TERM PAPER

FINANCIAL MANAGEMENT - I

Submitted to:
Prof. P. Saravanan

Goa Institute of Management

TOPIC - Fundamental and Technical analysis of Indian Banking

Industry: Past, Present and Way Forward

Submitted by:

Section A Group 5

Moumita Ghosh 2010022

Niteesha Sharma 2010026
Piyush Saxena 2010030
Prateek Agarwal 2010034
Rahul Chauhan 2010038

GOA INSTITUTE OF MANAGEMENT

PGP 1 2010 - 2012

1
Overview

The last decade has seen many positive developments in the Indian banking sector. The policy makers,
which comprise the Reserve Bank of India (RBI), Ministry of Finance and related government and
financial sector regulatory entities, have made several notable efforts to improve regulation in the sector.
The sector now compares favorably with banking sectors in the region on metrics like growth, profitability
and non-performing assets (NPAs). Recent time has witnessed the world economy develop serious
difficulties in terms of lapse of banking & financial institutions and plunging demand. Prospects became
very uncertain causing recession in major economies. However, amidst all this chaos India‟s banking
sector has been amongst the few to maintain resilience. A progressively growing balance sheet, higher
pace of credit expansion, expanding profitability and productivity akin to banks in developed markets,
lower incidence of nonperforming assets and focus on financial inclusion have contributed to making
Indian banking vibrant and strong. A few banks have established an outstanding track record of
innovation, growth and value creation. This is reflected in their market valuation. However, improved
regulations, innovation, growth and value creation in the sector remain limited to a small part of it. The
cost of banking intermediation in India is higher and bank penetration is far lower than in other markets.
India‟s banking industry must strengthen itself significantly if it has to support the modern and vibrant
economy which India aspires to be. While the onus for this change lies mainly with bank managements,
an enabling policy and regulatory framework will also be critical to their success.

In this paper we provide the fundamental and technical analysis of four Indian banks – two public
sector banks (SBI and PNB) and two private sector banks(HDFC and ICICI), which have created
commendable track records in the banking sector. The objective of this paper is to analyze the
share price movement and macro environmental developments of these top four banks (two
public and two private banks) over the period of project and analyze the past developments in
price and industry technically and fundamentally to give a holistic view of the future.

(India Banking 2010: Towards a High-performing Sector – A Report by McKinsey and Company)

(Indian Banking System: The Current State & Road Ahead - Annual Survey, February 2010 by Federation
of Indian Chambers Of Commerce & Industry)

Objectives of the study:

The study includes many objectives. As banking sector is growing rapidly in India we try develop the
overview of Indian banking industry. We also try to analyze the price of shares of top four banks, two
public sector and two private sector banks, using both technical and fundamental analysis. Often the two
methods are seen as supplementary but we see them as complementary to get holistic picture of share
price.
Technical analysis testing of the top four banks by including the prices till October 10 and then comparing
the predictions with actual performance till November third week.
One more objective is to test the technical indicators in context of Indian banking sector and working on
identifying the practical application of academic finance.

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Literature Review

A FUNDAMENTAL ANALYSIS OF INDIAN BANKING INDUSTRY

P Janaki Ramudu and S Durga Rao

Investment decisions, in all sectors, have been gaining paramount importance, warranting the investors to
be continuously cautious of risk and return involved in the same. The faculty „investment analysis‟ calls for
planned and meaningful appraisal of both internal and external factors affecting the returns. Ever since
Indian economy opened its doors to MNCs, the Indian banking sector has been witnessing bizarre
changes in terms of new products and services and stiff competition as well. The sorts of IPOs that have
been taking place in banking sector are amazing. In the light of these recent developments, a careful
analysis of the profitability of Indian banking sector is inevitable.

Bank Stock Performance since the 2000s

B.J. Queensly Jeyanthi"* and M Albert William Sf

“Banking sector plays very vital role in the economic development process. The health of the economy
depends on the soundness of its banking system. Modern trade and commerce would not be possible
without the availability of suitable banking services. The Indian banking system has undergone
tremendous changes since the nationalization of major commercial banks. The effect of banking reforms
processes have been reflected in the bank stock also. In this context the performance of bank stocks that
are listed in the National Stock Exchange is analyzed.”

A STUDY OF FACTORS AFFECTING EFFICIENCY OF PUBLIC SECTOR BANKS

Nageshwar Rao Shefali Tiwari

Banking industry in India is all poised for a major leap in coming years. The year 2004 witnessed some
major positive changes in this industry. Falling interest rates, a pickup in demand for loans, chiefly in retail
sector and good spreads in treasury transactions caused a substantial face lift to all players in the
banking sector. All top rated banks have succeeded in reducing their NPA‟s by around 65% to 100%. The
growth in business is also an impressive 24-41.”
More opportunities for banks to increase revenues by diversifying into investment banking, insurance,
credit cards, depository services, mortgage financing, securitization, etc. At the same time, liberalization
has brought greater competition among banks, both domestic and foreign, as well as competition from
mutual funds, NBFC‟s, post office, etc. Post-WTO, competition will only get intensified, as large global
players emerge on the scene. Increasing competition is squeezing profitability and forcing banks to work
efficiently on shrinking spreads (Bhaskaran, 2005).

Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical

Implementation

ANDREW W. LO, HARRY MAMAYSKY AND JIANG WANG*

One of the greatest gulfs between academic finance and industry practice is the separation that exists
between technical analysts and their academic critics. In contrast to fundamental analysis, which was
quick to be adopted by the scholars of modern quantitative finance, technical analysis has been an
orphan from the very start. It has been argued that the difference between fundamental analysis and
technical analysis is not unlike the difference between astronomy and astrology. Among some circles,
technical analysis is known as “voodoo finance.” And in his influential book A Random Walk down Wall
Street, Burton Malkiel 1996 concludes that “under scientific scrutiny, chart-reading must share a pedestal
with alchemy.” However, several academic studies suggest that despite its jargon and methods, technical
analysis may well be an effective means for extracting useful information from market prices.

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TESTS OF TECHNICAL ANALYSIS IN INDIA

Sanjay Sehgal and Meenakshi Gupta

“Old economy stocks exhibit relatively low volatility and usually pay consistent dividends as they operate
in mature industry sectors. In contrast the new economy stocks are heavily involved in the technology
sector. Their stocks are generally more volatile and they do not pay dividends, opting to reinvest their
cash into business expansions. Old and new economy stocks differ not only in their business activities but
also in the way they are valued by the market. While analyzing new economy stocks more focus is placed
on growth expectations and earnings estimates but for old economy stocks the emphasis is placed on
their value.”

SWOT analysis of Banking Sector

Strengths

Indian banks have compared favorably on growth, asset quality and profitability with other regional banks
over the last few years. As of 2010, the banking index has grown at a compounded annual rate of over 51
per cent since April 2001 as compared to a 27 per cent growth in the market index for the same period.
According to the 2010 survey by FICCI, the growth in the banking sector is expected to be greater than
20% for FY 2014-15. Policy makers have made some notable changes in policy and regulation to help
strengthen the sector. These changes include strengthening prudential norms, enhancing the payments
system and integrating regulations between commercial and co-operative banks. The Indian banking
sector has very strong fundamentals. As seen during the 2008 recession, when the world reeled from the
global financial meltdown, India‟s banking sector was one of the very few to actually maintain resilience
while continuing to provide growth opportunities, a feat unlikely to be matched by other developed
markets around the world. Some of the major strengths of the Indian banking industry, which makes it
resilient in the current economic climate as highlighted by FICCI 2010 survey were regulatory system,
economic growth, relative insulation from external market, good credit quality, continuous technological
advancement, fairly robust risk assessment systems. Extensive reach: With the vast networking &
growing number of branches & ATMs, Indian banking system has reached even to the remote corners of
the country. Bank lending has been a significant driver of GDP growth and employment in the past few
years. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean,
strong and transparent balance sheets relative to other banks in comparable economies in its region.
According to the FICCI 2010 survey, Regulatory systems of Indian banks are rated better than China,
Brazil, Russia, and UK; at par with Japan, Singapore and Hong Kong, USA. India‟s Risk management
systems has been rated more advanced than China, Brazil and Russia; above or at par with Japan,
Hong Kong, Singapore & UK and USA. Credit quality of banks has been rated above par than China,
Brazil, Russia, UK and USA but at par with Hong Kong and Singapore and at least at par with Japan. The
Reserve Bank of India has been playing a key role in assisting the banking sector in managing its
liquidity. This has a significant role to play in the medium-to-long-term India growth story . Capital
adequacy is seen as important to the stability of the banking system. The minimum Capital to Risk-
weighted Asset Ratio (CRAR) in India as required by the RBI is placed at 9%, one percentage point
above the Basel II requirement. Public sector banks are further required to maintain a CRAR of 12% by
the Government of India. Recent stress test (in 2008-09) results that Indian banks have the ability to
absorb twice the amount of their current NPA levels.

Weaknesses

Public Sector Banks need to fundamentally strengthen institutional skill levels especially in sales and
marketing, service operations, risk management and the overall organizational performance ethic &
strengthen human capital. Strengthening human capital will be the single biggest challenge. Old private
sector banks also have the need to fundamentally strengthen skill levels. The cost of intermediation
remains high and bank penetration is limited to only a few customer segments. Structural weaknesses
such as a fragmented industry structure, restrictions on capital availability and deployment, lack of
institutional support infrastructure, restrictive labour laws, weak corporate governance and ineffective
regulations beyond Scheduled Commercial Banks (SCBs) are prevalent, which could seriously weaken

4
the health of the sector if not properly addressed. Refusal to dilute stake in PSU banks: The government
has refused to dilute its stake in PSU banks below 51% thus choking the headroom available to these
banks for raining equity capital. Impediments in sectoral reforms: Opposition from Left and resultant
cautious approach from the North Block in terms of approving merger of PSU banks may hamper their
growth prospects in the medium term. Technological advancement has a long way to go in this sector. As
per FICCI 2010 survey, Technology systems of Indian banks have been rated below par with China,
Japan, Hong Kong, Singapore, UK and USA, though it has been rated more advanced than Brazil and
Russia.

Opportunities

The market is seeing discontinuous growth driven by new products and services that include
opportunities in credit cards, consumer finance and wealth management on the retail side, and in fee-
based income and investment banking on the wholesale banking side. These are the domains wherein
immense opportunities can be explored and these require new skills in sales & marketing, credit and
operations. New private banks could reach the next level of their growth in the Indian banking sector by
continuing to innovate and develop differentiated business models to profitably serve segments like the
rural/low income and affluent/HNI segments; actively adopting acquisitions as a means to grow and
reaching the next level of performance in their service platforms. Attracting, developing and retaining
more leadership capacity would be an important determinant in achieving this objective. Foreign banks
committed to making a play in India will need to adopt alternative approaches to win the “race for the
customer” and build a value-creating customer franchise. At the same time, they should stay in the game
for potential acquisition opportunities as and when they appear in the near term. Maintaining a
fundamentally long-term value-creation mindset will be their greatest challenge. There is a huge scope for
penetration and consolidation in rural India for the private sector and foreign banks. Expansion of
operations may be done by branch expansion and strategic alliances. Liberalization of ECB norms: The
government also liberalized the ECB norms to permit financial sector entities engaged in infrastructure
funding to raise ECBs. This enabled banks and financial institutions, which were earlier not permitted to
raise such funds, explore this route for raising cheaper funds in the overseas markets. Hybrid capital: In
an attempt to relieve banks of their capital crunch, the RBI has allowed them to raise perpetual bonds and
other hybrid capital securities to shore up their capital. If the new instruments find takers, it would help
PSU banks, left with little headroom for raising equity. There is further scope for new entrants in the
market, as there continue to remain opportunities in unbanked areas NBFCs may be allowed to be
established as banking institutions but only if adequate capitalization levels, a tiered license that enables
new entrants to enter into specific areas of the business only after satisfactorily achieving set milestones
for the prior stages, cap on promoter's holdings and other regulatory limitations are ensured. In the
coming years, most profitable non-interest income opportunities will be in areas of Forex management,
Derivatives trading, Wealth management, Selling of mutual funds.

Threats

Threat of intermittent instability in the system: Failure of some weak banks has often threatened the
stability of the system. Further, since banks will no longer enjoy windfall treasury gains that the decade-
long secular decline in interest rates provided, there is a huge chance of weaker banks getting exposed.
Given the demographic shifts resulting from changes in age profile and household income, consumers
will increasingly demand enhanced institutional capabilities and service levels from banks. Rise in
inflation figures would lead to increase in interest rates. Increase in the number of foreign players would
pose a threat to the public sector banks as well as the private players. With increased interest in India,
competition from foreign banks will only intensify in the coming years. Public sector banks, private sector
banks as well as foreign banks have already started facing difficulty in hiring highly qualified youngsters.
The major threat to their HR practices will be high staff cost overheads, poaching of skilled quality staff
and high attrition rates. Thus the major challenges faced by the banking industry are ever rising customer
expectations, risk management, maintaining the growth rate, human resource management,
consolidation, making a global mark, employee retention.

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Profile of the four banks under study

1. HDFC BANK

COMPANY PROFILE
Housing Development Finance Corporation Limited, more popularly known as HDFC Bank Ltd, was
established in the year 1994, as a part of the liberalization of the Indian Banking Industry by Reserve
Bank of India (RBI). It was one of the first banks to receive an 'in principle' approval from RBI, for setting
up a bank in the private sector.
The bank was incorporated with the name 'HDFC Bank Limited', with its registered office in Mumbai. The
following year, it started its operations as a Scheduled Commercial Bank. Today, the bank boasts of as
many as 1725 branches and over 4865 ATMs in 780 towns and cities across India.
As on 30th June, 2010 the authorized share capital of the Bank is Rs. 550 crore. The paid-up capital as
on said date is Rs. 459, 69, 07,030/- (45, 96, 90,703 equity shares of Rs. 10/- each). The HDFC Group
holds 23.63 % of the Bank's equity and about 17.05 % of the equity is held by the ADS Depository (in
respect of the bank's American Depository Shares (ADS) Issue). 27.45% of the equity is held by Foreign
Institutional Investors (FIIs) and the Bank has about 4, 33,078 shareholders.
The shares are listed on the Bombay Stock Exchange Limited and the National Stock Exchange of India
Limited. The Bank's American Depository Shares (ADS) are listed on the New York Stock Exchange
(NYSE) under the symbol 'HDB' and the Bank's Global Depository Receipts (GDRs) are listed on
Luxembourg Stock Exchange under ISIN No US40415F2002.

2. ICICI BANK

COMPANY PROFILE
ICICI Bank is India's second-largest bank with total assets of Rs. 3,634.00 billion (US$ 81 billion) at
March 31, 2010 and profit after tax Rs. 40.25 billion (US$ 896 million) for the year ended March 31, 2010.
The Bank has a network of 2,507 branches and 5,808 ATMs in India, and has a presence in 19 countries,
including India. ICICI Bank offers a wide range of banking products and financial services to corporate
and retail customers through a variety of delivery channels and through its specialized subsidiaries in the
areas of investment banking, life and non-life insurance, venture capital and asset management. The
Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in United States,
Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre and
representative offices in United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and
Indonesia. Their UK subsidiary has established branches in Belgium and Germany.
ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock
Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock
Exchange (NYSE).

3. STATE BANK OF INDIA

COMPANY PROFILE
The State Bank of India, the country‟s oldest Bank and a premier in terms of balance sheet size, number
of branches, market capitalization and profits is today going through a momentous phase of Change and
Transformation – the two hundred year old Public sector behemoth is today stirring out of its Public
Sector legacy and moving with an agility to give the Private and Foreign Banks a run for their money. The
Bank is forging ahead with cutting edge technology and innovative new banking models, to expand its
Rural Banking base, looking at the vast untapped potential in the hinterland and proposes to cover
100,000 villages in the next two years.
It is also focusing at the top end of the market, on whole sale banking capabilities to provide India‟s
growing mid / large Corporate with a complete array of products and services. It is consolidating its global
treasury operations and entering into structured products and derivative instruments. Today, the Bank is
the largest provider of infrastructure debt and the largest arranger of external commercial borrowings in
the country. It is the only Indian bank to feature in the Fortune 500 list.

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4. PUNJAB NATIONAL BANK

COMPANY PROFILE
Since its humble beginning in 1895 with the distinction of being the first Swadeshi Bank to have been
started with Indian capital, PNB has achieved significant growth in business which at the end of March
2010 amounted to Rs 435931 crore. PNB is ranked as the 2nd largest bank in the country after SBI in
terms of branch network, business and many other parameters. During the FY 2009-10, with 40.85%
share of CASA deposits, the Bank achieved a net profit of Rs 3905 crore. Bank has a strong capital base
with capital adequacy ratio of 14.16% as on Mar‟10 as per Basel II with Tier I and Tier II capital ratio at
9.15% and 5.01% respectively. As on March‟10, the Bank has the Gross and Net NPA ratio of 1.71% and
0.53% respectively. During the FY 2009-10, its ratio of Priority Sector Credit to Adjusted Net Bank Credit
at 40.5% & Agriculture Credit to Adjusted Net Bank Credit at 19.7% was also higher than the stipulated
requirement of 40% & 18% respectively. The Bank has been able to maintain its stakeholders‟ interest by
posting an improved NIM of 3.57% in Mar‟10 (3.52% Mar‟09) and a Return on Assets of 1.44% (1.39%
Mar‟09). The Earning per Share improved to Rs 123.98 (Rs 98.03 Mar‟09) while the Book value per share
improved to Rs 514.77 (Rs 416.74 Mar‟09). Punjab National Bank continues to maintain its frontline
position in the Indian banking industry. In particular, the bank has retained its NUMBER ONE position
among the nationalized banks in terms of number of branches, Deposit, Advances, total Business,
Assets, Operating and Net profit in the year 2009-10.

Technical and fundamental analysis of top four Indian banks

Technical Analysis

Technical analysis is the practice of using statistics to determine trends in security prices and make or
recommend investment decisions based on those trends. It is the study of relationships among security
market variables, such as price levels, trading volume, and price movements, so as to gain insights into
the supply and demand for securities. Rather than concentrating on earnings, the economic outlook, and
other business-related factors that influence a security's value, technical analysis attempts to determine
the market forces at work on a certain security or on the securities market as a whole.

Technical analysis indicators and their implications

1. MACD ( Moving average convergence divergence)

Simple Moving Averages:

A simple moving average (SMA) is obtained by adding the market price of a security over a specified
number of trading days, and then dividing it by the total number of trading days. The “market price”
mentioned above could be the opening, closing, average, high or low price of the security – it depends on
the preference of the technical analyst. However, many technical analysts prefer to take the closing price
for calculating simple moving averages.

Exponential Moving Averages:

SMA takes the previous days‟ market prices into consideration. That is why it is termed as a “lagging
indicator”. Many technical analysts would like the moving average to be more representative of the
current prices. Exponential Moving Averages (EMAs), also referred to as Exponentially Weighted Moving
Averages, help them do precisely that by including in the calculations a weight factor that lends the
current price carry more weight compared to the previous day‟s price. EMAs thus help cut the time “lag”
factor in the MA curve. The shorter the EMA period, the higher is the weight the current price carries in
the MA curve, and vice versa. EMAs are considered more relevant than SMAs, and the MA curve
obtained using EMAs is more in sync with the current price trends.
The current EMA is calculated as:
Current EMA = [(Current price – Previous Day's EMA) × Weight factor W)] + Previous Day‟s EMA
The weight factor is given by
W = 2 divide by (1 + N)

7
Where, N denotes the number of days for which the EMA is to be calculated.

Short-term traders/investors and day traders prefer to work with EMAs as they yield a moving averages
curve that is more representative of the current market prices. Medium- and long-term investors can rely
on either EMAs or SMAs, as they believe that market prices smoothen out over time (30-day and above).

The standard MACD formula

The MACD value for a given day is calculated using the following standard formula:
MACD= shorter term moving average - longer term moving average
For example,
MACD = 12-Day EMA – 26-Day EMA
It can be deduced from this equation that if a 12-day EMA is greater than a 26-day EMA then MACD will
have a positive value, and if vice versa then MACD will have a negative value. The EMA values used
here are those calculated using the closing price for that day. Each MACD value calculated from this
equation yields one data point on the MACD curve. The various MACD data points calculated for different
days are joined and the resultant curve is compared with a trigger curve, which is usually a 9-day EMA
curve. If the MACD curve crosses the 9-day EMA curve, it signals a bullish trend; when it falls below it, a
bearish signal emerges

Interpretations:

The most reliable “sell” signal given out by MACD is when the stock‟s price is moving sideways or in an
up-trend but the MACD curve begins to move downward, creating successively lower highs. This signal is
called “Negative Divergence” in technical analysis jargon. These signals are not common, but once the
MACD gives this signal, one can be rest assured that the stock will crash.
The most reliable buy signal given out by MACD is when the stock‟s price is in a downtrend but the
MACD curve begins to move forward, creating successively higher lows. It doesn‟t matter if the stock is in
a downtrend. This signal is called “Positive Divergence” in technical analysis jargon. Once the MACD
gives this type of signal, one can be rest assured that the stock will fly upwards.

http://www.moneyhighstreet.com/feature/technical-analysis-moving-averages/

http://www.moneyhighstreet.com/feature/technical-analysis-moving-average-convergencedivergence-
macd/

2. Money flow index

The Money Flow Index (MFI) is a momentum indicator. MFI is a rigid indicator in that it is volume-
weighted, and is therefore a good measure of the strength of money flowing in and out of a security. It
compares "positive money flow" to "negative money flow" to create an indicator that can be compared to
price in order to identify the strength or weakness of a trend. Like the RSI, the MFI is measured on a 0 -
100 scale and is often calculated using a 14 day period.

Calculation

The "flow" of money is the product of price and volume and shows the demand for a security and a
certain price. The money flow is not the same as the Money Flow Index but rather is a component of
calculating it, i.e. the "Raw" money flow.

Typical Price = ((Day High + Day Low + Day Close) / 3)

Raw Money Flow = (Typical Price) x (Volume)
Positive Money Flow = Sum of Raw Money Flow for the specified number of periods where Typical Price
increased
Negative Money Flow = Sum of Raw Money Flow for the specified number of periods where Typical Price
decreased

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Money Ratio = (Positive Money Flow / Negative Money Flow)
Finally, the MFI can be calculated directly from the Money Ratio:
Money Flow Index = 100 - (100 / (1 + Money Ratio))

The fewer number of days used to calculate the MFI, the more volatile it will be.

Interpretations

The MFI can be interpreted much like the RSI in that it can signal divergences and overbought/oversold
conditions.
Divergences
Positive and negative divergences between the stock and the MFI can be used as buy and sell signals
respectively, for they often indicate the imminent reversal of a trend. If the stock price is falling, but
positive money flow tends to be greater than negative money flow, then there is more volume associated
with daily price rises than with the price drops. This suggests a weak downtrend that threatens to reverse
as money flowing into the security is "stronger" than money flowing out of it.
Overbought/Oversold – overbought means maximum demand reached, so price will fall; oversold means
maximum supply reached so supply shortage so prices will rise.
As with the RSI, the MFI can be used to determine if there is too much or too little volume associated with
a security. A stock is considered "overbought" if the MFI indicator reaches 80 and above (a bearish
reading). On the other end of the spectrum, a bullish reading of 20 and below suggests a stock is
"oversold".

http://stockcharts.com/help/doku.php?id=chart_school:technical_indicators:money_flow_index_mfi

3. Rate of change

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 ROC
calculation compares the current price with the price "n" periods ago. The plot forms an oscillator that
fluctuates above and below the zero line as the Rate-of-Change moves from positive to negative. As a
momentum oscillator, ROC signals include centerline crossovers, divergences and overbought-oversold
readings. Even though centerline crossovers are prone to whipsaw, especially short-term, these
crossovers can be used to identify the overall trend. Identifying overbought or oversold extremes comes
natural to the Rate-of-Change oscillator.

Calculation:

ROC = [(Close - Close n periods ago) / (Close n periods ago)] * 100

Interpretations:

Traders will buy a security when the ROC crosses above the 0 line and sell when the indicator crosses
below 0. As the Price Rate of Change trends higher with price, this is confirmation that the trend has
lags. However, if the price of the security heads higher, while the ROC trends lower, this type of
divergence often precedes a market top. The Percent Rate of Change will have completely different
values for different stocks. The best method for trading the ROC is to look at previous peaks and troughs
for the indicator.

http://stockcharts.com/help/doku.php?id=chart_school:technical_indicators:rate_of_change_roc_a

9
4. Relative strength index

The Relative Strength Index is a price-following oscillator that ranges between 0 and 100. Traditionally,
and according to Wilder, RSI is considered overbought when above 70 and oversold when below 30.
Signals can also be generated by looking for divergences, failure swings and centerline crossovers. RSI
can also be used to identify the general trend.

Calculation

RSI = 100 – (100/1+RS)

RS = Average Gain / Average Loss
This RSI calculation is based on 14 periods. Losses are expressed as positive values, not negative
values.
The very first calculations for average gain and average loss are simple 14 period averages.
First Average Gain = Sum of Gains over the past 14 periods / 14.
First Average Loss = Sum of Losses over the past 14 periods / 14
The second, and subsequent, calculations are based on the prior averages and the current gain loss:
Average Gain = [(previous Average Gain) x 13 + current Gain] / 14.
Average Loss = [(previous Average Loss) x 13 + current Loss] / 14

Taking the prior value plus the current value is a smoothing technique similar to that used in exponential
moving average calculation. This also means that RSI values become more accurate as the calculation
period extends
Interpretations

A popular method of analyzing the Relative Strength Index is to look for a divergence in which the
security is making a new high, but the Relative Strength Index is failing to surpass its previous high. This
divergence is an indication of an impending reversal.
Divergences signal a potential reversal point because directional momentum does not confirm price. A
bullish divergence occurs when the underlying security makes a lower low and RSI forms a higher low.
RSI does not confirm the lower low and this shows strengthening momentum. A bearish divergence forms
when the security records a higher high and RSI forms a lower high. RSI does not confirm the new high
and this shows weakening momentum.
The Relative Strength Index usually tops above 70 and bottoms below 30. It usually forms these tops
and bottoms before the underlying price chart. RSI is considered overbought above 70
and oversold below 30

http://stockcharts.com/help/doku.php?id=chart_school:technical_indicators:relative_strength_in

10
Appendix 1

11
Results for SBI:

1. MACD – As on October 10, MACD signal is not moving in tandem with the price, it signals that the
price might fall.

2. MFI – On October 10, MFI is at near about 70 and is consistently above 50 which shows that the stock
might be overbought.

3. ROC – The rate of change is positive on October 10 and has risen from negative in September, which
gives a buy signal but high fluctuations.

4. RSI – the RSI as on October 10 is nearly 65 and risen from 25 to 30 in September, showing that
bottom might come again.

The tools give a signal that the buying on Oct 10 might be risky and investors may sell some of their
shares. Let us see what happened.

Hypothesis:

MACD signal proved right and price fell but rose after November 10.
RSI is right in analyzing as prices are falling.
MFI indicated that the stock is oversold but activates between Oct 10 and Nov 10 were less, as volume
increased, price rose and is falling.
ROC signal confirmed the fluctuations that happened in the price due to the trends in past 5 months.

12
Appendix 2

13
Results for PNB:

1. MACD – As on October 10, MACD signal is moving in tandem with the price, it signals that the price
will be stable and it‟s a hold and buy security.

2. MFI – On October 10, MFI is at near about 60 and is consistently varying between above and below 50
which shows that stock is in balance bought and sold.

3. ROC – The rate of change is positive bur is moving towards zero on October 10 and has fluctuated in
the previous months ,which gives a slightly risk signal.

4. RSI – The RSI as on October 10 is nearly 70 and reflects that immediate price gains cannot be
possible.

The tools give a signal that the buying on Oct 10 will not help in short term gains and investors should
hold the security and new investors can buy if risk taking. Let us see what happened.

Hypothesis:

MACD signal proved right and price rose and fell but is fairly stable till November 18.
RSI is right in analyzing as that immediate price gains are not possible.
MFI indicated that the stock is balanced in sale and purchase which is seen in November price variations
which are not too high.
ROC signal indicated some risk and trading activities have fallen in November indicating customer
sensitivity.

14
Appendix 3

15
Results for HDFC:

1. MACD – As on October 10, MACD signal is moving against the price rise ( 1 week prior to Oct 10)
which shows that price is going to fall and short term and risk averse investors should sell the stock.

2. MFI – On October 10, MFI is at near about 80 and is rising for the last month which shows that stock is
being overbought. Price will fall.

3. ROC – The rate of change is positive bur is moving towards zero on October 10, which gives a sell
signal due to risk, but may be a buy signal for risk taking investors.

4. RSI – The RSI as on October 10 is nearly 75 and is coming down from 80 and reflects that price will
fall.

The tools give a signal that the selling on Oct 10 will help in risk averse investors and investors who are
willing to take risk also should wait for price to come down before buying. Let us see what happened.

Hypothesis:

MACD signal proved right and price fell in October and November beginning.
RSI is right in analyzing that price fell.
MFI indicated that the stock is overbought and trading fell in November.
ROC signaled the fluctuations rightly and price fell below the Oct 10 level.

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Appendix 4

17
Results for ICICI:

1. MACD – As on October 10, MACD is in tandem with price which indicates stable and uptrend price
giving a buy signal.

2. MFI – On October 10, MFI is between 50 and 60 indicates a balance between buying and selling.
There might be a slight indication towards more buying but will tend to be stable.

3. ROC – The rate of change gives a buy signal (Different interpretations for different types of investors)

4. RSI – The RSI as on October 10 coming down from peak and there are slight chances of increase in
prices.

The tools give a signal that investors can buy the stock. No immediate fluctuations are in sight. Let us see
what happened.

Hypothesis:

MACD buy signal proved correct.

RSI is right in suggesting price increase in future as price rise and fell but increased over October level.
MFI indicated that the stock is balanced and trading activity did increase in the Mid November.
ROC signaled buy rightly as fluctuations were controlled.

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Fundamental Analysis

Fundamental analysis: A brief overview

Fundamental analysis of a business involves analyzing its financial statements and health, its
management and competitive advantages, and its competitors and markets. It is the process of looking at
a business at the basic or fundamental financial level. This type of analysis examines key ratios of a
business to determine its financial health and gives you an idea of the value its stock.

How data has been collected for Fundamental analysis

We have used balance sheet, profit and loss account and ratios of the four banks from the web site
moneycontrol.com. With these ratios we have calculated intrinsic value for the firm.

Tools of fundamental analysis: They focus on earnings, growth, and value in the market. The details
are given below:

a. Earnings per share - The portion of a company's profit allocated to each outstanding share of
common stock. Earnings per share serve as an indicator of a company's profitability.

Earnings per share (EPS) = Net earnings / outstanding shares.

The EPS is helpful in comparing one company to another, assuming they are in the same industry, but it
doesn‟t tell you whether it‟s a good stock to buy or what the market thinks of it. For that information, we
need to look at some ratios which we will describe below.

There are three types of EPS numbers:

Trailing EPS – last year‟s numbers and the only actual EPS
Current EPS – this year‟s numbers, which are still projections
Forward EPS – future numbers, which are obviously projections

Our intrinsic value model is based on Trailing EPS.

b. Price Earnings Ratio: The P/E looks at the relationship between the stock price and the company‟s
earnings. Though even this doesn‟t give a complete picture in itself.

P/E = Stock Price / EPS

The P/E gives indicates what the market is willing to pay for the company‟s earnings. The higher the P/E
the more the market is willing to pay for the company‟s earnings. Some investors read a high P/E as an
overpriced stock and that may be the case, however it can also indicate the market has high hopes for
this stock‟s future and has bid up the price.
Conversely, a low P/E may indicate a “vote of no confidence” by the market. It could also mean that it is a
sleeper that the market has overlooked. Known as value stocks, many investors made their fortunes
spotting these “diamonds in the rough” before the rest of the market discovered their true worth.

c. Projected Earnings Growth: We use this to look at future earnings growth called the PEG ratio. The
PEG factors in projected earnings growth rates to the P/E for another number to remember.

PEG = P/E / (projected growth in earnings)

The lower the number the less you pay for each unit of future earnings growth. Hence even a stock with a
high P/E, but high projected earnings growth may be a good value.

d. Dividend payout ratio: It measures what a company‟s pays out to investors in the form of dividends.

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DPR = Dividends per Share / EPS

Growing companies will typically retain more profits to fund growth and pay lower or no dividends.
Companies that pay higher dividends may be mature industries where there is little room for growth and
paying higher dividends is the best use of profits.

Intrinsic value calculation of share

http://www.stock-investment-made-easy.com/calculate-intrinsic-value.html

Step One: Forecast Share Price

First of all, forecast the share price for the time frame say Y years down the road. This is done by the
following formula

Forecasted stock price after Y years = EPS after Y years * Average PER
= Present EPS*(1+EPSGR) ^Y* Average PER

EPSGR is EPS growth rate which is average growth rate of previous years say X previous years.
Here in our project we have used trailing PER of X previous years and averaged it to find Average PER.

Step Two: Forecast Total Future Value

Secondly, we need to calculate the total future value. This must include the potential dividend as well.

Dividend Payout = Total Dividends/ Total EPS

Total Dividends= total EPS * Average Dividend payout
Future value (of year Y) = forecasted stock price (of year Y) + Total Dividends

Average Dividend payout is average of dividend payouts of X previous years.

Step Three: Calculate Intrinsic Value

After having all these data, we can calculate the intrinsic value for stock

Intrinsic value = Net Present Value = Future value/ (Expected ROI^Y)

Step Four: Compare with Current Stock Price

If intrinsic value is above market value, buy the stock; if it is equal or nearly equal hold it; and if lower than
market value sell it.

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Interpretation of fundamental analysis of SBI, PNB, ICIC & HDFC Banks

APPENDIX I

SBI

Intrinsic value of SBI and its comparison with market value

2010 2009 2008 2007 2006
EPS 144.37 143.67 106.56 86.29 83.73
Dividend per share 30 29 21.5 14 14
CMP (22-nov-2010) 3038.6

EPSGR 0.004849 0.348255 0.234906 0.030574

Average EPSGR 0.154646
PER 21.04731 21.14986 28.51539 35.21381 36.29046

Avg. PER 28.44337

dividend payout 0.207799 0.201851 0.201764 0.162244 0.167204

Avg. dividend payout 0.188173

Forecast price 8427.56

Projected EPS 2011 2012 2013 2014 2015

166.6962 192.4751 222.2405 256.6091 296.2926

Total projected EPS 1134.314

Total dividend 213.4467

Future value of stock 8427.56

Intrinsic value 5232.851

Market value 3038.6

Since intrinsic value of stock is higher

than market value we suggest
BUYING the stock

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APPENDIX II

PNB

Intrinsic value of HDFC and its comparison with market value

2006 2007 2008 2009 2010
EPS 45.65 48.64 64.98 98.03 123.86
dividend per share 6 10 10 20 22
CPM (22-nov-2010) 1310

EPSGR 0.065498 0.335938 0.508618 0.263491

average EPSGR 0.293386
PE ratio 28.696605 26.932566 20.160049 13.363256 10.576457

Average PER 19.945787

Div. payout 0.131435 0.205592 0.153894 0.204019 0.177620

Avg. div payout 0.174512

Forecast price 8941.765998

Projected EPS 2011 2012 2013 2014 2015

59.043078 76.365501 98.770082 127.747858 165.227312

Total projected EPS 527.153832

Total dividend 91.994618

Future value of stock 9033.76

Intrinsic value 5609.25

Market value 1310.00

Since intrinsic value of stock is higher than market

value we suggest BUYING the stock

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APPENDIX III
ICICI

Intrinsic value of ICICI and its comparison with market value

2006 2007 2008 2009 2010
EPS 28.55 34.59 37.37 33.76 36.1
dividend per share 8.5 10 11 11 12
CMP (22-nov-2010) 1179.65

EPSGR 0.211559 0.080370 -0.096602 0.069313

Average EPSGR 0.066160
PER 41.318739 34.103787 31.566765 34.942239 32.677285

Average PER 34.921763

Div. payout 0.297723 0.289101 0.294354 0.325829 0.332410

Avg. div payout 0.307883

Forecast price 1736.661869

Projected EPS 2011 2012 2013 2014 2015

38.488376 41.034766 43.749626 46.644101 49.730074

Total projected EPS 219.646943

Total dividend 67.625661

Future value of stock 1804.29

Intrinsic value 1120.32

Market value 1179.65

Since intrinsic value of stock is near the market

value we suggest HOLDING the share

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APPENDIX IV

HDFC

Intrinsic value of HDFC and its comparison with market value

2006 2007 2008 2009 2010
EPS 35.64 43.29 44.87 52.77 64.42
dividend per share 5.5 7 8.5 10 12
CMP (22-nov-2010) 2370.35

EPSGR 0.214646 0.036498 0.176064 0.030574

Average EPSGR 0.114446
PER 66.508137 54.755140 52.827056 44.918514 36.795250

Average PER 51.160819

Div. payout 0.154321 0.161700 0.189436 0.189502 0.186278

Avg. div payout 0.188173

Forecast price 5665.691821

Projected EPS 2011 2012 2013 2014 2015

71.792598 80.008958 89.165646 99.370279 110.742789

Total projected EPS 451.080270

Total dividend 84.880933

Future value of stock 5750.572754

Intrinsic value 3570.65

Market Value 2370.35

Since intrinsic value of stock is higher than the

market value we suggest BUYING the stock

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Findings from the study

Based on the intrinsic value model we can easily suggest investor where and when to invest and if
already holding shares then what to do with them (i.e. hold, sell)
Comparing the leading players in the banking sector is possible and on this basis future investment
decision can be based.
Long term and short term analysis can be easily done by mixing the technical with fundamental analysis
to give a more complete picture.
Technical analysis uses only prices to predicted future value ignoring other factors.
Fundamental analysis analyses company‟s financial statement and health ignoring share prices to predict
the future value.
Just technical or fundamental analysis is not complete in itself. Combining the two gives the better result.

Limitations

Some of the limitations of the current study are owing to the limitations of the modes of analysis
themselves.
Fundamental analysis calculations are based on historical data – past performance record may not give
an absolutely accurate prediction for future, especially stock prices. Still past performance record is a
crucial driver in determining the worth of the firm.
Indicators used in technical analysis are mostly lag indicators. Divergence signals may not be always
reliable.
Technical analysis takes only prices and volumes into account; in contrast fundamental analysis does not
into take into account the trends in prices and volumes.
For technical analysis, we have taken a window of June 10- Oct 10. Analysis will present a short run view.

Further Directions

The present study may be well supplemented with technical analysis done over longer windows of price
movement. Several such observations of medium and long term (250 days) analyses will blend well with
the fundamental analysis in providing a holistic picture on the firm‟s worth.

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