A PROJECT REPORT ON

(CHANGING TRENDS IN THE BANKING SECTOR AND ITS FUTURE PROSPECTS)

By KUMAR SHREYAS Enrollment No: 10BSPHH011075

IBS HYDERABAD

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A PROJECT REPORT ON
(CHANGING TRENDS IN THE BANKING SECTOR AND ITS FUTURE PROSPECTS) By KUMAR SHREYAS Enrollment No 10BSPHH011075

A project report submitted in partial fulfillment of the requirements of MBA Program of IBS Hyderabad Distribution List: Faculty Guide
Prof. Archana Pillai IBS Hyderabad

Company Guide
Mr. O. P. Singh Regional Manager Sharekhan Ltd. Sector 14 Gurgaon

Name of the Organization

SHAREKHAN Ltd.

Date of Submission: 20.05.2011

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Growth should not be, and is not, a strategy; its a tactic Howard Schultz

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AUTHORIZATION

This is to certify that this report is submitted in partial fulfillment of the requirements of MBA program of ICFAI Business School (IBS), Hyderabad. This report document titled: Changing Trends in the Banking Sector and its Future Prospects is done by Kumar Shreyas as part of the completion of the study at Sharekhan Ltd during his Internship program under the guidance of Mr. O. P. Singh, Regional Manager, Sharekhan Ltd, Sector 14, Gurgaon.

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ACKNOWLEDGMENT I would like to express my profound gratitude to all those who have been instrumental in the preparation of my project report. To start with, I would like to thank the organization Sharekhan Ltd for providing me the chance to undertake this internship study and allowing me to explore the area of finance which was totally new to me and which would prove out to be very beneficial to me in my future assignments, my studies and my career ahead. I wish to place on records, my deep sense of gratitude and sincere appreciation to my company guide and mentor, Mr. O. P. Singh, Regional Manager, Sharekhan Ltd, who suggested and prepared the frame work of the project. I would also like to thank him for his continuous support, advice and encouragement, without which this report could never have been completed. I am deeply grateful, to my faculty guide, Prof Archana Pillai who took pain to come allover from Hyderabad to Gurgaon to give her invaluable suggestions, comments and feedback on the project.

Lastly, I wish to thank my family and friends for their valuable help and support .

Kumar Shreyas

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EXECUTIVE SUMMARY This report titled Changing Trends in the Banking Sector and its Future Prospects is a document to be used by Sharekhan Ltd, to provide its customer an in depth knowledge about Banking Sector in India. Over the years Banking Sector has seen many changes. Once dumped as a sector which has reached its maturity has completely revamped itself and is growing like never before. This report explains in detail about each phase Banking Industry has gone through. A section has also been dedicated to the international Basel II Accord, prepared by the Basel Committee which was established by the central-bank Governors of the group of ten countries in 1974. The section explains the pillars of the Basel II accord on which it is made. CAMELS model is one of the most popular model being used for the analysis of the banking sector. A section of this report is devoted on explaining the factors involved in the CAMELS analysis and parameters describing those factors. Banking sector is heart of any economy. Major factors affecting economy also affects the banking sector. The economic analysis section of this report deals with some of the major economical factors affecting the banking sector. The report also provides an insight of the condition of the Indian Banking Industry in its Industrial analysis section. Based on the difference in shareholding pattern of different banks, six banking companies have been selected and analyzed on CAMELS model. Juggling through many ratios may confuse a customer, so a simple ranking method has been devised, which ultimately decides which banking company is the best. Ultimate goal of Sharekhan Ltd is to provide information to its customers on the available investment opportunities. This report uses four different technical analysis tools to analyze the investment opportunities in the selected banking companies. Different tools may suggest different strategy to follow, which might be contradictory in nature. Therefore a Weighted score method, which gives equal weight to all the tools, has been adopted to decide on the strategy to be followed. The methodology formulated assumes that the investor is risk averse.

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Abstract

The project undertaken for the Summer Internship Project (SIP) is Changing trends in the Banking Sector and its Future Prospects. Banking systems have always been the backbone of any economy. A good banking system is essential for the growth of the economy. To mobilize saving and direct it to finance small businesses, working capital of big industries, studies of students etc, not only increases bank profitability but also helps in the growth of economy. With Indian GDP poised to grow in double digit figures, a robust banking system is essential. Constant changes in regulation and interest rates by the Reserve Bank of India have created many trends in the banking sector. There are many international banks now entering the Indian Market due to the immense scope for growth and lucrative business opportunities. In the present environment understanding the future of banking industry is very important. The growth of this sector will portray the growth of all other sectors in the country. This study examines the changes that have taken in the banking sector. The analysis is done by fundamental and technical analysis. In fundamental analysis economy, industry and company analysis is done. Technical analysis is done by using four tools on the selected companies and a strategy for each company is selected using a Weighted Score method.

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TABLE OF CONTENTS

1. INTRODUCTION

1.1 OBJECTIVE OF THE PROJECT....14 1.2 LIMITATIONS.............14 1.3 HISTORY OF BANKING SYSTEM IN INDIA.....15 1.4 BASEL II ACCORD............19 1.5 CAMELS FRAMEWORK...21
2. FUNDAMENTAL ANALYSIS

2.1 ECONOMIC ANALYSIS27 2.2 INDUSTRIAL ANALYSIS.30 2.3 COMPANY ANALYSIS......38

3. TECHNICAL ANALYSIS

3.1 MOVING AVERAGE..............49 3.2 BOLLINGER BAND...50 3.3 RELATIVE STRENGTH INDEX.......51 3.4 RATE OF CHANGE........52 3.5 ANALYSIS..53
4. CONCLUSIONS...............63 5. REFERENCES..............64

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LIST OF TABLES Table 1: CRAR Requirement Table 2: BETA Table 3: Systematic Risk Table 4: Unsystematic Risk Table 5: Weightage Table 6: Scores Table 7: Score Distribution Table 8: Weightage Table 9: Weighted Score 23 45 45 46 46 48 61 61 62

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LIST OF CHARTS Chart 1: Deposit/GDP Chart 2: Inflation, CRR, Repo Rate and Reverse Repo Rate Chart 3: Reach Chart 4: Growth Chart 5: Return on Assets Chart 6: CRAR
Chart 7: Net NPA Ratio

27 29 31 32 33 36
37

Chart 8: Shareholding Pattern Chart 9: CRAR Chart 10: DEBT EQUITY RATIO Chart 11: Advances to Total Assets Chart 12: Gross NPA to Total Loan Chart 13: Net NPA TO Total Advances Chart 14: Total Advances to Deposit Ratio Chart 15: Profit per Employee Chart 16: ROAA Chart 17: Interest Income to Total Income Chart 18: EPS Chart 19: Credit Deposit Ratio Chart 20: Cash to Deposit Ratio Chart 21: BETA Chart 22: Systematic Risk Chart 23: Unsystematic Risk Chart 24: EMA 50 and EMA 20- ICICI Chart 25: Bollinger Band- ICICI Chart 26: ROC- ICICI Chart 27: RSI- ICICI Chart 28: EMA 50 and EMA 20- Axis Bank Chart 29: Bollinger Band- Axis Bank Chart 30: ROC- Axis Bank
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38 39 39 40 40 41 41 42 42 43 43 44 44 45 46 46 53 53 54 54 54 55 55

Chart 31: RSI- Axis Bank Chart 32: EMA 50 and EMA 20- Canara Bank Chart 33: Bollinger Band- Canara Bank Chart 34: ROC- Canara Bank Chart 35: RSI- Canara Bank Chart 36: EMA 50 and EMA 20- Standard Chartered Chart 37: Bollinger Band- Standard Chartered Chart 38: ROC- Standard Chartered Chart 39: RSI- Standard Chartered Chart 40: EMA 50 and EMA 20- HDFC Chart 41: Bollinger Band- HDFC Chart 42: ROC- HDFC Chart 43: RSI- HDFC Chart 44: EMA 50 and EMA 20- Yes Bank Chart 45: Bollinger Band- Yes Bank Chart 46: ROC- Yes Bank Chart 47: RSI- Yes Bank

55 56 56 56 57 57 58 58 58 59 59 59 59 60 60 60 61

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ABBREBIATIONS ATM: Automated Teller Machine BCBS: Basel Committee on Banking Supervision BFS: Board of Financial Supervision BIA: Basic Indicator Approach BPR: Business Process Reengineering BPSS: Board for Regulation and Supervision of Payment and Settlement Systems CIBIL: Credit Information Bureau (India) Limited CRAR: Capital to Risk-weighted Assets Ratio DEMAT: De Materialize EPS: Earning per Share FDI: Foreign Direct Investments GDP: Gross Domestic Product HDFC: Housing Development and Financial Corporation ICICI: Industrial Credit and Investment Corporation of India IRB: Internal Rating Based OOC: Office of the Comptroller of the Currency ROAA: Return on Average Assets ROC: Rate of Change RSI: Relative Strength Index SBI: State Bank of India

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SLR: Statutory Liquidity Ratio VRS: Voluntary Retirement Schemes WPI: Wholesale Price Index

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1. INTRODUCTION 1.1 OBJECTIVE OF THE PROJECT: PRIMARY OBJECTIVES: a) To study the changes in the banking system over the years. b) To evaluate the current situation in the banking industry by fundamental analysis. c) Comparative study of banking companies. d) To determine the future direction of the stocks by technical analysis. SECONDARY OBJECTIVES: a) To learn about the reforms in the banking sector. b) To give better insight to the customers of Sharekhan Ltd in the banking sector. c) To understand the working of Indian stock markets. 1.2 LIMITATIONS a) The project depends entirely on the secondary data. b) Fundamental analysis is done on the CAMELS framework only. c) Technical analysis involves usage of four tools only. d) Since annual reports give the condition of the banks on an annual basis, these may not reflect the current positions of the bank.

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1.3 HISTORY OF BANKING SYSTEM IN INDIA India has always been land of great economist and banking system in India is as old as its history itself. From past to present Banking System in India has taken many forms. The phases in the Indian Banking Sector can be divided in 4 parts:

PRE NATIONALIZATION PHASE According to Kautalyas Arthshastra, the minimum interest on capital was set at 15% per annum. Taking clue from Arthshastra, the Sahukari system evolved in India. Sahukars were a kind of private bankers. In this system borrowers were known to Sahukars. Lending was done with very little documentation, having exorbitant interest rates, which were compounded at short interval. Lending process often involved hypothecation or mortgage of properties. Due to lack of education, documents were tampered and peasants more often than not, have to surrender their properties to the corrupt Sahukars. With coming up of Britishers in India, commercial banks got established. The first bank to be established was the Central Bank in 1786 1. After that came the Hindustan Bank and Bengal Bank. The East India Company came up with some of its own banks. They include Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843). Though these Banks worked as independent units but together they were called as Presidency Bank. These three banks were later amalgamated in 1920 to form Imperial Bank of India. Shareholders of this bank were mainly Europeans.

http://www.gktoday.in/bank-po/brief-history-of-banking-in-india/

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When Swadeshi movement was on its peak, many Banks with Indian management got established. These included the Punjab National Bank in 1894 with headquarters in Lahore. Bank of Baroda, Canara Bank, Indian Bank, Bank of India, Central Bank of India, and Bank of Mysore were set up. Apart from these banks many small, city level banks were also set up. With no regulation to guide these banks, many banks met with failures. With economy under siege of Britishers, growth of these banks was slow. NATIONALIZATION Government intervention with banks began in 1930s. The RBI act was passed in 1934 and Reserve Bank of India was established in 1935. RBI acted as the central bank of India, issuing banking notes and acting as supervisory body for all bank and exchange related activities. Before 1967 Indian banking sector used to consist of schedule commercial banks on which government had very little influence. They were free to decide about their credit policies and used to provide customized banking services to their client. It was an era of class banking. Many sectors, like agriculture were profit was less, was neglected by these banks. For a balanced growth of country, government felt need for having control over the policies of the commercial banks. On December 1967 social control of banking sector took underway. This was done to align the banking policy to the need of economic policy. On 22nd December 1967 National Credit Council was set up to discuss and asses the credit priorities of the country2. To promote export, Export credit (interest subsidy) scheme was introduced in 1968. To tighten its control over the banking sector, government established the Banking commission in January 1969. This commission was to look after: a) Banking costs b) Legislations affecting banking c) Indigenous banking d) Bank procedures e) Non banking financial intermediaries.

http://www.rbi.org.in/scripts/chro_1968.aspx

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The most important turn in the history of Indian Banking industry came on 19th, July 1969 to when the 14 major schedule commercial banks with deposits over 50 crore were nationalized. With this, the era of mass banking emerged. In 1970 the SLR rate was increased from 25% to 28% and penalty for non compliance of CRR and SLR was introduced which gave teeth to RBI to control the commercial banks. Six more banks were nationalized on 15 th April 1980 to further control the heights of the economy. By the end of 1990s nearly 80% of the banking sector was under the control of government. The planned economic development required huge development expenditures. This expenditure was met by automatic monetization of fiscal deficit and subjecting the banking sector to large preemption both in terms of the statutory holding of Government securities (statutory liquidity ratio, or SLR) and administrative direction of credit to preferred sectors. Focus of development was on sectors like agriculture, small scale industry, retail trade, small businesses and transport. A part of the successes of green revolution could be attributed to these public banks. There was other side of the nationalization too. Mass banking resulted in deterioration of customer banker relationship. There was no healthy competition among the banks. A complex structure of administered interest rates prevailed, guided more by social priorities, necessitating cross-subsidization to sustain commercial viability of institutions. These not only distorted the interest rate mechanism but also adversely affected financial market development. There were all signs of `financial repressions in the system. LIBERALIZATION Country faced a major humiliation, when it was forced to pledge its gold reserves for avoiding the balance of payment crisis. Narasimha committee was formed to give recommendation on banking sector reforms. On the basis of its report in 1991 CRR and SLR rates were reduced. The SLR has been gradually reduced from a peak of 38.5% to 25%. The CRR was reduced from a peak of 15% during 1989 to 1992 to 4.5% in June 2003. However it has been revised to 6%. The interest rate was deregulated.

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There were some institutional reforms too. Board for Financial Supervision (BFS) 3, was formed in 1994, to exercise the powers of supervision and inspection in relation to the banking companies, financial institutions and non-banking companies. It was constituted to form an armslength relationship between regulation and supervision. On similar lines, a Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) prescribes policies relating to the regulation and supervision of all types of payment and settlement systems, set standards for existing and future systems, authorize the payment and settlement systems and determine criteria for membership to these systems. Banking sector was open to the private players in 1993. Private investors have been allowed to invest upto 49% in public sector banks. Diversification of ownership, while retaining public sector character of these banks has led to greater market accountability and improved efficiency without loss of public confidence and safety. Since 1993, 12 private banks have been set up. With increase in FDI limit in the banking sector to 74%4, it attracted many foreign investors. Major shareholdings in ICICI and HDFC banks are of foreign investors only. With large amount of foreign investment and foreign management coming to India, the structure of banking system took a major turn. These private banks started giving services of international standards. Suddenly Indian cities landscape was filled with ATMs.

POST 2000 CHANGES To overcome the competitions from the private players the public sector bank started getting structural changes. State Bank of India, the biggest public sector bank undertook business process re-engineering. The business process reengineering (BPR) team was constituted in June 2003 with McKinsey & Company as consultants. The BPR's basic goal was to create an operating architecture that would facilitate service delivery of international standards. The project objectives were defined as "increasing customer satisfaction and convenience, freeing up time for branch manager and branch staff to focus on sales and marketing, simplifying process
3

http://www.rbi.org.in/scripts/AboutusDisplay.aspx#FS http://eravandi.blogspot.com/2009/12/fdi-in-banking.html

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for employees, enhancing SBI's competitiveness in the market, increasing the profitability through higher market share and improved process efficiency..." After consultation the loan granting process of SBI was centralized. Moreover the branches of the SBI were redesigned and decorated to give its customer a better banking experience. Other banks were not too far behind. To tap on better employees many bank introduced Voluntary Retirement Schemes (VRS) and let away inefficient manpower in the banking in the system. Many new services were added with the banking system. Insurance and DEMAT account services were a boon more customers and bankers both.

1.4 BASEL II ACCORD

The Basel Committee was established by the central-bank Governors of the group of ten countries in 19745. It meets regularly four times a year. The countries which are member to this committee are Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. These countries are represented by their central bank and also by the authority with formal responsibility for the prudential supervision of banking business where this is not the central bank. Though this Committee does not have any formal supervisory authority, and its conclusions do not have legal force, yet it formulates broad supervisory standards and guidelines and recommends statements of best practice. It expects that the individual country authorities will take steps to implement them through detailed arrangements - statutory or otherwise - which are best suited to their own national systems. In this way, the Committee encourages convergence towards common approaches and common standard. In 1988, the Committee decided to introduce a capital measurement system commonly referred to as the Basel Capital Accord. The revised version of the guidelines was issued by the Basel
5

http://www.bis.org/bcbs/history.htm

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Committee of Banking Supervision in June 2006, which is being implemented by the banks all over the world. This revised framework is known as Basel II Accord and it emphasizes more on a risk sensitive approach for proving capital. The revised framework is based on three important aspects called three pillars:

BASEL II ACCORD BASEL II ACCORD

CAPITAL CAPITAL ADEQUACY ADEQUACY

SUPERVISORY SUPERVISORY R E VI E W R E VI E W
nd 2nd PILLAR 2nd PILLAR

MARKET MARKET

DISCIPLINE DISCIPLINE
rd 3rrd PILLAR 3 d PILLAR

1sstt PILLAR 1 PILLAR

1ST PILLAR - CAPITAL ADEQUACY The first pillar relates to minimum capital requirement for credit risk, operational risk and trading book issues including market risk. There are two approaches for providing capital against credit risk which include Standardized Approach and Internal Rating Based (IRB) approach. For capital requirement in respect to operational risk, the risk can be measured by adopting any of the three approaches, i.e. the Basic Indicator Approach (BIA), Standardized Approach and Advanced Measurement Approach. For market risk the Basel Committee has suggested two broad methodologies; Standardized method and Banks internal risk management model. 2ND PILLAR- SUPERVISORY REVIEW Supervisory review process is intended to ensure that banks have adequate capital to support all the risk in their business and encourage them to develop and use better risk management technique in monitoring and managing risk. Central banks are to evaluate as to how well banks are assessing their capital needs considering their risk profile. There are 4 key principles of supervisory review: a) Banks should have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for maintaining their capital levels.
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b) Supervisors should review and evaluate banks internal capital adequacy assessment and strategies, as well as their ability to monitor and ensure their compliance with regulatory capital ratios. c) Supervisors should expect banks to operate above minimum regulatory capital ratios and should have the ability to require banks to hold capital in excess of the minimum. d) Supervisors should seek to intervene at an early stage to prevent capital to fall below the minimum levels required to support the risk characteristics of a particular bank and should require rapid remedial action if capital is not maintained or restored.

3RD PILLAR- MARKET DISCIPLINE Capital and risk management are of interest not only to supervisors, but also to all stakeholders, including the banks owners, employee as well as banks depositors and lenders. The objective of 3rd pillar is to complement the minimum capital requirement and supervisory review process through disclosers such as: a) Capital structure b) Total amount of Tier 2 capital c) Banks approach to asses the capital adequacy to support its current and future activities i.e. capital required for credit, market or operational risk. d) Interest rate risk in the banking books.

1.5 CAMELS FRAMEWORK Several foreign supervisory and regulating agencies; such as Office of the Comptroller of the Currency (OOC) and Federal Deposit Insurance Corporation were used to rate the banks under their authority on CAMELS framework. CAMELS framework gives a broader insight on the position of a bank. In 1995 RBI had set up a working group headed by Sri. S. Padmanabhan to take a fresh look at the banking supervision during 1995. It suggested measures for on-site and off-site supervision and subsequent rating of banks by RBI. The committee suggested that supervision of bank should focus on defined parameters of soundness, financial, managerial and

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operational efficiency. Accordingly it recommended that bank should be rated on a 5 point scale; from A to E, widely on the lines of international CAMELS framework. It stands for:

C- CAPITAL ADEQUACY A- ASSET QUALITY M-MANAGEMENT E- EARNINGS L- LIQUIDITY S- SENSITIVITY

CAPITAL ADEQUACY Capital Adequacy is a measure of a bank's financial strength, in particular its ability to cushion operational and abnormal losses. In the volatile economic environment the capital base is the only safeguard that any financial institutions have with them. By using their capital base, banks can honour their obligations even in a case of financial breakdown. Also capital base of any bank helps depositors in forming their risk perception about the institutions. The parameters defining the capital adequacy are: Capital to Risk Weighted Asset Ratio: The most widely used indicator of capital adequacy is capital to risk-weighted assets ratio (CRAR). High value of CRAR means higher level of safety for banks. It is calculated as = (Total Capital Fund)/ (Risk Weighted Assts) The capital taken into consideration for calculating the CRAR are the Tier 1 and Tier 2 capital. These are capital which is supposed to remain with the bank in most adverse financial conditions. The minimum level of CRAR required by the banks to maintain is:

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TABLE 1: CRAR REQUIREMENT Minimum as per BASEL II recommendations Minimum in India as per RBI guidelines New Private Sector banks Banks undertaking Insurance business Local Area Banks 08% 09% 10% 10% 15%

Debt Equity Ratio: The debt to equity ratio of a bank indicates, how much of banks business is financed through its own capital or through debt taken from others. It shows the financial leverage of the bank. An increase in the ratio decreases banks ability to raise future funds and hence affects the capital adequacy of the banks. It is calculated as: = (Borrowings)/ (Capital + Reserve and Surplus) Advances to Total Asset Ratio: This ratio show, what amount of assets has been given as advances. Advances are directly responsible for the profit. An aggressive bank will try to earn more profit by giving out more advances. Thus a higher ratio of advance to assets is preferred than a lower one. It is calculated as: = Advances/ Total Assets ASSET QUALITY Appreciation or depreciation of the value of assts that banks have is dependent on various market conditions. Asset quality has direct impact on the performance of the bank. The quality of assets particularly, loan assets and investments, would depend largely on the risk management system of the bank. To increase profitability bank provide large amount of loans on which it earns the interest. The nature and risk involved in each loan varies. Thus to measure the asset quality, one have to look at the Non Performing Assets of the bank. The parameters describing asset quality of a bank are: Gross NPA to Advances: As gross NPA gives the exact amount of non performing assets in that year as provisions are not deducted form it, it provides the vital information of how the assets performed in that year. It is calculated as =Gross NPA/ Advances

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 Net NPA to Advances: Net NPA to advances ratio gives the information regarding the performance of total assets combining the provisions also. Many banks operating aggressively have large provisions for their Non Performing Assets. It is calculated as = Net NPA/ Advances MANAGEMENT As important for any company, management plays a vital role in the functioning of banks. The performance of the other five CAMELS components will depend on the vision, capability, agility, integrity, and competence of the bank's management. In effect, management rating is just an amalgam of performance in the above-mentioned areas. The parameters defining management efficiency are: Advances to Deposit Ratio: This ratio tells how much deposit has been gives as advances to others. Advances are necessary to earn profit and service the interest being paid to the deposits. It is calculated as =Total Advances/ Total Deposits Loan per unit Spent: It is the loan amount the bank is able to generate after spending a unit amount on its operating activities. A good management will try to generate as much creditors as it can by spending as little as it can on its operating activities. It is calculated as = Term Loan/ Operating Expense

Profit per Employee: This ratio indicates the average profit generated per person employed. A good management will motivate employee to earn more profit for the bank. EARNINGS The ultimate aim of any financial institution is to increase its bottom line and bring profit to the stakeholders. In addition, it also helps to support present and future operations of the institutions. A bank must earn reasonable profit to support asset growth, build up adequate reserves and enhance shareholders value. Good earnings performance would inspire the confidence of depositors, investors, creditors, and the public at large. The parameters defining earnings are:

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 ROAA gives an indication as to how much profit a bank is able to generate per unit assets. An indicator used to assess the profitability of a firm's assets. It is most often used by banks and other financial institutions as a means to gauge their performance. As return on average assets (ROAA) is calculated at period ends (in this case year end), it does not reflect all of the highs/lows but is merely an average of the period. Interest Income to Total Income: The core activity of any bank is to provide credit, on which it earns interest. Thus interest income is the most important income any bank has. The interest to total income shows the percentage of interest income to total income. It is calculated as = Interest Income/ Total Income Earning per Share: If a person invests in any company, it wishes to get return out of it. Earning per share gives the gain a common stock holder earns. It is that portion of the company profit that has been allocated to each outstanding share of common stock. LIQUIDITY To meet the demands of the customers; the depositors and the creditors, banks must maintain liquidity in their asset. This is done by an effective mechanism called the Asset and Liability Management. It minimizes maturity mismatches between assets and liabilities and to optimize returns. The indicators used to determine the liquidity of a bank are the credit to deposit ratios and cash to deposit ratio. Credit Deposit Ratio: This ratio gives the information of how much of the deposit has been gives away as credit. Since not all depositors will take out all their many at a time, banks give a large amount of credit from it. This in turn reduces the liquidity of the banks. Cash Deposit Ratio: Cash being liquid of all the assets gives the direct picture of the liquidity of the bank. But large volume of the cash in the system is harmful for the profit of the bank.

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SENSITIVITY TO MARKET RISK Over the years Indian banks have diversified the areas in which they operate. They are into exchange of foreign currencies, insurance related operations etc. Some of the risks associated with the banks are the interest rate risk, exchange rate risk, equity price risk, etc. Sensitivity analysis reflects institutions exposure to interest rate risk, foreign exchange volatility and equity price risks (these risks are summed in market risk). Risk sensitivity is mostly evaluated in terms of managements ability to monitor and control market risk. The common methods of quantifying risk are as follows: Beta: Beta is a measure of the volatility of a security or a portfolio of securities in comparison to the market as a whole. It is a measure of the sensitivity of the assets return to the market return. It measures the strength of the relationship between the market return and the security return. The beta is calculated in the following way: = Cov(s, m)/Var (m) Where Cov(s, m) is the covariance between the market return and the security return and Var (m) is the variance of the market return. A positive beta will indicate that the securities return and the market return follow the same trend whereas a negative beta will indicate that the securities return and the market return follows the opposite trend i.e. if market moves up then the securities return will move down. Systematic Risk: Systematic Risk also known as the Non-diversifiable risk is that portion of an assets risk that is attributable to risk factors that affect all firms in the entire market. Systematic risk is beyond the control of investors and cannot be mitigated by diversification, i.e. combination of the asset with other assets. The factors of risk are changes in taxation, foreign investment policy change, shift in socio-economic parameters, international incidents etc. Unsystematic Risk: Unsystematic risk also known as the Diversifiable risk is that portion of an assets risk that is inherent in each investment. It is attributable to industry specific or firm specific events that can be eliminated by diversification. The risk is due to the following factors strikes, lawsuits, regulatory actions etc

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2. FUNDAMENTAL ANALYSIS
The fundamental analysis of the banking sector deals with: a) the effect of economy on the banking sector in the economic analysis, b) the baking industry as a whole in industrial analysis, c) the analysis of seven selected banking companies in company analysis. 2.1 ECONOMIC ANALYSIS GDP Economic analysis deals with forces operating in the economy which influences the banking sector. Any economy is best described by its GDP. Indian economy is the second fastest growing economy in the world. From 2004 until 2010, India's average quarterly GDP Growth was 8.40 percent reaching an historical high of 10.10 percent in September of 2006 and a record low of 5.50 percent in December of 2004. India's diverse economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services. Services are the major source of economic growth, accounting for more than half of India's output with less than one third of its labor force. This service industry is dependent on the banking sector to provide capital. Banking industry is the heart of the economy which is pumping the liquidity in the economy. Banking sector held an important position in Indias service sector. The growth of the economy directly affects the banking industry. Chart 1: Deposit/GDP6

Source for Deposit value: http://rbi.org.in

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Interpretation:

Deposits constitute a major source of funds for banks in India. As seen in the chart, the deposit of private, public and foreign banks has grown as the GDP 7 has grown over the years. This figure also shows the confidence of the customers in banking system of India as the deposit in the bank is a considerable percentage of the GDP. On running a regression between GDP at market price and deposits in banks (public, private and foreign banks combined). Here Deposits in bank in considered as a dependent factor which depends on the GDP at market prices. The period taken for analysis is after the reform; from 1991 to 2010. INFLATION Inflation refers a general increase in the prices measured against a general level of the power to purchase. To control inflation, RBI uses tools like, CRR (Cash Reserve Ratio), Repo (Repurchase) Rate and Reverse Repo Rate. CRR is the amount of Cash that the banks have to keep with RBI. This Ratio is basically to secure solvency of the bank and to drain out the excessive money from the banks. To control increase in inflation rate RBI decides to increase the percent of this, so that the available amount with the banks comes down. Repo rate is the rate at which the RBI lends shot-term money to the banks. To control inflation RBI increases repo rate, which makes borrowing form RBI more expensive. Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the RBI. The RBI uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep their money with the RBI.

Source for GDP value: http://mospi.nic.in/t1_1996_2003q2.htm

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Note: in this analysis Wholesale Price Index (WPI) is taken as a proxy for inflation. The monthly inflation rate in calculated by subtracting the current WPI from WPI of same month, a year before and dividing by the current WPI.

Chart 2: Inflation, CRR, Repo Rate and Reverse Repo Rate:8

Interpretation: Chart shows that the rates under consideration have been increased only when the rate of inflation has crossed the 7.5 mark. The inflation rate crossed the 7.5 mark in April 2008 and again in January 2010 and both the time first the CRR rate was increased, followed by Repo rate and Reverse rate respectively. It is also observed that whenever there was rapid increase in the inflation rate, CRR as a tool has been used by the RBI, to cool off the inflation. This is seen in the way that CRR was increased considerably both between April till July 2008 and again in January till April 2010. In 2009, when the inflation rate was under control and was decreasing the CRR rate was fixed at 5, repo rate at 4.75 and reverse repo rate at 3.25. In 2010, the CRR was increased to 6 in order to reduce the rapid increase in the inflation rate, whereas further correction in the inflation rate was done by varying the repo and reverse repo rate.

Appendix I

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2.2 INDUSTRIAL ANALYSIS9 Banks in India can be categorized into non-scheduled banks and scheduled banks. Scheduled banks constitute of commercial banks and co-operative banks. There are 88 scheduled commercial banks. Among these, 27 banks are public sector banks in which government has the major stake. There are 31 private and 38 foreign sector banks operating in India. The commercial banks in India have an extensive network of branches all across the country. Nearly 78% of the banking industry asset is with the public sector bank.

PORTER FIVE FORCES MODEL10

a) Bargaining power suppliers: It is high in the periods when there is tight liquidity. Being a service sector, human capital is one of the most important supplies to the sector. Public sector banks in India have big trade unions which are having high bargaining power. Establishment of well functioning capital market in India has given a choice to the depositors to invest instead of saving. Moreover, with the deregulation of the interest rate suppliers bargaining power has considerably increased.

b) Bargaining power of customers: With large number of banks operating in India, the bargaining power of creditworthy borrowers is high. Development of capital markets in India has given an additional option to the businesses in India to source their funds.

c) Threat of substitute products: With development well functioning capital market in India, investors have an opportunity to direct their savings into investment opportunities whenever they decide so. Even Corporates have an option of raising their capital through public issues, than for taking debt from banking companies.

All data for analysis is taken from http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Basic%20Statistical%20Returns

10

http://www.equitymaster.com/research-it/sector-info/bank/

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d) Threat of new entrant: After changes made in the regulation of the banks, many new private are coming up and foreign banks are considering entering India. Now RBI is coming up with new guidelines for NBFCs who wishes to start commercial banking operations.

e) Competition Rivalry: Competition in banking sector is high due to presence of public sector, private sector banks and foreign banks along with non banking financial companies.

REACH Chart 3: Reach Interpretation: By the end of March 2010, in rural India, the public sector banks were having nearly 20000 branches, where as private sector banks have only 1000 branches. Foreign sector banks have yet to expand in the rural areas. The number of branches of foreign and private sector bank increases as we move from rural to semiurban to urban and metropolitan areas. This is because, private and public sector banks follow the class banking philosophy. They provide quality services to people who do large transactions. Whereas the number of branches of public sector banks depends on the population it covers. This is why, the number of branches of public sector banks decreases as me move from rural to semi-urban to urban and metropolitan areas. Still large population of the country is still left to be covered by the banking sector. ICICI, a private sector bank has extensively started its operation in the rural areas. Similarly foreign sector banks are spending heavily to increase their operations in India.
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GROWTH Chart 4: Growth

Note: The figure shows the year on year growth average of 28 banks in India. The banks included are; Allahabad Bank, Andhra Bank, Bank of Maharashtra, Bank of Rajasthan, Bank of Baroda, Bank of India, Canara Bank, Corporation Bank, City Union Bank, Deena Bank, Dhan Laxmi Bank, Federal Bank, State Bank of India, Punjab National Bank, HDFC, IDBI, INDUSDIN, J&K Bank, Indian Oversees Bank, Karur Vasya Bank, Bank of Karnataka, Oriental Bank, South India Bank, Syndicate Bank, Union Bank, Axis Bank, ING Vasya Bank and Yes Bank. Interpretation: The figure clearly depicts the phenomenal growth rate that banking industry has achieved over the years. Growth rate in PAT of nearly 30% shows that Banking Industry is still in its growth phase of life cycle in India. It is opposed to what the general perception of the people had about Indian Banking Industry to be in mature phase with very little opportunity of growth. RETURN ON ASSETS Return on Assets measures a banks profits compared to its entire investment. It is an indicator of how profitable a bank is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. It is calculate as:
= Net Income/ Total Asset

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Chart 5: Return on Assets Interpretation: Public and Foreign sector banks saw a fall in their returns on assets in the financial year ended March 31, 2010 as a decrease in funding costs was unable to offset a fall in the interest rates charged to customers. The RBI has set the trigger point for RoA if it goes below .25% mark. With RoA still near 1% mark, it can be said that banks are doing well inspite of tough competition over interest rates.

RISK INVOLVED IN THE BANKING SECTOR

The risks associated with providing banking services differ by the type of service rendered. Risk is the danger of an adverse deviation in the actual result from an expected result. High returns are said to also accompany high risk. So the risks involved in the banking sector are: CREDIT RISK MARKET RISK OPERATIONAL RISK LIQUIDITY RISK OTHER RISKS

CREDIT RISK Credit risk is defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. It is the negative consequence associated with the defaults or non- fulfillment of concluded contracts in lending operations due to deterioration in

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the counterpartys credit quality. The goal of credit risk management is to maximize a bank's risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. Banks need to manage the credit risk inherent in the entire portfolio as well as the risk in individual credits or transactions. Banks should also consider the relationships between credit risk and other risks. The effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organization. It consists of: a. Counterparty default risk: this refers to the possibility that the other party in contract in an agreement will default. b. Securitization risk: in recent world crisis that led to global recession was started due to improper management of the securitization risks. Securitization is a process of distributing risk by aggregating debt instruments in a pool and then issuing new securities backed by the pool. There are two type of securitizations viz., traditional and synthetic securitizations. A traditional securitization is one in which an originating bank transfers a pool of assets that it owns to an arms length special purpose vehicle. Conversely, a synthetic securitization is one in which an originating bank transfers only the credit risk associated with underlying pool of assets through the use of credit-linked notes or credit derivatives while retaining the legal ownership of the pool of assets. c. Concentration risk: it is any single exposure or group of exposures with the potential to produce losses large enough (relative to banks capital, total assets, or overall risk level) to threaten a banks health or ability to maintain its core operations.

MARKET RISK Market risk is the risk of possible losses in, on- balance sheet and off balance sheet positions, due to movement in the market prices. The market risk positions, subject to capital charge requirement, are: a. Interest Rate Risk (IRR): The risks pertaining to interest rate related instruments and equities in the trading book. IRR is defined as the change in banks portfolio value due to interest rate fluctuations. The IRR management in concerned with measurement and control of risk exposures, both in trading book (i.e. assets that are regularly traded and are

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liquid in nature) and the banking book (i.e. assets that are usually held till maturity and rarely traded). b. Equity Price Risk: the risk arising due to fluctuation in market prices of equity due to general-market related operations. c. Foreign exchange risk throughout the bank. The risk arises due to fluctuation in the exchange rate.

OPERATIONAL RISK Operational risk is defined as the risk to loss resulting from inadequate or failed internal processes, people and systems or external events. This does not include strategic and reputational risk. Some of the factors for operational risk could be lack of competent management or proper planning and controls, incompetent staff, indiscipline, involvement of staff in frauds, outdated systems, non-compliance, programming errors, failure of computer systems, increased competition, deficiency in loan documentation etc.

LIQUIDITY RISK Liquidity risk arises from the banks inability to meet its obligation when they come due. The various types of liquidity risks are: a. Term Liquidity Risk: this risk arises due to unexpected prolongation of the capital commitment period in lending transactions. It is the unexpected delay in the repayment. b. Withdrawal/Call Risk: it is the risk that more deposits will be withdrawn than expected. When large amount of deposits are taken away from the bank in a relatively span of time, it raises the risk that bank will not be able to meet all its obligations. c. Structural Liquidity Risk: it is the risk that rises when the necessary funding transactions cannot be carried out. The risk is sometime also called as funding liquidity risk. d. Contingent Liquidity Risk: it is the risk associated with funding additional funds or replacing maturing liabilities under potential, future stressed market conditions. e. Market Liquidity Risk: this is a risk which arises when positions cannot be sold within desired time period or could only be sold at a discount. This is especially the case with securities/derivatives in illiquid markets, or when bank hold such a large positions that they cannot be easily sold.
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OTHER RISKS a. Strategic Risk: it refers to the negative impact on capital and earnings due to business policy decisions, changes in the macro economic environment, insufficient

implementation of decisions or failure to adopt in the changing economic environmental conditions. b. Reputation Risk: it is the potential adverse effect that a bank can have if its reputation deviates negatively from its expected position. A banks reputation refers to its image in the eyes of interested public; the stakeholders. c. Capital Risk: it is the imbalance in the internal capital structure in relation to the nature and size of the bank, or from difficulties associated with raising additional risk coverage capital quickly, if necessary. d. Earnings Risk: this risk arises due to inadequate diversification of banks earnings or its inability to attain sufficient and lasting profitability.

CAPITAL TO RISK WEIGHTED ASSETS RATIO To overcome the risk involved in the banking sector, banks have to maintain a minimum amount of capital base. The ratio of this capital base with respect to the credit, market and operational risk is known as Capital to Risk Weighted Assets Ratio and is calculated as follows: Total Eligible Capital Fund/ Risk Weighted Asset

Chart 6: CRAR Interpretation: The minimum required CRAR for public bank is 9% and for private and foreign banks is 10%. If we look at the CRAR of public, private and foreign banks over the years we see that the ratio has always been above 12%, well above the

requirement. By 2010 the public and

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private sector banks were having CRAR of more than 17% which shows that the banks in India are very safe. NET NON PERFORMING ASSETS RATIO Talking about the risk involved in the banking sector, one need to measure it. One of the indicators used to determine risk in the banking system is to look at the non performing assets of the banks. Non performing assets are those assets of banks on investment of which banks are not getting any returns. These are percentage of the loans distributed by banks, which have not been returned back. Banks usually treat assets as non-performing if they are not serviced for some time. If payments are late for a short time a loan is classified as past due. Once a payment becomes really late (usually 90 days) the loan classified as non-performing. Chart 7: Net NPA Ratio Interpretation: If we look at the average of the net non performing assets of the 33 Indian banks, we find the ratio is bellow 1.2% mark. As per RBI guidelines the NPA of any bank should be less than 10%. So the NPA level of Indian banks is well below danger level. This means that banks operate at a very safe level.

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2.3 COMPANY ANALYSIS11 For analysis of banking companies, six banking were selected. The selection of these companies was on the basis of the unique shareholding pattern of those companies. The shareholders in a banking company are divided into seven groups. These are Indian Government and RBI, Indian Financial Institutions, Foreign Financial Institutions, Other Indian Corporate, Other Foreign Corporate, Individual Indian Residents and Individual Foreign Residents. Chart 8: Shareholding Pattern:

Interpretation: The banking companies selected for the analysis are; Canara Bank, Axis Bank, HDFC Bank, ICICI Bank, Yes Bank and Standard Chartered Bank. The major shareholder of Canara Bank is the Government and RBI, hence it could be considered as a bank run by Government. ICICI bank can be said to be run by the Foreign Financial Institutions as they have nearly 66% stake in the bank. Axis Bank can be said to be a collaboration of Indian and Foreign Financial Institution. They are having 46% and 42% stake in the bank respectively. HDFC Bank can be said as bank run by Corporate. Both Indian and Foreign Corporates are major shareholder of this bank. Yes Bank is unique in a manner that a quarter of its shares are held by Indian individuals. Standard Chartered is a foreign bank operating in India and hence taken for analysis.

11

Calculation in Appendix II

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CAPITAL ADEQUACY RATIO Chart 9: CRAR Interpretation: It can be seen that private banks such as HDFC and ICICI have stored a large amount of capital in 2009 and 2010 to safeguard them from any financial shocks. Canara bank on the other has maintained its CRAR to a safe around 13.5% level. Axis bank too is maintaining more than the required CRAR. It has raised its reserve capital from 11.57% in 2007 to nearly 16% in 2010. Yes Bank being a new entrant in the banking sector is maintaining the highest level of required capital compared to its risk weighted assets. Standard Chartered bank being a foreign bank operating in India is maintaining, just sufficient level of CRAR.

Chart 10: DEBT EQUITY RATIO Interpretation: Banks in India has an average of Debt to Equity ratio of 1. Banks like HDFC, Canara and Standard Chartered can raise more capital when required as their ratio is less than 1. On the other hand ICICI, Axis and Yes bank will have problem in borrowing the money as they are highly leveraged.

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Chart 11: Advances to Total Assets Interpretation: All the banks except Canara Bank and Standard Chartered have to

maintained

their

Advances

Asset ratio to around 50%. Since Canara Bank was very slow to changes in the Banking sector its Advances to Asset ratio was very less in 2007 and 2008. But from 2009 onwards it has increased the amount of advances with respect to the total assets. Standard Chartered wholesale banking saw decrease in 2009 due to unfavorable economic conditions. This greatly affected the advances of the bank and a decrease in the advances to total asset ratio.

ASSET QUALITY

Chart 12: Gross NPA to Total Loan

Interpretation: Compared to the peers in the banking sector the gross NPA to advances ratio of Yes and AXIS bank are very high. This is due to the aggressive policies they adopt while sanctioning the advances. Axis bank gross NPA has reached alarming level, but the bank has increased provisions for non performing assets. Standard Chartered Bank has faced huge losses due to Non Performing Assets in India. Nearly 70% of all

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the loans and advances by Standard Chartered bank are of short tenure (less than a year), which has increased the probability of non performance of the loans and advances. Chart 13: Net NPA TO Total Advances: Interpretation: Net Non Performing Assets to total advances of each bank is well within the trigger level of RBI. Canara Bank being most conservative player in the field is having the lowest value of the ratio. Axis bank through large amount of provision has managed to lower the net Non Performing Assets to total advances to acceptable level. Standard Chartered credit policy of giving short term loan is mainly responsible for its high Net NPA to total advances ratio. MANAGEMENT EFFICIENCY Chart 14: Total Advances to Deposit Ratio

Interpretation: Advances to deposit ratio of nearly all the banks in banking sector has gradually increased from around 60% to 75%. ICIC Bank and Standard Chartered Bank which have aggressive management policy from the beginning itself has given large amount of advances with respect to their deposits.

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Chart 15: Profit per Employee Interpretation: Canara Bank being a public sector bank, very resistive to changes has a very low profit per employee ratio among its peers. HDFC bank is yet to fully establish itself also has a very low profit per employee ratio. Axis bank is having a good profit per employee ratio which shows good management efficiency of the bank. Yes Banks management policy gives great importance to its human capital. Its HR policies involve great precaution in selection process. Hence Yes Bank has the highest Profit per Employee ratio. EARNING QUALITY Chart 16: ROAA

Interpretation: Return on average asset of Axis bank and HDFC bank is very high. Since ICICI bank is

expanding its base in the rural areas, its return on average asset is maintained around 1%. Canara Bank too has managed to increase its return on average asset to around 1.3%. Standard Chartered bank being a foreign bank, has presence only in metropolitan cities, hence with small assets it has been able to generate comparatively large profit.

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Chart 17: Interest Income to Total Income Interpretation: With Indian banks diversifying their operation in many fields, yet interest income is one the major source of their revenue. The interest income holds 70 to 80 percent weightage in nearly all banks total income. HDFC bank operating in many diverse fields has a relatively less income from interest. Chart 18: EPS

Interpretation: Most of the banks in the banking sector have earning per share of around Rs 30 to Rs 40. Yes bank being new in the banking sector is still in its formative years, hence earning per share of this bank is low. HDFC has the best earning per share value among its peers in the banking sector.

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LIQUIDITY Chart 19: Credit Deposit Ratio (in %)

Interpretation: With boom in the economy all the banks has increased their credit to deposit ratio to around 70%. ICICI again being an

aggressive bank has the highest value for the credit deposit ratio. HDFC bank on the other hand has not increased its credit deposit ratio. Chart 20: Cash to Deposit Ratio (in %) Interpretation: On an average Banks in India maintains 0.50% cash in hand to the deposit that they have. Canara, Yes and Axis Bank are keeping less cash compared to their

deposit compared to the industrial average. SENSITIVITY TO MARKET RISK Note: For calculating the beta, systematic and unsystematic risk of the banking companies, share price data of 8 banking companies are taken on a monthly basis from January 2006 to April 2011. All of these banks are listed in the National Stock Exchange. Their return is compared with S&P CNX Nifty return, which is taken as a proxy for market return. It consists of stocks of 50 companies over 23 sectors, and hence is a diversified portfolio, reflecting the overall trend of the market. The data for Yes Bank is taken from March 2008.

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Table 2: BETA12
NIFTY yearly return Beta 0.1279 AXIS 0.2681 1.1241 CANARA HDFC STAN' CHART YES BANK 0.0883 0.028 0.191294587 1.4090 0.821 1.626209913 ICICI

0.1851 0.2071 0.85152 1.1528

Chart 21: BETA

Interpretation: Axis, HDFC, ICICI, Yes Bank shows greater fluctuation than the market and hence are more risky than market portfolio. On the other hand Canara and Standard Chartered bank have less volatility than the market portfolio and hence are less risky. If we compare the risk with the return, we find that banks with high risk have also given high returns. But ICICI bank, though being perceived risky has given comparatively small yearly return.

Table 3: Systematic Risk

AXIS sys risk 0.0093 CANARA HDFC STAN' CHART YES BANK 0.0147 0.0050 0.02463282 ICICI

0.0053 0.0098

12

Calculation in Appendix IV

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Chart 22: Systematic Risk Interpretation: Though Systematic Risk is that part of risk that cannot be diversified and affects all the banking companies, yet Yes bank is shown have more systematic risk than its peers. This is due to the fact that it is a small bank compared to others and will face a bigger impact than others.

Table 4: Unsystematic risk:

AXIS un sys risk 0.0089 CANARA HDFC STAN' CHART YES BANK 0.0105 0.0054 0.011908274 ICICI

0.0077 0.0059

Interpretation: Again,Yes bank is having high value of unsystematic risk also. Standard Chareterd being a foreign bank is fully diversified is having least unsystematic risk as it operates many economies. Chart 23: Unsystematic Risk RANKING OF THE BANKING COMPANIES To identify the best bank, taken in the analysis a ranking method is employed. In this, weightage is given to each of the components and their parameters used in CAMELS analysis framework, depending on their relative importance and the importance of the parameter contained within them. The total weight of all the components is equal to 100. The weights given are as follows:

Table 4: Weightage13
13

Calculation and Marks Distribution in Appendix III

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Ratio Capital Adequacy CRAR Debt Equity Ratio Advances to Assets Asset Quality Gross NPA to Advances Net NPA to Advances Management Efficiency Total Advances to Deposit Loan per unit Spent Profit per Employee Earning Quality ROAA Interest to Total Income EPS Liquidity Credit Deposit Ratio Cash Deposit Ratio Sensitivity Beta Systematic Risk Unsystematic Risk Total

Weightage 27 9 9 9 10 5 5 15 5 5 5 15 5 5 5 18 9 9 15 5 5 5 100

Rationale: Capital Adequacy is considered the most important requirement for running a Bank effectively. Hence capital adequacy component of the CAMELS ratio is given the highest importance. Next liquidity is considered as an important aspect for running a bank smoothly. Thus it has been given the second highest weighted in the CAMELS framework. The importance of Capital Adequacy and Liquidity in the banking sector can be seen in the way the new BASEL III guidelines being issued for these two factors. All other parameter has been given equal weightage of five each. Since the model applies to all banks in same manner therefore the effect of weightage to all banks will be same. Process: A unit weight is taken as a unit mark. Every mark is given a band of parameter value. Mark is given to every bank depending on the band in which they fall in. An average is taken for the four years and score is obtained separately for each parameter for each bank. A score is obtained out of 100 for each bank and then compared. The band of value set for each parameter for each is given in Appendix III.

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Table 6: Scores
HDFC CRAR D/E Advances/Asssets OUT OF 27 6.5 8.5 8.25 23.25 ICICI 6.5 3.75 8.5 18.75 CAPITAL ADEQUACY CANARA AXIS BANK YES BANK STANDARD CHARTERED

5.25 5 6.75 2.75 8 5.75 3 7 6.25 8.5 8.75 6.75 19.5 19.25 18.5 16.5 ASSET QUALITY HDFC ICICI CANARA BANK BANK YES BANK STANDARD CHARTERED AXIS 3 4.75 5 4.75 4 1 Gross NPA Ratio 4.75 5 3.75 4.75 5 3 Net NPA Ratio 7.75 9.75 8.75 9.5 9 4 OUT OF 10 MANAGEMENT EFFICIENCY HDFC ICICI CANARA BANK BANK YES BANK STANDARD CHARTERED AXIS Advances/Deposit 3.25 5 3.5 3.25 4.25 5 Loan per unit 2.25 4 3.5 4.5 4.75 1 Spent Profit per 5 5 4.5 5 5 2.75 employee 10.5 14 11.5 12.75 14 8.75 OUT OF 15 EARNING HDFC ICICI CANARA BANK BANK YES BANK STANDARD CHARTERED AXIS 3.25 3 2.5 3 3.5 5 ROAA Interest/Total 1.75 5 4.25 4 5 4.25 Income 3.5 3 3.75 2 1.5 3 EPS 8.5 11 10.5 9 10 12.25 OUT OF 15 LIQUIDITY HDFC ICICI CANARA BANK BANK YES BANK STANDARD CHARTERED AXIS 5 5 8.25 4 2.25 8.75 Credit/Deposit 8.5 5.75 2 1 1 4.75 Cash/Deposit 13.5 10.75 10.25 5 3.25 13.5 OUT OF 18 SENSITIVITY HDFC ICICI CANARA BANK BANK YES BANK STANDARD CHARTERED AXIS 4 2 5 3 1 5 Beta 1 1 4 1 1 4 Systematic Risk 4 1 2 1 1 4 Unsystematic Risk 9 4 11 5 3 13 OUT OF 15 CAMELS FRAMEWORK HDFC ICICI CANARA BANK BANK YES BANK STANDARD CHARTERED AXIS 71.75 68.25 71.5 57.75 57.75 68 TOTAL SCORE

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Interpretation: The total score out of hundred shows that among the banks selected for the analysis and the methodology adopted for the analysis, HDFC, a bank solely run by corporates is the best bank, followed by Canara Bank, in which the majority shareholder is Government and RBI.

3. TECHNICAL ANALYSIS
Technical analysis is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends. 14 It is a method of predicting price movements and future market trends. Technical analysis proposes that all information about the market price and its future fluctuation is contained in a price chain. All the factors that have some influence on the price, be it economical, political or psychological has already been considered and included in the price of that stock. 3.1 Moving Average Moving average is an indicator which is used in technical analysis which shows the average value of securities prices over a number of days. Moving averages smooth the price data and filter out the fluctuations to form a trend following indicator. Shorter length moving averages are more sensitive and it catches the trend earlier but is not much reliable, whereas longer moving averages are more reliable, it catches up the big trend but are less responsive.

There are basically two types of Moving Average Simple Moving Average: It is formed by calculating the average price of a security of a specific number of periods Exponential Moving Average: It is calculated by putting more weight to recent prices.

14

Technical Analysis of the Financial Markets by John J. Murphy

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Exponential Moving averages are more sensitive to recent prices and recent price changes. Therefore Exponential Moving average will turn and change before Simple Moving Average.

Trend Indicators:

An upward momentum is considered when a short run moving average crosses over a long run moving average predicting a bullish market. A downward momentum is considered when a short run moving average crosses below a long run moving average predicting a bearish market. Moreover for a bullish market there should be a plenty of space in between the moving average and both the moving averages should be sloping upward. Moving Averages are also used to find out the support and resistance level of a securities price over a specific period.

3.2 BOLLINGER BANDS:

Bollinger bands developed by John Bollinger are one of the important technical indicators in measuring price action volatility. The major signals from the Bollinger Bands are:

The squeeze The expansion

The bands automatically widens when the volatility increases and contracts when the volatility decreases. Bollinger band limits indicate whether an individual stock is overbought or oversold.

Bollinger band consists of a middle band and two outer bands. The middle band is a Simple Moving average usually set at 20 periods. The outer two bands are usually set at a standard deviation of 2 above and below the middle band.

For determining the strength of the band two trends are to be identified:

W-Bottoms
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 M-Tops

W-Bottoms: This is formed during a downtrend and it involves two reaction lows in which the second low is lower than the lower band but it remains above the first low. The stages of formation of W-Bottoms are-First a reaction low is formed then the prices shoots upward towards the middle band and then the prices declines below the first low but it remains above the lower band. This indicates that the weakness of the stock is reducing and then the prices shoots upward and it generally breaks the resistance level.

M-Tops: An M-Top is formed during an up-trend. The stages of formation of it are Firstly the price breaks the resistance level and overshoots the upper band then the price is pulled backward towards the middle band again the price moves upward and it overshoots the previous high but it fails to reach the upper band. The failure of the price to reach the upper band is usually a signal that the trend is going to be reversed. Finally the price moves in a downward trend indicating a bearish market sign.

3.3 Relative Strength Index

Relative strength index was developed by J.Welles Wilder. RSI is an extremely popular momentum indicator. RSI is a momentum oscillator that measures the speed and change of price movements. RSI oscillates between zero and 100. Here RSI is calculated on 14 days basis. Traditionally the stock is considered to be overbought when RSI is above 70 and oversold when RSI is below 30.

RSI Signals:

When the RSI crosses over 70 marks the stock is considered to be oversold and hence it is overvalued. So it is high time to sell the stock so as to make profits. When the RSI crosses below 30 marks the stock is overbought and hence it is undervalued. So it is high time to buy the stock.
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 An RSI reading over 50 indicates a bullish signal and below 50 indicates a bearish signal

3.4 Rate of Change (ROC):

The Rate-of-Change (ROC) indicator, which is also referred to as simply Momentum, is a pure momentum oscillator that measures the percent change in price from one period to the next. The value of ROC oscillates around a central zero-point level. To calculate ROC 12 days period is used to compare with todays price.

ROC Indicators:

A movement toward the zero line indicates that the existing trend is losing momentum. ROC moving from above zero to below zero level is an indication of sell while ROC moving from below zero to above zero level is an indication of buy.

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3.5 Analysis15: Charts taken under study are from 8th February to 6th May 2011. ICICI BANK Chart 24: EMA 50 and EMA 20 Interpretation: EMA 20 was above EMA 50 from March till May 2 but the two EMAs are coming close together and is also downward trend along with the price so bearish trend is indicative of that and hence SELL signal is generated.

Chart 25: Bollinger Band Interpretation: From this it can be seen that M-tops are formed during March 28 when the prices have overshot the upper band again in April 4 the price has crossed the previous high but is unable to touch the upper band which indicates that the share price is weakning and hence a downward trend prevails thereafter. But a price have crossed the lower band in May 2-6 which indiactes the possibility of formation of W-bottoms and rising of share prices in future but the bands have contracted indicating a bearish market trend. For a long run, this indicates a HOLD signal.

15

Charts taken from http://in.finance.yahoo.com

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Chart 26: ROC Interpretation: The ROC line shows that it has crossed below 0 point indicating a bearish momentum and hence it is time to SELL the stock.But it is upward sloping at the end indicating that the stock is gaining strength. The chance of upward movement of share generates a HOLD signal.

Chart 27: RSI Interpretation: The RSI line shows that the trend line has crossed below 30 mark and hence it is overbought and reversal of trend is indicative of that and it has touched 50 mark indicating a bullish market is on the way. This indicates a BUY signal.

AXIS BANK Chart 28: EMA 50 and EMA 20

Interpretation: From the graph it is seen that EMA20 crossed below EMA 50 and both are downward sloping and the share price is also below the EMAs

indicating a bearish trend and hence it is time to SELL the stock.

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Chart 29: Bollinger Band Interpretation: W-bottom is formed during

April-May indicating that the weakness of the stock is getting reduced and the bands have also expanded indicating that a

bullish market trend is on its way. This gives a signal to BUY.

Chart 30: ROC Interpretation: Since ROC line is below 0 point and downward sloping so it is time to SELL the stock.

Chart 31: RSI Interpretation: The RSI line indicates that the it has touched 30 mark indicating overbought and hence reversal of trend is indicative of that and also the line is upward sloping so bullish market trend is on its way. So this generate a BUY signal.

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CANARA BANK Chart 32: EMA 50 and EMA 20 Interpretation: From the graph it is seen the EMA 20 has crossed below EMA 50 and share price is also below the EMAs indicating a bearish signal. Hence it is time to SELL the stock.

Chart 33: Bollinger Band Interpretation: From the graph it is seen that M top was formed in the month of April. Again we can see that share price has crossed below the lower band, which indicates the

formation of W Bottom. This indicates that the weakness of the stock is getting reduced and the bands have also expanded

indicating that a bullish market trend is on its way. This gives a signal to BUY.

Chart 34: ROC Interpretation: The ROC line shows that it has crossed below 0 point indicating a

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bearish momentum and hence it is time to SELL the stock.But it is upward sloping at the end indicating that the stock is gaining strength. The chance of upward movement of share generates a HOLD signal.

Chart 35: RSI Interpretation: The RSI line indicates that the it has touched 30 mark indicating overbought and hence reversal of trend is indicative of that and also the line is upward sloping so bullish market trend is on its way. So this generate a BUY signal.

STANDARD CHARTERED Chart 36: EMA 50 and EMA 20

Interpretation: The EMA 20 line is moving below the EMA 50 line for the past three months. Also the current shareprice is below the EMAs lines. This indicates a bearish market and is time to SELL the shares.

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Chart 37: Bollinger Band

Interpretation: The graph shows the formation of a M Top from April 4 to May 3. The shareprice has crossed above the top band on April 4 and came below the middle band on April 18. Again we can see that share price has crossed below the lower band, which of W

indicates

the

formation

Bottom. This indicates that the weakness of the stock is getting reduced. The bands have started to expand indicating a reversal in trend. For the moment this generates a HOLD signal.

Chart 38: ROC Interpretation: The ROC line shows that it has crossed below 0 point indicating a bearish momentum and hence it is time to SELL the stock.

Chart 39: RSI

Interpretation: From the graph it is seen that RSI is reaching between the 70 and 30 mark. This indicates that shares are nither overbought nor undersold. Therefore this generates a signal to HOLD.

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HDFC Chart 40: EMA 50 and EMA 20 Interpretation: EMA 20 is below EMA 50 line. Also the shareprice is below the EMA 20 line. But the last share price is above the EMA 20 line. This sows that stock is gaining strenght. Therefore it is a HOLD signal.

Chart 41: Bollinger Band Interpretation: The price of the share has gone below the lower band and the next lower is above the lower band. This indicates that stock will gain

strength and is bullish. Hence it is a BUY signal.

Chart 42: ROC Interpretation: The ROC is above 0. This shows that the share is bullish and the price of share will increase. Hence it indicates a BUY signal.

Chart 43: RSI Interpretation: The RSI is reaching 50. This indicates share to be bullish, hence it is a BUY signal.
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Yes Bank Chart 44: EMA 50 and EMA 20 Interpretation: The graph shows that EMA 20 is above EMA 50 from March 28. This is a bullish signal. But the two EMAs are converging, which is a sign of trend moment it is better to HOLD the shares. reversal. At this

Chart 45: Bollinger Band Interpretation: From the graph it is seen that that share price has crossed below the lower band, which indicates the formation of W Bottom. This indicates that the weakness of the stock is getting reduced and the bands have also expanded indicating that a bullish market trend is expected. This gives a signal to BUY.

Chart 46: ROC

Interpretaion: The ROC line shows that it has crossed below 0 point and reached -30 level. This indicates the stock is overbought. Thus this generates a BUY signal for the investors.

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Chart 47: RSI Interpretation: The graph shows that RSI is moving to 50. This is a bullish signal. Hence this indicates a BUY signal for the stock.

3.6 Strategy

Since each of the tool used in the Technical analysis gave different result for a particular share, therefore to decide on the final strategy to follow, a Weighted Score method is followed.

Table 7: Score Distribution: Strategy Score(X) Buy 1 Sell -2 Hold 1

The score given to each strategy is based on the assumption that investor is risk averse. As carrying a stock has a risk of earning loss, therefore he is more willing to sell the shares than to keep or buy it.

Table 8: Weightage Indicator EMA Bollinger ROC RSI Weight .25 .25 .25 .25 Score X X X X Weighted Score X*.25 X*.25 X*.25 X*.25 Explanation: As there are four tools used in the technical analysis, each tool is given equal weightage. The score obtained is

multiplied with the weight and weighted score is obtained.

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Table 9: Weighted Score Rationale: Action Buy Sell Hold Weighted Score S=1 S<=0 0<S<1 As the investor is risk averse, he will buy the share only when all the tool indicates a bullish market. On the other hand, he will sell the shares if more than one tool in

indicating a bearish market for that stock.

The Scores obtained are:

ICICI

Canara Bank

Axis Bank

Yes Bank

Standard Chartered

HDFC

0.25

0.25

-0.5

-0.5

Therefore it is concluded that the final strategy to be followed is to HOLD the shares of ICICI and Canara Bank. SELL the shares of Axis and Standard Chartered Bank and BUY the shares of HDFC and Yes Bank.

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4. CONCLUSIONS

Indian Banking Industry has gone throgh various phases of development in history.

The present growth in the banking sector can be attributed to the various financial reforms undertaken by the government.

Bankning companies are having more than sufficient capital to shield itself from risk weighted assets.

The deposits of banking companies is increasing with increase in GDP at market price.

Statutary requirement is being used as tool by RBI to keep inflation under check.

Past five year has seen an average gerowth of nearly 30% in Profit after Tax of the banking companies

Non Performing Assets Ratio of Indian banking companies is around 1.2%, well below the RBI set danger level of 10%.

Banking companies in India differs in the shareholding pattern.

Among the banks selected for the CAMELS analysis and the ranking methodology adopted for the analysis, HDFC bank is the best bank followed by Canara Bank.

The Technical Analysis suggests, holding the shares of ICICI and Canara Bank. Selling the shares of Axis and Standard Chartered Bank and Buying the shares of HDFC and Yes Bank.

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5. REFERENCES

1. DON U.A. GALAGEDERA and PIYADASA EDIRISURIYA., 2003. Performance of Indian Commercial Bank (1995-2002): an application of data envelopment analysis and Malamquist Productivity Index, pp. 1-5 2. JOHN. J. MURPHY., 1999. Technical Analysis of the Financial Market, pp. 234-245 3. N.S. TOOR., 2009. Handbook Of Banking Information, pp. 1-28 4. McKinsey & Company., 2010. Indian Banking 2010 5. Reserve Bank Of India., 2009. The Banking Sector in India: Emerging Issues and Challenge, Volume: 1, pp. 1-12 6. Reserve Bank Of India., 2009. The Banking Sector in India: Emerging Issues and Challenge, Volume: 2, pp. 433-439 7. Case Study, ICMR., 2004. State Bank of India: Competitive Strategy of a Market Leader. 8. Annual Report 2007 to 2010 of HDFC 9. Annual Report 2007 to 2010 of ICICI 10. Annual Report 2007 to 2010 of Canara Bank 11. Annual Report 2007 to 2010 of Axis Bank 12. Annual Report 2007 to 2010 of Yes Bank 13. Annual Report 2007 to 2010 of Standard Chartered Bank

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