net worth
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L Liquidity:
An adequate liquidity position refers to a situation, where institution can obtain sufficient funds, either by increasing liabilities or by converting its assets quickly at a reasonable cost. It is, therefore, generally assessed in terms of overall assets and liability management, as mismatching gives rise to liquidity risk. Efficient fund management refers to a situation where a spread between rate sensitive assets (RSA) and rate sensitive liabilities (RSL) is maintained. The most commonly used tool to evaluate interest rate exposure is the Gap between RSA and RSL, while liquidity is gauged by liquid to total asset ratio. Initially solvent financial institutions may be driven toward closure by poor management of
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short-term liquidity. Indicators should cover funding sources and capture large maturity mismatches. The term liquidity is used in various ways, all relating to availability of, access to, or convertibility into cash. An institution is said to have liquidity if it can easily meet its needs for cash either because it has cash on hand or can otherwise raise or borrow cash. A market is said to be liquid if the instruments it trades can easily be bought or sold in quantity with little impact on market prices. An asset is said to be liquid if the market for that asset is liquid. The common theme in all three contexts is cash. A corporation is liquid if it has ready access to cash. A market is liquid if participants can easily convert positions into cash or conversely. An asset is liquid if it can easily be converted to cash. The liquidity of an institution depends on: The institution's short-term need for cash; Cash on hand; Available lines of credit; The liquidity of the institution's assets; The institution's reputation in the marketplacehow willing will counterparty is to transact trades with or lend to the institution? There are various criteria available to measure the financial performances of the Banks. It is usual to measure the performance of banks using financial ratios. Often, a number of criteria such as profits, liquidity, asset quality, attitude towards risk, and management strategies must be considered. In the early 1970s, federal regulators in USA developed the CAMEL rating system to help structure the bank examination process. Financial ratios are often used to measure the overall financial soundness of a bank and the quality of it management. Bank regulators, for example, use financial ratios to help evaluate a banks performance as part of the CAMEL system.
FundamentalAnalysisofBankingStocks L -Liquidity.
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Each of the five factors is scored from one to five, with one being the strongest rating. An overall composite CAMEL rating, also ranging from one to five, is then developed from this evaluation. As a whole, the CAMEL rating, which is determined after an on-site examination, provides a means to categorize banks based on their overall health, financial status, and management. As there are various emerging private and public sector banks in India it is useful to analyze their financial performance so as to rank them.
CAPITAL ADEQUACY
Capital adequacy Tier I capital + Tier II capital / Risk weighted ts Advances to assets ratio G-sec total investment ratio Total advances / Total assets Amount invested in Government securities / total investments
ASSET MANAGEMENT
Net NPAs to total Assets Net NPAS /Total Assets
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MANAGEMENT
PROFIT PER EMPLOYEE PAT /NO. OF EMPLOYEES
EARNINGS-PROFITABILITY OPERATING PROFIT BY AVERAGE Operating Profit/Average Working Fund Net Profit/ Total Asset
LIQUIDITY LIQUID ASSETS TO TOTAL DEPOSITS Liquidity Asset/ Total Deposit (%) Liquid assets to demand deposits (%) Liquidity Asset/ demand Deposit
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To compare the financial performances of the private, public and foreign sector banks using CAMEL RATING MODEL we have taken 3 Banks from top 5 banks from each sector on the basis of their rankings.
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ADVANCES TO ASSETS
2005-06 Banks ICICI HDFC AXIS PNB BOI BOB CITI HSBC ING Score 9.50 7.81 7.35 8.41 9.51 8.66 8.26 7.35 10.00 2006-07 Score 9.13 8.28 8.10 9.57 9.68 9.41 8.66 6.78 10.00 2007-08 Score 8.88 7.50 8.58 9.46 10.00 9.36 7.80 6.22 9.04 2008-09 Score 9.09 8.53 8.73 9.90 10.00 9.99 7.23 4.61 8.31 2009-10 Score 7.92 8.99 9.18 10.00 9.74 10.00 6.03 4.13 8.69 Average Score 9.09 8.73 8.57 9.68 10.00 9.69 7.75 5.93 9.40 Ranks 5 6 8 3 1 2 7 9 4
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5.00 5.00 2.32 0.94 2.68 11.47 TABLE 7.8 SCORE OF NET NPA TO TOTAL ASSETS
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BANKS
2005-06 (in%)
2006-07 (in%) 1.02 0.00 0.01 0.01 0.01 0.01 0.01 0.00 0.01
2007- 08 (in%) 1.55 0.00 0.00 0.01 0.01 0.00 0.01 0.01 0.01
2008-09 (in%) 2.09 0.01 0.00 0.00 0.00 0.00 0.01 0.01 0.01
2009-10 (in%) 2.12 0.00 0.00 0.01 0.01 0.00 0.03 0.02 0.01
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BANKS
2005-06 (in%)
2006-07 (in%) 26.43 33.18 36.69 27.80 24.95 24.41 23.22 25.73 22.50
2007- 08 (in%) 27.83 36.71 30.75 27.12 23.37 24.43 24.14 25.41 19.59
2008-09 (in%) 27.13 30.70 31.36 25.67 23.28 23.14 21.99 32.92 29.44
2009-10 (in%) 33.22 24.53 30.98 26.20 24.40 21.98 23.29 45.65 24.68
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BANKS
2005-06 (in%)
2006-07 (in%) 0.09 0.05 0.07 0.03 0.03 0.03 0.17 0.14 0.02
2007- 08 (in%) 0.10 0.04 0.07 0.04 0.05 0.04 0.38 0.17 0.03
2008-09 (in%) 0.11 0.04 0.09 0.05 0.07 0.06 0.45 0.16 0.03
2009-10 (in%) 0.12 0.06 0.12 0.07 0.04 0.08 0.44 0.12 0.04
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BANKS
2005-06 (in%)
2006-07 (in%) 12.80 5.37 9.59 4.13 4.95 5.40 12.62 9.60 6.16
2007- 08 (in%) 11.35 4.34 9.99 5.10 6.49 7.04 29.87 10.35 6.71
2008-09 (in%) 13.23 4.59 9.65 6.26 8.28 9.11 21.08 9.61 6.62
2009-10 (in%) 11.44 5.65 11.35 7.66 10.04 10.68 18.55 11.71 7.33
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FundamentalAnalysisofBankingStocks BUISNESS PER EMPLOYEE 2005-06 Banks ICICI HDFC AXIS PNB BOI BOB CITI HSBC ING Score 4.34 2.16 3.37 1.18 1.33 1.40 5.00 3.44 2.78 2006-07 Score 1.93 2.10 3.75 1.61 1.93 2.11 4.93 3.75 2.41 2007-08 Score 1.90 0.73 1.67 0.85 1.09 1.18 5.00 1.73 1.12 2008-09 Score 3.14 1.09 2.29 1.49 1.96 2.16 5.00 2.28 1.57 2009-10 Score 3.08 1.52 3.06 2.06 2.71 2.88 5.00 3.16 1.97 Average Score 3.17 1.35 2.60 1.38 1.74 1.88 5.00 2.65 1.80
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Ranks 2 9 4 8 7 5 1 3 6
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BANKS
2005-06 (in%)
2006-07 (in%) 2.05 2.98 2.1 2.41 1.88 1.94 4.02 4.09 1.33
2007- 08 (in%) 2.14 3.13 2.57 2.25 2.31 1.96 3.98 4.23 1.45
2008-09 (in%) 2.33 2.94 2.95 2.52 2.7 2.22 4.04 4.39 1.57
2009-10 (in%) 2.72 3.33 3.48 2.7 1.88 2.03 3.72 3.73 2.13
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(ii) RETURN ON ASSETS = Net Profit / Total Asset BANKS 2005-06 (in%) ICICI HDFC AXIS PNB BOI BOB CITI HSBC ING 5.03 4.33 5.11 4.78 4.73 4.20 6.56 4.79 4.55 2006-07 (in%) 5.79 5.28 5.44 5.04 4.94 4.95 7.16 4.89 4.92 2007- 08 (in%) 7.13 5.38 5.53 6.04 6.04 5.63 8.39 5.48 5.61 2008-09 (in%) 7.33 6.66 6.72 6.91 6.64 5.87 7.45 5.27 5.92 2009-10 (in%) 6.30 5.43 5.80 6.35 5.32 5.39 3.21 3.79 5.24
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RETURN ON ASSETS
2005-06 Banks ICICI HDFC AXIS PNB BOI BOB CITI HSBC ING Score 4.60 3.95 4.67 4.37 4.33 3.84 6.00 4.38 4.16 2006-07 Score 4.85 4.42 4.56 4.22 4.14 4.14 6.00 4.10 4.12 2007-08 Score 5.10 3.85 3.96 4.32 4.32 4.03 6.00 3.92 4.02 2008-09 Score 5.90 5.37 5.42 5.57 5.35 4.73 6.00 4.24 4.77 2009-10 Score 5.95 5.12 5.48 6.00 5.02 5.09 3.03 3.58 4.95 Average Score 5.78 4.96 5.24 5.33 5.07 4.77 6.00 4.43 4.80 Ranks 2 6 4 3 5 8 1 9 7
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BANKS
2005-06 (in%)
2006-07 (in%) 73.42 78.36 81.50 85.32 85.11 86.26 103.32 70.24 81.26
2007- 08 (in%) 75.90 79.73 79.46 87.56 85.37 85.04 101.75 69.61 79.12
2008-09 (in%) 77.74 82.47 78.44 85.03 84.27 84.42 81.08 69.86 80.12
2009-10 (in%) 75.60 80.93 74.54 85.53 87.23 83.87 57.64 69.83 78.08
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(i)
BANKS
2005-06 (in%)
2006-07 (in%) 22.89 9.00 7.37 13.96 16.99 18.80 25.62 47.93 15.47
2007- 08 (in%) 23.17 19.10 17.08 13.80 14.05 17.49 35.62 59.58 20.52
2008-09 (in%) 23.57 37.33 31.14 12.46 14.47 14.90 50.52 68.83 16.77
2009-10 (in%) 27.15 69.98 46.11 11.79 16.11 16.51 72.95 43.10 17.03
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(ii)
BANKS
2005-06 (in%)
2006-07 (in%) 246.83 64.87 76.52 118.61 217.53 237.83 95.92 169.49 125.97
2007- 08 (in%) 229.39 66.94 74.68 129.14 168.93 227.37 119.70 194.02 126.07
2008-09 (in%) 23.57 89.64 73.75 138.94 218.19 198.31 190.51 259.53 125.95
2009-10 (in%) 27.15 104.89 57.50 123.91 233.06 210.36 268.96 150.43 107.62
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(iii)
BANKS
2005-06 (in%)
2006-07 (in%) 15.28 14.07 11.80 12.02 14.32 16.41 21.35 30.39 12.37
2007- 08 (in%) 14.15 14.45 13.65 11.54 11.78 14.81 24.75 33.44 16.43
2008-09 (in%) 13.55 13.91 12.39 10.59 12.15 12.64 31.12 36.35 13.10
2009-10 (in%) 15.07 17.54 10.24 9.91 13.47 14.30 37.72 26.57 13.00
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2005-06 Banks ICICI HDFC AXIS PNB BOI BOB CITI HSBC ING Total Score 113.21 96.76 97.39 108.49 99.85 105.13 133.17 114.07 91.97 Rank 2 9 8 4 6 5 1 3 7
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2006-07 Banks Total Score Rank ICICI 76.95 2 HDFC 61.18 7 AXIS 61.08 8 PNB 62.73 6 BOI 64.02 5 BOB 64.55 4 CITI 78.75 1 HSBC 73.88 3 ING 60.73 9 TABLE 7.32YEAR WISE ANALYSIS 2006-07
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2007-08
Banks Total Score Rank ICICI 71.95 2 HDFC 56.58 8 AXIS 56.92 7 PNB 59.96 6 BOI 60.51 5 BOB 61.23 4 CITI 77.41 1 HSBC 69.48 3 ING 54.77 9 TABLE 7.33YEAR WISE ANALYSIS 2007-08
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2008-09 Banks Total Score Rank ICICI 63.107 4 HDFC 66.7677 3 AXIS 59.1589 8 PNB 60.3223 7 BOI 62.9132 5 BOB 60.3256 6 CITI 78.2652 1 HSBC 69.975 2 ING 55.3453 9 TABLE 7.34YEAR WISE ANALYSIS 2008-09
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2009-10 Banks Total Score Rank ICICI 63.4704 4 HDFC 68.9411 3 AXIS 60.3878 8 PNB 59.7998 7 BOI 60.3557 5 BOB 60.6806 6 CITI 77.6792 1 HSBC 61.2729 2 ING 53.8859 9 TABLE 7.35YEAR WISE ANALYSIS 2009-10
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Banks ICICI HDF C AXIS PNB BOI BOB CITI HSBC ING
MANAGEMENT QUALITY
Earnings Quality
Banks
PAT / NO. Interest Net TOTAL Operating Profit OF BUISNESS / Income/ Profit / / Average EMPLOYEE Total Total NO. OF Working Fund EMPLOYEES S Income Asset 3.17 1.35 2.60 1.38 1.74 1.88 5.00 2.65 1.80 1.59 0.76 1.26 0.63 0.64 0.68 5.00 2.14 0.37 5.18 5.51 5.42 5.88 5.89 5.80 6.00 4.75 5.57 5.78 4.96 5.24 5.33 5.07 4.77 6.00 4.43 4.80 3.33 4.49 4.02 3.58 3.09 2.99 5.81 6.00 2.21
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Liquidity
Average 5 years
Banks
Total Score
Rank
3.77 4.55 3.19 3.92 2.51 3.93 3.17 2.25 2.94 3.45 4.41 2.11 3.50 6.68 2.15 3.98 7.00 2.41 7.49 5.07 5.94 8.00 5.58 7.00 3.53 3.89 2.31 TABLE 7.35 OVERALL ANALYSIS
2 4 8 7 6 5 1 3 9
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Chapter 8
Hypothesis Testing
H0:- Capital Adequacy Ratios is significant in analyzing performance measure of stocks. H1:- Capital Adequacy Ratios is not significant in analyzing performance measure of stocks. CAPITAL ADEQUACY RATIO Govt-Security To Total Capital Risk Investment Adequacy Ratio 7.04 8.13 6.33 8.82 8.49 8.23 10.00 7.31 8.90
Ttab 2.306
Banks ICICI HDFC AXIS PNB BOI BOB CITI HSBC ING
Tcal 0.875
Advances to Assets 9.09 8.73 8.57 9.68 10.00 9.69 7.75 5.93 9.40
TOTAL 26.14 26.14 23.68 26.86 26.64 26.46 25.54 21.98 25.77
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Asset Quality
Banks ICICI HDFC AXIS PNB BOI BOB CITI HSBC ING
Tcal 0.065
TOTAL INVESTMENT / TOTAL ASSETS 4.13 4.73 5.00 3.90 3.59 3.61 3.37 4.68 3.53
Ttab 2.306
NET NPA /TOTAL ADVANCES 5.00 0.02 0.02 0.02 0.03 0.02 0.05 0.04 0.04
Net NPAS /Total Assets 3.53 5.00 1.27 1.20 2.44 1.28 2.67 1.44 2.89
Ttab> Tcal Null Hypothesis is accepted.
TOTA L 12.66 9.75 6.29 5.12 6.06 4.91 6.08 6.16 6.46
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Banks ICICI HDFC AXIS PNB BOI BOB CITI HSBC ING Tcal 0.759
PAT / Average net worth 2.82 4.55 4.90 5.00 3.16 4.11 4.76 3.40 2.31
MANAGEMENT QUALITY TOTAL BUISNESS / NO. OF EMPLOYEES 3.17 1.35 2.60 1.38 1.74 1.88 5.00 2.65 1.80 Ttab 2.306
PAT / NO. OF EMPLOYEES 1.59 0.76 1.26 0.63 0.64 0.68 5.00 2.14 0.37 Ttab> Tcal Null Hypothesis is accepted.
TOTAL 7.59 6.67 8.76 7.01 5.54 6.67 14.76 8.19 4.49
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H0:- Earning Quality Ratios is significant in analyzing performance measure of stocks. H1:- Earning Quality Ratios is not significant in analyzing performance measure of stocks. Earnings Quality Net Profit / Operating Profit / Average Total Asset Working Fund 5.78 4.96 5.24 5.33 5.07 4.77 6.00 4.43 4.80 Ttab 2.306 3.33 4.49 4.02 3.58 3.09 2.99 5.81 6.00 2.21
Banks ICICI HDFC AXIS PNB BOI BOB CITI HSBC ING
Interest Income/ Total Income 5.18 5.51 5.42 5.88 5.89 5.80 6.00 4.75 5.57 Tcal 1.379
TOTAL 14.30 14.96 14.68 14.79 14.05 13.55 17.81 15.18 12.59
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H0:- Liquidity Ratios is significant in analyzing performance measure of stocks. H1:- Liquidity Ratios is not significant in analyzing performance measure of stocks. Liquidity Liquidity Asset/ Demand Deposit 4.55 2.51 2.25 4.41 6.68 7.00 5.07 5.58 3.89 Ttab 2.306
Banks ICICI HDFC AXIS PNB BOI BOB CITI HSBC ING Tcal 0.759
Liquidity Asset/ Total Asset 3.77 3.92 3.17 3.45 3.50 3.98 7.49 8.00 3.53
Liquidity Asset / Total Deposit 3.19 3.93 2.94 2.11 2.15 2.41 5.94 7.00 2.31 Ttab> Tcal
TOTAL 11.51 10.35 8.36 9.97 12.33 13.38 18.51 20.58 9.73
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Conclusion:From the above hypothesis testing, we can say that CAMEL model is significant in analyzing performance measure of banking stock. We have used T-Test to evaluate the performance measure. We have undertaken 5% confidence interval at 8df to calculate T-Test.
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Rank 1 2 3 4 5
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Chapter 10 Findings
In Capital Adequacy ratio, we have calculated three ratios, foreign banks shows better performance in Government Securities To Total Investment ratio. Private Banks shows better performance in Advances to Asset ratio. Government Banks shows better performance in Capital Risk Adequacy Ratio. In Asset Quality Ratio, ICICI and HDFC banks shows better performance. In Management Quality Ratio, CITI, ICICI and HSBC banks shows better performance. In Earning Quality Ratio, CITI, ICICI, BOI and HSBC banks shows better performance. In Liquidity Ratio, CITI, BOB, BOI and HSBC banks shows better performance. Where as, in 2005-06 financial year, top 5 banks are CITI, ICICI, HSBC, PNB and BOB respectively. Where as, in 2006-07 financial year, top 5 banks are CITI, ICICI, HSBC, BOB and BOI respectively. In this year, PNB has gone down from fourth position to sixth position and BOB has gone up on fourth position. Where as, in 2007-08 financial year, top 5 banks are CITI, ICICI, HSBC, BOB and BOI respectively. Where as, in 2008-09 financial year, top 5 banks are CITI, HSBC, HDFC, ICICI and BOI respectively. In this year, ICICI has gone down from second position to fourth position and HDFC has gone up on third position. Where as, in 2009-10 financial year, top 5 banks are CITI, HSBC, HDFC, ICICI and BOI respectively. Over all analysis of 5 years shows that, top 5 banks to invest for long term are CITI, ICICI, HSBC, HDFC and BOB. CAMEL model proves beneficial in analyzing performance measure of banking stocks. It also proves significant while evaluating using hypothesis testing.
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Chapter 11 Recommendation
Investors Perspective:Investing in top 5 banks for long term will prove beneficial as we have compared and evaluated the CAMEL model by hypothesis testing. We would recommend the investors, based on analysis to invest in CITI, ICICI, HSBC, HDFC and BOB, in weight age of score given to particular bank as shown in portfolio construction. In CITI bank investor will invest highest, then in ICICI, then in HSBC, then in HDFC and least in BOB.
Banks Perspective:In Capital Risk Adequacy ratio, ICICI and HDFC are showing better performance. So other banks are recommended to follow the ICICI and HDFC to maintain their Capital Risk Adequacy ratio. Advances to Assets are better of BOI and BOB. So other banks are recommended to follow the BOI and BOB to maintain their advances. Asset Quality Ratios are better of HDFC and ICICI. As management of NPA is more in HDFC and ICICI. So other banks are recommended to follow the ICICI and HDFC to maintain their NPAs. Management Quality Ratios are better of CITI, HSBC, ICICI, PNB and AXIS. So other banks are recommended to follow these banks to maximize Return on Net Worth and Profit per Employee. Earning Quality Ratios are better of CITI, HSBC, ICICI and BOI. So other banks are recommended to follow these banks to increase their Operating Profit and Return on Assets. Liquidity Ratios of HSBC, CITI, BOB and BOI are better as their liquid assets are managed better. So other banks are recommended to follow these banks to improve their liquidity management.
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Chapter 12 Conclusion
CAMEL model proves beneficial in analysis performance measure of banking stocks. It also proves significant while evaluating using hypothesis testing. This analysis is beneficial for long term investors.
CITI, ICICI, HSBC, HDFC and BOB are the top 5 banks according to our analysis.
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Chapter 13
Bibliography
The annual reports of ICICI bank has been extracted from the website www.icici.com on 25th Oct, 2010. The annual reports of BOI bank have been extracted from www.bankofindia.com on 26th Oct, 2010. The annual reports of HDFC bank have been extracted from www.hdfcbank.com on 27th Oct, 2010. The annual reports of AXIS bank have been extracted from www.axisbank.com on 28th Oct, 2010. The annual reports of BOB bank have been extracted from www.bankofbaroda.com on 29th Oct, 2010. The annual reports of CITI bank have been extracted from www.citibank.co.in on 30th Oct, 2010. The annual reports of HSBC bank have been extracted from www.hsbc.co.in on 1st Nov, 2010. The annual reports of ING bank have been extracted from www.ingvysyabank.com on 1st Nov, 2010. The annual reports of PNB bank have been extracted from www.pnbindia.in on 1st Nov, 2010. The data of CAMEL MODEL have been extracted from The Reserve Bank of India www.rbi.org.in/scripts/AboutUsDisplay.aspx?pg=DeptOfBS.htm on 15th Nov, 2010. The data of History of Banking In India have been extracted from India finance and investment 2010.
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The data of Scheduled Commercial Banks In India have been extracted from India finance and investment guide, link is http://finance.indiamart.com/investment_in_india/scheduled_commercial_banks.html on 28th Nov, 2010. The data of Pillars of Basel II Capital Accord have been extracted from http://www.bankingindiaupdate.com/basel.htm on 8th Dec, 2010. The data of Introduction of Fundamental Analysis have been extracted
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