EQUITY ANALYSIS ON SBI

Submitted by:

Enrollment no.

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 Abstract

The main aim of this project is to do equity research banking sector and to find out the
opportunities of investment in these sectors where returns can be maximized.

Indian Economy being one of the fastest developing economies in the world, company’s in India
are growing at faster rate as compared to their growth rate a decade back. Many Indian
companies are expanding their business globally with mergers and acquisitions.

As companies grow their shareholders are benefitted with good dividend and capital appreciation
on investment in equity shares of such companies. Number of companies listed in stock
exchange (BSE & NSE) has been increasing every year with new IPOs coming in the market.

In India people are realizing that equity has potential to give highest return as compared to other
investment avenues however people are not aware how to do equity valuation, they just invest in
shares based on tips given by brokers, friends or family members.

Investing in equity shares based on tips is not the true investment but it is clear gambling with
your money which many of us would not like to do with our hard-earned money.

Equity valuation begins with analysis of the sector in which you want make investment; if the
sector looks positive then analyze various companies in the sector. A Company is analyzed
fundamentally to check its performance and financial strength. Technical analysis is used to
decide the right price to buy a stock so that higher return on investment can be generated.

Economy of India and banking industry are analyzed on the basis of various factors and
indicators. Above mentioned four banks were analyzed based on the various qualitative and
quantitative factors. After analyzing these banks, stock price is estimated using relative valuation
method. The market price and P/E ratios have been taken to calculate the EPS. After the target
price was calculated with the help of sector P/E and EPS and finally the difference was taken
between the target price and market price to arrive at the best performing company.

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 Acknowledgement

I would like to express my deepest gratitude to my mentor Prof. for helping

me accomplish this important mile stone in my career and for his useful remarks and support all
the way through my master thesis. I would like to specially thank my supervisor Prof.
for her comments and suggestions of my thesis. Moreover, I would like show deepest
appreciation to my parents who supported me and kept me motivated all the way. Thanks to all
my beloved friends who gave there enthusiastic helps throughout the course of this thesis.

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 Table of content

Chapter 1: Introduction to the Study

Chapter 2: Literature Review

Chapter 3: Research Method

Chapter 4: Discussion, Conclusions, and Recommendations

Data analysis

References

Appendix

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 CHAPTER 1

INTRODUCTION TO THE STUDY

What is Equity?

In accounting and finance, equity is the residual claim or interest of the most junior class of
investors in assets, after all liabilities are paid. If valuations placed on assets do not exceed
liabilities, negative equity exists. In an accounting context, Shareholders equity (or stockholders’
equity, shareholders’ funds, shareholders’ capital or similar terms) represent the remaining
interest in assets of a company, spread among individual shareholders of common or preferred
stock.

This definition is helpful to understand the liquidation process in case of bankruptcy. At first, all
the secured creditors are paid against proceeds from assets. Afterword, a series of creditors,
ranked in priority sequence, have the next claim/right on the residual proceeds. Ownership equity
is the last or residual claim against assets, paid only after all other creditors are paid. In such
cases where even creditors could not get enough money to pay their bills, nothing is left over to
reimburse owners’ equity. Thus, owner’s equity is reduced to zero. Ownership equity is also
known as risk capital, liable capital and equity.

EQUITY SHARES

An equity share, commonly referred to as ordinary share also represents the form of fractional or
part ownership in which a shareholder, as a fractional owner, undertakes the maximum
entrepreneurial risk associated with a business venture. The holders of such shares are members
of the company and have voting rights.

DERIVATIVES

A derivative is a financial instrument that gets its value from some really good or stock. It is the
derived value of an underlying asset. It is, in its most basic form, simply a contract between two
parties to exchange value based on the action of a really good or service. Typically, the seller

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receives money in exchange for an agreement to purchase or sell some good or service at some
specified future date.

Derivatives offer some degree of leverage or multiplication as a mortgage. For a small amount of
money, the investor can control a much larger value of company stock than would be possible
without use of these instruments. This can work both ways, though. If the investor is correct,
then more money can be made than if the investment had been made directly into the company
itself. The losses are multiplied instead, however, if the investor is wrong.

The basic concept of a derivative contract remains the same whether the underlying happens to
be a commodity or a financial asset. However, there are some features which are very peculiar to
commodity derivative markets.

1.1 BACKGROUND OF THE STUDY

EQUITY INVESTMENT

Equity investment generally refers to buying and holding of shares of stock on a stock market by
individuals and firms in anticipation of income from dividend and capital gain as the value of the
stock rises. It also sometimes refers to the acquisition of equity (ownership) participation in
private (unlisted) company or start up (a company being created or newly created). When
investment is in infant companies, it is referred to as venture capital investing and is generally
understood to be higher risk than investment in listed going-concern situation.

How to invest in Equity Shares?

Investors can buy equity shares of a company from security market that is from primary market
or secondary. The primary market provides the channel for sale of new securities. Primary
market provides opportunity to issuers of securities; Government as well as corporate, to raise
resources to meet their requirements of investment and/or discharge some obligations some
obligations. Investors can buy shares of a company through IPO (Initial Public Offerings) when
it is first time issued to the public. Once shares are issued to the public it is traded in the
secondary market. Stock exchange only acts as facilitator for trading of equity shares. Anyone
who wishes to buy shares of company can buy it from an existing shareholder of a company.

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Why should one invest in equity in particular?

Equities have the potential to increase in value over time. It also provides your portfolio with the
growth necessary to reach your long term investment goals. research studies have proved that the
equities have outperform most other forms of investments in the long term. Research studies
have proved that investments in some shares with a longer tenure of investment have yielded far
superior returns than any other investment. However, this does not mean all equity investments
would guarantee similar higher returns. Equities are high in investment. One need to study before
investment.

Purpose of equity research is to study companies, analyze financials, and look at quantitative and
qualitative aspects mainly for decision: Whether to invest or not.

To be able to value equity, we need to first understand how equity is to be analyzed. Equity
Share of any company can be analyzed through:

Fundamental Analysis

Technical Analysis

FUNDAMENTAL ANALYSIS

Fundamental Analysis is a method of evaluating a security that entails attempting to measure its
intrinsic value by examining related economic, financial and other qualitative and quantitative
factors. Fundamental analysts attempt to study everything that can affect the security's value,
including macroeconomic factors (like the overall economy and industry conditions) and
company-specific factors (like financial condition and management).

Fundamental analysis is about using real data to evaluate a security's value. Although most
analysts use fundamental analysis to value stocks, this method of valuation can be used for just
about any type of security

Fundamental analysis observes numerous elements that affect stock prices such as sales, price to
earnings (P/E) ratio, profits, earnings per share (EPS), as well as macroeconomic and industry
specific factors.

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The end goal of performing fundamental analysis is to produce a value that an investor can
compare with the security's current price, with the aim of figuring out what sort of position to
take with that security (underpriced = buy, overpriced = sell or short).

Fundamental analysis of a business involves analyzing its financial statements and health, its
management and competitive advantages, and its competitors and markets. When analyzing a
stock, futures contract, or currency using fundamental analysis there are two basic approaches
one can use; bottom up analysis and top down analysis. The term is used to distinguish such
analysis from other types of investment analysis, such as quantitative analysis and technical
analysis.

Fundamental analysis is performed on historical and present data, but with the goal of making
financial forecasts. There are several possible objectives:

• To conduct a company stock valuation and predict its probable price evolution,
• To make a projection on its business performance,
• To evaluate its management and make projected decisions

Fundamental analysis includes:

1. Economic analysis

2. Industry analysis

3. Company analysis

On the basis of these three analyses the intrinsic value of the shares is determined. This is
considered as the true value of the share. If the intrinsic value is higher than the market price it is
recommended to buy the share. If it is equal to market price, then hold the share and if it is less
than the market price then sells the shares.

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TYPES OF FUNDAMENTAL ANALYSIS:

1. Quantitative Factors

2. Qualitative Factors

The various fundamental factors can be grouped into two categories: quantitative and qualitative.

Qualitative - related to or based on the quality or character of something, often as opposed to

its size or quantity.

Quantitative - capable of being measured or expressed in numerical terms.

QUALITATIVE FACTOR – THE INDUSTRY

Each industry has differences in terms of its customer base, market share among firms, industry-
wide growth, competition, regulation and business cycles. Learning about how the industry
works will give an investor a deeper understanding of a company’s financial health.

Customers

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

Market Share

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

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

Competition

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

QUALITATIVE FACTOR – THE COMPANY

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

Business Model

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

Competitive Advantage

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Another business consideration for investors is competitive advantage. A company’s long- term
success is driven largely by its ability to maintain a competitive advantage – and keep it.

Powerful competitive advantages, such as Reliance’s brand name and Microsoft’s domination of
the personal computer operating system, create a moat around a business allowing it to keep
competitors at bay and enjoy growth and profits. When a company can achieve competitive
advantage, its shareholders can be well rewarded for decades.

Management

A company relies upon management to steer it towards financial success. Some believe that
management is the most important aspect for investing in a company. It makes sense – even the
best business model is doomed if the leaders of the company fail to properly execute the plan.
Every public company has a corporate information section on its website. Usually there will be a
quick biography on each executive with their employment history, educational background and
any applicable achievements. Don’t expect to find anything useful here. Let’s be honest: We’re
looking for dirt, and no company is going to put negative information on its corporate website.

Instead, here are a few ways for to get a feel for management:

1. Management Discussion and Analysis (MD&A)

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

2. Past Performance

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

3. Conference Calls

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

QUANTITATIVE FACTORS

Now as we know the qualitative factor of fundamental analysis, let’s proceed to the quantitative
factor of the fundamental analysis. Quantitative factor includes analysis of financial statement of
the company.

RATIO ANALYSIS

Financial ratios are tools for interpreting financial statements to provide a basis for valuing
securities and appraising financial and management performance. In general, there are 3 kinds of
financial ratios that a financial analyst will use most frequently, these are:

• Working capital ratios

• Liquidity ratios
• Solvency ratios

EARNINGS PER SHARE

Earnings per share is calculated by dividing the net profit (after interest, tax and preference
dividend) by the number of equity shares. Earnings per share = Net profit after Interest, Tax and
Preference Dividend/ No. of Equity Shares

P/E Ratio -

In general, a high P/E suggests that investors are expecting higher earnings growth in the future
compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story
by itself. It's usually more useful to compare the P/E ratios of one company to other companies
in the same industry, to the market in general or against the company's own historical P/E. It
would not be useful for investors using the P/E ratio as a basis for their investment to compare
the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has
much different growth prospects.

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The P/E is sometimes referred to as the "multiple", because it shows how much investors are
willing to pay per rupee of earnings. If a company were currently trading at a multiple (P/E) of
20, the interpretation is that an investor is willing to pay Rs.20 for Re.1 of current earnings. It is
important that investors note an important problem that arises with the P/E measure, and to avoid
basing a decision on this measure alone. The denominator (earnings) is based on an accounting
measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E
only as good as the quality of the underlying earnings number.

Generally, a high P/E ratio means that investors are anticipating higher growth in the future.

The average market P/E ratio is 20-25 times earnings.

The p/e ratio can use estimated earnings to get the forward-looking P/E ratio.

PEG ratio -

The PEG ratio that indicates an over or underpriced stock varies by industry and by company
type; though a broad rule of thumb is that a PEG ratio below one is desirable. Also, the accuracy
of the PEG ratio depends on the inputs used. Using historical growth rates, for example, may
provide an inaccurate PEG ratio if future growth rates are expected to deviate from historic a l
growth rates. To distinguish between calculation methods using future growth and historic a l
growth, the terms "forward PEG" and "trailing PEG" are sometimes used.

TECHNICAL ANALYSIS

Technical analysis is a financial term used to denote a security analysis discipline for forecasting
the direction of prices through the study of past market data, primarily price and volume.
Behavioral economics and quantitative analysis incorporate technical analysis, which being an
aspect of active management stands in contradiction to much of modern portfolio theory.

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

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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 actual 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.

Simply put, technical analysis is the study of prices, with charts being the primary tool.
Technical analysts are sometimes referred to as chartists because they rely almost exclusively on
charts for their analysis.

Technical analysis is applicable to stocks, indices, commodities, futures or any tradable

instrument where the price is influenced by the forces of supply and demand. Price refers to any
combination of the open, high, low or close for a given security over a specific time frame.

The time frame can be based on intraday, daily, weekly or monthly price data and last a few
hours or many years.

The price is the end result of the battle between the forces of supply and demand for the
company’s stock. The objective of analysis is to forecast the direction of the future price.

By focusing on price and only price, technical analysis represents a direct approach. After all, the
value of any asset is only what someone is willing to pay for it.

Equity Analysis on Banking Sector

The main aim of this project is to analyze current growth trend of scripts of banking in equity
market. Based on the study of Indian economy. Research studies have proved that investments in
some shares with a longer tenure of investment have yielded far superior returns than any other
investment. However, this does not mean all equity investments would guarantee similar high
returns. Equities are high-risk investments. One needs to study them carefully before investing
Since 1990 till date, Indian stock market has returned about 17% to investors on an average in

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terms of increase in share prices or capital appreciation annually. Besides that, on average stocks
have paid 1.5 % dividend annually. Dividend is a percentage of the face value of a share that a
company returns to its shareholders from its annual profits. Compared to most other forms of
investments, investing in equity shares offers the highest rate of return, if invested over a longer
duration. Each investment alternative has its own strengths and weaknesses. Some options seek
to achieve superior returns (like equity), but with corresponding higher risk. Other provide safety
(like PPF) but at the expense of liquidity and growth. Other options such as FDs offer safety and
liquidity, but at the cost of return. Mutual funds seek to combine the advantages of investing in
arch of these alternatives while dispensing with the shortcomings. Indian stock market is semi-
efficient by nature and, is considered as one of the most respected stock markets, where
information is quickly and widely disseminated, thereby allowing each security’s price to adjust
rapidly in an unbiased manner to new information so that, it reflects the nearest investment
value. And mainly after the introduction of electronic trading system, the information flow has
become much faster. But sometimes, in developing countries like India, sentiments play major
role in price movements, or say, fluctuations, where investors find it difficult to predict the future
with certainty. Banks are the major part of any economic system. They provide a strong base to
Indian economy as well. Even in the share markets, the performance of banks shares is of great
importance.

Thus, the performance of the share market, the rise and the fall of market is greatly affected by
the performance of the banking sector shares and this report revolves around all factors, their
understanding and a theoretical and technical analysis

1.2 Problem Statement

Capital market provides the resources needed by medium and large-scale industries for
investment purposes. Unlike the money market which deals with short term sources of funds or
which provides working capital resources, capital market deals in long term sources of funds.
The long-term sources, in this context mean the sources of funds the term for which is more than
one year. Thus, capital market functions as an institution which channelizes the savings into
investment. It serves as medium to bring together entrepreneurs, initiating activity involving

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huge financial resources on the one hand and savers, individuals or institutions, seeking outlets
for investments, on the other.

The capital market consists of the primary markets and the secondary markets with a close link
between them. The primary market creates long term instruments through which corporate
entities borrow from the capital market, but the secondary market is the one, which provides
liquidity to these instruments. These (primary and secondary) markets interact with each other, if
secondary market is active and/or buoyant. The term capital market also includes, apart from the
primary and secondary market, term lending institutions, banks and investors. It also includes
everybody and anybody who is engaged in providing long term capital to various sectors.

1.3 Purpose of Study

In India, the history of capital markets dates back to more than 130 years. The inception of
capital markets in India was caused by the establishment of the Stock Exchange, Mumbai
(Popularly known as BSE) in 1875. For more than 100 years of its inception, the capital market
was considered as a place for elite group only. It was not seen as a factor, which can mobilize the
saving into investment till recent decades. But, the increasing capital requirements of the
economic system have induced common man to be aware of the development and working of
capital markets.

Firstly, it is now being emphasized that capital market is not meant only for private corporate
entities to raise their funds, but it can mobilize the household savings and such small savings,
collectively can be put to use more efficiently, through the capital market. Now even the
governments have also realized that in the area of public sector, capital market may act as the
key factor in raising finance from various sources. Keeping all these considerations in mind, this
topic has been chosen for the present study.

Secondly, the capital market has, from research point of view so for remained less touched. The
common man has also a fear about the capital market in his mind. Hence, the present study is an
attempt to remove the myths and misconceptions about the capital market and this would, in turn
facilitate a better understanding about the markets for the common man.

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Indian capital market has grossly remained ignored from the academic research. Samir K Barua,
V. Raghunathan and Jayanth R. Varma have observed this fact in the following words

“Considering the size, vintage and the extent of development of the Indian Capital market, the
total volume of research on it appears to be woefully modest. The total number of research works
(book, dissertation or research paper) for 118 potential research institutions is only about 0.1 unit
of work per institution per year! If one applies a strict definition of research, half of these works
have to be excluded from the list.”

Arup Choudhari says “A major reason for the paucity of capital market-based studies in
emerging capital markets is the difficulty of obtaining data regarding the public release of
information in these markets and share price/value changes over a sufficiently long period of
time.”

Harvey comments that “another major inhibiting factor is weakness in the research capability of
local brokers and financial institutions. Shortages of qualified personnel, absence of effective
competition among brokers, and a weak financial press often combine to retard the flow of
financial and other information to investors.”

The possible causes of this fact may be the lack of availability of data base and computing
resources. But now, with increasing foreign institutional investment in the Indian capital market,
it is expected that some really rigorous and empirical studies may come out in the near future.
The present study is a small attempt in this direction.

1.4 Research Objectives

The major objectives of the study: -

• To study the equity analysis of the SBI Bank.

• To help the investors for choosing to make their investments in banking sector.
• To calculate the risk-return stock of banking sector.
• To understand the concept of investing in equity shares.

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1.5 Definitions

Throughout finance, one rule always holds true. The general belief is that the value of any asset
or security is exactly equal to the discounted present value of all the cash flows that can be
derived from it in future periods.

Using this principle, one can easily value securities like debt. This is because they have a finite
existence. The cash flows derived from them can be easily predicted. However, equity valuation
is not so simple. Equity represents a partnership in the business. As such, it represents an attempt
to value cash flows which are uncertain and unpredictable.

Definition

In finance, valuation is a process of determining the fair market value of an asset. Equity
valuation therefore refers to the process of determining the fair market value of equity securities.

Importance of Equity Valuation: Systemic

The whole system of stock markets is based upon the idea of equity valuation. The stock markets
have a wide variety of stocks on offer, whose perceived market value changed every minute
because of the change in information that the market receives on a real time basis.

Equity valuation therefore is the backbone of the modern financial system. It enables companies
with sound business models to command a premium in the market. On the other hand, it ensures
that companies whose fundamentals are weak witness a drop in their valuation. The art and
science of equity valuation therefore enables the modern economic system to efficiently allocate
scare capital resources amongst various market participants.

Importance of Equity Valuation: Individual

As discussed, on a micro level, equity valuation is beneficial for the entire stock market
ecosystem. However, how does it benefit an individual to study and apply the principles of
equity valuation?

Well, markets receive information every moment and make an attempt to factor the financial
effect of this information in the stock price. Individual estimates of the effect vary and as such

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different people may come up with different stock prices. Therefore, there can be a difference
between the market value of a company and what investors call its true or “intrinsic value”

Investors, stand to gain a lot of money if they are able to correctly identify this difference. The
second richest person in the world, Warren Buffett has made his fortune correcting and applying
the art of equity valuation. In fact, the theory of equity valuation has been heavily influenced by
the work of Warren Buffett and his mentor.

Process of Conducting Equity Valuation

Equity valuation is followed differently by different individuals. As such, there is no set pre-
defined standard process. Instead, equity valuation consists of 4 or 5 broad categories of steps
that need to be followed. The procedures maybe different but the objectives are always the same.
Every person conducting equity valuation, must in one way or another account for these
parameters:

1. Understand the macroeconomic factors and the industry: No company operates in

vacuum. As such, the performance of every business is influenced by the performance of
the economy in general as well as the industry in which it operates. As such, before
making an attempt to value a business, the macro-economic factors must be accounted
for. A reasonably accurate prediction regarding these parameters creates the base for an
accurate valuation.
2. Make a reasonable forecast of the company’s performance: Mere extrapolation of the
company’s current financial statements does not constitute a good forecast. A good
forecast takes into account how the company may change its scale of production of the
forthcoming future. Then, it also takes into account how changes in this scale will affect
the costs. Costs and sales do not move in linear fashion. To come up with an accurate
forecast, an analyst would require intricate knowledge of the company’s business.
3. Select the appropriate valuation model: Valuation is less of a science and more of an
art. There are multiple valuation models available. Also, all these valuation models do not
necessarily lead to the same conclusion. Hence, it is the job of the analyst to understand
which model would be most appropriate given the type and quality of data available.

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 4. Arrive at a valuation figure based on the forecast: The next step is to apply the
valuation model and come up with an exact numerical value which according to the
analyst defines the worth of the business. It may be a single estimated amount or it could
be a range. Investors prefer a range so that they clearly know what their lower and upper
bounds for bidding should be.
5. Take action based on the arrived valuation: Finally, the analyst has to give a buy, sell
or hold recommendation based on the current market price and what analysis shows is the
intrinsic worth of the company.

The process of equity valuation is thus long, subjective and difficult to understand. However, for
those who do master this art, the rewards are enormous.

1.6 Scope of the Study

The scopes of the project are limited to understanding the basics of fundamental analysis and
technical analysis and apply it to take a decision of investing in banking sector.

1.7 Limitations

• The study is based on the data is given by the investors and the employee which may not
be 100% correct.
• Moreover, very few investors and agents have a detail knowledge of the study.
• The study is confined to only one sector.
• The project has been limited to investment analysis of banking sector only.

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1.8 Significance of the Study

Increased competition, changing business environment, globalization and advancement of

information and communications technology are the important changes that have forced the
banking and financial services to change. Demand for financial services is changing rapidly.
Accompanying these changes is customer behavior regarding to these services. They need to
adapt to the new banking environment. Therefore, with the passing of the traditional banking to
electronic banking, banks need a new working system and strategies. To attract and retain
existing and new customers they need to employ an innovative approach to conducting their
business.

Information technology is a capital-intensive industry. Investing in e-banking if not done

appropriately it can cost very substantial sum of money. Today many banks worldwide offer
their services electronically. In an increasingly integrated global economy, the Indian economy
will lag behind if it does not take advantage of this new banking system. On the other hand,
customers who have the technological understanding are growing in number and these customers
prefer a distribution system that is based on information technology. Response to this need of
customers with traditional banking systems is relatively expensive. Thus, getting the appropriate
technology is essential to remain in the market. Slow response or overlooking this technological
innovation will leave space for non-bank companies and organizations to provide banking
services and take a larger share of the market.

The significance of this study is on assessing the prospects of Equity Analysis of SBI. This study
tries to disclose the central factors that affect Equity price and participation or lack of
participation of customers in this enterprise. The study also intends to seek for solution to assist
the banking industry to improve networking and services. Although the findings may be limited
in scope but it nevertheless makes some contribution to help investors to choose or not to choose
to invest in SBI Bank.

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1.9 Company Profile

SBI Group

The Bank of Bengal, which later became the State Bank of India. State Bank of India with its
seven associate banks commands the largest banking resources in India.

Nationalization

The next significant milestone in Indian Banking happened in late 1960s when the then Indira
Gandhi government nationalized on 19th July 1949, 14 major commercial Indian banks followed
by nationalization of 6 more commercial Indian banks in 1980.

The stated reason for the nationalization was more control of credit delivery. After this, until 1990s,
the nationalized banks grew at a leisurely pace of around 4% also called as the Hindu growth of
the Indian economy.

After the amalgamation of New Bank of India with Punjab National Bank, currently there are 19
nationalized banks in India.

Liberalization-

In the early 1990’s the then Narasimha Rao government embarked a policy of liberalization and
gave licenses to a small number of private banks, which came to be known as New generation
tech-savvy banks, which included banks like ICICI and HDFC. This move along with the rapid
growth of the economy of India, kick started the banking sector in India, which has seen rapid
growth with strong contribution from all the sectors of banks, namely Government banks, Private
Banks and Foreign banks. However, there had been a few hiccups for these new banks with many
either being taken over like Global Trust Bank while others like Centurion Bank have found the
going tough.

The next stage for the Indian Banking has been set up with the proposed relaxation in the
norms for Foreign Direct Investment, where all Foreign Investors in Banks may be given voting

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rights which could exceed the present cap of 10%, at present it has gone up to 49% with some
restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time, were
used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new
wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All
this led to the retail boom in India. People not just demanded more from their banks but also
received more.

CURRENT SCENARIO

Currently (2010), overall, banking in India is considered as fairly mature in terms of supply,
product range and reach-even though reach in rural India still remains a challenge for the private
sector and foreign banks. Even in terms of quality of assets and capital adequacy, Indian banks are
considered to have clean, strong and transparent balance sheets-as compared to other banks in
comparable economies in its region. The Reserve Bank of India is an autonomous body, with
minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to
manage volatility-without any stated exchange rate-and this has mostly been true.

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. M&As, takeovers, asset sales and much more action
(as it is unraveling in China) will happen on this front in India.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak
Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed
to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any
stake exceeding 5% in the private sector banks would need to be vetted by them.

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is
with the Government of India holding a stake), 29 private banks (these do not have government
stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have
a combined network of over 53,000 branches and 21,000 ATMs. According to a report by ICRA

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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.SBI is the only
bank consisting 26% participation in public sector banks and 39% participation in commercial
banks in India.

Banking in India

1 Central Bank Reserve Bank of India

State Bank of India, Allahabad Bank, Andhra Bank,
Bank of Baroda, Bank of India, Bank of Maharashtra,
Canara Bank, Central Bank of India, Corporation Bank,
Dena Bank, Indian Bank, Indian overseas Bank, Oriental
2 Nationalized
Bank of Commerce, Punjab and Sind Bank, Punjab
Banks
National Bank, Syndicate Bank, Union Bank of India,
United Bank of India, UCO Bank, and Vijaya Bank.

Bank of Rajasthan, Bharat overseas Bank, Catholic

Syrian Bank, Centurion Bank of Punjab, City Union
Bank, Development Credit Bank, Dhanalaxmi Bank,
Federal Bank, Ganesh Bank of Kurundwad, HDFC Bank,
3 Private Banks
ICICI Bank, IDBI, IndusInd Bank, ING Vysya Bank,
Jammu and Kashmir Bank, Karnataka Bank Limited,
Karur Vysya Bank, Kotak Mahindra Bank, Lakshmivilas
Bank, Lord Krishna Bank, Niantic Bank, Ratnakar Bank,
Sangli Bank, SBI Commercial and International Bank,
South Indian Bank, Tamil Nadu Mercantile Bank Ltd.,
United Western Bank, UTI Bank, YES Bank.

Structure of Indian Banking

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 Reserve Bank of India is the regulating body for the Indian Banking Industry. It is a mixture of
Public sector, Private sector, Co-operative banks and foreign banks.

Reserve Bank of India

Scheduled Banks

Scheduled Commercial Banks Scheduled Co-operative Banks

Public Sector Banks Private Sector Banks Foreign Banks Regional Rural Banks

Scheduled Urban cooperative Bank

Scheduled State co-operative Banks

Nationalized Banks

SBI & its Associates

Old Private Sector Banks New Private Sector Banks

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STATE BANK OF INDIA

Not only many financial institution in the world today can claim the antiquity and majesty of the
State Bank Of India founded nearly two centuries ago with primarily intent of imparting stability
to the money market, the bank from its inception mobilized funds for supporting both the public
credit of the companies governments in the three presidencies of British India and the private credit
of the European and India merchants from about 1860s when the Indian economy book a
significant leap forward under the impulse of quickened world communications and ingenious
method of industrial and agricultural production the Bank became intimately in valued in the
financing of practically and mining activity of the Sub- Continent Although large European and
Indian merchants and manufacturers were undoubtedly thee principal beneficiaries, the small man
never ignored loans as low as Rs.100 were disbursed in agricultural districts against glad
ornaments. Added to these the bank till the creation of the Reserve Bank in 1935 carried out
numerous Central – Banking functions

Adaptation world and the needs of the hour has been one of the strengths of the Bank, In the post-
depression exe. For instance – when business opportunities become extremely restricted, rules laid
down in the book of instructions were relined to ensure that good business did not go post. Yet
seldom did the bank contravene its value as depart from sound banking principles to retain as
expand its business. An innovative array of office, unknown to the world then, was devised in the
form of branches, sub branches, treasury pay office, pay office, sub pay office and out students to
exploit the opportunities of an expanding economy. New business strategy was also evaded way
back in 1937 to render the best banking service through prompt and courteous attention to
customers.

A highly efficient and experienced management functioning in a well-defined organizational

structure did not take long to place the bank an executed pedestal in the areas of business,
profitability, internal discipline and above all credibility An impeccable financial status consistent
maintenance of the lofty traditions if banking an observation of a high standard of integrity in its
operations helped the bank gain a pre- eminent status. No wonders the administration for the bank
was universal as key functionaries of India successive finance minister of independent India

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Resource Bank of governors and representatives of chamber of commercial showered economics
on it.

Modern day management techniques were also very much evident in the good old day’s years
before corporate governance had become a puzzled the banks bound functioned with a high degree
of responsibility and concerns for the shareholders. An unbroken record of profits and a fairly high
rate of profit and fairly high rate of dividend all through ensured satisfaction, prudential
management and asset liability management not only protected the interests of the Bank but also
ensured that the obligations to customers were not met.

The traditions of the past continued to be upheld even to this day as the State Bank years itself to
meet the emerging challenges of the millennium.

THE PLACE TO SHARE THE NEWS ...……

SHARE THE VIEWS ……

Togetherness is the theme of this corporate loge of SBI where the world of banking services meets
the ever-changing customers’ needs and establishes a link that is like a circle, it indicates complete
services towards customers. The logo also denotes a bank that it has prepared to do anything to go
to any lengths, for customers.

The blue pointer represents the philosophy of the bank that is always looking for the growth and
newer, more challenging, more promising direction. The key hole indicates safety and security.

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MISSION STATEMENT:

To retain the Bank’s position as premiere Indian Financial Service Group, with world class
standards and significant global committed to excellence in customer, shareholder and employee
satisfaction and to play a leading role in expanding and diversifying financial service sectors while
containing emphasis on its development banking rule.

VISION STATEMENT:

❖ Premier Indian Financial Service Group with prospective world-class Standards of

efficiency and professionalism and institutional values
❖ Retain its position in the country as pioneers in Development banking.
❖ Maximize the shareholders’ value through high-sustained earnings per Share.
❖ An institution with cultural mutual care and commitment, satisfying and
❖ Good work environment and continues learning opportunities.

VALUES

❖ Excellence in customer service

❖ Profit orientation
❖ Belonging commitment to Bank
❖ Fairness in all dealings and relations
❖ Risk taking and innovative
❖ Team playing
❖ Learning and renewal
❖ Integrity
❖ Transparency and Discipline in policies and systems.

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Organization Structure

MANAGING DIRECTOR

CHIEF GENERAL MANAGER

G. M G.M G. M G.M G. M

(Operations) (C&B) (F&S) (I) & CVO (P&D)

Zonal officers
Functional Heads

Regional officers

Former Associate Banks

SBI obtained the control of seven banks in 1960. They were the seven regional banks of ex- Indian
princely states. These were renamed, prefixing them with 'State Bank of'. These seven banking
institutions were State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State
Bank of Indore (SBN), State Bank of Mysore (SBM), State Bank of Patiala (SBP), State Bank of
Saurashtra (SBS) and State Bank of Travancore (SBT). Each one of these banks received the same
logo as the parent bank, SBI.

The plans for making SBI a mega bank with trillion-dollar business by merging the associate banks
started in 2008, and in September the same year, SBS merged with SBI. The very next year, State
Bank of Indore (SBN) also merged. In the same year, a subsidiary named Bharatiya Mahila Bank
was formed. The negotiations for merging of the 6 associate banks (State Bank of Bikaner and

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Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala, State Bank of
Travancore and Bharatiya Mahila Bank) by acquiring their businesses including assets and
liabilities with SBI started in 2016. The merger was approved by the Union Cabinet on 15 June
2016. The State Bank of India and all its associate banks used the same blue Keyhole logo. The
State Bank of India wordmark usually possessed one standard typeface, but also utilized other
typefaces.

On 15 February 2017, the Union Cabinet approved the merger of five associate banks with SBI.
What was overlooked, however, were different pension liability procedures and accounting
guidelines for bad loans, based on regional risks.

The State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank
of Patiala and State Bank of Travancore, and Bharatiya Mahila Bank were merged with State Bank
of India with effect from 1 April 2017.

Non-banking subsidiaries
Apart from its five associate banks (merged with SBI since April 1, 2017), SBI also has the
following non-banking subsidiaries:
• SBI Capital Markets Ltd
• SBI Funds Management Pvt Ltd
• SBI Factors & Commercial Services Pvt Ltd
• SBI Cards & Payments Services Pvt. Ltd. (SBICPSL)
• SBI DFHI Ltd
• SBI Life Insurance Company Limited
• SBI General Insurance

In March 2001, SBI (with 74% of the total capital), joined up with BNP Paribas (with 26% of the
rest capital), to create a joint venture life insurance company called SBI Life Insurance company
Ltd. In 2004, SBI DFHI (Discount and Finance House of India) was founded using its head office
in Mumbai.

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Listings and shareholding
As on 31 March 2017, Government of India held around 61.23% equity shares in SBI. The Life
Insurance Corporation of India, itself state-owned, is the largest non-promoter shareholder in the
company with 8.82% shareholding

Shareholders Shareholding

Promoters: Government of India 61.23%

FIIs/GDRs/OCBs/NRIs 11.17%

Banks & Insurance Companies 10.00%

Mutual Funds & UTI 8.29%

Others 9.31%

Total 100.0%

The equity shares of SBI are listed on the Bombay Stock Exchange, where it is a constituent of
the BSE SENSEX index, and the National Stock Exchange of India, where it is a constituent of
the CNX Nifty. Its Global Depository Receipts (GDRs) are listed on the London Stock Exchange

Employees
SBI is one of the largest employers in the country with 209,567 employees as on 31 March 2017,
out of which there were 23% female employees and 3,179 (1.5%) employees with disabilities. On
the same date, SBI had 37,875 Scheduled Castes (18%), 17,069 Scheduled Tribes (8.1%) and
39,709 Other Backward Classes (18.9%) employees. The percentage of Officers, Associates and
Sub-staff was 38.6%, 44.3% and 16.9% respectively on the same date. Around 13,000 employees
have joined the Bank in FY 2016-17. Each employee contributed a net profit
of ₹511,000 (US$7,800) during FY 2016-17

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Recent awards and recognition

• SBI was ranked as the top bank in India based on tier 1 capital by The Banker magazine in
a 2014 ranking.

• SBI was ranked 232nd in the Fortune Global 500 rankings of the world's biggest
corporations for the year 2016.
• SBI was named the 29th most reputed company in the world according to Forbes 2009
rankings

• SBI was 50th Most Trusted brand in India as per the Brand Trust Report 2013,an annual
study conducted by Trust Research Advisory, a brand analytics company and subsequently,
in the Brand Trust Report 2014, SBI finished as India's 19th Most Trusted Brand in India.

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 CHAPTER 2

LITERATURE REVIEW
The Indian capital market has changed dramatically over the last few years, especially since
1990. Changes have also been taking place in government regulations and technology. The
expectations of the investors are also changing. The only inherent feature of the capital market,
which has not changed is the 'risk' involved in investing in corporate securities. Managing the
risk is emerging as an important function of both large scale and small-scale investors.

Risk management of investing in corporate securities is under active and extensive discussion
among academicians and capital market operators. Surveys and research analyses have been
conducted by institutions and academicians on risk management. The mutual fund companies in
India have conducted specific studies on the 'risk element' of investing in corporate securities.

Grewal S.S and Navjot Grewall (1984) revealed some basic investment rules and rules for selling
shares. They warned the investors not to buy unlisted shares, as Stock Exchanges do not permit
trading in unlisted shares. Another rule that they specify is not to buy inactive shares, ie, shares
in which transactions take place rarely. The main reason why shares are inactive is because there
are no buyers for them. They are mostly sharing of companies, which are not doing well.

A third rule according to them is not to buy shares in closely-held companies because these
shares tend to be less active than those of widely held ones since they have a fewer number of
shareholders. They caution not to hold the shares for a long period, expecting a high price, but to
sell whenever one earns a reasonable reward.

Jack Clark Francis (1986) revealed the importance of the rate of return in investments and
reviewed the possibility of default and bankruptcy risk. He opined that in an uncertain world,
investors cannot predict exactly what rate of return an investment will yield. However, he
suggested that the investors can formulate a probability distribution of the possible rates of
return.

He also opined that an investor who purchases corporate securities must face the possibility of
default and bankruptcy by the issuer. Financial analysts can foresee bankruptcy. He disclosed

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some easily observable warnings of a firm's failure, which could be noticed by the investors to
avoid such a risk.

Preethi Singh (1986) disclosed the basic rules for selecting the company to invest in. She opined
that understanding and measuring return md risk is fundamental to the investment process.
According to her, most investors are 'risk averse'. To have a higher return the investor has to face
greater risks.

She concludes that risk is fundamental to the process of investment. Every investor should have
an understanding of the various pitfalls of investments. The investor should carefully analyse the
financial statements with special reference to solvency, profitability, EPS, and efficiency of the
company.

David.L.Scott and William Edward (1990) reviewed the important risks of owning common
stocks and the ways to minimise these risks. They commented that the severity of financial risk
depends on how heavily a business relies on debt. Financial risk is relatively easy to minimise if
an investor sticks to the common stocks of companies that employ small amounts of debt.

They suggested that a relatively easy way to ensure some degree of liquidity is to restrict
investment in stocks having a history of adequate trading volume. Investors concerned about
business risk can reduce it by selecting common stocks of firms that are diversified in several
unrelated industries.

Lewis Mandells (1992) reviewed the nature of market risk, which according to him is very much
'global'. He revealed that certain risks that are so global that they affect the entire investment
market. Even the stocks and bonds of the well-managed companies face market risk. He
concluded that market risk is influenced by factors that cannot be predicted accurately like
economic conditions, political events, mass psychological factors, etc. Market risk is the
systemic risk that affects all securities simultaneously and it cannot be reduced through
diversification.

Nabhi Kumar Jain (1992) specified certain tips for buying shares for holding and also for selling
shares. He advised the investors to buy shares of a growing company of a growing industry. Buy
shares by diversifying in a number of growth companies operating in a different but equally fast-
growing sector of the economy.

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He suggested selling the shares the moment company has or almost reached the peak of its
growth. Also, sell the shares the moment you realise you have made a mistake in the initial
selection of the shares. The only option to decide when to buy and sell high priced shares is to
identify the individual merit or demerit of each of the shares in the portfolio and arrive at a
decision.

Carter Randal (1992) offered to investors the underlying principles of winning on the stock
market. He emphasised on long-term vision and a plan to reach the goals. He advised the
investors that to be successful, they should never be pessimists. He revealed that - though there
has been a major economic crisis almost every year, it remains true that patient investors have
consistently made money in the equities market. He concluded that investing in the stock market
should be an un-emotional endeavour and suggested that investors should own a stock if they
believe it would perform well.

L.C.Gupta (1992) revealed the findings of his study that there is existence of wild speculation in
the Indian stock market. The over speculative character of the Indian stock market is reflected in
extremely high concentration of the market activity in a handful of shares to the neglect of the
remaining shares and absolutely high trading velocities of the speculative counters.

He opined that, short- term speculation, if excessive, could lead to "artificial price". An artificial
price is one which is not justified by prospective earnings, dividends, financial strength and
assets or which is brought about by speculators through rumours, manipulations, etc. He
concluded that such artificial prices are bound to crash sometime or other as history has repeated
and proved.

Yasaswy N.J. (1993) disclosed how 'turnaround stocks' offer big profits to bold investors and
also the risks involved in investing in such stocks. Turnaround stocks are stocks with
extraordinary potential and are relatively under priced at a given point of time.

He also revealed that when the economy is in recession and the fundamentals are weak, the stock
market, being a barometer of the economy, also tends to be depressed. A depressed stock market
is an ideal hunting ground for 'bargain hunters', who are aggressive investors. Sooner or later
recovery takes place which may take a very long time. He concluded that the investors' watch
work is 'caution' as he may lose if the turnaround strategy does not work out as anticipated.

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Sunil Damodar (1993) evaluated the 'Derivatives' especially the 'futures' as a tool for short-term
risk control. He opined that derivatives have become an indispensable tool for finance managers
whose prime objective is to manage or reduce the risk inherent in their portfolios.

He disclosed that the over-riding feature of 'financial futures' in risk management is that these
instruments tend to be most valuable when risk control is needed for a short- term, I.e., for a year
or less. They tend to be cheapest and easily available for protecting against or benefiting from
short term price. Their low execution costs also make them very suitable for frequent and short-
term trading to manage risk, more effectively.

Yasaswy J.N." (1993) evaluated the quantum of risks involved in different types of stocks.
Defensive stocks are low risk stocks and hence the returns are relatively low but steady. Cyclical
stocks involve higher risks and hence the rewards are higher when compared to the growth
stocks. Growth stocks belong to the medium risk category and they offer medium returns which
are much better. than defensive stocks, but less than the cyclical stocks. The market price of
growth stocks does fluctuate, sometimes even violently during short periods of boom and bust.
He emphasised the financial and organisational strength of growth stocks, which recover soon,
though they may hit bad patches once in a way.

Donald E Fischer and Ronald J. Jordan (1994) analysed the relation between risk, investor
preferences and investor behaviour. The risk return measures on portfolios are the main
determinants of an investor's attitude towards them. Most investors seek more return for
additional risk assumed. The conservative investor requires large increase in return for assuming
small increases in risk. The more aggressive investor will accept smaller increases in return for
large increases in risk. They concluded that the psychology of the stock market is based on how
investors form judgements about uncertain future events and how they react to these judgements.

R.Venkataramani.l l994) disclosed the uses and dangers of derivatives. The derivative products
can lead us to a dangerous position if its full implications are not clearly understood. Being off
balance shekt in nature, more and more derivative products are traded than the cash market
products and they suffer heavily due to their sensitive nature.

He brought to the notice of the investors the 'Over the counter product' (OTC) which are traded
across the counters of a bank. OTC products (eg. Options and futures) are tailor made for the

36 | P a g e
particular need of a customer and serve as a perfect hedge. He emphasised the use of futures as
an instrument of hedge, for it is of low cost.

K.Sivakumar. '"1994) disclosed new parameters that will help investors identify the best
company to invest in. He opined that Economic Value Added (EVA) is more powerful than other
conventional tools for investment decision making like EPS and price earnings ratio. EVA looks
at how capital raised by the company from all sources has been put to use. Higher the EVA,
higher the returns to the shareholder. A company with a higher EVA is likely to show a higher
increase in the market price of its shares.

To be effective in comparing companies, he suggested that EVA per share (EVAPS) must be
calculated. It indicates the super profit per share that is available to the investor. The higher the
EVAPS, the higher is the likely appreciation in the value in future. He also revealed a startling
result of EVA calculation of companies in which 200 companies show a negative value addition
that includes some blue-chip companies in the Indian Stock Market.

Pattabhi Ram.V.15 (1995) emphasised the need for doing fundamental analysis and doing Equity
Research (ER) before selecting shares for investment. He opined that the investor should look for
value with a margin of safety in relation to price. The margin of safety is the gap between price
and value. He revealed that the Indian stock market is an inefficient market because of the
absence of good communication network, rampant price rigging, the absence of free and
instantaneous flow of information, professional broking and so on. He concluded that in such
inefficient market, equity research will produce better results as there will be frequent mismatch
between price and value that provides opportunities to the long-term value-oriented investor. He
added that in the Indian stock market investment returns would improve only through quality
equity research.

Philippe Jhorion and Sarkis Joseph Khoury (1996) reviewed international factors of risks and
their effect on financial markets. He opined that domestic investment is a subset of the global
asset allocation decision and that it is impossible to evaluate the risk of domestic securities
without reference to international factors. Investors must be aware of factors driving stock prices
and the interaction between movements in stock prices and exchange rates. According to them
the financial markets have become very much volatile over the last decade due to the
unpredictable speedy changes like oil price shocks, drive towards economic and monetary

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unification in Europe, the wide scale conversion of communist countries to free market policies
etc. They ekphasized the need for tightly controlled risk management measures to guard against
the unpredictable behaviour of financial markets.

S.Rajagopal (1996) commented on risk management in relation to banks. He opined that good
risk management is good banking. A professional approach to Risk Management will safeguard
the interests of the banking institution in the long run. He described risk identification as an art of
combining intuition with formal information. And risk measurement is the estimation of the size,
probability and timing of a potential loss under various scenarios.

Charles.P.Jones (1996) reviewed how to estimate security return and risk. To estimate returns,
the investors must estimate cash flows the securities are likely to provide. Also, investors must
be able to quantify and measure risk using variance or standard deviation. Variance or standard
deviation is the accepted measure of variability for both realised returns and expected returns. He
suggested that the investors should use it as the situation dictates.

He revealed that over the past 12 years, returns in stocks, bonds, etc. have been normal. Blue
chip stocks have returned an average of more than 16% per year. He warned that the investors
who believe that these rates will continue in the future also, will be in trouble. He also warned
the investors not to allow themselves to become victimised by "investment gurus".

Basudev Sen (1997) disclosed the implications of risk management in the changed environment
and the factors constraining the speed of risk management technology up-gradation. He opined
that the perception and management of risk is crucial for players and regulators in a market-
oriented economy. Investment managers have started upgrading their risk management practices
and systems. They have strengthened the internal control systems including internal audit and
they are increasingly using equity research of better quality.

He observed that risk measurement and estimation problems constrain the speed of up-gradation.
Also, inadequate availability of skills in using quantitative risk management models and lack of
risk hedging investments for the domestic investors are major constraints. He concluded that
with the beginning of a derivative market, new instruments of risk hedging would become
available.

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Bhalla V.K." (1997) reviewed the various factors influencing the equity price and price eamings
ratio. He is of the opinion that equity prices are affected primarily by financial risk
considerations that, in turn, affect earnings and dividends. He also stated that market risk in
equity is much greater than in bonds, and it influences the price also. He disclosed that many
analysts follow price earnings (P/E) ratio to value equity, which is equal to market price divided
by earnings per share.

He observed that inflationary expectations and higher interest rates tend to reduce P/E ratios
whereas growth companies tend to have higher P/E ratios. He suggested that an investor should
examine the trend of P/E ratios over time for each company.

Ghosh T.P.1998 reviewed the various types of risks in relation to the different institutions. He
opined that 'Managing risk' has different meanings for banks, financial institutions, and
nonbanking financial companies and manufacturing companies. In the case of manufacturing
companies, the risk is traditionally classified as business risk and financial risk. Banks, financial
institutions and nonbanking financial companies are prone to various types of risks important of
which are interest rate risk, market risk, foreign exchange risk, liquidity risk, country and
sovereign risk and insolvency risk.

Suseela Subramanya (1998) commented on the risk management processes of banks. She
revealed that banks need to do proper risk identification, classify risks and develop the necessary
technical and managerial expertise to assume risks. Embracing scientific risk management
practices will not only improve the profits and credit management processes of banks, but will
also enable them to nurture and develop mutually beneficial relationships with customers. She
concluded that the better the risk information and control system the more risk a bank can
assume prudently and profitably.

Terry.J.Watsham (1998) discusses the nature of the risks associated with derivative instruments,
how to measure those risks and how to manage them. He stated that risk is the quantified
uncertainty regarding the undesirable change in the value of a financial commitment. He opined
that an organisation using derivatives would be exposed to risks from a number of sources,
which are identified as market risk, credit or defduit risk, operational risk and legal risk. He
revealed that there is 'systemic risk' that the default by one market participant will precipitate a
failure among many participants because of the inter-relationship between the participants.

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Ghose.T.P. (1998) reviewed VAR (Value at Risk). There are two steps in measuring market risk,
the first step is computation of the DEAR, (The Daily Earning at Risk) the second step is the
computation of the VAR. He also reviewed the measurement of price sensitivity. He stated that
price sensitivity could be measured by modified duration (MD) or by cash flow approach.

Mall C.P. and Sigh J.P. (1998) emphasised the importance of diversification and introducing
flexibility to reduce risk. They stated that diversification reduces risks on the one hand and
increases the possibility of large gains on the other. They also reviewed insurance as a way-out
for reducing the risk. The immense schemes help transfer of risks to the insurance companies,
especially applicable in agricultural business.

Avijit Banerjee (1998) reviewed Fundamental Analysis and Technical Analysis to analyse the
worthiness of the individual securities needed to be acquired for portfolio construction. The
Fundamental Analysis aims to compare the Intrinsic Value (I.V) with the prevailing market price
(M.P) and to take decisions whether to buy, sell or hold the investments. The fundamentals of the
economy, industry and company determine the value of a security. If the 1.V is greater than the
M.P., the stock is underpriced and should be purchased.

Juan H Pujadas (1999) commented on the models of measuring risks. He opined that the models
of measuring risk are only as good as the assumptions underlying them. They are not realities,
but models. Commenting on default risk in India, he stated that many defaults are not reported.
He is of the opinion that default risks are not handled properly.

Ashutosh Bishnoi (1999) commented on the risk involved in the gilt funds. He argued that the
gilt funds are not risk free and investors should watch out for interest rate and management risk.
Whenever one invests, the return on investment represents a risk premium. The general rule is
the higher the risk; the higher will be the risk premium. Logically, 'zero risk' investments should
carry zero or near zero returns. Obviously, the gilt funds, having an approximately 11% annual
return must carry reasonable risk. He also commented on the effect of short-term volatility on the
retail investors. The retail investors in any market find it difficult to live through the short-term
volatility. He concluded the article by suggesting that in the gilt market the way to minimise the
impact of volatility is to invest more when the market falls.

40 | P a g e
Suresh G Lalwani " (1999) emphasised the need for risk management in the securities market
with particular emphasis on the price risk. He commented that the securities market is a 'vicious
animal' and there is more than a fair chance that far from improving, the situation could
deteriorate.

Seema Shukla (1999) is of the view that the risk can be managed whether it be political,
commercial or technological. But 'mathematical risk management' has not yet been fully applied
across all sectors of companies, the concept is still evolving world-wide.

She commented that risk management comes into focus due to the uncertainty that prevails in the
business environment. It has developed more in countries whose economies are deregulated and
privatised, as opposed to economies like India, which are in the process of opening up. However,
once risks are identified, they are measured and managed, she concluded that the risk function
has to form the basis for decision- making.

Indu Salian (1999) reviewed risk management of the financial sector. She opined that managing
financial risk systematically and professionally becomes an important task, however difficult it
may be. A11 risks are to be monitored within reasonable limits. He revealed that tested risk
control systems are today available virtually off the shelf and can be made universally applicable
with a little bit of judgement and modification.

While discussing on financial sector reforms introduced in 1992-93 and its effect on risk
management, he revealed that reforms would necessarily have transition risks and volatility. And
margins will get squeezed and the cushion to absorb risk will get reduced. Then management of
risk requires strong risk control. He concluded that if we are able to manage the transition phase
of the reforms and upgrade our infrastructure for improved risk management capabilities, we are
certain to come out ahead.

Seema Shukla " (1999) disclosed the changing face of risk by comparing the old paradigm and
the new paradigm. The old paradigm is that risk assessment is an AD-HOC activity that is done
whenever managers believe there is a need to do it. But the new paradigm is that risk assessment
is a continuous activity. The old pattern of risk management was to inspect and detect business
risk and then react. But the new pattern is to anticipate and prevent business risk at the source
and then monitor business risk controls continuously. She distinguished between business risks

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and financial risks. In managing the business risk, one looks at the risk reward profile to
maximise reward based on the risk appetite. She opined that one can run a business by
minimising financial risk, but the business risk itself could be high.

She clears the air by stating that business risk is technology risk, political risk, geography risk,
the changing preference of customers, economic risk, etc. whereas financial risk is currency risk,
interest rate risk, commodities risk etc. To manage these risks, the first step is to identify the
risks and determine the source of those risks. There is no way to manage something that cannot
be measured, so the next step involves getting a measure of the significance and likelihood of
occurrence. She concluded by emphasizing the need to priorities the risks, as it is impossible to
throw resources on all kinds of risks.

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 CHAPTER 3

RESEARCH METHODOLOGY
The process used to collect information and data for the purpose for making business decisions.
The methodology may include publication research, interviews, surveys and other research
techniques, and could include present and historical information.

The methodology of study consists of

• Source of data collection

• Statistical tools and techniques

Source of data collection:

The data has been collected through primary and secondary sources

primary data: -

• Discussion with branch manager

• Live trading in the market
secondary data: -

• Books related to financial management

• Web sites can be used as vital information source

Statistical tool and techniques:

The collected data needed for the analysis are:

• Comparative analysis of balance sheets

• Financial ratio’s

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Fundamental Analysis:

Fundamental analysis refers to the study of the core underlying elements that influence the
economy of a particular entity. It is a method of study that attempts to predict price action and
market trends by analyzing economic indicators, government policy and societal factors within a
business cycle framework. The fundamental analysis of a company involves the following
parameters:

1. Macroeconomic Analysis
2. Industry Analysis
3. 3.Company analysis

How does an investor determine if a stock is undervalued, overvalued, or trading at fair market
value? With fundamental analysis, this may be done by applying the concept of intrinsic value. If
all the information regarding a corporation's future anticipated growth, sales figures, cost of
operations, and industry structure, among other things, are available and examined, then the
resulting analysis is said to provide the intrinsic value of the stock. To a fundamentalist, the
market price of a stock tends to move towards its intrinsic value. If the intrinsic value of a stock
is above the current market price, the investor would purchase the stock. However, if the investor
found through analysis that the intrinsic value if a stock was below the market price for the stock,
the investor would sell the stock from their portfolio or take a short position in the stock.

1. Macroeconomic Analysis:

Change in rates by RBI:

Looking at the changing scenario, RBI keeps on changing rates such as Repo Rate, Reverse
Repo Rate and Cash Reserve Ratio. These rates have a direct relation with Bank’s performance
and in turn share prices are linked with bank’s performance. Thus, a change in these rates or
even a speculation of change in these rates affects share prices.

Global Analysis:

Any change in global economy or in other words, global changes also affects Indian Economy.
For example: The recession was first observed in USA and later on it caught its lead in other

44 | P a g e
countries too. When it entered India, the share market crashed literally. It affected many banks as
ICICI and others, resulting in loss of people’s confidence towards banks.

Change in Governments Policy:

The government takes desired steps and keeps on reviewing its policies, rules, regulations and
procedures. A change in FDI and FII inflow restrictions, entry exit barriers for foreign banks in
India, EXIM regulations, change in Basel norms, etc. form a part of important government
policies. For example, if government allows entry of foreign banks in India, then competition
would rise, and it may happen that those foreign banks may outperform and leave our own banks
far behind. Thus, some restriction would follow and this will definitely affect share prices.

Effect of Inflation on banking operations:

Several economists have found that countries with high inflation rates have inefficiently small
banking sectors and equity markets. This effect suggests that inflation reduces bank lending to
the private sector, which is consistent with the view that a sufficiently high rate of inflation
induces banks to ration credit.

Effect of monetary policy on Banking Sector:

Monetary policy affects banking sector in many ways. One way is through credit Markets.
Because of imperfect information, incomplete contracts and imperfect bank Competition,
monetary policy may affect banks’ loan supply. In particular, expansive Monetary policy may
increase banks’ loan supply directly (bank lending channel), or Indirectly by improving
borrowers’ net worth and, hence, by reducing the agency costs of lending.

2. Industry Analysis:

Life Cycle Analysis:

Bank plays an important role in the economic development of the country. The entire
commercial and industrial activities are well knitted with the banks. One cannot imagine the
cessation of the banking activities even for a day. There may be an economic crisis in the country
if the banks stop functioning for some days.

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In the early days, the banking business was confined to receiving of deposits and lending of
money. But the modern bankers undertake wide variety of functions to assist their customers.
Banks are like any other business in that they produce goods and services to customers. Like any
other businesses, their products have life cycles. Cheques are in a decline phase of their life cycle
and use of cheques is declining rapidly and being replaced by electronic bill pay and debit cards.
Internet Banking and Electronic Bill pay are in their growth phase as more and more customers
are using these services. Cards or Cheque Cards are in their maturity phase as they are accepted
by nearly everyone. So overall, the banking industry is in a GROWTH PHASE, as new measures
are being adopted overtime so as to make transactions speedy and easy.

Porter’s five forces analysis:

1. Threat of New Entrants. The average person can't come along and start up a bank, but there
are services, such as internet bill payment, on which entrepreneurs can capitalize. Banks are
fearful of being squeezed out of the payments business, because it is a good source of fee-based
revenue. Another trend that poses a threat is companies offering other financial services. Also,
the possibility of a mega bank entering into the market poses a real threat.

2.Power of Suppliers. The suppliers of capital might not pose a big threat, but the threat of
suppliers luring away human capital does. If a talented individual is working in a smaller
regional bank, there is the chance that person will be enticed away by bigger banks, investment
firms, etc.

3. Power of Buyers. The individual doesn't pose much of a threat to the banking industry, but
one major factor affecting the power of buyers is relatively high switching costs. If a person has
a mortgage, car loan, credit card, checking account and mutual funds with one particular bank, it
can be extremely tough for that person to switch to another bank. In an attempt to lure in
customers, banks try to lower the price of switching, but many people would still rather stick
with their current bank. On the other hand, large corporate clients have banks wrapped around
their little fingers. Financial institutions - by offering better exchange rates, more services, and
exposure to foreign capital markets - work extremely hard to get high-margin corporate clients.

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4. Availability of Substitutes. There are plenty of substitutes in the banking industry. Banks
offer a suite of services over and above taking deposits and lending money, but whether it is
insurance, mutual funds or fixed income securities, chances are there is a non-banking financial
services company that can offer similar services. On the lending side of the business, banks are
seeing competition rise from unconventional companies. Sony, General Motors and Microsoft all
offer preferred financing to customers who buy big ticket items

5. Competitive Rivalry. The banking industry is highly competitive. The financial services
industry has been around for hundreds of years and just about everyone who needs banking
services already has them. Because of this, banks must attempt to lure clients away from
competitor banks. They do this by offering lower financing, preferred rates and investment
services. The banking sector is in a race to see who can offer both the best and fastest services,
but this also causes banks to experience a lower ROA. They then have an incentive to take on
high-risk projects. In the long run, we're likely to see more consolidation in the banking industry.
Larger banks would prefer to take over or merge with another bank rather than spend the money
to market and advertise to people.

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 CHAPTER 4

DATA ANALYSIS AND INTERPRETATION

Key Financial Figures

Table no. 4.1

Consolidated (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Interest earned 1,67,978.14 1,89,062.43 2,07,974.34 2,21,854.84 2,30,447.49
Interest expended 1,06,817.91 1,21,479.04 1,33,178.64 1,43,047.36 1,49,114.67
Net Interest Income 61,160.23 67,583.39 74,795.70 78,807.48 81,332.82
Other income 32,581.69 37,882.13 49,315.17 51,016.19 68,192.96
Operating expenses 52,819.80 63,368.74 73,848.01 73,717.07 87,290.07
Operating Profit 40,922.12 42,096.78 50,262.86 56,106.60 62,235.71
Provisions (other than provisions 15,040.31 20,771.24 24,408.29 37,929.82 61,290.88
for tax) and contingencies
Exceptional items
PBT 25,881.81 21,325.54 25,854.57 18,176.78 944.83
Tax 7,558.82 6,836.07 8,337.20 5,433.50 1,335.50
PAT (before Minority Interest and 18,322.99 14,489.47 17,517.37 12,743.28 (390.67)
share of Associates)
Profit/ (loss) attributable to 638.44 633.43 837.51 794.51 (338.62)
Minority Interest
Share of profit / (loss) of (231.68) (317.73) (314.44) (275.82) (293.28)
Associates
Consolidated Profit / (Loss) for 17,916.23 14,173.77 16,994.30 12,224.59 241.23
the year

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Profitability Analysis

Table no. 4.2

Consolidated %
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Net Profit Margin Ratio 9.14 6.38 6.81 4.67 (0.13)
Cost to Net Income Ratio 56.35 60.08 59.50 56.78 58.38
Other Income to Net Income Ratio 34.76 35.92 39.73 39.30 45.61

Chart no. 4.1

Net Profit Margin Ratio

9.14

6.81
6.38

4.67

0.13
FY 2013 FY 2014 FY 2015 FY 2016 FY 2017

Net Profit Margin Ratio

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 Chart no. 4.2

Cost to Net Income Ratio

60.08
59.5

58.38

56.78
56.35

FY 2013 FY 2014 FY 2015 FY 2016 FY 2017

Cost to Net Income Ratio

Chart no. 4.3

Other Income to Net Income Ratio

45.61

39.73 39.3
34.76 35.92

FY 2013 FY 2014 FY 2015 FY 2016 FY 2017

Other Income to Net Income Ratio

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Interpretation:

Net profit margin is arrived at by dividing profit after tax by the total income generated (i.e.
interest earned plus other income) and shows what is left for the shareholders as a percentage of
total income.

Cost to net income ratio is particularly important in valuing banks. It is derived by dividing
operating expenses by the net income generated (i.e. net interest income plus the other income).
The ratio highlights the efficiency with which the bank is being run – the lower it is, the more
profitable the bank will be. If this ratio rises from one period to the next, it means that costs are
rising at a higher rate than income. Together these ratios help in understanding the cost and profit
structure of the bank and analysing business inefficiencies.

Other income largely constitutes of fee income such as commission and brokerage fees and
client-based merchant foreign exchange trade, service charges from account maintenance,
transaction banking (including cash management services), syndication and placement fees,
processing fees from loans and commission on non-funded products (such as letters of credit and
bank guarantees) etc. Banks in developed countries derive nearly 50% of their income from these
non-funded sources. A high other income to net income ratio is good for the bottom line (i.e.
net profit) as income from this stream is derived without significant mobilization of deposits and
hence the cost associated with this income is relatively lower compared to interest income.

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 Key Balance Sheet Figures

Table no. 4.3

Sources of Funds / (Rs. Cr)

Liabilities

Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017

Share Capital 671.04 684.03 746.57 746.57 776.28
Reserves & Surplus 1,05,558.97 1,24,348.99 1,46,623.96 1,60,640.97 1,79,816.09
Net worth (shareholders’ 1,06,230.01 1,25,033.02 1,47,370.53 1,61,387.54 1,80,592.37
funds)
Minority Interest 3,725.68 4,253.86 4,909.15 5,497.12 6,267.40
Deposits 14,14,689.40 16,27,402.61 18,38,852.36 20,52,960.79 22,53,857.56
Borrowings 1,57,991.36 2,03,723.20 2,23,759.71 2,44,663.47 2,58,214.39
Other liabilities and 1,47,319.73 1,72,745.65 1,81,089.86 2,35,601.11 2,71,965.92
provisions
Total Liabilities 18,29,956.18 21,33,158.34 23,95,981.61 27,00,110.02 29,70,897.64

Table no. 4.4

Application of Funds / (Rs. Cr)

Assets
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Fixed Assets 7,407.97 9,369.93 10,559.78 12,379.30 15,255.68
Cash and balance with RBI 79,199.21 89,574.03 1,14,095.60 1,44,287.55 1,60,424.57
Balances with banks and 48,391.62 55,653.69 53,065.74 64,299.02 43,734.90
money at call and short notice
Advances 11,63,670.21 13,92,608.03 15,78,276.69 16,92,211.33 18,70,260.89
Investments 4,60,949.14 5,19,393.19 5,78,793.09 6,95,691.75 7,05,189.08
Other Assets 70,338.03 66,559.46 61,190.71 91,241.07 1,76,032.52
Total assets 18,29,956.18 21,33,158.34 23,95,981.61 27,00,110.02 29,70,897.64

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 Efficiency Analysis

Table no. 4.5

Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017

Advances / Loan Funds Ratio 73.99 76.05 76.52 73.65 74.45
ROE / RONW 14.44 14.33 9.62 10.18 6.54

Chart no. 4.4

Advances/Loan Funds Ratio

76.52
76.05

74.45
73.99
73.65

FY 2013 FY 2014 FY 2015 FY 2016 FY 2017

Advances/Loan Funds Ratio

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 Chart no. 4.5

ROE/RONW

14.44 14.33

10.18
9.62

6.54

FY 2013 FY 2014 FY 2015 FY 2016 FY 2017

ROE/RONW

Interpretation:

Advances to Loan funds ratio: This ratio indicates the efficiency with which the bank is able to
deploy the funds it mobilizes and is arrived at by dividing the banks total advances by its total
deposits (i.e. deposits + borrowings). A high advance to loan fund ratio indicates that the bank
might not have enough liquidity to cover any unforeseen fund requirements; if the ratio is too
low, banks may not be earning as much as they could be.

Return on Equity (ROE) or Return on Net Worth (RONW): measures the amount of profit
which the company generates on money invested by the equity shareholders (i.e. share capital +
reserves and surplus). In short, ROE draws attention to the return generated by the shareholders
on their investment in the business. ROE is widely used in comparing the profitability of the
company with other companies in the same industry.

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 Valuation Analysis
Table No. 4.6

Consolidated
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Net Interest Income Rs. 61,160.23 67,583.39 74,795.70 78,807.48 81,332.82
Growth (%) 5.67 % 10.50 % 10.67 % 5.36 % 3.20 %
PAT (Rs. Cr.) 18,322.99 14,489.47 17,517.37 12,743.28 (390.67)
Growth (%) 14.71 % (20.92 %) 20.90 % (27.25 %)
Earnings Per Share-Basic (Rs.) 26.68 20.40 22.76 15.95 0.31
Earnings Per Share-Diluted (Rs.) 26.68 20.40 22.76 15.95 0.31
Price to Earnings 7.77 12.75 11.70 12.18

Liquidity and Credit Analysis

Table No. 4.7

Consolidated
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Net Interest Margin Ratio (“NIM”) 3.34 3.17 3.16 2.96 2.84
Capital Adequacy Ratio 12.51 12.44 12.00 13.12 13.11
Net NPAs 2.10 2.57 2.12 3.81 3.71

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 Chart no. 4.6

Capital Adequacy Ratio

13.12 13.11

12.51
12.44

12

FY 2013 FY 2014 FY 2015 FY 2016 FY 2017

Capital Adequacy Ratio

Chart no. 4.7

Net Profit Margin Ratio

9.14

6.81
6.38

4.67

0.13
FY 2013 FY 2014 FY 2015 FY 2016 FY 2017

Net Profit Margin Ratio

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 Chart no. 4.8

Net NPAs

3.81 3.71

2.57
2.1 2.12

FY 2013 FY 2014 FY 2015 FY 2016 FY 2017

Net NPAs

Interpretation:

NIM: Banks focus on lending or advancing money at a rate higher than the rate at which they
accept deposits. Net Interest Margin is calculated by dividing the difference between Interest
earned (on advances) and interest expended (on deposits) by the amount of (average) Invested
Assets. If this ratio rises from one period to the next, it indicates that the bank is able to deploy
its funds more efficiently which results in greater profitability.

Capital Adequacy Ratio (CAR): or Capital to Risk Weighted Assets Ratio (CRAR) is a
measure of a bank’s capital (net worth plus subordinated debt) expressed as a percentage of a
bank’s risk weighted credit exposures (loans).

Two types of capital are measured: tier I capital, which can absorb losses without a bank being
required to cease trading (such as ordinary share capital and free reserves); and tier II capital,
which can absorb losses in the event of a winding-up and so provides a lesser degree of
protection to depositors (such as long term unsecured loans and revaluation reserves which is
taken at a discount of 55 % while determining its value for inclusion in Tier II capital).

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Measuring credit exposures requires adjustments to be made to the amount of assets shown on a
bank’s balance sheet. This is done by weighting the loans made by a bank according to their
degree of riskiness, e.g. loans to Governments are given a 0 %weighting whereas loans to
individuals are weighted at 100 %. Similarly, off-balance sheet items such as guarantees and
foreign exchange contracts are also weighted for their riskiness. On-balance sheet and off-
balance sheet credit exposures are added to get total risk weighted credit exposures.

As per the Basel II norms the minimum capital adequacy ratios that apply are:

Tier I capital to total risk weighted credit exposures to be not less than 4 %;

Total capital (Tier I plus Tier II less certain deductions) to total risk weighted credit exposures to
be not less than 8%.

The RBI currently prescribes a minimum capital of 9 % of risk-weighted assets, which is higher
than the internationally prescribed percentage of 8 %.

Applying minimum capital adequacy ratios serves to protect depositors and promote the stability
and efficiency of the financial system.

NPA: Non-Performing Asset or NPA is a classification used by financial institutions that refer to
loans that are in jeopardy of default. Once the borrower has failed to make interest or principal
payments for 90 days the loan is considered to be a non-performing asset. Any rise in the
percentage of NPAs results in a sharp decline in the overall profitability.

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Findings

The net profit margin is a good way of comparing companies in the same industry, since
such companies are generally subject to similar business conditions. However, the net
profit margins are also a good way to compare companies in different industries in order
to gauge which industries are relatively more profitable. Also called net margin. A higher
profit margin indicates a more profitable company that has better control over its costs
compared to its competitors. Profit margin. The profit margin ratio, also known as the
operating performance ratio, measures the company’s ability to turn its sales into net
income. To evaluate the profit margin, it must be compared to competitors and industry
statistics. It is calculated by dividing net income by net sales.
The part of the earnings not paid to investors is left for investment to provide for future
earnings growth. Investors seeking high current income and limited capital growth prefer
companies with high Dividend payout ratio. However, investors seeking capital growth
may prefer lower payout ratio because capital gains are taxed at a lower rate. High
growth firms in early life generally have low or zero payout ratios. As they mature, they
tend to return more of the earnings back to investors.
The portion of a company’s profit allocated to each outstanding share of common stock.
Earnings per share serves as an indicator of a company’s profitability. Earnings per share
is generally considered to be the single most important variable in determining a share’s
price. It is also a major component used to calculate the price-to-earnings valuation ratio.
The sum of declared dividends for every ordinary share issued. Dividend per share (DPS)
is the total dividends paid out over an entire year (including interim dividends but not
including special dividends) divided by the number of outstanding ordinary shares issued.
A liquidity ratio measures a company’s ability to pay short-term obligations.
An indicator of a company’s short-term liquidity. The quick ratio measures a company’s
ability to meet its short-term obligations with its most liquid assets. The higher the quick
ratio, the better the position of the company.
A debt obligation where the borrower has not paid any previously agreed upon interest
and principal repayments to the designated lender for an extended period of time. The
nonperforming asset is therefore not yielding any income to the lender in the form of
principal and interest payments.

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 In net profit margin ratio 2014 it has decrease in year 2014 from 9.14 to 6.38 i.e. 2.76
times and again it has increased in 2015 0.43 times. In dividend payout ratio it has
gradually increase in year 2014 by 0.46 times, in tear 2015 by 2.67 times which has
reduced again in year 2014 by 3.47 times. Earnings per share have increase in year 2014
by 58.08 times which has decrease in year 2014 by 28.30 times. Dividend per share and
Non-performing assets has also increase in every year. Current ratio has increase form
0.1 times in year 2014 and quick ratio has also frequently increased.

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Suggestions:

High growth of Indian Economy:

The growth of the banking industry is closely linked with the growth of the overall economy.
India is one of the fastest growing economies in the world and is set to remain on that path for
many years to come. This will be backed by the stellar growth in infrastructure, industry,
services and agriculture. This is expected to boost the corporate credit growth in the economy
and provide opportunities to banks to lend to fulfill these requirements in the future.

Rising per capita income:

The rising per capita income will drive the growth of retail credit. Indians have a conservative
outlook towards credit except for housing and other necessities. However, with an increase in
disposable income and increased exposure to a range of products, consumers have shown a
higher willingness to take credit, particularly, young customers. A study of the customer profiles
of different types of banks, reveals that foreign and private banks share of younger customers is
over 60% whereas public banks have only 32% customers under the age of 40. Private Banks
also have a much higher share of the more profitable mass affluent segment.

New channel – Mobile banking is expected to become the second largest channel for
banking after ATMs:

New channels used to offer banking services will drive the growth of banking industry
exponentially in the future by increasing productivity and acquiring new customers. During the
last decade, banking through ATMs and internet has shown a tremendous growth, which is still
in the growth phase.

Financial Inclusion Program:

Currently, in India, 41% of the adult population doesn’t have bank accounts, which indicates a
large untapped market for banking players. Under the Financial Inclusion Program, RBI is trying
to tap this untapped market and the growth potential in rural markets by volume growth for
banks. Financial inclusion is the delivery of banking services at an affordable cost to the vast
sections of disadvantaged and low-income groups.

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 • Investors shouldn’t be depending upon the rumors and TV news which might affect the
shares only for a short span of time.
• The banks can expand its network by increasing its branches. Investments are to be made
in those banks which give fairly good returns, dividends every year.
• Financial inclusion initiatives also need to be taken care of as India fares very poorly on
this regard as half the population does not have access to banking services.

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Conclusion

The economic growth of the country is an apt indicator for the growth of the banking sector. The
Indian economy is projected to grow at a rate of 5-6 percent34 and the country’s banking
industry is expected to reflect this growth.

The onus for this lies in the capabilities of the Reserve Bank of India as an able central
regulatory authority, whose policies have shielded Indian banks from excessive leveraging and
making high risk investments.

There are emerging challenges, which appear in the forms of consolidation; recapitalization,
prudential regulation weak banks, and non-performing assets legal framework etc. needs urgent
attention. The paper concludes that, from a regulatory perspective, the recent developments in
the financial sector have led to an appreciation of the limitations of the present segmental
approach to financial regulation and favors adopting a consolidated supervisory approach to
financial regulation and supervision, irrespective of its structural design.

The Indian banking sector has been relatively well shielded by the central bank and has managed
to sail through most of the crisis. But, currently in light of slowing domestic GDP growth,
persistent inflation, asset quality concerns and elevated interest rates, the investment cycle has
been wavering in the country.

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[4] Shukla S. Performance of the Indian Banking Industry: A Comparison of Public and Private
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[10] www.sbi.co.in

[11] www.icicibank.com

[12] www.in.finance.yahoo.com

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 ANNEXURE

Balance Sheet of State Bank of India ------------------- in Rs. Cr. -------------------

Mar 19 Mar 19 Mar 18 Mar 18 Mar 17

12 mths 12 mths 12 mths 12 mths 12 mths

EQUITIES AND LIABILITIES

SHAREHOLDER'S FUNDS

Equity Share Capital 892.46 892.46 892.46 892.46 797.35

Total Share Capital 892.46 892.46 892.46 892.46 797.35

Revaluation Reserve 0.00 24,653.94 24,847.99 24,847.99 31,585.65

Reserves and Surplus 220,021.36 195,367.42 193,388.12 193,388.12 155,903.06

Total Reserves and Surplus 220,021.36 220,021.36 218,236.10 218,236.10 187,488.71

Total ShareHolders Funds 220,913.82 220,913.82 219,128.56 219,128.56 188,286.06

Deposits 2,911,386.01 2,911,386.01 2,706,343.29 2,706,343.29 2,044,751.39

Borrowings 403,017.12 403,017.12 362,142.07 362,142.07 317,693.66

Other Liabilities and Provisions 145,597.30 145,597.30 167,138.08 167,138.08 155,235.19

Total Capital and Liabilities 3,680,914.25 3,680,914.25 3,454,752.00 3,454,752.00 2,705,966.30

ASSETS

Cash and Balances with Reserve Bank of

176,932.42 176,932.42 150,397.18 150,397.18 127,997.62
India

Balances with Banks Money at Call and Short

45,557.69 45,557.69 41,501.46 41,501.46 43,974.03
Notice

Investments 967,021.95 967,021.95 1,060,986.72 1,060,986.72 765,989.63

Advances 2,185,876.92 2,185,876.92 1,934,880.19 1,934,880.19 1,571,078.38

Fixed Assets 39,197.57 39,197.57 39,992.25 39,992.25 42,918.92

Other Assets 266,327.70 266,327.70 226,994.20 226,994.20 154,007.72

Total Assets 3,680,914.25 3,680,914.25 3,454,752.00 3,454,752.00 2,705,966.30

OTHER ADDITIONAL INFORMATION

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Number of Branches 0.00 22,010.00 22,414.00 22,414.00 17,170.00

Number of Employees 0.00 257,252.00 264,041.00 264,041.00 209,567.00

Capital Adequacy Ratios (%) 13.00 13.00 13.00 13.00 13.00

KEY PERFORMANCE INDICATORS

Tier 1 (%) 0.00 11.00 10.00 10.00 10.00

Tier 2 (%) 0.00 2.00 2.00 2.00 3.00

ASSETS QUALITY

Gross NPA 172,750.36 172,753.60 223,427.46 223,427.46 112,342.99

Gross NPA (%) 8.00 8.00 11.00 11.00 7.00

Net NPA 65,894.74 658,947.40 110,854.70 110,854.70 58,277.38

Net NPA (%) 3.00 3.00 6.00 6.00 4.00

Net NPA To Advances (%) 0.00 3.00 6.00 6.00 4.00

CONTINGENT LIABILITIES, COMMITMENTS

Bills for Collection 0.00 70,022.54 74,027.90 74,027.90 65,640.42

Contingent Liabilities 0.00 1,116,081.46 1,162,020.69 1,162,020.69 1,046,440.93

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Profit & Loss account of State Bank of India ------------------- in Rs. Cr. -------------------

Mar 19 Mar 18 Mar 17 Mar 16 Mar 15

12 mths 12 mths 12 mths 12 mths 12 mths

INCOME

Interest / Discount on Advances / Bills 161,640.23 141,363.17 119,510.00 115,666.01 112,343.91

Income from Investments 74,406.16 70,337.62 48,205.31 42,303.98 37,087.77

Interest on Balance with RBI and Other Inter-Bank

1,179.07 2,250.00 1,753.47 621.07 505.12
funds

Others 5,643.19 6,548.53 6,049.46 5,094.25 2,460.27

Total Interest Earned 242,868.65 220,499.32 175,518.24 163,685.31 152,397.07

Other Income 35,214.34 44,600.69 35,460.93 28,158.36 22,575.89

Total Income 278,082.99 265,100.00 210,979.17 191,843.67 174,972.97

EXPENDITURE

Interest Expended 154,519.78 145,645.60 113,658.50 106,803.49 97,381.82

Payments to and Provisions for Employees 41,054.71 33,178.68 26,489.28 25,113.82 23,537.07

Depreciation 0.00 2,919.47 2,293.31 1,700.30 1,116.49

Operating Expenses (excludes Employee Cost &

28,633.02 23,845.30 17,690.18 14,968.24 14,024.08
Depreciation)

Total Operating Expenses 69,687.73 59,943.45 46,472.77 41,782.37 38,677.64

Provision Towards Income Tax 745.25 673.54 4,033.29 3,577.93 6,719.11

Provision Towards Deferred Tax 0.00 -9,654.33 337.78 245.47 -477.56

Other Provisions and Contingencies 53,828.55 75,039.20 35,992.72 29,483.75 19,570.38

Total Provisions and Contingencies 54,573.80 66,058.41 40,363.79 33,307.15 25,811.93

Total Expenditure 278,781.31 271,647.46 200,495.07 181,893.01 161,871.39

Net Profit / Loss for The Year -698.32 -6,547.45 10,484.10 9,950.65 13,101.57

Net Profit / Loss After EI & Prior Year Items 862.23 -6,547.45 10,484.10 9,950.65 13,101.57

Profit / Loss Brought Forward 0.00 0.32 0.32 0.32 0.32

Transferred on Amalgamation 0.00 -6,407.69 0.00 0.00 0.00

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Total Profit / Loss available for Appropriations 0.00 -12,954.83 10,484.42 9,950.98 13,101.90

APPROPRIATIONS

Transfer To / From Statutory Reserve 0.00 0.00 3,145.23 2,985.20 4,029.08

Transfer To / From Capital Reserve 0.00 3,288.88 1,493.39 345.27 105.50

Transfer To / From Revenue And Other Reserves 0.00 -1,165.14 3,430.55 4,267.35 5,889.06

Dividend and Dividend Tax for The Previous Year 0.00 0.00 0.00 0.01 0.00

Equity Share Dividend 0.00 0.00 2,108.56 2,018.32 2,648.17

Tax On Dividend 0.00 0.00 306.38 334.51 429.76

Balance Carried Over To Balance Sheet 0.00 -15,078.57 0.32 0.32 0.32

Total Appropriations 0.00 -12,954.83 10,484.42 9,950.98 13,101.90

OTHER INFORMATION

EARNINGS PER SHARE

Basic EPS (Rs.) 0.97 -7.67 13.43 12.98 17.55

Diluted EPS (Rs.) 0.97 -7.67 13.43 12.98 17.55

DIVIDEND PERCENTAGE

Equity Dividend Rate (%) 0.00 0.00 260.00 260.00 350.00

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Cash Flow of State Bank of India ------------------- in Rs. Cr. -------------------

Mar 19 Mar 19 Mar 18 Mar 18 Mar 17

12 mths 12 mths 12 mths 12 mths 12 mths

Net Profit/Loss Before Extraordinary Items And

1,607.48 0.00 -15,528.24 -15,528.24 14,855.16
Tax

Net CashFlow From Operating Activities 34,627.51 0.00 -85,425.25 -85,425.25 11,060.32

Net Cash Used In Investing Activities -3,958.60 0.00 879.08 879.08 -3,148.45

Net Cash Used From Financing Activities -1,087.83 0.00 4,290.92 4,290.92 -1,780.27

Foreign Exchange Gains / Losses 1,010.38 0.00 100,182.24 100,182.24 -1,627.61

Net Inc/Dec In Cash And Cash Equivalents 30,591.47 0.00 19,926.99 19,926.99 4,503.99

Cash And Cash Equivalents Begin of Year 191,898.64 0.00 171,971.65 171,971.65 167,467.66

Cash And Cash Equivalents End Of Year 222,490.11 0.00 191,898.64 191,898.64 171,971.65

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