A STUDY ON COMPARATIVE ANALYSIS OF HDFC BANK AND ICICI BANK ON

THE BASIS OF CAPITAL MARKET PERFORMANCE

1. INTRODUCTION
Capital market is a mechanism through which funds can be borrowed and lent for long period of
time and stock price is determined though free interaction of market forces such as demand and
supply. Since share price is market determined, often it does not reflect the true intrinsic value.
There are different conceptual frameworks, tools and techniques to analyze the performance of
capital market instruments which includes Markowitz model, Sharpe Single Index Model,
Capital Asset Pricing Model, Technical analysis, Fundamental analysis, Efficient Market
Hypothesis and different valuation approaches. All the models are based on some critical
assumptions as well as on strong analytical foundations. It has been experienced that often these
established empirical models are unable to forecast the movement of stock prices. Almost in all
the cases, models are formed on the basis of simplistic assumption that investors are rational in
nature where in reality; market is driven by emotion, sentiment, greed and fear of the investors.
Thus the assumption of rationality of investors does not hold in real life. Hence companys
capital market performance should be used as an integral part to analyze the perception of
investors about the company instead of using the same to judge the fundamental strength of the
company.

HDFC bank1 has largest market capitalization among the banking players which is immediately
followed by State bank of India2 (SBI) and ICICI bank3. Since SBI is largest PSU bank in India,
ICICI bank and HDFC banks are considered for comparative analysis in order to create a level
playing field.
1 As on 6th February, 2015, HDFC bank has market capitalization of Rs 255556.32 crores.
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2. SURVEY OF EXISTING LITERATURE

India becomes an interesting case study because since the early 1990s, some very fundamental
changes have taken place at the Indian capital market. These include the birth of the Securities
and Exchange Board of India (SEBI) as a regulator of the Indian capital market, the birth of the
National Stock Exchange (NSE) as a competitor of the Bombay Stock Exchange (BSE),
introductions of computerized screen based trading at both the exchanges and dematerialization of
shares. These changes have led to substantial improvement in market capitalization, liquidity and
efficiency of the Indian capital market, especially during the second half of the 1990s
(Bhattacharya K. S., 2003:554).
Majority of the models, tools and techniques of valuation are based on the assumption that the
capital market is perfect. But emerging markets are not characterized by a well developed
information disbursement mechanism. Hence, any news, after its release, may reach different
groups of investors at different points in time. This leadlag relationship between the news and
its reception may temporarily make some investors better informed than others, creating
possibilities for one group of investors to make above normal profit (Mishra and Mishra,
2011:467).

Volatility is fundamental in the trade-off between risk and expected return. A rise in volatility
can have a potentially destabilizing effect especially if financial markets are thin; this is very
often the case in developing countries (Lakshmi, 2012 :58).
2 As on 6th February, 2015, SBI has market capitalization of Rs 216767.50 crores.

3 As on 6th February, 2015, ICICI bank has market capitalization of Rs 191139.39 crores.
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Several intellectual outputs are available on performance of Indian capital market (Bhattacharya,
2002 ; Kadapakkam, 2003; Dhankar, 2005; Bhaduri, 2008 ).
Within the broad ambit of the financial sector, the banking sector constitutes a crucial component
of any economy. It acts as the most important intermediary for channeling resources from
ultimate lenders to final borrowers. The banking industry has its distinct characteristics in
comparison with other industries (Ghosh, 2005:89).
3. OBJECTIVE OF THE STUDY
a) To identify the different methods which are used to judge the capital market performance of a
stock.
b) To examine the Economy Industry Company (EIC) analysis for ICICI bank and HDFC
bank.
c) To make a comparative study on the share performance analysis of ICICI bank and HDFC
bank.
4. RESEARCH METHODOLOGY
The proposed research work will be explanatory and empirical research. It incorporates different
dimensions such as sources of data and data analysis.

Scope of the Study

The Indian banking has come from a long way from being a sleepy business institution to a
highly proactive and dynamic entity. This transformation has been largely brought about by the
large dose of liberalization and economic reforms that allowed banks to explore new business
opportunities rather than generating revenues from conventional streams (i.e. borrowing and
lending). The banking in India is highly fragmented with 30 banking units contributing to
almost 50% of deposits and 60% of advances. Indian nationalized banks (banks owned by the
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government) continue to be the major lenders in the economy due to their sheer size and
penetrative networks which assures them high deposit mobilization. The Indian banking can be
broadly categorized into nationalized, private banks and specialized banking institutions.

Significance to the Industry

The need of the project is to study and analyses certain issues in HDFC BANK AND ICICI
BANK ON THE BASIS OF CAPITAL MARKET PERFORMANCE and there comparative
strategy, which need further attention. And some suggestions have been given to make the
HDFC BANK AND ICICI BANK ON THE BASIS OF CAPITAL MARKET
PERFORMANCE and Marketing Strategy industry more effective in order to utilize its full
potential and serve the objective of an event and be mutually beneficial for the agency, the
Corporate and the customer.

Significance for the Researcher

To study the HDFC BANK AND ICICI BANK ON THE BASIS OF CAPITAL MARKET
PERFORMANCE .
How this industry can be the beneficiary for the HDFC AND ICICI BANK .

Research Design
i

This project is not have any probability

ii

It is non probability based project and it is simply calculated from the differential
based technique.

iii

Exploratory research will be taken for this project work

Sampling Methodology

Sample Design
Sampling is the process of collecting information only from a small representative part of the
population. Stratified Random Sampling is one amongst the most elementary random sampling
techniques. A stratified random sampling is a method that allows each possible sample to have an
equal probability of being picked and each item or individual in the entire population have an
equal chance of being included in the sample. For this project work, without replacement
sampling method is used. It means that a person or item once selected is not returned to the frame
and therefore cannot be selected again. This selection process continues until the desired sample
size n is obtained.

Sampling chosen with the Random method

ii

Sampling Area would be Delhi & NCR and near area only

iii

Sample Size: 100

Limitations
This is stick with the one organization report and may be due to of very busy
schedule of work employee many not take very appropriate decision when time of
filling the questionnaire
Also for future events Disclosure Company are not sharing more internal
information either on internet or ready to give.
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4.1 DATA SOURCES

The proposed dissertation is expected to take into consideration the secondary data available in
several research articles prevalent in the different reputed national and international journals
downloaded from EBSCO host and Emerald. It also incorporates the necessary information
inputs from the statutory and non statutory disclosure provided by the banks in the public domain
in the form of their quarterly, half early and annual reports. Apart from that, data base from
official website of Bombay Stock Exchange (BSE) is used.

4.2 Time Horizon

The time frame for the proposed study will be considered from 1 st January 2014 to 31st October,
2014. The general election took place in India during the month of April and May 2014 to
constitute the sixteenth Lok Sabha. Thus the ten months time frame is considered to even out the
pre election and post election extreme values.

4.3 DATA ANALYSIS

Data analysis will proceed by using relevant statistical and financial techniques as well as
models. Statistical techniques incorporate mean, variance, coefficient of variation, correlation
coefficient and regression coefficient. Daily return, daily risk and risk per unit of return are
computed for Sensex, Bank Index and ICICI bank as well as HDFC bank. Financial technique
includes alpha value, beta value, total return, total risk, systematic risk, unsystematic risk of both
the banks. Portfolio return, portfolio risk, Sharpe ratio, Treynor ratio, Jensen alpha are calculated
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to analyze the performance of portfolio. Apart from that

characteristic line for both banking

stocks as well as Security Market Line are derived. Data analysis is done through excel sheet
(Annexure I, Annexure -II and Annexure -III).

5. KEY FINDINGS
Fundamental analysis or EIC analysis or top down approach is used to compute the intrinsic
value of a stock.

5.1 Economic Analysis

At first different macro economic variables such as GDP growth rate, volume of saving and
investment, inflation rate, interest rate, budget, balance of payment, monsoon, infrastructure and
index of industrial production are analyzed. Performance of the particular company is judged on
the basis of financial ratios, SWOT analysis and different valuation techniques which are
composed of discounted cash flow method and relative valuation method. GDP Growth rate for
the financial year 2012-13 and 2013-14 were 4.5% and 4.9% respectively. The growth rates
were far below with respect to double-digit growth rate of 9.3% in 2010-11 and 8.6% in
200910. GDP growth rate for the first and second quarter of the financial year 2014-15 were
5.7% and 5.3% respectively. Hence average GDP growth rate for the first half of the financial
year 2014-15 was 5.5%.According to Planning Commission of India, saving to GDP ratio for
the financial year 2013-14 was 30.5% which was 1.3% less with respect to the previous
financial year. According to Planning Commission of India, the Investment to GDP ratio for the
financial year 2013-14 was 31.4% 2013 which was 3.3% less with respect to the previous
financial year.

5.2 Industry Analysis

Michael Porters five forces analysis can be done to judge the strength of banking sector. The
entry barrier is high in banking sector as any player cannot participate in banking business
unless and until the same is receiving banking license from Reserve Bank of India. The mode of
operation of RBI was bit conservative as it did not allow any non banking player to participate
in banking business and any banking player was prohibited to enter into any non banking
business. The scenario changed when both the houses of the Parliament in India passed the
much awaited banking amendment bill on December, 2012. According to this bill, nonbanking
business players are also entitled to apply for the banking license from the RBI. It also
recommended for raising the cap on voting rights in public sector banks from 1% to 10%. It has
restricted foreign
5.3 Capital Market Performance Analysis of ICICI bank and HDFC bank
The focus of the study is capital market performance analysis of ICICI bank and HDFC bank.
Hence indicators of Economy Industry-Company analysis of a bank are performance of market
index, banking index and the particular banking stock price. Sensex generated average daily
return of 0.139 % over a period of ten months from 1 st January, 2014 to 31st October, 2014.
Banking index generated average daily return of 0.209 % during that time period. In order to get
actual status, average daily standard deviation of Sensex as well as Banking Index should be
taken into account. Average daily standard deviation of Sensex was 0.811% and average daily
standard deviation of banking sector was 1.362% during that time period. The coefficient of
variation of Sensex and banking index during that time was 5.82 and 6.52 respectively. Hence it
can be concluded that banking sector under performed with respect to Sensex during that period.
The average daily return of HDFC bank and ICICI bank were 0.164% and 0.208% respectively.
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Simultaneously the average daily standard deviation of HDFC bank and ICICI bank were
1.278% and 1.7272% respectively.

The coefficient of variation of HDFC bank and ICICI bank were 7.80 and 8.29 respectively. On
the basis of above-mentioned information input, it can be said that Sensex has outperformed with
respect to banking index and both HDFC bank and ICICI bank have underperformed with respect
to banking index. If interbank comparison is to be done, HDFC bank clearly outperformed ICICI
bank on the basis of coefficient of variation.

6. PRINCIPAL CONCLUSION
Two portfolios are constructed by taking two different combinations of ICICI banks and HDFC
banks stocks. Portfolio 1 contains 75% of HDFC bank and 25% of ICICI bank. Portfolio 2
contains 25% of HDFC bank and 75% of ICICI bank. Portfolio 1 is offering 0.175% return and
portfolio 2 is offering 0.197% return. Beta value of the portfolio 1 and portfolio 2 are 1.168 and
1.437 respectively. In order to judge the performance of the portfolio, different measures are used
such as Sharpe ratio4 , Treynor ratio5 and Jensen alpha6 . All these follow the principle More is
good. Higher the Sharpe ratio, Treynor ratio and Jensen alpha, portfolio is considered to be the
good performer and vice versa. Sharpe ratio for portfolio 1 and portfolio 2 are 0.101805 and
4 Sharpe ratio measures risk premium earned by a portfolio per unit of total risk.

5 Treynor ratio measures risk premium earned by a portfolio per unit of market risk.

6 Jensen Alpha measures excess of expected return generated by a portfolio over and above its
CAPM return
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0.100088 respectively. Treynor ratio for portfolio 1 and portfolio 2 are 0.001097 and 0.001047
respectively. Jensen alpha for portfolio 1 and portfolio 2 are 0.000200 and 0.000174 respectively.
Portfolio 1 is outperforming with respect to portfolio 2 on the basis of total risk, beta value,
Sharpe ratio, Treynor ratio and Jensen alpha. The simple logic is portfolio I is heavily skewed
toward HDFC banks share where portfolio II is heavily skewed toward ICICI banks share.

7. REFERENCES

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[1] Bhaduri, N. Saumitra. (2008). Investment and Capital Market Imperfections: Some Evidence
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[2]Bhattacharya, Kaushik, Nityananda Sarkar and Debabrata Mukhopadhyay (2003). 'Stability
of the Day of the Week Effect in Volatility at the Indian Capital Market : a GARCH Approach
with Proper Mean Specification'. Applied Financial Economics , 553563.
[3] Bhattacharya, Kaushik and Samarjit Das. (2002). Price Discovery at the Beginning of a Trading
Day: an Error Correction Model for the Indian Capital Market. Applied Economics Letters ,
529-535.
[4] Dhankar, Raj. S. (2005). Arbitrage Pricing Theory and the Capital Asset Pricing Model
Evidence Erom The Indian Stock Market. Journal of Financial Management and Analysis , 1427.
[5] Ghosh, Saurabh. (2005). The Post-offering Performance of IPOs in the Indian Banking
Industry. Applied Economics Letters , 8994.
[6] Kadapakkam, Palani.-Rajan, Lalatendu Mishra and Yiuman TSE. (2003). International Price
Discovery for Emerging Market Stocks: Evidence from Indian GDRs. Review of Quantitative
Finance and Accounting , 179199.
[7] Lakshmi, P. (2012). FII Trading Volume and Symmetric Volatility:Analysis from Indian Spot
Market. Vilakshan, XIMB Journal of Management , 57-72.
[8] Mishra, Ankia and Vinod Mishra (2011). Is the Indian Stock Market Efficient?Evidence from a
TAR Model with an Autoregressive Unit Root. Applied Economics Letters , 18, 467472.

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