PROJECT REPORT ON

FUNDAMENTAL ANALYSIS OF BANKING SECTOR IN INDIA

UNDER THE GUIDANCE OF

CA SHARIQUE AHMAD

SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENT

OF

MASTER OF BUSINESS ADMINISTRATION

BY

SHADAB HUSSAIN

MBA-B-14

YEAR 2016-2018

DEPARTMENT OF BUSINESS ADMINISTRATION

ALIGARH MUSLIM UNIVERSITY

KISHANGANJ (BIHAR)
Certificate

This is to certify that the project work titled “FUNDAMENTAL ANALYSIS OF

BANKING SECTOR IN INDIA” is a final project work carried out by Mr.
Shadab Hussain.

I further certify that the said work has not been submitted in the part or in full,
to any other University.

Date: 30th July, 2017

___________ ____________________
DECLARATION

I, Mr Shadab Hussain, student of Aligarh Muslim University of Department of

Business Administration at the centre of Kishanganj hereby declare that I have
completed the final project on FUNDAMENTAL ANALYSIS OF BANKING
SECTOR IN INDIA in the Academic year 2016-2018. The information
submitted is true & original to the best of my knowledge.

SHADAB HUSSAIN
ACKNOWLEDGEMENT

At the outset of this project, I would like to express my profound gratitude to a

few people without whose help, completion of this project would not have been
possible.

I am very thankful to CA. SHARIQUE AHMAD for being an excellent mentor

and helping me whenever I approached him.

EXECUTIVE SUMMARY
Fundamental Analysis involves examining the economic, financial and other qualitative and
quantitative factors related to a security in order to determine its intrinsic value. If a
company's stock is trading above the intrinsic value or fair value, then the stock is
overvalued. If a company's stock is trading below the intrinsic value, then the stock is
undervalued. It attempts to study everything that can affect the security's value, including
macroeconomic factors (like the overall economy and industry conditions) and individually
specific factors (like the financial condition and management of companies).

Fundamental analysis, which is also known as quantitative analysis, involves delving into a
company’s financial statements (such as profit and loss account and balance sheet) in order to
study various financial indicators (such as revenues, earnings, liabilities, expenses and
assets).

The main purpose of the report is to understand and interpret the factors affecting the banking
sector in India.
INDEX

SR. NO. CONTENT PAGE

NO.
1 RESEARCH METHODOLOGY 1
2. INTRODUCTION TO BANKING 2
SECTOR
3. FUNDAMENTAL ANALYSIS 8
4. DATA COLLECTION 10
5 DATA ANALYSIS AND 13
INTERPRETATION
6 FINDINGS 49
7 RECOMMENDATION 51
8 CONCLUSION 53
9 BIBLIOGRAPHY 54
RESEARCH METHODOLOGY

Analytical in nature.

DATA COLLECTION

The data collected was secondary in nature.

METHOD OF DATA COLLECTION

Data was collected primarily through moneycontrol.com, RBI websites and other
related websites.

OBJECTIVES OF THE STUDY

1. To study the changes in the banking system over the years.

2. To evaluate the current situation in the banking industry by fundamental analysis.

3. Comparative study of financial performance of banking companies.

4. To determine the future direction of the stocks by technical analysis.

LIMITATIONS
1. Limited study done due to time constraint on the project.
2. For the fundamental analysis, only 4 banks were analysed. All banks are not
included.
3. Dynamic market leads to inaccurate data.
4. The project study is restricted to banking sector used in India only.

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INTRODUCTION

History of Banking in India

The banking sector is the most important sector as it helps to develop the vital sectors
of the economy. The RBI set up in 1935 is the chief bank which was founded to
control the monetary policy in India. It took the responsibility of regulating the Indian
banking sector from 1935. After India’s independence RBI was nationalized and given
broader powers. This was an important landmark in the Indian Banking system. The
RBI in general regulated and supervised the major financial system in India. Before
the nationalization of the bank except for State bank of India all the banks were
privately controlled. By then the Indian Banking sector had grown in strength and
large number of people were employed. In 1969, 14 commercial banks have been
nationalized followed by 6 more banks in the year 1980. With the second phase of
nationalization the Indian government controlled approximately 91% of the banking
sector. The total number of banks however came down to 19 with the merger of New
Bank of India with Punjab National Bank.

As the banking sector expanded and became increasingly complex due to innovation
and technological up gradations. The banks with time had to change the way they
functioned by offering new services to the customers. The rapid technological
advancement has reduced the transaction costs. Despite the progress that the banks
have made post the 1991 liberalization there has been a decline in productivity and the
profits of the banks have reduced. Therefore the government of India set up the
Narasimham Committee to look into the problems and recommend measures to
improve the health of the financial system.

Currently the banking industry has entered into a new era with the era of
technological advancements and other challenges. Branches and ATM’s will need to
grow to serve the bankable population. Banks will also have to adopt new
technologies like CRM which will automate certain systems. In additions to this they
also need to understand and adopt new technologies like cloud computing.

For the past three decades India's banking system has several outstanding
achievements to its credit. The most striking is its extensive reach. It is no longer
confined to only metropolitans or cosmopolitans in India. In fact, Indian banking

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system has reached even to the remote corners of the country. This is one of the main
reasons of India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich dividends
with the nationalization of 14 major private banks of India.

The first bank in India, though conservative, was established in 1786. From 1786 till
today, the journey of Indian Banking System can be segregated into three distinct
phases. They are as mentioned below:

 Early phase from 1786 to 1969 of Indian Banks

 Nationalization of Indian Banks and up to 1991 prior to Indian banking sector

Reforms.

 New phase of Indian Banking System with the advent of Indian Financial &
Banking Sector Reforms after 1991.

Phase I

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan
and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank
of Bombay (1840) and Bank of Madras (1843) as independent units and called it
Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank
of India was established which started as private shareholders banks, mostly European
shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab
National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906
and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian
Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935.
During the first phase the growth was very slow and banks also experienced periodic
failures between 1913 and 1948. There were approximately 1100 banks, mostly small.
To streamline the functioning and activities of commercial banks, the Government of
India came up with The Banking Companies Act, 1949 which was later changed to
Banking Regulation Act 1949 as per amending Act of 1965. Reserve Bank of India
was vested with extensive powers for the supervision of banking in India as the

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Central Banking Authority.
During those days public had lesser confidence in the banks. As an aftermath deposit
mobilisation was slow. Abreast of it the savings bank facility provided by the Postal
department was comparatively safer. Moreover, funds were largely given to traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after
independence. In 1955, it nationalized Imperial Bank of India with extensive banking
facilities on a large scale especially in rural and semi-urban areas. It formed State
Bank of India to act as the principal agent of RBI and to handle banking transactions
of the Union and State Governments all over the country.

Seven banks forming subsidiary of State Bank of India was nationalized in 1960 and
on 19th July, 1969, major process of nationalization was carried out. It was the effort
of the then Prime Minister of India, Mrs. Indira Gandhi
14 major commercial banks in the country were nationalized.

Second phase of nationalization Indian Banking Sector Reform was carried out in
1980 with seven more banks. This step brought 80% of the banking segment in India
under government ownership.

The following are the steps taken by the Government of India to Regulate Banking
Institutions in the Country:

1949 : Enactment of Banking Regulation Act.

1955 :Nationalisation of State Bank of India.

1959 :Nationalisation of SBI subsidiaries.

1961 : Insurance cover extended to deposits.

1969 :Nationalisation of 14 major banks.

1971 : Creation of credit guarantee corporation.

1975 : Creation of regional rural banks.

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1980 : Nationalisation of seven banks with deposits over 200 crore.

After the nationalization of banks, the branches of the public sector bank India rose to
approximately 800% in deposits and advances took a huge jump by 11,000%.
Banking in the sunshine of Government ownership gave the public implicit faith and
immense confidence about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking sector in
its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee
was set up by his name which worked for the liberalisation of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being
put to give a satisfactory service to customers. Phone banking and net banking is
introduced. The entire system became more convenient and swift.
The financial system of India has shown a great deal of resilience. It is sheltered from
any crisis triggered by any external macroeconomics shock as other East Asian
Countries suffered. This is all due to a flexible exchange rate regime, the foreign
reserves are high, the capital account is not yet fully convertible, and banks and their
customers have limited foreign exchange exposure.

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Organizational Structure of Banks in India:

In India banks are classified in various categories according to different criteria. The
following charts indicate the banking structure

CURRENT TRENDS

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Some of the biggest challenges that the banking system face are inflation, muted
growth, downsizing, high NPA’s and also asset restructuring. When it comes to NPA’s
As on September 30, 2016 gross NPAs of public sector banks rose to Rs. 6,30,323
crore as against Rs. 5,50,346 crore by June end.

This represents an increase of Rs. 79,977 crore on quarter basis.

Also one of the problems that is persistent in the banking sector is the high NPA’s that
exist in the PSB’s due to various reasons like lack of modern technology, quality man
force. But in terms of the reach, access to low deposits the private players cannot
match up to the PSB. This is exactly where the private players enter the route of
M&A. Also apart from this factor the private players also have been the frontrunners
when it comes to innovative banking like internet banking, phone banking, mobile
banking which is fast catching up with the public ATM’S and various other services.

The FDI has paved the way in the banking sector. A MNC bank or its subsidiary
regulated by the host country can invest up to 100% in the Indian Private Sector. For
foreign investors the cap is set at 74%. For the PSB the ceiling has been set at 20%.for
nationalized banks as well as SBI and its associates. For others the ceiling is 49%.

A new concept is the emerging trend of universal banking in the banking sector.
Universal banking is offering all banking services under one roof. This trend has
come up in lieu of the lowering profit margin on the lending business. Some of the
particular services that come under the purview of universal banking apart from the
commercial bank functions are Merchant Banking, Mutual Funds, Factoring, Credit
cards, Insurance, Loans etc. ICICI Bank is a consequence of this trend.

Priority Sector lending was introduced with a view to help the weaker sectors that
impact large sections of the population. Sectors like agriculture, small scale industries
and others were basically neglected due to risk factor and urban bias. In April 2015
the RBI has revamped PSL norms. Now even loans given to SME’s, renewable energy
and social infrastructure, will come under the purview of PSL.

A large section of the Indian population still does not have any bank accounts. Due to
poverty, the lower income groups don’t have access to the various financial products
and services. There was a view that banking sector tends to exclude a huge section of
populations particularly the under privileged. The financial inclusion was first

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included in the Indian context in April 2005. Providing financial services to the low
income groups at nominal costs comes under financial inclusion. Under the
government introduced PMJDY an individual can avail basic banking account with
OD facility of Rs 5000 and other. As of 20th February, 2016 a total of over 20 Crore
Accounts were opened with around Rs 32378 crores deposited under the scheme.

Role of Banks:

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Banks play a positive role in economic development of a country as repositories of
community’s savings and as purveyors of credit. Indian Banking has aided the
economic development during the last fifty years in an effective way. The banking
sector has shown a remarkable responsiveness to the needs of planned economy. It has
brought about a considerable progress in its efforts at deposit mobilization and has
taken a number of measures in the recent past for accelerating the rate of growth of
deposits. As recourse to this, the commercial banks opened branches in urban, semi-
urban and rural areas and have introduced a number of attractive schemes to foster
economic development. In a way, commercial banks have emerged as key financial
agencies for rapid economic development.

By pooling the savings together, banks can make available funds to specialized
institutions which finance different sectors of the economy, needing capital for
various purposes, risks and durations. By contributing to government securities, bonds
and debentures of term-lending institutions in the fields of agriculture, industries and
now housing, banks are also providing these institutions with an access to the
common pool of savings mobilized by them, to that extent relieving them of the
responsibility of directly approaching the saver. This intermediation role of banks is
particularly important in the early stages of economic development and financial
specification.

Mobilization of resources forms an integral part of the development process in India.

In this process of mobilization, banks are at a great advantage, chiefly because of their
network of branches in the country. And banks have to place considerable reliance on
the mobilization of deposits from the public to finance development programmes.
Further, deposit mobilization by banks in India acquired greater significance in their
new role in economic development. Commercial banks provide short-term and
medium-term financial assistance.

FACTORS AFFECTING SHARE PRICES OF BANKING SECTOR

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There are several numbers of factors which affect the share prices. They can be
broadly classified into two:
 INTERNAL FACTORS

 EXTERNAL FACTORS

INTERNAL FACTORS:
As the name suggests, Internal Factors are those which affect the share prices
internally, i.e. they are internal to the company or more specifically bank. Some of the
major internal factors that affect the share prices of a bank are as follows:

a) Earnings of the company:

How much Profit a company earns acts as a significant factor in price movements.
Investors invest money in the companies who earn well and in turn give good return
on investment. Thus, a wealthy and a profitable company have good investors and
thus have positive price movements. Price/Earnings Ratio also gives us idea about the
same.

b) Market capitalization:
Generally we commit one mistake that we guess the company’s worth from the price
of its stock. It is the market capitalization of the company, rather than the stock price,
that is more important when it comes to determining the worth of the company. A
company or bank with high Market Capitalization turns out to be more popular among
investors. For example, HDFC BANK, ICICI BANK and SBI are more popular
among investors than other banks because they have huge market share and market
capitalization. As market capitalization increases, the share price tends to increase and
as market capitalization decreases, the share price tends to decrease.

c) Price/earnings ratio:

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Price/Earnings ratio or the P/E ratio gives us a fair idea of how a company's share
price compares to its earnings. If the price of the share is too much lower than the
earning of the company, the stock is undervalued and it has the potential to rise in the
near future. On the other hand, if the price is way too much higher than the actual
earning of the company and then the stock is said to overvalued and the price can fall
at any point.

d) Internal affairs of the company:

Any happening inside the company or any internal news does affect its share price.
For example any key person moving out of the company, acquisition or takeover or
merger news, share split, employee strike and any other thing internal to the affairs of
the bank affects the share price. A positive note from the internal affairs takes the
price to new highs and a negative does vice versa.

e) Interest rates:
Interest rates play a major role in determining stock market trends. Interest rates are
determined by the demand for capital – pushes them up and normally indicates that
the economy is thriving and that shares probably expensive. Low interest indicate low
demand for capital, thus liquidity builds up on the economy, driving share price down.
Other interest rates like that of on Deposits and Borrowings also have impact on share
prices.

f) Other factors:
Other factors like Growth of the company, figures of deposits, advances, balance
sheet, Profit and Loss Account, etc. Also affect the share prices drastically.

EXTERNAL FACTORS:

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After studying the internal factors, let’s take a look at some External Factors which
affect the Share Prices.

a) Sentiments:
Investor sentiment is almost impossible to predict and can be infuriating if, for
example, you have bought shares in a company that you think is a good "buy‟ but the
price remains flat. Investor sentiment is influenced by a wide variety of factors.
Investor sentiment can lead to irrational buying or selling of shares and result in bull
and bear markets In the technology boom of the late 1990s, for example, investors
paid extremely high prices for shares and ignored traditional valuation measures, such
as P/E ratios. This carried on until 2000 when investors belatedly realized these shares
has risen too far and resulted in a three year bear market in shares. Thus, Sentiments
of investors affect the share prices a lot and this is something unpredictable and
immeasurable factor, but still the most important one.

b) Company news and other news:

The way investors interpret news coming out of companies is also a major influence
on share prices. For example, a company puts out a warning that business conditions
are tough, shares will often drop in value. Companies put out a great deal of news and
most of the major announcements are covered by the financial press. Also any other
news or speculation about factors like change in Repo Rate, Cash Reserve Ratio,
Reverse Repo Rate, any change or likely change in the policies of government or RBI
or SEBI, any new guidelines issued by the concerned authority, etc. affect the price of
the share. A positive news in any of these respects leads to a rise in price and a
negative takes it to the other side. Thus, news in any respect is undoubtedly a huge
factor when it comes to stock price.

c) Demand and supply:

This fundamental rule of economics holds good for the equity market as well. The
price is directly affected by the trend of stock market trading. When more people are
buying a certain stock, the price of that stock increases and when more people are
selling the stock, the price of that particular stock falls. Now it is difficult to predict
the trend. Thus, we should be very careful while dealing in stocks as buying or selling
pressure may lead to steep rise or fall in price of the shares.

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d) Analysts’ reports:
. Analysts‟ reports are produced primarily by investment banks for professional
investors, although some stockbrokers will make their research available to private
investors. We may find summaries of some reports published on financial news
websites or in newspapers and magazines.. We should remember that the
recommendation an analyst puts on a company will affect its share price very quickly
and can become irrelevant within hours. The reports usually contain a great deal of
useful information on the company and how its business is developing. They also
often look at how the company rates against its competitors.

e) The economy:
The health of the global economy has a fundamental influence on share prices
because it is ultimately responsible for driving company profits. Broadly speaking, if
the economy is growing, company profits improve and shares will become more
highly valued. If the economy is weakening, company profits will fall and share
prices will go down.
When looking at economic data, we need to think not only how the wider economy
will be affected but whether certain areas will be more affected than others. A rise in
interest rates is, for example, often bad news for house builders as people feel less
confident about taking on debt. Retailers are often badly affected too as people spend
less. Pharmaceutical companies are, however, usually unaffected as people’s demand
for drugs is not influenced by the state of the economy. Companies whose profits are
closely tied to the health of the economy are known as “cyclical” stocks. Those
businesses that aren’t too affected by the economy are called “defensive” stocks. If
economic conditions deteriorate you will often see investors shift from cyclical stocks
to defensives. Thus, the economic health of an Economy affects the Share Prices.

f) Technical influences:

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Share prices can rise and fall for a variety of technical reasons that may have nothing
to do with the actual outlook for an individual company or the outlook for the market.
It is, for example, a common occurrence for share prices to drop back after a strong
rally. This happens because investors take profits on some of the shares that have risen
in value, protecting their gains just in case the shares start to slip back. Investors often
refer to this as market consolidation. Share prices can also be affected by investors
who use technical analysis to drive their investment techniques.

f) OTHER FACTORS:
Some other factors which influence share prices are as follows:

Change in rates by RBI:

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

Global changes:
Any change in the global economy or in other words global changes also affects
Indian economy. Thus, the performance of an economy and its banks is affected by
these global changes. For example: The recession was first observed in the USA and
later on it caught its lead in other countries too. When it entered India, the share
market crashed literally. So, a careful and logical investor always keeps this in mind
that what global changes affect the market and thus leads to rise or fall in share prices.

Change in Government Policies:

Keeping in mind the progress and well wishes about the country, the government
takes desired steps and keeps on reviewing its policies, rules and regulations and
procedures. A change in FDI and FII inflow restrictions, entry exit barriers for foreign
banks in India, EXIM regulations, change in Basel Norms, etc form part of important
government policies. Thus, a change in these policies affects the market scenario.

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For example: if government allows entry of foreign Banks in India, then the
competition would rise and it might happen that those foreign Banks may outperform
and leave our own banks far behind. Then in this case, the investors would be
interested in investing in those foreign Banks and a government would never like that
the funds are invested in some foreign banks rather than our own banks. Thus, some
restriction would follow and this will definitely affect the share prices.

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INTRODUCTION TO FUNDAMENTAL ANALYSIS

Fundamental Analysis involves examining the economic, financial and other

qualitative and quantitative factors related to a security in order to determine its
intrinsic value.

It attempts to study everything that can affect the security's value, including
macroeconomic factors (like the overall economy and industry conditions) and
individually specific factors (like the financial condition and management of
companies).

Fundamental analysis, which is also known as quantitative analysis, involves delving

into a company’s financial statements (such as profit and loss account and balance
sheet) in order to study various financial indicators (such as revenues, earnings,
liabilities, expenses and assets). Such analysis is usually carried out by analysts,
brokers and savvy investors.

Many analysts and investors focus on a single number--net income (or earnings)--to
evaluate performance. When investors attempt to forecast the market value of a firm,
they frequently rely on earnings. Many institutional investors, analysts and regulators
believe earnings are not as relevant as they once were.

Two Approaches of fundamental analysis

While carrying out fundamental analysis, investors can use either of the following
approaches:

1 .Top-down approach: In this approach, an analyst investigates both international and

national economic indicators, such as GDP growth rates, energy prices, inflation and
interest rates. The search for the best security then trickles down to the analysis of
total sales, price levels and foreign competition in a sector in order to identify the best
business in the sector.

2. Bottom-up approach: In this approach, an analyst starts the search with specific
businesses, irrespective of their industry/region

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How Does fundamental analysis works ?

Fundamental analysis is carried out with the aim of predicting the future performance
of a company. It is based on the theory that the market price of a security tends to
move towards its 'real value' or 'intrinsic value.' Thus, the intrinsic value of a security
being higher than the security’s market value represents a time to buy. If the value of
the security is lower than its market price, investors should sell it.

The steps involved in fundamental analysis are:

1. Macroeconomic analysis, which involves considering currencies, commodities and

indices.

2. Industry sector analysis, which involves the analysis of companies that are a part of
the sector.

3. Situational analysis of a company.

4. Financial analysis of the company.

5. Valuation

The valuation of any security is done through the discounted cash flow (DCF) model,
which takes into consideration:

1. Dividends received by investors

2. Earnings or cash flows of a company

3. Debt, which is calculated by using the debt to equity ratio and the current ratio
(current assets/current liabilities)

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Benefits of fundamental analysis

Fundamental analysis helps in:

1. Identifying the intrinsic value of a security.

2. Identifying long-term investment opportunities, since it involves real-time data.

Drawbacks of fundamental analysis

The drawbacks of fundamental analysis are:

 Too many economic indicators and extensive macroeconomic data can

confuse novice investors.
 The same set of information on macroeconomic indicators can have varied
effects on the same currencies at different times.It is beneficial only for long-
term investments

Fundamental Analysis Tools

These are the most popular tools of fundamental analysis.

(i) Earnings per Share – EPS

(ii) Price to Earnings Ratio – P/E
(iii) Price to Book – P/B
(iv) Dividend Payout Ratio
(v) Book Value
(vi) Return on Equity

Ratio analysis

Financial ratios are tools for interpreting financial statements to provide a basis for
valuing securities and appraising financial and management performance.

A good financial analyst will build in financial ratio calculations extensively in a

financial modelling exercise to enable robust analysis. Financial ratios allow a
financial analyst to:

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  Standardize information from financial statements across multiple financial
years to allow comparison of a firm’s performance over time in a financial
model.
 Standardize information from financial statements from different companies to
allow an apples to apples comparison between firms of differing size in a
financial model.
 Measure key relationships by relating inputs (costs) with outputs (benefits)
and facilitates comparison of these relationships over time and across firms in
a financial model.

In general, there are 4 kinds of financial ratios that a financial analyst will use most
frequently, these are:

 Performance ratios
 Working capital ratios
 Liquidity ratios
 Solvency ratios

These 4 financial ratios allow a good financial analyst to quickly and efficiently
address the following questions or concerns:

Performance ratios

 What return is the company making on its capital investment?

 What are its profit margins?

Working capital ratios

 How quickly are debts paid?

 How many times is inventory turned?

Liquidity ratios

 Can the company continue to pay its liabilities and debts?

Solvency ratios (Longer term)

 What is the level of debt in relation to other assets and to equity?

 Is the level of interest payable out of profits?

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Technical analysis is the practice of anticipating price changes of a financial
instrument by analyzing prior price changes and looking for patterns and relationships
in price history.

Since all the investors in the stock market want to make the maximum profits
possible, they just cannot afford to ignore either fundamental or technical analysis.

The price of a security represents a consensus. It is the price at which one person
agrees to buy and another agrees to sell. The price at which an investor is willing to
buy or sell depends primarily on his expectations. If he expects the security's price to
rise, he will buy it; if the investor expects the price to fall, he will sell it. These simple
statements are the cause of a major challenge in forecasting security prices, because
they refer to human expectations. As we all know firsthand, humans expectations are
neither easily quantifiable nor predictable.

If prices are based on investor expectations, then knowing what a security should sell
for (i.e., fundamental analysis) becomes less important than knowing what other
investors expect it to sell for. That's not to say that knowing what a security should
sell for isn't important--it is. But there is usually a fairly strong consensus of a stock's
future earnings that the average investor cannot disprove.

DATA COLLECTION

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FUNDAMENTAL ANALYSIS

The fundamental analysis of the banking sector deals with:

 The effect of economy on the banking sector in the economic analysis,

 The banking industry as a whole in industrial analysis,

 The analysis of four selected banking companies in company analysis.

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.

The global financial system is still far away from a full recovery on account of a
slowdown in the US economy, the soft landing in China and the Euro debt crisis. The
Indian banking sector has been relatively well shielded by the central bank and has
managed to sail through most of the crisis. But, currently in light of slowing domestic
GDP growth, persistent inflation, asset quality concerns and elevated interest rates,
the investment cycle has been wavering in the country.

The cost of borrowings was higher on account of the various monetary tightening
measures undertaken by the central bank. People preferred to park their funds in
higher yielding fixed deposits rather than current or savings account (CASA). CASA
accretion slowed for most banks which led to a higher cost of funds. The savings bank
account rate was deregulated by the RBI, however most banks continue to hold the
rate at 4%.

Apart from streamlining their processes through technology initiatives such as ATMs,
telephone banking, online banking and web based products, banks also resorted to
cross selling of financial products such as credit cards, mutual funds and insurance
policies to augment their fee based income. They are also looking at various financial

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inclusion initiatives in order to spread the use of financial services among India’s
large unbanked population.

INDUSTRIAL ANALYSIS

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 62
scheduled commercial banks. Among these, 25 banks are public sector banks in which
government has the major stake. There are 24 private and 13 foreign sector banks
operating in India. The commercial banks in India have an extensive network of
branches all across the country.

Porter’s five forces analysis:

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

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

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

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

5. Competitive Rivalry. The banking industry is highly competitive. The financial

services industry has been around for hundreds of years and just about everyone who
needs banking services already has them. Because of this, banks must attempt to lure
clients away from competitor banks. They do this by offering lower financing,
preferred rates and investment services. The banking sector is in a race to see who can
offer both the best and fastest services, but this also causes banks to experience a
lower ROA. Larger banks would prefer to take over or merge with another bank rather
than spend the money to market and advertise to people.

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REACH

India may be one of the most populous countries on earth, but a small proportion of
its population has access to a bank branch. As the case for financial inclusion grows,
lenders are clamouring to take advantage of what has been described as 'the largest
banking opportunity in the world'.

Findings

By the end of December 2015, near about 49181 banks reach rural areas, 35259 in
semi urban areas, 24608 in urban area and 21650 banks in metropolitan area. Still
large population of the country is still left to be covered by the banking sector.

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GROWTH

The figure shows the year on year increase of banks in India. The banks included are;
All Private and public sector banks.

Findings

The figure clearly depicts the phenomenal growth rate that banking industry has
achieved over the years. Growth rate 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.

COMPANY ANALYSIS

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For analysis of banking companies, four banks 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 six groups. These are Indian
Promoters, Foreign collaborators, Indian inst/Mutual Fund, Foreign Institutional
Investors, Global Depository Receipts (GDRs)/American Depository Receipts
(ADRs), free float.

SHAREHOLDING PATTERN

Shareholding pattern reveals how the shares of a company are divided among the
various bodies that constitute its ownership.

Before buying any stock, we research the company from all possible angles. We take
into account the company’s profit and loss, sales and debt, among other things and
thus, try to gather as much information as possible about the business into which we
are going to invest our hard-earned money so as to avoid nasty surprises in the future.

This is also important because when we buy a share, we are not just buying a piece of
paper, but also becoming a part owner of the business to the extent of the
shareholding percentage.

Here, I am presenting the shareholding pattern of four banks i.e. State bank of India,
ICICI Bank, Punjab National Bank and HDFC Bank

State Bank of India

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Shareholders Equity Held

Promoters: Government of India 61.23%

FIIs/GDRs/OCBs/NRIs 11.17%

Banks & Insurance Companies 10.00%

Mutual funds & UTI 8.29%

Others 9.31%

Total 100%

INTERPRETATION

The Government of India owns 61.23% equity, 11.17% equity is held by

FIIs/GDRs/OCBs/NRIs, 10%equity is held by Banks & Insurance Companies, 8.29%
equity held by Mutual funds & UTI , remaining equity is held by others.

ICICI Bank

Name of the Holder Equity Held

(%)

Foreign Institutions 38.15

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Financial Institutions 15.08

Banks/ Mutual Funds 9.34

General Public 5.67

Others 2.99

Central Govt 0.11

INTERPRETATION

Foreign Institutions owns 38.15% equity, 15.08% equity is held by financial

institutions, 9.34 % equity is held by the Banks and Mutual Funds and remaining
equity is held by the general public and central government.

Punjab National Bank

Name of the Holder Equity Held (%)

Indian Promoters 62.08

Financial Institutions 24.34

NBFC and Mutual Funds 6.06

General Public 4.61

Foreign Institutions 1.86

Others 1.03

Central Government 0.02

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INTERPRETATION

Indian Promoters owns 62.08% equity whereas 24.34% is held by Financial

Institutions. The rest are held by NBFC, Mutual Funds, General Public and Central
Government

HDFC Bank

Name of the Holder Percentage

Promoters 26.47

Financial Institutions 42.87

NBFC and Mutual Funds 10.65

General Public 10.51

Others 9.39

Central Government 0.12

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INTERPRETATION

Promoters owns 26.47% equity, 42.87% equity is held by financial institutions,

10.65 % equity is held by the Banks and Mutual Funds and remaining equity is held
by the general public and central government.

Current Ratio

TABLE 1.1 OF 4 SELECTED BANKS ARE AS FOLLOWS:

Current Ratio Mar Mar Mar Mar Mar

'13 '14 '15 '16 '17

SBI 0.04 0.03 0.04 0.07 0.07

PNB 0.02 0.02 0.02 0.03 0.03

HDFC 0.06 0.06 0.04 0.07 0.06

ICICI 0.09 0.09 0.06 0.13 0.12

CHART 1.1 shows the Current Ratio of selected banks which are as follows

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INTERPRETATION:

EARNINGS PER SHARE

TABLE 1.2 OF 4 SELECTED BANKS ARE AS FOLLOWS:

Earning per share Mar '13 Mar '14 Mar '15 Mar '16 Mar
'17

SBI 206.2 145.88 17.55 12.825 13.15

PNB 134.31 92.32 16.51 -20.24 6.23

HDFC 28.27 35.34 40.76 48.64 56.78

ICICI 72.22 85.04 19.28 16.73 16.83

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CHART 1.2 shows the Earning per share of selected banks which are as follows

INTERPRETATION

SBI reported a Net profit of Rs 10484.10 crore, Net interest income, rose just 3.6 per
cent YoY compared to Rs 13,252 crore reported in the year-ago period. The rise in bad
loans however has reduced the EPS of the bank. The weakness in the domestic
markets have dented the profitability of the banks. Similarly PNB and ICICI have
seen their share prices declined to a great extent.

HDFC on the other hand has its EPS increased since the year 2013 where it was
28.27 to 56.78 in 2017. In the private sector also HDFC is one of the top companies
with the highest market capitalisation rate

BOOK VALUE PER SHARE

TABLE 1.3 OF 4 SELECTED BANKS ARE AS FOLLOWS:

book value per share Mar '13 Mar '14 Mar '15 Mar '16 Mar
'17

SBI 1445.6 1584.34 172.04 185.85 196.53

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PNB 884.03 952.5 203.24 180.61 179.03

HDFC 152.2 181.23 247.39 287.47 349.12

ICICI 578.65 634.6 138.72 149.47 166.37

CHART 1.3 shows the Book Value Per Share of selected banks which are as follows

INTERPRETATION

Book value per common share is a measure used by owners of common shares in a
firm to determine the level of safety associated with each individual share after all
debts are paid accordingly. In simple terms it would be the amount of money that a
holder of a common share would get if a company were to liquidate. The above
figures are adjusted book value per share

A stock may trade below its book value for several reasons, the foremost being lack of
investor confidence in the company's future. If it is widely believed that the
company's performance will deteriorate, its stock will possibly trade at a discount to
its book value. Another reason could be belief that the company is adopting
aggressive accounting policies to bloat its net worth.

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Amongst the banks HDFC has the highest book value per share with Rs 252 while
the rest of the banks SBI, ICICI and PNB are trading at 212, 230 and 230 respectively.
Book value should not be seen in isolation. At times, due to its cyclical nature, the
whole industry may be going through tough times. Such companies, as a result, may
trade at a discount to their book value

NET PROFIT MARGIN RATIO:

TABLE 1.4 OF 4 SELECTED BANKS ARE AS FOLLOWS:

Net Profit Margin Ratio Mar '13 Mar '14 Mar '15 Mar '16 Mar
'17

SBI 11.78 7.98 8.59 6.07 5.97

PNB 11.33 7.33 6.61 -8.38 2.8

HDFC 19.18 20.61 21.07 20.41 20.99

ICICI 20.77 22.2 22.76 18.44 18.09

CHART 1.4 shows the Net Profit Margin Ratio of selected banks which are as
follows

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INTERPRETATION:

The net profit margin is a good way of comparing companies in the same industry,
since such companies are generally subject to similar business conditions. However,
the net profit margins are also a good way to compare companies in different
industries in order to gauge which industries are relatively more profitable. A higher
profit margin indicates a more profitable company that has better control over its costs
compared to its competitors Profit margin. The profit margin ratio, also known as the
operating performance ratio, measures the company’s ability to turn its sales into net
income. To evaluate the profit margin, it must be compared to competitors and
industry statistics. It is calculated by dividing net income by net sales

STATE BANK OF INDIA: In table 1.4 chart shows increasing trend till 2013 and in
2014 the ratio fell to 7.98 and increased to 8.59 in 2015.
ICICI BANK: The ratio has shown a decreasing trend till 2013 and from there on
has increased till 2015
PUNJAB NATIONAL BANK : Profit margin has shown a decreasing trend from
16.42 in 2011 to 6.61 in 2015
HDFC Bank: It shows increasing trend at increasing rate since 2013

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DIVIDEND PAYOUT RATIO:

TABLE 1.5 OF 4 SELECTED BANKS ARE AS FOLLOWS:

Dividend Payout Ratio Mar '13 Mar '14 Mar '15 Mar '16 Mar
'17

SBI 20.12 20.56 19.51 20.28 20.11

PNB 20.1 10.83 20.51

HDFC 19.46 19.38 19.62 19.53 --

ICICI 27.71 27.07 25.93 29.89 --

CHART 1.5 shows the Dividend Payout Ratio of selected banks which are as follows

INTERPRETATION:
The part of the earnings not paid to investors is left for investment to provide for
future earnings growth. Investors seeking high current income and limited capital
growth prefer companies with high Dividend payout ratio. However investors seeking
capital growth may prefer lower payout ratio because capital gains are taxed at a

Page | 36
lower rate. High growth firms in early life generally have low or zero payout ratios.
As they mature, they tend to return more of the earnings back to investors

The dividend payout ratio has been in a decreasing trend since 2011 for all banks
except HDFC Bank. This can be attributed to the RBI's decision of clearing the NPA's
by 2017 and also the RBI norms regarding the dividend payout ratio.

DEBT EQUITY RATIO:

TABLE 1.6 OF 4 SELECTED BANKS ARE AS FOLLOWS:

Debt-Equity Ratio Mar '13 Mar '14 Mar '15 Mar '16 Mar
'17
SBI 13.87 13.34 13.87 13.55 15.08
PNB 13.8 14.48 14.51 17.28 17.39
HDFC 9.09 9.36 8 8.25 8.02
ICICI 6.57 6.65 6.64 6.86 6.58

CHART 1.6 shows the Debt-Equity Ratio of selected banks which are as follows

INTERPRETATION

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A measure of a company's financial leverage calculated by dividing its total liabilities
by stockholders' equity, it indicates what proportion of equity and debt the company is
using to finance its assets. A high debt/equity ratio generally means that a company
has been aggressive in financing its growth with debt. This can result in volatile
earnings as a result of the additional interest expense.

The debt equity ratio of the banks has reduced for all the banks. In case of SBI Bank it
has increased to 14.2 in the FY 2015. For ICICI and PNB the ratio has remained
unchanged since the last year. HDFC has reduced the debt equity ratio from 9.4 in
2014 to 8.1 in 2015.

Net Non Performing Assets (NPA)

TABLE 1.7 OF 4 SELECTED BANKS ARE AS FOLLOWS:

Net Non-Performing Mar '13 Mar '14 Mar '15 Mar '16 Mar
Asset '17

SBI 2.1 2.57 2.12 3.81 3.71

PNB 2.4 2.85 4.06 8.61 7.81

HDFC 0.2 0.3 0.2 0.28 0.33

ICICI 0.8 0.97 1.61 2.67 4.89

CHART 1.7 shows the Net Non Performing Asset of selected banks which are as
follows

INTERPRETATION

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Net Non Performing Assets to total advances of each bank is well within the trigger
level of RBI. HDFC Bank being most conservative player in the field is having the
lowest value of the ratio. ICICI 's NPA ratio has increased to about 1.6% of the total
advances. PNB has amongst the highest ratio of the NPA with about 4.1% in 2015.

FINDINGS

State Bank Of India

 The revenue growth for FY16 and FY17 is expected at 2.8-16%.

 SBI PE ratio is expected to increase to about 10.9 in FY 2016
 The net non-performing assets to net advances ratio is expected to be at 3% in
FY17 which shows the continuous improvement in its assets quality; but, it is
still not up to the mark.

ICICI Bank

 The dividend payout ratio has declined from 24.1% in 2014 to about 4.7% in
2015.

 Net NPA stands at about 1.6% in FY 2015 and this is expected to increase to
1.8% in FY 2016. As cited by the Management, the weakness in global steel
cycle and RBI’s contention to recognize and provide stressed assets that led to
the substantial deterioration in asset quality.

 EPS has seen a major fall from 154 in 2012 to about 17 in 2015.

 PE ratio of the bank also has seen a drastic decline from 20 in 2011 to about 3
in 2015. Investors however have been advised to buy the share because of it's
great potential.

Punjab National Bank

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  The revenue growth for FY16 is expected to grow at about 2.11%.
 EPS of the firm has reduced from 84.4 in 2011 to 28.27 in 2013. However
there is a slight improvement from 28.27 in 2013 to 40.76 in 2015
 Amongst the banks compared PNB has one of the highest NPA to net advance
ratio from 2.9 % in 2014 to 4.1 % in 2015. For the quarter ended 31st
December 2015 its Gross NPA stands at about 8.4%. This has occurred due to
the provisioning for bad loans.

HDFC Bank

 HDFC is seemingly performing very well in terms of the ratio compared.

 The dividend payout ratio has been constant at around 18%
 The Bank has increased its book value per share by 43.01% in FY15.
 The non-performing assets to net advances ratio of the bank have been
continuously around 0.3%, which shows its asset quality is very good.
 Profit margin is at an increasing trend from 19.18% in 2013 to about 21.07%
in about 2015.
SUGGESTIONS

High growth of Indian Economy:

One cannot deny that there is a strong link between GDP and the growth of the
banking industry. India is one of the fastest growing economies in the world and is
set to remain on that path for many years to come. This will be backed by the
stellar growth in infrastructure, industry, services and agriculture. The best
indicator is the growth in bank credit. For the past 30 years it was 0.49 % of the
GDP. Now the same ratio has increased to 0.65 in the last 10 years.

Rising per capita income:

The rising per capita income will drive the growth of retail credit. Indians have a
conservative outlook towards credit except for housing and other necessities.
However, with an increase in disposable income and increased exposure to a range
of products, consumers have shown a higher willingness to take credit,
particularly, young customers. Private Banks also have a much higher share of the
more profitable mass affluent segment.

Payment Banks:

Eleven payments banks has been launched in 2016 and 2017. Higher deposit rates
may disrupt the rural, semi-urban deposit market for existing lenders.

Competition for deposits:

The deposit market in India has seen very little change. Most banks have offered a
steady 4% on savings deposits even after these rates were deregulated in 2011.

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 Some think payments banks could force a change while others say that payments
banks won’t make enough profits so as to offer higher deposit rates

Human Resource Issues:

More and more senior people are retiring thus leaving a gap of experienced
professionals on the top. The banks need to continuously enhance the skill levels
of their employees so as to remain viable and competitive and to take advantage of
new opportunities. The banking personnel, across the cadres need to be suitably
trained to acquire necessary skill sets to perform their jobs more efficiently. The
biggest challenge is to build capacity at a rate which matches the loss of existing
talent and skills to retirement, poaching and resignations.

RECOMMENDATIONS

State Bank of India

 Based on the RBI recommendations of NPA provisioning the shares of PSB

has dropped and will continue to do so in the next quarter.
 Therefore if an investor is looking for a long time horizon it's recommended
that he hold on to it probably for a chance to turnaround.
 In the short term the stock looks weak at Rs 185 which is expected to rise at
235 in the long run.

ICICI Bank

 ICICI is trading at around Rs220 in 2016 from around Rs 359 in 2016.

 The target price is expected to be around Rs 212-219
 Also the recent cut in repo rate by 25 basis points to about 6.5% suggests that
the liquidity in the system will improve. After the provisioning of NPA is over
the worst scenario will be over. Also ICICI is one of the best managed private
sector bank.
 These factors put together makes ICICI share a HOLD for the medium to
longer run.

Page | 41
 Punjab National Bank
 PNB is one of the weaker performing stocks amongst the banks compared.
There is a possibility that with more provisioning to come in the coming
quarters the stock will further weaken.
 Like ICICI ,it is recommended that after the NPA provisioning is done and
only after that a decision be taken whether to sell or accumulate the stock.

HDFC Bank

 The bank has recorded a very healthy growth in terms of its operating income
and its interest income
 Also the bank has expanded in various parts of the country with around 600
branches added in the last quarter
 Based on these favourable factors and also backed by a robust asset quality
and wholesale loan book it is recommended to BUY the stock

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CONCLUSION

 The economic growth of the country is an apt indicator for the growth of the
banking sector. The Indian economy is projected to grow at 7.3% and the
country’s banking industry is expected to reflect this growth.

 The RBI will play an important role in maintaining stability in the Indian
market with regards to the repo rate which stands at around 6.5%. This means
that the lending system will become a bit more cheaper which will provide a
boost to the Indian economy. This also acts as a tool to keep inflation in check
by reducing money supply in the economy

 There are emerging challenges, which appear in the forms of consolidation,

recapitalization, weak banks, and non-performing assets, legal framework etc.
needs urgent attention.

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

Page | 43
BIBLIOGRAPHY

The following articles from internet have been used for the study purpose:

(a) www.nseindia.com
(b) www.bseindia.com
(c) www.moneycontrol.com
(d) www.livemint.com
(e) www.rbi.org

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